Pierre-Cyrille Hautcoeur, Université d'Orléans et DELTA. Publié dans D. Glasner (ed.) Business Cycles and Depressions: an encyclopedia, Garland, 1997, pp.39-42
 

The Bank of France was founded in 1800 by a group of parisian banks as a discount bank with a local monopoly on note issue. It subsequently acquired the central-banking responsability of protecting the country against domestic as well as international crises, having a special role in providing the Bank of England access to its gold reserves. In the nineteenth century, the Bank of France enjoyed a high degree of autonomy, but its intransigent anti-inflationary stance during the great depression caused the government to diminish its independence after 1935.

1. Domestic lender of last resort
As early as 1810, 1818, and 1826, the Bank of France responded to the shortage of money by discounting generously commercial paper. In 1830, it accepted almost any paper, although doing so violated its statute.
The Bank was accused of having acted primarily in its own interest in many crises. In 1848, it allowed all the provincial banks of issue to fail in a successful attempt to transform them into branches (Gille 1970). Moreover, some attribute the fall of the Pereires' Credit Mobilier in 1868 to the rivalry between the Currency-School ideas of the Bank and the Banking-School or "Saint-Simonian" ideas of the Pereires who had intended to compete with the Bank and its Rothschild allies by taking over the bank of issue of the annexed Kingdom of Savoy (Cameron 1961). The same is said about the Union Générale crash in 1882. But a close analysis of both episodes shows that the Credit Mobilier and the Union Générale were deeply involved in industrial speculations and that the Bank did not cause their failure (Levy-Leboyer 1976).
The Bank did save many other banks in difficulty, or organized their liquidation to avoid a general panic, as in the cases of Laffitte (1831), the Comptoir d'Escompte (1889) and the Banque Nationale de Crédit (1931). The 1931 bank crisis wasn't very serious, because of the conservative attitude of major French banks toward industrial operations and in the cover of all sight obligations. The Bank of France intervened in favor of many provincial banks with limited industrial commitment. However, the Bank was criticized for never intervening directly for commerce or industry, but only for great or medium-size banks, and for asking the large banks and the State to share in the cost of rescue operations. In the Great Depression, the banks protested against competition by the Bank of France through "direct discount" (maintained by the government since the founding of the Bank although the growth of the banking sector had made it unnecessary). But the main reason for hostility against the Bank, its very conservative attitude in supplying money for normal economic activity, was only indirectly related to the crises.

2. Macroeconomic policy
The Bank never publicly accepted responsibility for economic fluctuations: "the Bank", wrote the Conseil Général of the Bank in 1857, "does not regulate the price of money, it only records it officially"  (Plessis 1985, 215). Throughout the nineteenth century, "the only service the Bank has to offer is to moderate business activity" (Plessis 1985, 165), by raising its discount rate, thus signalling the beginning of a crisis as well as dampening its impact. However, its practice was different, and for the entire century the Bank tried to keep its discount rate at a low level. Its method was also different from that of the Bank of England (even if the result was exactly the same mean rate in the long run): the Bank of France tried to keep its discount rate stable at a "normal" rather than at the lowest level possible. The four-percent rate did not change from 1820 to 1847 and the rate was never more than one point above or below three percent from 1882 to 1914. Such a policy was possible before 1870 because of the strict limitation of the money supply and of the liabilities of the Bank.  It was facilitated thereafter by  a balance-of-payments surplus.
The Bank oposed the founding of many banks (particularly provincial banks of issue before the Bank's privilege was extended to the entire country in 1848) until the liberty to incorporate was given in 1863. Before the new joint-stock banks started competing in the 1870s, the Bank's discount was limited to a small number of Parisian banks by severe conditions of admission. Its reluctance to issue notes of medium or small amount (because of fears of panic dating back to the 1720 Law experience and the Revolutionary Assignats) and the late (1865) legal recognition of the check by the government resulted in a low degree of monetization of the French economy and the continued use of gold coins (Cameron, 1967).
A flexible rate policy like that of the Bank of England from the 1840s was adopted only between 1857 and 1882, and did not match the frequency of the English variations. This was the only period in with a determined countercyclical macroeconomic policy was practiced.
The Bank's influence on the money market declined between 1880 and 1940 because its share of total discounts disminished, because the great deposit banks (that never required to rediscount at the Bank) had excess liquidity, and because the Bank refused twice to engage in an open market policy (in 1861 and 1928). After 1918, the supply of money from the Bank rose, not because of a change in its discount policy but because it was no able to limit its advances to the state budget. The belated resistance of Governor Robineau during the resulting franc crisis of 1925 was continued by his successors Moreau and Moret. But from January 1935, the Bank was obliged to discount Treasury bills and to make advances to the state, in an ever-growing subordination on the Finance Minister that is reflected by the frequent changes of the state-appointed governors of the Bank. These inflationary practicescombined with an increasing discount rate and a policy of strictly restricting lending to private business, which reflects the absence of a coherent macroeconomic policy, were continued after 1935, partly explaining the duration of the Great Depression in France.

3. Defense of the franc
Guaranteeing the franc was ever said to be the principal aim of the Bank. From 1800 to 1914, the convertibility of the notes it issued was guaranteed at an invariable rate, except in two cases of political origin, from 1848 to 1852 and from 1870 to 1878. Despite the preoccupation with convertibility, exchange-rate crises rarely required a high interest rate. In 1836, the Bank lost 55 percent of its reserves without raising its discount rate, preventing the international crisis from affecting France. In 1855, 1857, 1864, the solvency of the Bank was imperiled by high London rates, and its rate rose to 10% in 1857, the highest level of the century. But after 1866, high English interest rates did not attract enough gold to force the Bank of France to raise its rate.
The reason for the relative insulation of France from world crises was the very high reserves/liabilities ratio (often more than 80 percent) the Bank maintained until the 1930s, a consequence of its strict Currency-School principles and of the resulting limited monetization of France.
After 1918, the Bank was unable to prevent the fall of the franc, except briefly in 1924, with the help of the Morgan bank. But it assisted the Poincaré government in stabilizing the franc in 1926. During the Great Depression, its preoccupation with the franc led the Bank to favor deflationary policy. However, after 1935, the Bank could not prevent the growth of advances to the state and the subsequent recurrence of speculation, inflation and devaluations.

4. International policy
The Bank played an important international role in the nineteenth century, mainly because it was the only bank with enough gold reserves and international influence to help the Bank of England, providing assistance in 1825, in 1836-39, in the Baring crisis of 1890, in 1906-07, and in 1931 (by forbearing to convert its sterling holdings and arranging large credit for the Bank of England). The Bank may be considered the second center of the international monetary system from 1840 to 1914.
During the 1930s, the Bank of France was widely held responsible for the Great Depression and the devaluation of the pound in 1931. The Bank of England accused it of sterilizing the gold inflows to monopolize the world's gold. In fact, the Bank tried to return to its old Currency-School principles that required a large gold stock. From 1924 to 1928 the gold flows had been purely speculative, unrelated to differences in discount rates, which explains the reluctance of the Bank to let the money supply reflect those flows. But the inflows of 1926-1932 were consistent with the French economy's traditional wide use of notes issued by the Bank of France in preference to deposits, and with a Currency-School central-bank that rejected the use of open market operations as inflationary. But sterilization was not a cause of the Great Depression since the sterilization of capital inflows did not continue after the formal resumption of convertibility in June 1928. Thereafter, the ratio of gold plus foreign exchange reserves to the Banks liabilities stopped rising. A more likely cause is that the extent of exchange-rate speculation in the 1920s was to great for central-bank cooperation cope with, undermining the nineteenth-century equilibrium in which gold reserves were largely concentrated in the Bank of France. Credits organized by the Banks of France and England and the Federal Reserve Bank of New-York could not halt the crisis, because speculators soon suspected there were disagreements between the main countries, and no one could act as the international lender of last resort.

The Bank of France's policy against crises during the nineteenth century differed from the Bank of England's, beeing adapted to a country with limited international commitments like France. After 1918, many governments had no serious economic (and especially tax) policy: by stages, they limited the Bank to servicing the Treasury's financial needs. The Bank could not resist, which led to the prolongation of the Great Depression in France and the final loss of the Bank's autonomy. After 1945, the Bank was called on to finance the reconstruction and to prevent crises, while exchange control was used to protect the franc's stability. From then on, the Bank was simply the principal agent of the government in implementing its monetary policy.
 

                                                        Pierre-Cyrille HAUTCOEUR
 

 BIBLIOGRAPHY

Cameron, Rondo. France and the Economic Development of Europe, 1800-1914. Princeton: Princeton University Press, 1961.
Cameron, Rondo. Banking in the Early Stages of Industrialization. London: Oxford University Press, 1967.
Eichengreen, Barry. "The Bank of France and the sterilization of Gold, 1926-1932", in Explorations in Economic History. Vol. 23, n°1,1986, pp. 56-84.
Gille, Bertrand. La banque en France au XIXème siècle. Genève: Droz, 1970.
Kindleberger, Charles P. Manias, Panics, and Crashes. London: Macmillan, 1989 (first ed. 1978).
Kindleberger, Charles P. & J. P. Laffargue (eds). Financial Crises: Theory, History and Policy. Cambridge: Cambridge University Press, 1977.
Levy-Leboyer, Maurice. Les banques européennes et l'industrialisation internationale. Paris: Presses Universitaires de France, 1964
Levy-Leboyer, Maurice. "Le crédit et la monnaie" and "La spécialisation des établissements bancaires", in F. Braudel & E. Labrousse (eds) Histoire économique et sociale de la France, III, vol.1. Paris: Presses Universitaires de France, 1976.
 Plessis, Alain. La politique de la Banque de France de 1851 à 1870. Genève: Droz, 1985.