THE BITTER BATTLE OF THE FRANC

AS the weakest link in the chain of major currencies, the French franc is the primary source of world monetary instability. The immediate fate of the franc rides on the long-awaited wage negotiations between Charles de Gaulle's government and French labor unions. Last week, three days after they began, those talks collapsed in acrimony. French unions called a 24-hour general strike for early this week and set the stage for a showdown that could determine whether France can avoid devaluation--and whether the world can escape new monetary dislocations.

With the promise of trouble to come, money markets came under their worst speculative pressure since last November's currency crisis. In Paris, London and Zurich, the free-market price of gold climbed to all-time highs. It soared to $48.41 per oz. in Paris, compared with the official price of $35. Many people were lusting to buy gold, and practically no one was willing to sell. Frenchmen, historically distrustful of their own currency, defied monetary controls and smuggled suitcases full of francs into Switzerland and Belgium. There, they rushed to put their money into gold, Eurodollars and strong currencies--notably Swiss francs, Belgian francs and West German marks. Speculators and traders outside France were betting, in effect, on devaluation; they were agreeing to buy francs for future delivery only at discounts of up to 27%. The jitters spread to the British pound, which also weakened on currency exchanges. On Wall Street, the Dow-Jones industrial average dropped twelve points in two days, closing the week at 911.

Implacable Enemies. The French labor talks were the first since last May's nationwide riots. The earlier negotiations led to wage hikes averaging about 15% and touched off an inflationary spiral that has damaged the country's trade position and weakened confidence in the franc. As last week's labor talks approached, French workers complained that price increases have eaten into earlier wage gains, and insisted on new increases of 10% to 12%. Eventually, the union leaders trimmed their demand by half. But government negotiators argued that even a 6% raise would force the franc's "immediate devaluation." They offered 4%.

The result was what the French call a dialogue des sourds (dialogue of the deaf), a meeting marked by arm waving, table thumping--and little, if any, progress. Union and government negotiators could not even agree on what to talk about, a divergence that was hardly surprising in a country where workers and management traditionally view each other as implacable enemies.

Shopkeepers to the Streets. Big wage increases could put new inflationary pressures on an economy that is already severely strained. Because inflation has hindered exports and stoked domestic demand for imports, French trade deficits ran more than $200 million a month in both December and January. Devaluation of the franc would relieve the competitive imbalance by making French goods cheaper on world markets. But devaluation would also be a bitter political setback for Charles de Gaulle, who has staked his prestige on maintaining parity of the franc at 20 U.S. cents. Even so, a currency that foreigners hesitate to handle and that Frenchmen hold only because they have to is hardly the basis for a policy of grandeur.

In the latest of many austerity moves to hold off devaluation, the Bank of France is expected to announce this week another increase in the country's discount rate, which has been raised over the past year from 3 1/2% to 6%. Such belt tightening has already fanned social unrest. Across France last week, normally docile merchants closed down their shops in a one-day protest against high taxes. Some even took to the streets and battled riot police.

Dangerous Game. If labor eventually settles for increases of 4% or so, the franc will probably squeeze through. Too many concessions by the government would force devaluation. Somehow, De Gaulle must be tough enough to face down the unions but flexible enough to avoid the kind of revolutionary unrest that shook France during last spring's devastating strikes. Last week De Gaulle issued yet another "non" to both lavish wage increases and devaluation. He told his cabinet that the wage settlement offer last May was "probably too much. But what has been done is done. In any event, there is no question of going any further." Despite De Gaulle's stubborn determination, a large number of European moneymen regard as inevitable a 10% to 15% devaluation of the franc before the end of the year.

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