THE FIGHT FOR THE FRANC

FEW men cherish the sanctity of the spoken word as does Charles de Gaulle, especially when he has spoken it himself. Three weeks ago, when an exodus of francs began to threaten the stability of France's currency, De Gaulle loftily dismissed the possibility of the franc's devaluation as "the worst absurdity." Almost no one believed him. Speculation against the franc continued to mount until it neared crisis proportions, threatening to unbalance the entire, delicate mobile of the Western monetary system. The money managers and bankers of Europe and the U.S. assembled in Bonn in an emergency session, and solemnly rendered collective judgment that the franc must be devalued. The French braced for the worst, and the money men in capitals around the world prepared for the myriad adjustments in trade and currency flows that a cheaper franc would require. De Gaulle's critics could scarcely contain their glee that, at last, the oracle of the Elysee would be found fallible and forced to retract an utterance.

It all counted for nought with the President of France. Last week, on the day after his 78th birthday, he brought off the greatest surprise in a long lifetime dedicated to the practice of the unexpected. In a stunning act of defiance against the world's financial experts and the seeming necessity of events, he refused to devalue the franc by one centime. Compared with De Gaulle's other famous nons--his withdrawal from NATO and his vetoes of British admission to the Common Market--the refusal to devalue was, perhaps, not of equal importance but certainly even more surprising. It was also perhaps his greatest gamble. At stake was not only the pride and economic power of France but also the stability of the free world's monetary system, on whose smooth, uninterrupted functioning depends the economic health of nations.

For three weeks the crisis in world money markets had been gathering, set off by rumors that West Germany's healthy Deutsche Mark would be revalued. Speculators hastened to sell their francs for marks, and during that period a total of some $1.7 billion in francs was sold, forcing France to use its gold reserves to support the parity of its currency. The run stopped only when the world's currency markets were closed down for three days to give the West's industrial nations, the so-called Group of Ten, a chance to solve the crisis. After three days of almost nonstop sessions in Bonn, the financial experts emerged confident that they had found the solution. In a showdown, the West Germans refused to revalue the mark.

As a result, most of the delegates then concluded that the franc would be devalued. The French delegates gave the grim impression of men accepting the inevitable.

A Shift of Power

That seeming inevitable represented a major and ironic defeat for Charles de Gaulle. It was he who had forced France to practice severe austerity at home in order to build up the huge gold hoard that he used to support the new solid, or so-called heavy franc. The solidity of the franc was the basis of his foreign policy. It was he who had lectured other countries on the value of a sound currency. He had not been above engaging in a bit of monetary warfare to undercut the dollar and pound, with the notion that he was enhancing France's grandeur and independence. Now the franc was in danger.

Not surprisingly, there was some chortling in capitals that had felt the sting of De Gaulle's mercantilist monetary policies. In France itself, there was an unparalleled outpouring of scorn on him for letting the franc blunder into a crisis. As the rumor of devaluation raced through Paris and was soon accepted as certainty, Le Monde wrote, "The regime itself is devalued." Equally hard to take was West Germany's victory at the Bonn meeting. De Gaulle's France, reflected Jean-Jacques Servan-Schrei-ber, lost "the most important battle against the Germans--the economic one." Meanwhile, the West Germans savored the notion that they had triumphed over France. NOW THE GERMANS ARE NO. 1 IN EUROPE! bannered the Bild Zeitung. Many people detected a shift in Europe's center of gravity. As the Times of London put it, "The primacy of power in Europe has passed from Paris to Bonn."

Against that forbidding background, the French Cabinet assembled in the Elysee Palace presumably to set the rate of the devaluation, which was expected to be somewhere between 7% and 20%.

The worry was that the General, in his anger at being forced to shrink the franc, would devalue so sharply that he would bring down with him the British pound and perhaps even the dollar, since a massive devaluation on the order of 15% to 20% would rend the fabric of Western trade and monetary arrangements.

Script Rewritten

"Great leaders have always stage-managed their effects," De Gaulle once wrote, and last weekend's events in Paris had the air of a coup de theatre. By the time the ministerial Citroens began sweeping to stops on the gravel courtyard of the Elysee for the special Cabinet meeting, the French press was printing down to the third decimal point exactly how large the rate of devaluation would be. Le Monde, France's most prestigious daily, said the figure, which was attributed to excellent sources, was 9.785%. Paris-Presse, which closely reflects Gaullist views, devoted most of its coverage that day to the austerity program that would accompany the devaluation. The Ministry of Information put out the word that the Cabinet meeting was expected to last the ordinary amount of time--about 90 minutes.

Some 70 French and foreign reporters gathered at the Information Ministry at 69 Rue de Varenne in Paris' seventh arrondissement at the usual time.

Other reporters waited in the courtyard of the Elysee. Two hours passed and no one appeared. The suspicion began to grow that De Gaulle had rewritten the script. At the ministry, the headwaiter put out bottles of J&B and mineral water to appease the impatient reporters. After three hours and 35 minutes, the Cabinet ministers filed out of the palace, silent, unsmiling and uncommunicative. Finally, Information Minister Joel le Theule showed up at the ministry for the briefing. By this time, the tension was great. The Paris afternoon papers were holding their evening editions for the final details of the devaluation. Instead of making the announcement about devaluation, Le Theule read a routine statement that financial and economic matters had been discussed. But he omitted any reference to devaluation. The President himself, said Le Theule, would make the statement about the franc. "When? When?" cried the newsmen, who chased Le Theule into a corner of the room. He repeated only: "That's all I can tell you. I'm sorry, I'm sorry." Later, at 7:45 that evening, French radio and television interrupted their broadcasts with a special bulletin from the Elysee: "The present parity of the French franc is maintained." Obviously, just saying so would not make the franc stable, but the assertion was itself a startling and audacious act. How had it happened?

Sting of Humiliation

De Gaulle got out of bed on the morning of the decisive day in an "extremely grouchy mood," according to those Elysee insiders who find deep international significance in the servants' chronicling of every presidential burp and hint of indigestion. Later in the morning he had long private sessions with two old economic advisers: Jean-Marcel Jeanneney, 58, a statist economist, and Roger Goetze, 55, who was the general's financial adviser when he returned to power and devalued the franc in 1958. De Gaulle was weighing the question of devaluation in much the same manner as he pondered the issue of whether to resign or during the riots in May. By the tim the Cabinet met, De Gaulle had in all likelihood made his decision. Even so, he gave his ministers a full hearing.

De Gaulle called first on Finance Minister Franc,ois Ortoli to sum up the Bonn meeting. Ortoli stressed that although the Ten broke up with the clear understanding that France was about to devalue ("and not at a rate much beyond 10%"), he had not given any pledge that France would follow through. Furthermore, he said that a fund of $2 billion to support the franc, created in Bonn, was given with no strings attached. There was some passion in Ortoli's voice as he described how France had been "pressured" into considering devaluation after the Germans refused to revalue the mark. He told of the Germans' jubilation when it seemed to them that they had won the day. Although De Gaulle had heard all this before, it was the first time that the majority of ministers had learned of the "humiliation" in Bonn. Then, one by one, the other 19 ministers gave their views. Couve de Murville was the last man to offer his opinion, and he advised against devaluation. The other ministers were divided, some for a devaluation of the currency, at varying rates, and others--although a minority--against devaluing at all.

During the session De Gaulle asked few questions. He had on his desk three "position papers" from the Ministry of Finance. One of them projected the situation if the franc were devalued at 9.785%--the figure in Le Monde. The second paper outlined a devaluation of 7.5%. The third report, prepared at De Gaulle's personal request, projected the consequences if he were not to devalue at all. When everyone had spoken, the General gave a brief resume of the trends of thought.

Then he scribbled a note on a piece of paper and handed it to Minister of Information Joel le Theule. It said simply that a communique would be issued at 7:45 that evening. Neither Le Theule nor any other Cabinet official, except perhaps Couve, had a clear idea of what the President would do. Typically, De Gaulle did not make his decision known to his Cabinet or talk about his solution. He said only, "Thank you, gentlemen. I will take your views into consideration."

Pride and Principle

Many factors were involved in De Gaulle's decision. One of them was pride. The West Germans had failed to mask their glee at France's discomfiture. In fact, the French first learned of the devaluation discussions in Bonn through press reports quoting West Germany's Finance Minister Franz-Josef Strauss. After the final session, Strauss implied that the devaluation was a foregone conclusion. "The French government has to decide the extent of it," he said.

For De Gaulle, it was also a matter of principle. From the start, the Gaullists have maintained that the crisis was an international affair in which the West German mark was deeply involved. In the French view, the mark was so strong that it was pulling other currencies off balance. By refusing to devalue, De Gaulle could perhaps bring about a situation in which the Germans would be frightened into increasing the exchange rate of the mark. That would automatically strengthen the franc by making German goods dearer on the world market. De Gaulle also knew that a devaluation would frighten the French, reminding them of the financial instability of the Fourth Republic before he came to France's rescue.

De Gaulle announced that the next day he would go on the radio to explain what he intended to do to defend the franc in lieu of devaluation. He could apply many of the same remedies that British Chancellor of the Exchequer Roy Jenkins had imposed last week on Britain. He could reduce government spending still further, raise taxes and institute currency and trade controls in an attempt to stanch the outflow of francs.

These measures would please the world's central bankers, but they would be taken as a direct affront by the millions of French workers who only a few months ago were striking for higher wages, better living conditions, more medical aid. Union officials warned De Gaulle not to put the burden of the franc's rescue on the workers. "If the government decides that the workers are going to pick up the tab, it will provoke a movement of great depth that risks being extremely serious and extremely violent," said Eugene Descamps, the secretary-general of France's largest non-Communist union. Similarly, if education reforms are curtailed, new student disorders might erupt. There is the distinct danger that De Gaulle, in his efforts to save the franc, might lose the support of the French.

Troubled Springtime De Gaulle could hardly blame other countries for dealing somewhat severely with him. He had always been notably reluctant to support his allies when they got into trouble. Just a year ago last week, he viewed devaluation of the British pound with haughty detachment--even with a certain amount of enjoyment. As he saw matters, it was high time that those lazy Londoners started straightening out their economic problems. A few months later, when the dollar also suffered a crisis of confidence, he recalled that he had said all along that the U.S. ought to stop its deficit spending, correct its imbalance of payments and, in order to ease the impact of inflation, raise its taxes.

Suddenly, however, De Gaulle found himself in trouble at home. Last May, France was thrown into chaos for weeks when students and workers declared a general strike. It was terrifyingly effective--and De Gaulle finally agreed to a settlement for the workers that set off an awesome wage-price spiral. Ever since, the French economy has been sagging under the increased burden. At the same time, West Germany, France's erstwhile foe and long-time competitor, has enjoyed a new burst of prosperity. Viewing this situation, De Gaulle and his new Premier, Maurice Couve de Murville, obstinately repulsed all suggestions that they might alleviate France's economic plight by devaluing the franc. Instead, they demanded that the Germans revalue the mark upward, and thus slow the flight of francs to West Germany.

Curiously, for all its troubles, France's economy was in basically good shape. French industry was producing at record levels and unemployment stood at a bearable 470,000. Despite a major outflow of monetary reserves brought on by the social upheavals that rocked the country last spring, the government still held more than $4 billion in gold and dollar reserves. About the only tangible signs of economic trouble were a 7% inflation rate, caused largely by the huge wage settlement that followed the general strike, and the bare beginnings of a trade deficit.

Nonetheless, confidence in the economy began to fade fast. French investors were disturbed by a newly enacted inheritance tax and additional levies on high-income taxpayers. Businessmen were concerned about a move, arising out of the country's social disorders, to give workers a much louder voice in corporate operations and perhaps a direct share in the profits as well. Ridden by such fears, Frenchmen, historically distrustful of their own currency, began putting their money into West German marks.

In money markets, speculation often seems to feed on itself. Thus, the more francs that flowed out of France, the more the currency came in doubt--which only served to intensify the outflow. Through it all, the most avid speculators were Frenchmen themselves.

The prudent French feared that the franc could not support such large outlays and began looking for another currency into which to put their funds.

Sterling on the Rocks

The French turned mainly to the currency of their powerful economic neighbor, West Germany. In ever-growing numbers, they streamed across the border into Switzerland carrying suitcases filled with francs. Some went so far as to borrow francs from French banks to convert into marks. As speculation mounted, the Bank of France was forced repeatedly to buy up francs in the open market to keep the currency from falling below its floor of 20.25 U.S. cents. Confidence in France's money began to sink. Cab drivers in Geneva refused to accept French francs. London hotels took them only at a humiliating discount. Meanwhile, the West German mark, bloated by the franc inflow, gained in value. It threatened to break through its ceiling of 25 U.S. cents. At that point, the rush into Deutsche Mark became a scramble as speculators began betting on an upward revaluation of the West German mark that would increase the worth of their investment. The Germans refused to try and stop the trend. Karl Blessing, president of the Federal Republic's Bundesbank, denied that Germany would revalue. "We know from experience," he said, "that sooner or later speculative waves run out."

But the French were becoming desperate. It was now costing $800 million a day to defend the franc. And it was at this point that they began to appeal for the upward revaluation of the Deutsche Mark. Such action would have taken the pressure off the franc by making German goods more costly in world markets and removing the speculative incentive from trading against French currency. Unless the Germans met their demands, the French threatened a massive devaluation of the franc that would have forced other currency devaluations.

The Germans and other Western economic powers tried to buy off the French with offers of massive loans. They refused all offers. Next, the Germans tried to placate the French by imposing on themselves export and import taxes that would have the effect of making German products less competitive on the world market. German Economics Minister Karl Schiller figured that the move would have the same effect as a 4% or 5% revaluation of the mark. Even Couve de Murville conceded that Bonn was making "an enormous concession."

Still, the major concession that De Gaulle wanted could not be extracted from Bonn. As the Germans well knew, a revaluation-induced increase in the cost of their goods sold abroad would almost certainly have pinched corporate profits at the same time that it increased unemployment. And what made both effects particularly untimely as far as Chancellor Kurt Kiesinger's government was concerned was the fact that national elections will be held next year. As Kiesinger publicly declared, "The ills of the sick should not be cured at the expense of the healthy one."

French and German intransigence sent Europe's monetary system reeling toward the brink of crisis. On the day that Schiller, chairman of the Group of Ten, summoned the world's leading central bankers and finance ministers to an emergency meeting in Bonn, demand for gold in London hit the highest level since March. In New York, sterling hit rock bottom at $2.38. In Swiss money markets, it slipped even lower. The dollar, by comparison, weathered the crisis fairly well, reflecting general confidence that the U.S. was finally doing something convincing about its balance of payments problem.*

Shouting Match

When the money men assembled in the barracks-style structure that houses the West German Economics Ministry, Schiller wasted little time in making clear his opposition to the revaluation of the mark. As the meeting dragged on into evening, tempers began to flare. "They did everything except throw chairs at each other," said one participant. Bitter exchanges broke out between the world's leading monetary managers. According to one report, Britain's Chancellor of the Exchequer lectured the West German Finance Minister "as if he were a member of the Conservative Opposition." Jenkins himself was heckled outside the ministry by Germans who were protesting against British efforts to encourage a mark revaluation. The demonstrators carried placards that read SCHILLER AND STRAUSS, DON'T BE BLACKMAILED! and WILSON, HANDS OFF THE D-MARK!--a reference to a telegram that British Prime Minister Harold Wilson had sent to Chancellor Kiesinger in an effort to enlist West German support for an upward pricing of the mark.

At one point in the proceedings, Schiller snapped at the U.S.'s Fowler: "Let us be clear that the mark is not undervalued, but that the dollar is overvalued." Fowler replied with an extraordinary paean: "Gold is the sun," he said, "and the dollar is the earth. The earth revolves around the sun and the relationship doesn't change." Retorted Schiller: "Then I guess we're all just little satellites launched from Cape Kennedy." After Jenkins and Fowler had characterized the German trade tax concessions as inadequate, Schiller declared, "If the lopping off of one third of our export surplus is not a sacrifice, then it is obvious that we have quite different concepts of social values."

The Germans refused to budge on the mark. During a three-hour adjournment the last evening, the delegates consulted with their governments about new positions, searching for a compromise solution. The forms of such an accommodation gradually began to emerge. It included devaluation of the franc and a loan of $2 billion to France as a support for its currency. The French still stalled. They insisted that unless the Germans backed down, they would undertake a massive devaluation that would wreck the international monetary system.

Finally the French delegation began to strike a more reasonable note. They gave the impression that they would devalue, and in a range that would not pull other currencies, notably the pound, into an involuntary downward spin. Obviously, the French delegation at Bonn had no authority to make a final decision. Even so, the participants flew home sure that France would devalue. The next move was up to the proud and tough man in the Elysee, who immediately called for a Cabinet session and began to prepare the dramatic events of the weekend.

Inventive and Aggressive

If the crisis amply illustrated the weakness of the franc and pound, it underscored just as strongly West Germany's powerful trade position. Unlike France, which was forced to absorb costly wage settlements following the spring disorders, Bonn has succeeded in keeping domestic inflation pretty much under control, an accomplishment that has restrained domestic demand for imports at the same time that it has kept prices on exports relatively low.

Having recovered from a 1966 recession, the Germans rank once more as the economic stalwarts of Europe, and their Deutsche Mark stands supreme among world currencies. There is virtually no unemployment, prices are more stable than ever, productivity is up by 7%, and the gross national product will grow 5.5% this year. A good deal of this success is undoubtedly due to the inventive and aggressive economic prescriptions of Economics Minister Karl Schiller (TIME, Oct. 25). They include as much free-market competition as possible, as much planning as necessary. Part of the Schiller scheme, however, reflects the adaptability of both management and labor. The Germans knew all the while how much they stood to lose by a recession. As a result, they were more than happy to cooperate with a government that offered a promise of economic robustness.

In an effort to halt the downhill slide, Schiller formulated a plan for extensive pump priming that eventually put $2 billion into public works. He also encouraged long-range fiscal planning, and helped balance the budget. Perhaps even more important, he instituted regular meetings between federal and local government officials, management and labor representatives, presenting them with detailed statistics and encouraging them to discuss economic requirements. Schiller is reluctant to attribute the astonishing orderliness and restraint of German management-labor relations to the Germans' somewhat stereotyped trait of discipline. Organization is at its heart, he maintains, explaining that after the war German unions were organized along modern lines, "meaning more centralized than, say, in Britain."

The one factor that still remains out of balance--and has significantly contributed to the fiscal problems of Britain and France--is the foreign-trade account. As in 1967, the Germans will record a trade surplus of more than $4 billion this year. Increased domestic consumption hardly makes up for that, and Schiller's solution has been the encouragement of investment abroad--some $2.5 billion so far in 1968.

Whatever Bonn's economic planning achievements, however, there are other, less tangible factors that have aided the German recovery. As the Bild Zeitung somewhat pompously observed last week in comparing the Federal Republic to France and Britain: "If we went on strikes and took breaks as often as the others, we too would have to go out and borrow, the only question being: From whom? If we had so suicidal a trade union system as the British, our mark would be just as tuberculous as the pound. If we had as many unsolved social problems as the French, then we would have as much unrest and --as in May in Paris--a ruinous rebellion."

Sanctity and Stability

In spurning devaluation as a way out of the franc crisis, De Gaulle was being faithful to his genuine, almost mystical belief that the sanctity of France depends on the stability of the franc. As he put it in 1963: "Neither Italy nor Belgium has a government. The United Kingdom and Germany are on the eve of not having one. We are the only country that is stable and sound; this I have brought, and it will last after me."

Whether it will or not remains to be demonstrated, for the consequences of the general's decision last week are difficult to foresee. There is always the possibility that the measures he is taking in lieu of devaluation may somehow succeed in stopping the run on the franc. France, after all, is in a far stronger position than Britain was when it devalued last year. Britain's gold and foreign-currency reserves had dwindled to a dangerously low level. France, despite the recent heavy losses, still has $4.1 billion in gold and reserves, and in addition to that the $2 billion credits made available in Bonn by the Ten and nearly another $1 billion open to it in Basel's Bank of International Settlements. Taken together, those are potent resources to throw into a speculative battle.

Moreover, the French economy is essentially sound. In food and industrial resources, France is largely self-sufficient. It is not yet in real balance of payments difficulties. The crisis of the franc was primarily created by the lure of volatile capital funds into the mark by speculators who believed it was about to be revalued. In strict and narrow economic terms, France does not need a devaluation.

But the pressures for devaluation are seldom as technically correct as they are psychologically inspired. That is why De Gaulle's gamble is essentially a psychological gamble. He does not need to reform the French economy so much as he needs to re-create confidence in the idea of the franc. Once the speculators fix on a vulnerable currency, it is difficult to persuade them to give up the pursuit. If, for example, the French unions refuse to accept De Gaulle's austerity measures and strike for a new round of wage increases, he is almost certain to lose his bet that he can save the franc without devaluing it.

If he does lose, for that or any other reason--or no reason at all except that the speculators refuse to quit selling francs--the most extreme consequence imaginable would be a world financial debacle, bringing down the present monetary system in ruins. But long before that should happen, the governments of the West would likely convene a world monetary conference to overhaul completely the present system. Even in that eventuality, the General in a sense would emerge as a winner by having forced the reform of the system he has so long excoriated. Whatever the outcome of De Gaulle's latest exercise in in dependence, he has demonstrated once again his unique ability to confound the conventions of an increasingly interdependent world.

*The Commerce Department last week reported a payments surplus of $35 million at seasonally adjusted rates during 1968's third quarter, the first such surplus in more than three years.

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