French inflation did not reach the catastrophic proportions of the German case, but it persisted until 1926. The evolution of wholesale prices and the industrial production index in France shows that the 1920 crisis temporarily reversed the sharp upward trend. Wholesale prices increased by 45% between 1919 and 1920. In 1922, they fell again below the 1919 level. Inflation reappeared and reached its peak in 1926. Between 1922 and 1926, wholesale prices more than doubled. The exchange rate of the pound, which had been 25.22 francs in 1914, reached 240 francs at the lowest point of monetary depreciation on 20 July 1926, while the dollar rose from 5.18 francs to 49.22 francs.
It was through exchange-rate stabilization that the Poincaré government ended inflation. Much emphasis has rightly been placed on the psychological dimension of the Poincaré experience, since the rise of the franc in the foreign-exchange market took place even before the essential measures were adopted. From 240 francs on 20 July, the pound fell to 208 on 23 July and to 190 on 26 July. It reached 162 francs on 7 August, at the moment when the first technical measures were being voted.
Stabilization produced a 13% decline in industrial output between 1926 and 1927, partly due to the liquidation of stocks accumulated during the inflationary period. The fall in prices did not lead to a sharp fall in securities, since Poincaré’s arrival in power reassured speculators. The inflation of 1922–1926 was essentially an exchange-rate inflation confined to financial intermediaries. Speculative demand concentrated mainly on foreign currencies and imported goods. Jean Gabillard’s analysis of the end of inflation in 1926 seems highly relevant: “As in the case of Germany, the monetary surplus represented by liquid assets accumulated during the war was concentrated in limited economic and social strata; inflationary behaviour did not become generalized. … The arrival of President Poincaré to power provided the necessary guarantees. With Poincaré it was known that things would end ‘well,’ without taxes or capital levies, without the introduction of exchange controls, without resort to excessively ‘dirigiste’ methods, without excessive fiscal pressure.”
A key factor was that this type of inflation was strongly supported by the banks, which not only received and transmitted buy and sell orders on the stock exchange but also provided the necessary liquidity and operated on their own account; the banks had no reason to fear the Poincaré program, which in credit matters implied almost exclusively an increase in the discount rate. Since the end of inflation was not feared, behaviour shifted radically the day Poincaré came to power; everyone sensed that public opinion supported this statesman and anticipated a reversal of the trend that had to be seized.
The clearest sign of confidence among these socioeconomic groups was the massive return of foreign currencies between the de facto stabilization of 22 December 1926 (1£ = 122.25 francs) and the legal stabilization of 25 June 1928, which restored the gold standard and defined the franc as 65.6 mg of gold at 9/10 purity, equivalent to one-fifth of the gold value of the germinal franc of year XI (322.5 mg at 9/10). As world conditions were expansionary and the devaluation favourable to French exports, the recession of 1926–1927 was shallow and short. However, according to I.N.S.E.E. estimates, the 1929 industrial production index (133) was below its 1926 level (138). This was not the case for the index of manufactured goods, which rose from 130 in 1926 to 143 in 1929.
The stagnation of the united kingdom
The British experience was different because, for the first time in its history, the United Kingdom discovered the incompatibility between the conditions required for satisfactory domestic growth and the constraints imposed by being a key currency. Competing with the dollar, which was becoming an international currency, the pound had to regain lost ground or at least avoid further losses. To restore confidence, the British government decided to re-establish the prewar exchange rate. Thus, on 13 May 1925, the pound became an overvalued currency, slowing British exports and therefore industrial activity. Compared with 1913, the average price of British exports in 1927–1929 was 62% higher, compared with 1% in France (a consequence of devaluation), 23% in Italy, and 49% in Switzerland. Over the same period, the volume of British exports was 15% below its 1913 level, whereas French export volumes rose by 47%, Italian by 36%, and Swiss by 1%. Price movements ran opposite to export volumes: British prices were therefore too high. Since adjustment could not occur through exchange-rate action, a deflationary policy on prices and costs had to be implemented.