Money, Banks and Finance in Economic Thought

Flight-to-safety and the Credit Crunch in France during the Great Depression

Patrice Baubeau, Paris Nanterre University
Monnet Eric, Banque de France, PSE, CPER
Riva Angelo, EBS-Paris and PSE
Ungaro Stefano, PSE

Despite the importance of the French economy and the international role of its central bank, a comprehensive picture of the French banking crisis during the Great Depression and its macroeconomic consequences is still lacking. Quantitative studies use French statistics extrapolated from the balance sheets of the four (or six) largest commercial banks (from INSEE 1952 to Fratianni & Giri 2017). These banks being stable between 1929 and 1932, it is commonly accepted that French bank failures were limited in size and had few consequences so that most authors even forbid themselves from speaking of a banking crisis (e.g. Kindleberger, 1986). The difficulties of French banks are assumed to have occurred later than in other countries, and to be mere consequences of France's deflationary adherence to the gold standard until 1936 (Grossman 1994, Eichengreen 2004, James 2009). Researchers have found that some banks failed during several panics, but they did not assess their macroeconomic consequences (Plessis 1991, Bonin 2000, Straus 2004). Lescure (2004) provides an informed description of the crisis affecting commercial banks, but he does not put in the picture other financial intermediaries nor draws the macro-economic consequences of the crisis. We provide a revisionist account of the banking crisis and its macro-economic implications thanks to a new dataset. Between 1929 and 1931, banking crisis unleashed a credit-crunch (-44%). The main commercial banks did not suffer from the crisis, but the remainder of the banking system lost 40% of deposits. We provide analyses of the transmission mechanisms of the crises. Quantitatively, the primary channel that led from bank distress to a credit crunch was a flight-to-safety; the sum of deposits that exited the banking system and foreign capital flowing into France were absorbed largely by the Caisses d’épargne (50%), with the remainder hoarded in cash (25%), deposited in the central bank (17%), and frozen in bankrupt banks (only 8%). France’s long-standing adherence to the gold standard until 1936 was not the primary cause of banking panics. Had French governments used Caisses d’épargne's deposits to pursue countercyclical, macroeconomic policies, and had the French central bank used its growing liability to support the private economy either directly or by refinancing banks and lending institutions, the credit crunch could have been mitigated. The deflationist policies cannot be understood outside a gold standard mentality (Mouré 1991, Eichengreen & Temin 2000), which was accompanied by a fierce belief in the real bills doctrine by the Banque de France.


Keywords: banking crisis, credit crunch, fight-to-safety, France, interwar

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