The Ambassador in France (Bullitt) to the Secretary of State
[Received 11:45 p.m.]
279. From Cochran. Reference Department’s 103, February 19, noon,22 Butterworth arrived in Paris this morning and we compared notes.
On February 15 Rowe-Dutton, British financial adviser in Paris, had asked me to cline with him tonight saying that Sir Frederick Phillips would arrive in town today for a meeting of a League of Nations committee and would be with him for dinner.
Butterworth met Phillips en route to Paris and Rowe-Dutton asked me to bring him to the dinner tonight. Points raised in Butterworth’s [Page 265]talk with Phillips on the way to Paris were used for leads and confirmed in our evening conversation transcribed below. Phillips did not see French Treasury officials here.
Our conversation at dinner attended by only four of us may be summarized as follows:
I told Phillips of Monick’s approach to me on February 17 and of the interview which I had with the Minister of Finance Marchandeau in Monick’s presence as reported in my No. 268 February 18, 6 p.m. I made it quite clear that while it was Monick who had brought the invitation to me to come to the Minister of Finance it was the latter who took the lead in the conversation, to whom I addressed my questions and from whose hands I received the memorandum quoted in my above mentioned cablegram.
Phillips stated that the British had received nothing in writing from Monick. I told Phillips that the impression that I gained from Monick’s hints when he called on me February 17 was that he had in mind some step involving a move towards stabilization of our three currencies. I added that these hints had not been repeated by Marchandeau. I had not therefore ventured to be more specific in reporting my interview at the Ministry of Finance than the memorandum which I received there warranted. Phillips said that in Monick’s talk with the British there had been no suggestion of any move toward achieving greater stability in any currency other than the French franc. It was his understanding that Monick had in mind some intermediate step towards stabilization between the present situation and a final de jure definite fixing of the franc against gold with the idea that this intermediate step should involve the defense of the franc more along the lines of working of the old gold standard than the present system.
Phillips did not seem optimistic over the chances for success of such an operation and would be very hesitant if his advice were sought by the French. Considering such a possibility however he discussed various factors involved. For instance if stabilization made available after due legislation the contents of the stabilization fund amounting to approximately 13,000,000,000 francs, the 6,000,000,000 francs in the rentes fund and between 17 and 20,000,000,000 francs profit from revaluing the present gold stock of the Bank of France from 43 milligrams to the current rate, what would be the lasting relief therefrom to the French situation? Would this putting of new francs on the market lead to spending which would really facilitate a new flight from the franc? Would stabilization at the present rate of say 155 francs to the pound be sound or what rate should be chosen? Obviously concerned over the fact that the present proposal [Page 266]is known only to Marchandeau, Chautemps and Delbos,23 Phillips wondered what reaction there would be on the part of other Government leaders to the proposition particularly Daladier who might conceivably oppose vigorously a return to a system which would automatically involve surrender of Bank of France gold (constituting the so-called war chest) to defend the franc.
I gave as my purely personal opinion that stabilization at the present rate would not in itself be sufficient inspiration for immediate and permanent return of a significant amount of French flight capital even though the French may by instinct prefer a fixed to a floating currency.
I thought other very progressive steps toward social peace and increased production would have to come before stabilization could be really effective. As to the proper rate, I remarked that difficulty had been experienced in defending the franc in each successive stage of depreciation from 105 to 155. From the fact that the rate fluctuated very little, however, during the brief period the franc was unprotected at the time of the latest Cabinet crisis, it appeared that the present rate might be correct from the current economic viewpoint. Unless the factors of labor and production are cleared up and the balance of payments improved this rate cannot be held indefinitely and it is impossible to say what rate could be maintained. It was difficult for any one of us to see a Radical Socialist government taking the lead in seeking exchange control. We agreed that if the present treasury loan does not go better than currently reported the French Treasury will experience difficulty in raising funds in March. If it should draw upon its remaining 5 million credit in securing Bank of France this would presumably depress the franc.
I saw scant opportunity for the French to borrow further in Switzerland or the Netherlands. Phillips said that the short term money market had changed entirely in London since the French obtained their two earlier credits there and that a participation in one now would be out of the question.
Any borrowing would have to be at long term with the bonds passed on to investors and such a loan would not be well received now considering the unfavorable British impression of the French domestic situation. Phillips talked about the possible relief that France would receive however through a loan which would permit a lowering of the French interest rates to 4%. Butterworth and I were not entirely convinced that a long term British loan would be out of the question if political circumstances made it imperative.[Page 267]
Phillips thinks that it is impossible for either the British or ourselves to refuse to talk with the French. I do not believe that they should be given any possible ground for complaining that we failed to meet the terms of the Tripartite Agreement which envisage consultation. We all felt, I believe, that we should accept the French approach but leave it very definitely to the French to advance specific ideas at the earliest possible stage. Furthermore the conversations should be technical rather than made too formally diplomatic. The British are ready to give their moral support to the French under the Tripartite Agreement but do not desire that any conversations be based upon sentimental or idealistic grounds.
Phillips, Butterworth, left on the 10 o’clock train for London and the latter did not have opportunity to read the above text although we did discuss it and I am repeating this message to London for Butterworth’s information and any supplementary additions. [Cochran.]