Delayed Budgets—The Caillaux Position—Outgeneralled in Finance—Gold
Reserves Undiminished—Allied Finance—No Financial Legislation—The
National Defense Loans.

The spectacle of England loaning money to rich France—20,000,000 pounds sterling, or $100,000,000—was something most surprising.

The French have been considered among the best financiers and economists of Europe. The whole world has been envious of the saving ability of France, and has invited the overflow of her accumulations into their local enterprises. For many years France has had the lowest interest rates and a considerable surplus to invest in outside countries. It is upon France that Russia has mainly relied for funds for her expanding industrial development. In the Baring crisis she sent her gold to London to fortify the situation, and in the American crisis of 1907 she extended her hand across the sea. Then she turned about and steadily built up her gold reserve in the Bank of France, from $500,000,000 to above $800,000,000, although her people were not expanding in population, industry, or enterprise. France had grown so confident that she seemed at one time to have lost her financial cunning.

In Germany in 1913 I was told that German finance had passed through the "fire test," that two years of building recession and of expanding commerce had placed her on a solid financial base; and it was true.

I was told to step over to Paris and see a disordered budget, an increasing national deficit, bad investments in Mexico and South America, and disorganized finance. I did and found it all true. I also found that France was fully able to take care of herself without any outside help, and, but for the specter of outside interference, to delay her financing if she so elected.

It has been something of a mystery as to how there could be two Balkan wars and so little of public finance behind them. Of course, Russia and France helped the Balkan States and Germany helped Turkey. The money of France came from the French banks and was loaned to the treasuries of the Balkan States and to Greece—to Bulgaria 350,000,000 francs; to Greece 250,000,000.

The French government said that this could not be financed by public issue after the war until the national budget itself had been arranged, although French bankers were permitted to float a $50,000,000 Servian loan. With the increasing cost of labor and supplies the French railways had been steadily running behind, and France had to face a deficit in her budget of something like 1,000,000,000 francs, or $200,000,000, per annum.

It was proposed last January that the government should consolidate its indebtedness and put its financial house in order, by an issue of long-term securities; but Caillaux opposed the programme and defeated it for many months. This postponed the issue of the Balkan States' loans.

To-day Caillaux is about the most hated man in France. Although he is financially well-to-do, the people believe that his connections and sympathy with Germany were too close. The German press took his side in the famous Calmette shooting affair and the trial of Madame Caillaux, and all this record now stands forth most threateningly in the French blood.

I may perhaps be permitted to say that M. Caillaux has been under arrest, and that the police of Paris have declared they would not be responsible for his safety. It has, therefore, been diplomatically arranged by the government that he should be now in Brazil upon a semi-diplomatic and trade mission.

The French loan just before the war was not a popular success. The reason is now obvious. It was sold short from other European capitals where it was better known that war was in the air.

When a famous "bear" operator reappeared upon the Paris Bourse after his return from Vienna, whence he had conducted his attack on the French loan, he was greeted with a storm of hisses. The French Bourse is a government institution and must support the credit of France and her allies. In Vienna they knew war was planned for the end of September, even before the assassination of the Austrian Crown Prince at Serajevo June 28. This event hastened but did not make the war.

Nevertheless, instead of permitting the French banks to bring out the Balkan loans thereafter, the French authorities allowed Turkey to come into the French market with a loan for 25,000,000 pounds, or 625,000,000 francs.

Some people pleaded with them that this money would be used against France, and that every franc would go to repay the German loans; and they were right.

In this financial situation France was suddenly plunged into war, and while Germany and England have been raising money by the billion, the marvelous thing is that France has made no public issue beyond one-year notes, but continues to pay her bills in gold and has the exchanges all in her favor. Money is flowing in, and not out.

It was most marvelous to find in France, in the fifth month of the war, prompt payment, no distrust of the government paper issues, gold and paper circulating side by side, and no strain for gold as in Germany.

Nevertheless, the war has been fought thus far for the most part on the paper issues of the Bank of France and with the gold reserve of that bank undiminished.

This is most remarkable.

The first reason I can assign for it is that the French soldier gets twenty-five centimes, or five cents a day, or one fifth the pay of an English soldier. Kitchener's army is to-day costing far more than the entire French army. French food is locally abundant and cheap, notwithstanding the octroi, or French local tax of one eighth. The main need of the French from the outside is boots and horses. The English in France are not taxing French resources at all. All their food-supplies, including the hay for their horses, come from England.

The English troops are also well supplied with money from home. Outside the regular Tommy Atkins, the volunteers and territorials coming into France have abundant money. They are the men from the cities and from the wealthiest families in the country life of England. There are more than 300,000 of them on French soil, and as they come and go in France, they are spending not less than four shillings a day each, or nearly four times their wages. This makes a daily expenditure of 60,000 pounds sterling in France, and calling for exchange. Hence the English pound has been at the lowest price in France on record, 24.95 and sometimes 24.90.

There is also the additional reason of higher insurance rates for the transportation of money across the Channel,—a channel infested with mines and submarines. It is no uncommon thing for boats crossing the Channel to sight floating mines, and the wonder is that disasters therefrom have been so few.

The third reason is that France has very large investments and credit resources outside, and can still summon money from abroad.

You see more English than French soldiers in the life of Paris. Their khaki uniforms are as conspicuous there as in London.

The character of the early enlistments for the front in London is illustrated by the following story. An officer entered a restaurant where a group of English soldiers in khaki uniforms were enjoying their cigarettes and pipes. The officer threw some shillings on the table and called, "Waiter, give these men some beer."

And a khaki uniform snapped forth a sovereign on the same table, and cried, "Waiter, give this officer some champagne."

Bank statements are queer contraptions nowadays. While the United States, with less gold in the country and less reserve in the banks than formerly, is showing the most enormous surplus—and a legitimate and better-protected surplus by reason of the new bank act—and the Bank of England is counting $100,000,000 of gold in Canada as a London bank reserve, and Russia has counted, as gold in her reserve, money on deposit which has been loaned out on time; while Belgium is doing a banking business from an English base, and Germany is inviting gold from the jewelry of her inhabitants and boasting her gold strength, the Bank of France refuses to publish any statement, makes no boast, but holds more gold than ever before in her history.

Only a few weeks before the war was her metal base put above $800,000,000. Then she suspended official statements until one was made to the government December 10, and this showed $880,000,000 metal base, or 4,500,000,000 francs. Upon this her note issue, which was formerly 5,800,000,000 has been expanded to nearly 10,000,000,000. She is authorized to issue up to 12,000,000,000 francs in paper.

From this metallic base she increased her bills receivable by 3,000,000,000 francs, or about the same amount that the Bank of England discounted in pre-moratorium bills under the backing of the government. Each country took on $600,000,000 of mercantile credits, and both countries are now finding this item receding. In France the mercantile credits have been considerably reduced—the increase reduced nearly a half—because the men are at the front and business is not calling for the credits formerly in use.

The Bank of France also promptly advanced 8,000,000,000 francs or $400,000,000 to the government.

In the last few weeks of 1914 the finances of Russia, France, and Belgium became interlaced with those of England, and gold credits for the Allies' supplies were established around the world, shipments from North America going both east and west into the European war. Government credit with the Bank of France was then extended, but should not early in January have been more than $800,000,000.

This is the main financial assistance on which France for five months conducted a successful defensive warfare, with 1,500,000 men at the front and nearly 3,000,000 men behind them.

The next most remarkable financial feature in respect to France is that there has been no special financial legislation, in fact no financial legislation whatsoever, except the December budget vote to cover government expenses, including the war. A moratorium was set up by decree, but authorization for this already existed under the general laws. Under this moratorium payments were permitted at first of 5 per cent, then 25 per cent. Later depositors were permitted to draw from the banks 40 per cent, and 40 per cent payments became the rule. Then 50 per cent for December, and in January, 1915, full payment to bank-depositors, although legally the moratorium stands to March 1, 1915.

Among other temporary devices in French finance was the issue by French chambers of commerce in the south of France of small pieces of paper,—as low as 50 centimes or 10 cents,—used only for circulation and change locally.

Many banks closed their branches because they had not the clerks to man them. Many bankers lost three fourths of their staff when the mobilization orders were issued, and all over Paris the banks are closed from twelve to two because of the limitations of the staff. When the CrÉdit Lyonnais reopened its branch in the Champs ÉlysÉes a few weeks ago it was manned by women clerks.

The government loan issued in the summer of 1914 met less than half of the floating indebtedness and 1914 ordinary deficit. The balance as maturing has been merged into the national-defense loan, which is only short-term financing. On the 10th of December there were 1,000,000,000 francs of the new national-defense loan outstanding, but it was being subscribed for all over France daily. This national-defense loan consists of three, six, nine, and twelve months' government bills bearing 5 per cent interest. I figured that the amount issued December 10 was for the most part used to provide for the maturing floating indebtedness, and for the deficit on the government budget aside from the expense of the present war.

As the government is advancing money to Servia and to Belgium, the loan of 20,000,000 pounds, or $100,000,000, from England can be readily accounted for.

There were loans from the big banks of France for the government at the opening of the war, but these loans I was assured were all merged in the 5 per cent national-defense loans, which have not exceeding one year to run.

On these national-defense loans the cautious Bank of France will advance in limited amounts 80 per cent of the face value, but only where the government loan matures within three months.

The great principle of the Bank of France is to keep liquid. Its assets must always be mobile.

There is only one point at which French finance should be criticized, and as we cannot know all the details of the stress of the military position when Paris was abandoned, her mobilizing of the reserves still in disorganization, and her transportation awry, we may not be in a position to level any just criticism.

But it must be set down in the interest of true report that the French credit was at one time endangered by the way the treasury, or the military authorities, handled the government credit in payment for war-supplies.

Instead of going to the bankers and making its financial arrangements, paying the war-supply contractors, the French government made many contracts under which it paid contractors, and purveyors, with the 6 per cent national-defense notes of the government, running three, six, nine, and twelve months.

As the contractors were making 15 per cent and 20 per cent on their mercantile overturn, they could afford to discount 5 per cent and more in the sale of the government notes, and while the government was passing out these notes at par to the patriotic subscribers, the contractors were negotiating liberal discounts to bankers and others.

Nevertheless, the stupendous fact remains that France, caught in a European war most unaware, with impaired budget and a floating indebtedness, has carried the greatest war of her history for six months without a long-term national loan and by the issue of less than $200,000,000 5 per cent short-term notes for not exceeding one year, and credits for less than $800,000,000 from the Bank of France; has maintained her gold basis unimpaired; and has kept the international exchanges steadily in her favor; and all this without any special financial legislation.

Nor could I find any evidence of a French disposition to sell the American copper shares, railroad bonds, or industrial shares into which the French have been putting some money of late years. But I did learn that short-term American railroad notes may this year be renewed abroad only in part.