Economic policy 1958-1968

On his return to power in 1958, de Gaulle was naturally concerned with consolidating France's independence; this could not be effective if the country was continually obliged to ask for financial help from other countries.

Concerning economic policy, therefore, General de Gaulle intended to abide by the principles of rigorous management: preferring effort to easy solutions, keeping spending within income, planning ahead as far as possible for future spending, all the rules of "domestic" economy  that transfer readily to the macro-economic level.

Ensuring that the budget was voted through in time, projecting future commitments several years ahead under legislated programmes, containing and eventually wiping out the budget deficit, encouraging financing based on long-term saving and avoiding the temptation of simply printing more money – these were lines of action adopted in 1958, in direct contrast to earlier practices that had been tolerated for too long. 

The 1958 Stabilisation Plan was first and foremost an "Operation Truth". To produce its full benefits, it relied on long-term commitment to maintaining the major balances.

I – The 1958 plan, "Operation Truth"

While it had major consequences in terms of international relations – devaluation, lifting of trade barriers, entry into the Common Market – the 1958 plan was inspired primarily by a concern to introduce true prices.

The abolition of indexation and the massive reduction in subsidies which helped to reduce the budget deficit led to the definition of a new level of prices and a new wage/price balance. At the time, the role of the state in this process was still primordial. Wage increases for employees of SNCF, RATP, EDF-GDF and other nationalised industries would therefore be strictly limited. The employers' federation, the CNPF, would be strongly encouraged to abide by similar levels of increase in private companies. The increase in industrial prices, which had yet to be freed, would be limited. 

This new equilibrium triggered a fairly heavy devaluation of the franc. In the wake of the various more or less official measures to depreciate the franc taken in 1957, General de Gaulle established an official parity of 420 francs to the dollar as of June 1958. The 17% devaluation of December 1958 left the new franc at 4.93 to the dollar. 

The adoption of this new exchange rate would pave the way for a rapid recovery in the balance of payments, the reconstitution of France's gold and currency reserves, and speedier repayment of foreign debt. It also put France in a position to make certain crucial decisions:

  • to abide by its undertaking to lift exchange controls (90%) under the terms of its membership of the Organisation for European Economic Co-operation (OEEC). In 1957, France had availed itself of the get-out clauses to return to a generalised quota system;
  • to make the franc a convertible currency as from 1 January 1959. This was the date chosen for the dissolution of the European Payment Union and the return to convertibility for Europe's currencies, at least for current payments;
  • the implementation of the Treaty of Rome, signed on 27 March 1957, and whose Customs and quota provisions were scheduled to come into force on the same date, 1 January 1959. These provisions consisted of:
  • the complete lifting, over a fairly brief transitional period, of all quantitative restrictions (import quotas and licences);
  • the creation of a common external tariff, matched by the gradual reduction and eventual elimination of Customs duties within the Community.

There were many in France and elsewhere who, knowing how little the General had been in favour of the Treaty of Rome, doubted whether he would agree to its implementation.

The decision to open up the French economy to the outside world was undoubtedly, alongside the approval of the Constitution of the Fifth Republic, the most significant event of late 1958.

II – Maintaining the balances

If the measures taken under the 1958 reform plan were to be fully effective, they would have to be extended by long term action into every area of economic policy.

The wage/price balance would require constant attention. Price tensions were already beginning to emerge at the end of 1959, particularly on certain food products. These would be heightened in 1962 and 1963 by a sharp increase in domestic demand triggered by the repatriation to mainland France of over a million French colonists from Algeria. The Stabilisation Plan of September 1963, which may have been seen as overdue, sought to remedy the situation. In the wake of the miners' strike in the winter of 1962-1963, a commission of "Wise Men" was appointed and then an "Income Conference" was called, both evidence of a continuing concern to avoid, as far as possible, losing control of wages and prices.

In the field of public finances, budget deficits were outlawed and the overall borrowing requirement, including treasury operations (known colloquially as the "impasse"), seriously limited. Whereas the budget deficit at the end of the Fourth Republic had reached 20% of government spending and 5.7% of GDP, the turnaround already under way in 1957 was to be continued without respite until the budget was back in balance, a point reached in 1964; the budget deficit, in years where it still occurred, remained below 2% of GDP. 

In the case of treasury operations, holding the "impasse" to 6 or 7 billion francs would become a kind of dogma, even if by 1967 arguments for greater flexibility, though still Keynesian in their inspiration, began to be heard.

Overall, local authority and Social Security finances also remained in balance, thanks to effective controls on spending.

Credit policy seemed to remain slightly removed from the current of reform, and it was not until the end of the period, according to a report published by a group of experts headed by  Mr. Olivier Wormser, a future governor of the Banque de France, that changes were made to the conditions under which the issuing bank operated. In a structure which certainly, at that time, left little scope for competition, financial policy was highly effective. Generally subject to the strictest controls, bank lending to the economy and the treasury could be refinanced through the central bank only by passing through a series of fairly effective filters: discount ceilings, treasury ratios requiring the holding of a minimum portfolio of treasury bonds, etc. There was effective control of access to the rediscounting of medium-term loans through specialised institutions: Crédit National for lending to industry; Crédit Foncier for housing loans; Banque Française du Commerce Extérieur for export credits, etc.

All in all, over the decade under consideration, the various economic policy "weapons" were deployed effectively. The results were satisfactory: outstanding in terms of growth, slightly less so in terms of controlling inflation.

The events of May 1968 and their consequences (higher prices and wages, crisis of confidence) were to cause a major upheaval in these established balances.