Fallacy or Victory?

For three years European economists have remained quietly sure that sooner or later President Roosevelt would eat some of the words with which in 1933 he wrecked the World Economic Conference, cabling to London: "The world will not long be lulled by the specious fallacy of achieving a temporary and probably an artificial stability in foreign exchange on the part of a few large countries only." Last week U. S. Secretary of the Treasury Henry Morgenthau Jr., British Chancellor of the Exchequer Neville Chamberlain and French Finance Minister Vincent Auriol got together by transatlantic and trans-Channel telephone and apparently achieved precisely what the President had derided in 1933. Mr. Morgenthau was of course acting for the President, but at Hyde Park last week Mr. Roosevelt did not actually eat any words, refused absolutely to comment on the reduction of the French franc to a new value at which it was jointly stabilized with the dollar and the pound.

In Paris for months and years the franc has been repeatedly hammered by lack of confidence which has ebbed & flowed like an erratic financial tide. Each time panic was in the air, huge shipments of French gold have been piled aboard transatlantic steamers and trans-Channel planes. Such "flights from the franc" have more than once been at a faster rate than they were last week --but with that obstinacy which is a leading French characteristic, Cabinet after Cabinet in Paris refused to yield and cheat possessors of francs by reducing the value of the money in their hands until and unless Washington and London should join Paris in agreement to make the new monetary basis stable all around. Among economic experts agreement reigned that the franc should be devalued because: 1) devaluation of the currencies of other countries had had the effect of reducing the prices of their goods on the world market until these were disastrously under cutting France and ruining her export trade; 2) higher wages and vacations with pay introduced in France by its present Socialist leaders have raised production costs so much that the only way to continue making profits is to pay French workers the "higher" wages they 'have won in "cheaper" money; 3) successive French regimes have operated with such enormous deficits in the last few years that .to cheapen the money in which this load of debt is owed is as good an idea in Paris as it has proved to be in Washington, London and Tokyo; 4) although there was still last week a 57% gold cover behind the French franc, whereas the legal requirement was only 35%, successive "flights from the" have reduced the Paris store of gold to a point at which the General Staff recently told the French Cabinet that they now had only the minimum requirement of gold necessary for national defense in case of a general European war. In the jargon of economists, there was last week "no technical reason" why it should have been necessary to monkey with the franc, but there was just about every other reason.

Super-Secrets. The office of whoever happens to be French Finance Minister is in the vast Palace of the Louvre at the end of interminable marble stairs. With its walls of red & gold, its enormous twinkling crystal chandeliers and its delicate and beautiful antique furniture, it resembles nothing so much as the boudoir of a Royal courtesan. In this setting last week heavy Radical Socialist Finance Minister Vincent Auriol, whose right eye droops half shut behind his tortoise-shell glasses, received correspondents in the dead of night. He had left President Lebrun and Premier Blum soon after midnight and at that hour said "Goodnight" over the transatlantic phone to Mr. Morgenthau for whom the time in Washington was nearer 7 p. m. Cried weary but still dynamic M. Auriol: "Messieurs, the entente which we have concluded constitutes the start of Monetary Peace! And that, Messieurs, is a prior condition for Economic Peace, for Human Peace!"

As the Finance Minister was frank to say, the French Cabinet had still to go before the French Parliament and obtain its consent for the measures about to be taken. There was in Paris none of that high-pressure invoking of a dormant "Trading-with-the-Enemy" Act by which smiling President Roosevelt suddenly authorized his dallying with gold before it could be ratified by Congress (TIME, March 13, 1933). Instead M. Auriol spoke of the Blum Cabinet's intention to safeguard War veterans on pensions and people living off their savings invested in small quantities of French bonds, by introducing legislation to compensate these needy ones for the reduction he proposed to make in the value of the franc. Instead of adopting a violent attitude of cracking down, or one of arousing class against class, M. Auriol pledged: "We shall undertake to reduce inconveniences. The Government wishes to avoid social injustices. It desires to consolidate social peace."

The Finance Minister then read from a separate sheet a statement of what the Blum Cabinet would ask the Chamber and Senate to do with the franc, namely reduce its gold content from that of 65 1/2 milligrams of nine-tenths fineness to a value controlled between 49 and 43 milligrams by a French Treasury stabilization fund of 10,000,000,000 francs in conjunction with the U. S. Treasury and the British Exchequer. In plain English the tourist who has been getting about 15 1/2 francs for his dollar in Paris will get about 21 1/2 francs.

The Washington-London-Paris agreement, M. Auriol dramatically explained, has been under super-secret negotiation ever since last June, not a word of what Morgenthau, Chamberlain and Auriol were confiding to each other having leaked to the press.

Inflation or Alignment? That the U. S. Treasury meant business was shown when the Soviet State Bank immediately, upon the opening of international exchange in Wall Street, after M. Auriol's statement last week, dumped overboard $5,000,000 in sterling pounds with orders to sell them for whatever they would bring in dollars. Secretary Morgenthau, alert at his desk in Washington, instantly used the $2,000,000,000 U. S. stabilization fund to buy the British money offered by the Bolsheviks. He then angrily exploded to Washington correspondents whom he hastily summoned, asking them to flash news of what he had done throughout the world. This flash could be counted on to warn money speculators everywhere that they would get their fingers burned if they tried to manipulate for reasons of private profit the dollars, pounds and francs with which it is the exalted mission of Morgenthau, Chamberlain and Auriol to manipulate for the public good.

What were the Bolsheviks up to? Had Moscow deliberately tried to wreck the new Monetary Peace during its first hours by a Russian bear raid on sterling? In the excited timbre of Secretary Morgenthau's voice when he first spoke there was perhaps a hint of suspicion of this sort, but most U. S. Treasury officials soon calmed down to a more comfortable theory. After all the Moscow comrades who run the Soviet State Bank are in danger of their very lives if they guess wrong on how to handle its assets and up to last week many European economists had guessed--not knowing of the super-secret parleys--that once the franc sank the British would sink their pound even lower to retain .its competitive advantage in world trade. It was perfectly believable that the State Bank comrades had dumped their sterling simply because they had wrongly but honestly guessed that it was too hot for them to hold.

The U. S. Administration side of the franc maneuver last week was a fascinating story in itself (see p. 12). If there was a British story, the British sat on it. In France the Cabinet's charming financial fairy tale was to substitute for such unpleasant words as "inflation" or "devaluation" the pleasant word "adjustment" or in French "l'alignement des monnaies." That is to say, the French Cabinet claims that what is being done is to adjust the franc by reducing its value and aligning it firmly with the dollar and the pound. As in all good fairy tales there is in this a large element of perfectly sound and factual truth. Any more cynical view results simply from the point of view itself.

"Unique Agreement." In European, Asiatic and Latin American eyes the great financial question was whether President Roosevelt was still in his own mind free to make slippery alterations in the value of the dollar or was firm in mind to maintain the new alignment of dollar, pound and franc. By remaining mum, Mr. Roosevelt contributed last week the one flimsy element in the new structure of international economic confidence which Morgenthau, Chamberlain and Auriol were striving to build. When probed and pressed by Washington correspondents, the answers of the Secretary of the Treasury as to whether the dollar positively would not be further monkeyed with were painful and obviously sprang from Mr. Morgenthau's own pain. "The answer is yes and no," he said. "If the agreement affects the internal prosperity of the United States we will take steps necessary to correct. Other governments have the same privilege. . . . The unique thing about this is that nobody signed anything, but each has confidence in the other. The moment one breaks faith the pact is off. . . . I am delighted. . . . Money will flow freely from country to country. We will gradually have recovery of trade. . . . This [pact] is something we have been waiting for for three and a half years."

All Off Gold? This week President Albert Meyer of Switzerland and Premier Hendrikus Colijn of The Netherlands rushed to broadcast in as soothing words as possible that their currencies need must soon join the franc in "alignment" at lower value. In Rome the ardently gold standardist Dictator slammed shut all exchanges "for a few days" and kept mum. Adolf Hitler in a speech on another subject paused to denounce "speculation or crooked inflation" but action to "align" the mark remained suspended in deep doubt. Meanwhile, although it seemed unlikely that the French Parliament would be so rash as to refuse to endorse what the Blum Cabinet had arranged with Washington and London, even this was not immediately settled. Paris orators in the Chamber of Deputies whooped up a fine "democratic" quarrel over points of detail before finally passing the bill after 24 hours of palaver which indicated that Premier Blum's position was weakening. With bland pretense the Bank of France announced that the franc was not yet off the gold standard--offered to sell anyone gold with the joker that it would not sell less gold at one clip than 5,000,000,000 francs worth.

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