The Prestige of the Franc That Dropped Two Zeros

The Anchor That Dropped Two Zeros

On January 1, 1960, a new franc came into effect in France. One new franc was equivalent to 100 old francs. On paper, two zeros were dropped. This denomination was designed by Finance Minister Pinay and economist Rueff. The goal was to restore the "prestige of a heavy franc."

Of course, dropping two zeros did not increase the franc's real value; the amount of goods one could buy remained the same as with 100 old francs. Nevertheless, this psychological anchor of a "heavy franc" contributed to the relative stability of the Fifth Republic initiated by de Gaulle. Currency is built on the belief that people have in it. The denomination was a device to rebuild that belief.

Reclaiming Gold to Bet on Prestige

Having established the prestige of the domestic currency, de Gaulle next challenged the global monetary order itself. Under the Bretton Woods system of the time, only the dollar was pegged to gold, allowing the United States to cover its deficits with its own paper money. Finance Minister Giscard d'Estaing called this system an "exorbitant privilege."

De Gaulle challenged not with words, but with action. In February 1965, France announced it would convert its dollar reserves into gold and used naval ships to transport the gold bullion from across the Atlantic. Other countries followed suit, and this movement depleted U.S. gold reserves, becoming one of the triggers for the dollar's suspension of gold convertibility in 1971. Although its own franc had been decoupled from gold in 1936, France urged the world to return to gold once more.

The General's Defeat, the Successor's Pragmatism

However, the franc's prestige was shaken by domestic events. In May 1968, amidst general strikes and occupations, capital fled from the franc. The government, employers, and unions reached the Grenelle agreements, raising the minimum wage by thirty-five percent and general wages by an average of ten percent. The demands from the streets were, in effect, written directly into the currency's ledger.

In November of the same year, the world expected a devaluation of the franc, but de Gaulle refused. He argued that a devaluation without a strict stabilization plan would end in failure. For him, devaluation was a defeat for prestige. However, nine months later, on August 8, 1969, the government of his successor, Pompidou, announced an 11.1 percent devaluation. By choosing a day when the stock exchange was closed, it avoided any speculative pressure. Devaluation had become a silent, pragmatic act.

The Faceless Foreign Exchange Market

Later, when Mitterrand was elected president in May 1981, the market immediately priced in a devaluation. However, he too initially refused, stating he would not devalue the currency of the people who had placed their trust in him. The government gambled on stimulating demand, but this unilateral expansion amidst a global recession nearly doubled the trade deficit, from fifty billion francs in 1981 to ninety-three billion the following year.

The franc was devalued twice: first by three percent in October, and then by another 5.75 percent the following June. The government then nationalized thirty-nine major private banks, along with Paribas and Suez, in 1982. But even by nationalizing the walls, capital could still escape across the border. The franc's enemy was no longer the bankers of Paris, but the faceless foreign exchange market.

Eventually, France itself would relinquish its franc to a European currency.