Fate of Blum Government Seen Resting On New French Loan Issue Reception

Necessity on the part of the Blum government to check the fall of the franc and the flight of capital if it is to survive was emphasized in an interview with Professor Seymour E. Harris yesterday.

Amplifying this statement, he pointed out the possible grave international consequences of a change in political alignment at this time, and intimated that a good deal depended on the Leftist party's ability to maintain confidence in the franc.

Concerning the new French Loan he said, "Its significance lies in its effects upon the franc. The franc has been weak largely as a result of the continued outflow of capital which is to be associated with unsettled conditions in Europe and lack of faith in the French Popular Front Government.

"If the franc is not maintained at the minimum point set by the devaluation law, i.e. 4.3 cents, the present government will probably not survive," Harris declared.

"Since the devaluation of her currency in 1935, there has not been the expected return of capital, he said, and the support of the United States and England has probably kept the franc from falling further.

Reasons for Failure

Harris gave three reasons for the failure of capital to come back to France: (1) The franc was provisionally stabilized at 4.3-4.9 cents and held at 4.6 cents. Speculative opinion was that it would fall to 4.3 cents at least. Hence why buy at 4.6 cents?

(2) Attempts on the part of the French government to tax part of any exchange gains. This discouraged conversion into francs and hence contributes to a weakness in francs.

(3) The fact that a socialist government was in power. This last was extremely important because the Blum ministry, in accordance with its platform, was dedicated to internal improvements and large expenditures which the French could not afford, and which destroyed faith in the franc.

"The gist of the matter," he said, "is that it is difficult for a socialist government to devaluate; for if devaluation is to be successful, wage increases of large proportions should not be encouraged; and the influx of capital which is very helpful, if not absolutely necessary, is not forthcoming."

"The idea of this loan," Harris said, "is to encourage people to buy French securities, and to buy them with foreign currencies which they turn into francs." He pointed out the danger at this time of purchases of securities by the banks when what is needed is not the creation of deposits (more money), but the transfer of savings (deposits) to the government.

Johnson Act

Questioned on the efficacy of the Johnson Act to prevent American money from going to a defaulting debtor nation, Harris said that in this case the Act merely made it difficult for the French to issue the securities here, and that there was nothing to prevent the American investor from buying French securities in the foreign market just as he could buy francs.

"The most effective manner of stopping the outflow of capital from France to the United States and starting a reverse flow is either to make economic (and political) conditions better in France or worse here," he said. "The latter can scarcely be termed a satisfactory solution.

Foreign Money Needed

"From current reports," Professor Harris continued, "the French Loan seems to have been a success. It has been heavily over-subscribed. Yet two factors must be kept in mind. Its success depends largely on the foreign money used to subscribe to the loan, and not merely on the actual amount of subscription in francs.

"Secondly, the question arises whether the loan was not necessarily limited to an amount which would assure over-subscription." Admitted failure at this point, he said, would be a calamity.

Since the success of the Devaluation Law is intimately tied up with success in maintaining the franc above the minimum level of 4.3 cents, we all hope that the loan was a success."