varietiesofcapitalisminfrance:interests, institutions ... · 1894 1897 1900 1903 1906 1909 1912...

Articles

Varieties of Capitalism in France: Interests,

Institutions, and Finance

Richard Carney2625 Wynonah Drive, Auburn, PA 17922, USA.

E-mail: [email protected]

Can capitalist systems rapidly change from type to another? According to thevarieties of capitalism literature, a broad set of complementary institutionalpractices make it very difficult for extensive changes to occur quickly. So howdid France make a secular change from the market-dominated finance character-istic of liberal market economies prior to WWII to banking-dominated financecharacteristic of coordinated market economies immediately following the war?I argue that the newfound political power of labor and farmers caused the switchto banking-dominance following the war, with political institutions enablingand cementing these new practices. Accordingly, this paper documents thatcapitalist systems can rapidly change from one type to another, and illustrateshow it can occur.French Politics (2006) 4, 1–30. doi:10.1057/palgrave.fp.8200090

Keywords: varieties of capitalism; finance; history; labor; farmers

Introduction

Can capitalist systems rapidly change from one type to another? According tothe varieties of capitalism (VoC) literature (Hall and Soskice, 2001), capitalistsystems can be arrayed along a spectrum, with coordinated market economiesCMEs at one end and liberal market economies (LMEs) at the other. In CMEs,relationship-based interactions predominate over the more market-based formsof coordination found among actors in LMEs. VoC analysis views a broad setof institutional practices as complementary to one another, including thefinancial system, wage determination, job security, welfare systems, educationand training, product–market competition, and monetary and fiscal policy.They argue that these elements need to be treated as a whole, not in isolation.I am sympathetic to that interest in institutional complementarity, but Inarrow the research focus to the financial system in order to emphasize andmeasure it.When firms seek to raise financing, they can turn either to external sources

— bank loans or securities markets — or to retained earnings. The main

French Politics, 2006, 4, (1–30)r 2006 Palgrave Macmillan Ltd 1476-3419/06 $30.00

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distinction between the financial systems of CMEs and LMEs regardstheir choice of external financing.1 Financial systems in which firms dependprimarily on bank lending are found among CMEs, while those in with aheavy reliance on capital markets are found among LMEs. Bank lending ismore common among CMEs because it allows firms to focus more on thelong-term, which is consistent with what Hall and Soskice describe asCMEs’ institutional emphasis on developing and utilizing specific assets.While national regulatory authorities have recently found ways to fostera long-term focus within the context of securities markets (since the 1980s),bank lending has traditionally served this purpose. In this regard, examininghow the post-war banking-oriented French financial system was created canoffer insight into how the broader set of capitalist institutions may havelikewise emerged.According to the analyses in Hall and Soskice’s volume, institutional

complementarities frequently vary according to labor’s power, bothpolitically and through unions. This offers a useful starting point.However, in developed democracies, and in France in particular, farmershave also been politically influential. Moreover, political institutionscan magnify or limit the influence of these groups. Changes amongthese variables (labor, farmers, and political institutions) will thereforebe examined to understand how France’s post-war financial systememerged.Prior to World War II (WWII), the French financial system looked very

similar to that found in the United States and Great Britain. Securities marketswere well-developed and large corporations frequently turned to them for theirexternal financing needs. Indeed, France had all the characteristics of a LME.With the Great Depression and WWII, securities markets declined and banksbecame more important in all countries, including the US and UK. AfterWWII, however, France remained dependent on bank lending while the USand UK reverted to their pre-war reliance on markets. Why did France make asecular change to banking-oriented finance? In contrast to arguments based onlegal institutions (La Porta et al., 1998), and international trade and capitalflows (Rajan and Zingales, 2003), and building on work that emphasizes theimportance of labor (Fehn and Meier, 2001; Pagano and Volpin, 2001;Roe, 2002), I argue that labor and farmers caused France’s post-warreliance on banks, with political institutions enhancing and cementing theirpost-war initiatives. Thus, this paper seeks to document that capitalist systemscan rapidly change from one type to another, and to illustrate how thiscan occur.The paper is divided into the following sections: (1) an overview of France’s

financial system across the 20th century; (2) the argument; (3) evidence; and (4)conclusions.

Richard CarneyVarieties of Capitalism in France

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French Politics 2006 4

The French Financial System

Prior to the 1930 s, France relied heavily on capital markets as the conduit bywhich money flowed from savers to borrowers, as described by Gueslin (1992):

The crisis of the 1880s brought to an end the preliminary phase of bankingdevelopment in France: it consolidated the position of the great creditinstitutions and generated a policy of management rationalization whichwas coupled in due course with an ‘industrial disengagement’. Itinaugurated the ‘golden age’ of a finance-market economy. The crisis ofthe 1930s marked the end of this period. Using modern economic conceptswith care, I mean by this that, throughout the period, banking creditremained more or less limited and the financing of the economy came aboutthrough the accumulation of savings: primarily as companies directly usedparts of their cash flow, but also by the transfer of domestic savings via thefinancial market.2

Figure 1 illustrates the change from the pre to the post-war period. Thebreaks in the data correspond to the two world wars, when the stock marketshut down. It would be preferable to have a measure of total banking assets;using a deposit measure is a reasonable indicator of banking reliance, however,since there is generally a strong correlation between it and a bank’s total assets.For the time period 1865 to 1913, Freedeman (1993) illustrates with severaldetailed industry-level case studies that ‘the issue of securities indicates arelatively efficient French capital market.’ Other sources corroborate this (e.g.,Rajan and Zingales, 2003). During the 1920s securities markets becameincreasingly important, while self-finance became more common during the1930s.3 Table 1 shows the decline in stock and bond issues for corporationsbeginning in the 1930s. Note the dramatic change from 1930 to 1938, and itspersistence to the end of the sample in 1964. As these data indicate, Franceradically transformed the financial system after the war so that the governmentwould stand between depositors and lenders, using bank lending as a keypolicy tool (Zysman, 1983). Why did France make a secular change frommarkets to banks?

The Argument

I argue that labor and farmers played the critical role in transforming France’sfinancial system into a banking-oriented one. Each actor favored bank lendingover capital markets, and each attempted to bend France’s financial system toits specific needs. Success depended on their political power in government. Inthis section, I discuss why they preferred bank lending.


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Labor: Labor seeks high and stable employment rates, along with reasonablyhigh and stable wages, and a generous supply of social welfare services(including guaranteed health care, unemployment insurance, disabilityinsurance, free public education, etc.). Left-wing political parties also considerthese among their highest priorities, generally acting on behalf of labor’sinterests; thus, I discuss these preferences with regard to labor, but left-wingpolitical parties also seek to fulfill these objectives.

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Figure 1 (a and b) The evolution of France’s bank–market orientation, 1890–1990. Data source:

Michele Saint Marc (1983, pp. 56–57; 1974, p. 334). Data are originally from annual publications of

the INSEE. Data source for Figure 4.2: Beck, Demirguc-Kunt, and Levine, 1999. ‘A new database

on Financial Development and Structure,’ Policy Research Working Paper Series 2146, The World

Bank.

Table 1 French Corporations’ Stock and Bond Issues, 1896–1964 (percent of gross domestic

product)

Year Stocks Bonds Total

1896 0.9 1.1 2

1900 2.0 1.8 3.8

1913 2.6 2.9 5.5

1924 3.3 1.2 4.5

1929 5.7 2.6 8.3

1930 3.4 4.4 7.8

1938 0.6 0.3 0.9

1949 0.6 0.3 0.9

1954 0.6 0.8 1.4

1959 1.7 1.4 3.1

1962 1.4 1.2 2.6

1964 1.2 1.0 2.2

Source: Carre et al (1975, 334).


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One way for labor to achieve its social welfare goals is to own the meansof production; that is, to nationalize the most important, if not all,corporations. Of course, owning and efficiently operating all corporationsthrough the government can be an extremely complex task, likely doomedto failure. A simpler method for pursuing the aforementioned goals is throughthe control of finance. By controlling the amount of money available tokey industries, the interest rate at which credit can be extended, and byoffering additional incentives and conditions for extending credit toparticular firms and industries, labor can effectively pursue its more specificobjectives. The control of credit permits labor to extract concessionsfrom firms’ owners and managers.4 Banks, or intermediaries generallyspeaking, are the preferred institutional mechanism for controlling creditsince markets do not permit precise, selective inducements to specific firmsand industries. Thus, because it allows direct control over the flow of funds,labor prefers bank-dominated financing as a mechanism for achieving itsemployment, wage, and social services objectives when it controls governmentpolicymaking.5 There are two mechanisms by which labor seeks tocontrol credit allocation: (1) direct control via government owned andoperated banking institutions; and/or (2) indirect control by regulatingfinancing arrangements in the marketplace. The second option occurs withlegislation and bureaucratic pressure on private firms, the private bankingsector, and the capital markets. The former offers more control over nationalfinance, and greater bargaining leverage with borrowers. As we will see,France chose the former, while her neighbor, Germany, chose the latter,following the war.This argument is consistent with, but different from, that presented by

Pagano and Volpin (2001), and Fehn and Meier (2001). They argue thatorganized labor and entrepreneurs may ally with one another in order toprotect their firms from takeover by external owners by pressing forregulations that restrict the development of capital markets. The argumentof these authors emphasizes the nature of corporate control, whichsubsequently leads to different forms of financing. My argument, by contrast,focuses on why labor favors bank lending as a way to exercise control overcorporations. The main difference regards the causal mechanism: for them it iscorporate control first with financing options following from it; for me it isfinancing acting as a mechanism to control corporations.

Farmers: Like any business, farmers seek cheap financing. As economiesindustrialize and modernize, however, markets allow capital to flow to thosegrowing industries that offer the highest rate of return with regard to risk. Thisreduction in the supply of agricultural finance raises its cost. Accordingly,farmers favor policies that divert money back to the rural sector, and awayfrom industry.6 To do this, banking institutions are necessary, and often


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emerge as farmers’ cooperatives, or other types of banking institutionsdesigned specifically to cater to farmers.Secondly, banks are willing to provide much-needed financing in difficult

times because of the long-term nature of their relationship. This helps tosmooth out the volatility associated with changes in seasonal weather patternsand uncertain crop yields. This is especially important to farmers since theirability to diversify among different crops and livestock is limited.Finally, banks, and especially small banks, are more likely to have sufficient

information about farmers to determine the appropriate rate at which toprovide them with financing. Without a high level of information, a riskpremium would have to be charged to compensate for the increased risk ofmaking a loan. Indeed, markets are likely to charge farmers a higher rate thanbanks for this reason, ceteris paribus. This results from a collective actionproblem (or free-rider problem) since no one investor is willing to invest thetime and effort to investigate every farmer, thereby creating a higher riskpremium. And although securitizing loans may reduce the risk of lending tosmall firms and thereby increase financing available to small farms via markets,the cost is usually higher, on average, relative to lending via local creditfacilities, especially if the operation of these facilities is subsidized by thegovernment, as is frequently the case. Thus, farmers generally prefer banks.7

Evidence

A comparison of the changes in the structure of the financial system with thechanges in the partisanship of the National Assembly from 1876 to 1988 offerscompelling evidence for a relationship between these two variables (Figures 1and 2). Of particular importance are the peaks in the bank–market ratio in themid-to-late 1940s and 1982, which correlate with the peaks in left-wing politicalpower in the 1940s and 1981. There is also an increase in left-wing politicalpower in 1936 (the Popular Front — a coalition of farmers, labor, and smallbusiness so it was not as far to the left as the 1944–1946 or 1981–1986 periods)which follows an increase in the bank–market orientation during the 1930 s.The unprecedented divergence between left-wing political power and the bank–market ratio in the mid to late 1980 s accords with international capitalmobility’s growing influence, which created incentives to bolster domesticcapital markets via privatization (Hall, 1986; Loriaux, 1991; Rajan andZingales, 2003).Looking at the National Assembly elections only offers a partial picture,

however, since it neglects the role of the Senate and the president. One wouldexpect the correlation to be stronger when the lower house has a greater shareof the political power, as in the Fourth Republic, 1944 to 1958. In the Third


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Republic, 1870 to 1940, the lower house shared power with the upper house,which could veto unfavorable legislation. And in the Fifth Republic, 1958 tothe present, the National Assembly shared power with the Senate and thepresident, but with a majority of power residing with parliament with respect todomestic issues such as economic policy.8 Because of the more democraticnature of the Senate during this latter period, it would more likely mirrorchanges in the National Assembly however.In addition to left-wing political power, labor unions may act independently

and more forcefully on this issue, and one might argue that labor unionscaused the changes in the financial system rather than the political parties.Figure 3 illustrates the change in the number of labor union members duringthe 20th century, which offers a reasonable guide to their changing bargainingstrength. The correlation between labor union’s strength and the structure of

National Assembly Elections, 1876-1988 (Percentage Seats to each Party)

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Figure 2 National Assembly Elections, 1876–1988. (Percentage seats to each party). Source: Cole

and Campbell (1989). Left¼Socialists (PS), Communists (PCF), Federation of the left Democratsand Socialists (FGDS), Unified Socialist Party (PSU), Union of the left Socialists and Democrats

(UGSD), Movement of the Left Radicals (MRG); Center-Left¼ Socialist Radicals, Cartel des

Gauches, Socialist Republicans; Center¼Radicals, Popular Republican Movement (MRP): 1945–1958, Christian Democrats, Progress and Modern Democracy (PDM), Reformist; Center-

Right¼Moderate Republicans, Left Republicans, Independent Republicans (RI), Right-wingRadicals, Union for the New Republic (UNR), Democratic Union of Workers (UDT), MRP: 1962,

Democratic Center (CD), Gaullists, Union of the Progressive Republicans (URP), Union for the

Democratic France (UDF); Right¼Conservatives, Republicans, Boulangists, Rallies/Liberals,Nationalists, Bloc National, Poujadists, National Center of Independents (CNI), Union of the

French People (RPR), Front National (FN), Union of the group of the Center (URC).


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the financial system is a loose one. That is, labor union membership increasedin the late 1930 s, and peaked immediately after WWII, corresponding toincreasing regulations over the financial system. From the 1950s onward,however, there is not much of a relationship, suggesting that left-wing politicalpower plays the more important role.While the correlation between left-wing political power and the bank-market

orientation of the financial system is suggestive of a causal link, it does notpermit us to conclude that one actually exists. We must look at the largeincreases in the political power of left-wing parties (i.e., where they have greaterthan 50% of the seats in parliament) and examine whether the predictedregulatory actions consequently occurred. Thus, Figure 2 is useful since it aidsin identifying periods worthy of closer inspection, including the Popular Front,1936–1938, and the post-war Provisional Government, 1944–1946. Addition-ally, the partisanship measure of government neglects the important influenceof farmers, which increased considerably as the balance of power shifted to theNational Assembly following WWII.

Leading up to the Popular Front

To understand the politics of the Popular Front, it is first necessary to map outthe distribution of power among the key political institutions of the ThirdRepublic: the Chamber of Deputies (also known as the National Assembly inthe post-war period), the Senate, and the Executive (the President and theMinistry). Before examining the financial politics of the Popular Front, it is

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Figure 3 Labor Union Members, 1894–1983. Source: Mouriaux, Rene and Francoise Subileau

(1987) ‘Les Effectifs Syndicaux en France, 1895–1985’ Document de travail, CEVIPOF, Paris.


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also useful to describe the influence of farmers and labor on the financialsystem during the years leading up to it.

Third republic political institutions: The Third Republic was dominated bythe parliament, comprised of the Chamber of Deputies and the Senate, with theSenate having the clear upper hand. The Senate was designed to insulate thepolitical system from the universal suffrage of the Chamber of Deputies.Senators were elected indirectly by mayors and councilors of departmental andarrondissement assemblies, ensuring that they were elected only by theprivileged. Wealthy landowners were over-represented in the Senate, and bigbusiness also wielded considerable influence through their direct financialcontributions to Senators and through the growing number of wealthyindustrialists. Labor, small business and small farmers had almost no influencein the upper house. Rather, their votes were important to the election ofDeputies.Labor did not emerge as an influential constituency until after World War I.

However, they did not acquire real political power in the Chamber until 1936,with the Popular Front, despite a brief surge in political support with theCartel des Gauches in 1924, which was more moderate and less powerful thanthe Popular Front.The Senate’s power, relative to the lower house, derived from its ability to veto

any legislation passed by the Chamber, and its ability to delay legislationindefinitely. Similarly, the formation of ministries was initiated by the Chamber,but the Senate held the power to defeat them. The lack of party cohesion furtherlimited any sense of duty to vote with their counterparts in the Chamber.9 Sincethe Senate held a veto on all bills initiated in the Chamber, the rural elite and bigbusiness acted as a veto-gate on the lower house’s more populist legislativeinitiatives, thereby preserving the status quo laissez-faire economy.The president was elected indirectly by a joint session of the Senate and

Chamber for 7-year terms. The president chose the president of the council ofministers (the technical name for the prime minister). The president could alsoinfluence the composition of cabinets (ministries). Ministries were responsibleto parliament, and had to command a majority there to survive.10 Thus, thebureaucracy came under the control of the parliament, and of the Senate inparticular, which meant that the Senate could control the enforcement oflegislation.

Farmers: The most important feature of the Third Republic’s agriculturaleconomy was the rapid industrialization movement. From the mid-19thcentury up to the 1930 s, the national supply of credit went increasingly to firmsparticipating in the industrial revolution (Gueslin, 1978, 29–44).11 Conse-quently, farmers faced rising borrowing costs. To remedy this problem, theLaw of November 5, 1894 created a nation-wide banking institution devoted toagricultural credit, which formed the foundation for the Credit Agricole.12


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One of the key problems with passing a law devoting capital to agriculture isthat farmers would not have sufficient qualifications to establish credit and getloans, especially peasant farmers (Henry and Regulier, 1986, 9).13 Studiesconducted by the Minister of Agriculture to evaluate the effects of the 1894 lawin 1896 and 1900 found that credit was primarily granted to the wealthyfarmers since they could more easily guarantee repayment of the loan, andbanks could more easily evaluate their creditworthiness (Henry and Regulier,1986, 17). Thus, with the passage of the 1894 law, the rural elite successfullyalleviated their initial credit crunch caused by growing industrialization andworsened by unforeseeable natural calamities; peasant farmers were leftbehind.Agricultural elites used their political influence to great effect at the turn of

the century. The number of regional banks grew from nine in 1900 to 98 in1913, local branches grew from 87 in 1900 to 4,533 in 1913, and the number ofbank accounts at these local banks grew from 2,175 in 1900 to 236,860 in 1913.The laws of 1899, 1906, and 1910 permitted the state to advance (i.e., redirect)money to the regional agricultural offices; the total advances from the statewent from 612,000 Francs in 1900 to over 93.9 million Francs in 1913,comprising 45% of the total resources of the regional agricultural offices in1900 and 74% in 1913.14 Clearly, agricultural interests were exertingconsiderable influence over the state’s finances.15 Despite the high growth inthe number of regional banks and local branches, only a select groupcomprising 2.9% of the active male agricultural population were members ofone of these facilities in 1910 (Gueslin, 1978, 253).16

In 1920, the government consolidated the national agricultural credit systemunder the Caisse Nationale de Credit Agricole, thereby increasing theavailability of agricultural credit and sparking the creation of new agriculturalcooperatives with the law of August 5, 1920.17 This new institution gaveagricultural finance a centralized national office, linking local and regionaloffices. And laws in 1928, 1929, 1931, and 1932 offered additional grants formedium and long-term agricultural loans, which went predominantly to largelandowners. The vast majority of small, peasant farmers did not and could notparticipate.But in terms of France’s overall financial system, agricultural credit

constituted a small fraction of total enterprise financing during the ThirdRepublic. Comparing the volume of lending by commercial banks, which wereprimarily involved with funding big business, to that of the Credit Agricoleillustrates that agricultural finance had a small impact on the overall bank–market orientation of the French financial system (Table 2). Recall that at thistime France depended to a large extent on capital markets, making farmers’financing a very small proportion of total financing indeed. Thus, althoughrural elites created and bolstered agricultural banks because of their political


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power, financing directed to the rural sector comprised a small fraction of theFrench financial system.

Labor: Prior to World War I, unions and left-wing political movements hadsporadic, but mostly negligible influence on firms and government. At the endof World War I, labor activity and union membership surged. On December16, 1918 the Confederation of Workers (Confederation General du Travail:CGT) issued a statement of the changes it sought in its Minimum Program,which formed the major themes of the interwar years. With regard to theeconomy, this document primarily focuses on the objective of dirigisme. Thatis, ‘The working classes must manage the national effort’ of reorganizing theeconomy by exercising ‘permanent’ control over all branches of production.18

While the document does not explicitly say that control over the allocation ofcredit, or of financial institutions, is how this will be achieved, it is nonethelessclear that this is a suitable option. The Program advocated nationalization ofkey industries, which was to be implemented not by the state alone, but bymixed public corporations, ‘administered by the qualified representatives ofproducers and consumers.’19 When possible, proposals for nationalizing themines, the railways, and ‘industrial monopolies’ were placed before parliamentduring the 1920s.Elections in 1924 brought the Cartel des Gauches to power in the Chamber of

Deputies, a coalition of the Socialists, Radicals and some minor left winggroups; it was a center-left alliance since the Radicals were centrist. Because ofthe strength of the moderate members of the coalition, left-wing members wereunable to push their policies through. However, the government did initiate thefirst ‘mixed companies’ in 1924 in the reacquired territory of Alsace: theCompagnie de Navigation du Rhin and the Chantiers et Ateliers du Rhin. Thegovernment owned a minority share in both enterprises and participatedin their management along with representatives of private stockholders.

Table 2 Financing of big business and farms (in millions of Francs)

Commercial banks (1) Credit Agricole (2) (2)/(1)

1913 13,400 79 0.6%

1920 26,000 189 0.7%

1929 70,000 1,873 2.7%

1931 56,000 2,906 5.2%

1935 50,000 3,112 6.2%

1938 60,000 5,691 9.5%

Source: Gueslin, Andre, 1992. ‘Bank and State in France from the 1880 s to the 1930s: the

impossible advance of the banks’ in Finance and Financiers in European History 1880-1960, (ed.)

Cassis. Original sources: Saint-Marc, Histoire economique: R. Priouret, La Caisse des depots et

consignations (1966); Teneul, Financement; Journal Officiel.


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However, no real change occurred with regard to the financial system sincelabor lacked sufficient political power. They would have to wait until thePopular Front.

The Popular Front

The Popular Front was a temporary and defensive electoral alliance of thosehit hardest by the depression: farmers, the middle class (including smallbusiness), and workers. This alliance included a coalition of Communists,Socialists, and center-left Deputies, the most numerous of whom were theRadicals. Divisions among these groups, and among small business inparticular (who was primarily represented by the Radicals), considerablyweakened the Popular Front in June 1937, with the defeat of Blum, when aconfidence motion expressing support for the Daladier government saw theSocialists and Communists move into opposition to the Radicals, who survivedin power with the support of the Right.20

The Senate’s composition, which had elections in 1935, was not altered bythe Popular Front surge. The upper house was still dominated by conservativessuch as the rural elite and big business. Consequently, many bills approved inthe Chamber, such as collective bargaining for farm workers and a modifiedform of the 8-hour work day, relief for farm debtors, and the protection of cashtenants against unjust practices by landlords, were sent to Senatorialcommittees for further study, never again to see the light of day.21 Bigbusiness and large landowners who dominated the Senate posed a considerableroadblock to the Popular Front’s objectives.In the 2 years prior to the Popular Front, members of the SFIO (the French

Socialist Party) discussed various possibilities for reorganizing the state’sfinances to deal with the depression and to achieve their more fundamentalgoal of redistributing national resources and improving working conditions.22

Henri de Man, a Belgian socialist who constructed a plan based on his analysisof the German experience and adopted by the Belgian Labor party inDecember 1933, captured the attention of the French left. De Man identifiedfinance capital as the common enemy and he argued that no more distributivereforms, such as higher wages or cheaper credit, were forthcoming withoutstructural change, and that nationalization of key sectors should begin with thecredit system.23

To achieve these ends, the Socialists proposed a Plan which would demandthe creation of a National Economic Council, comprised of representatives ofbig business, workers, directors and employees of banks, and representatives ofthe state. This organization would be responsible for the direction of creditand, in particular, control of the Bank of France. Nationalization of credit waspivotal to the Plan: ‘The socialization of credit is the condition of industrial


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socialization.’24 And two leaders of the CGT, E. Lefranc and J. Itard, furtherremarked:

The nationalization of credit and the control of the banksy. the immediateeffective control of key industries by the representatives of the collectivityand the salaried workersy. these two structural transformations arenecessary for the economy of this country to leave the capitalist stage andare only possible with the distributive reforms requested by the CGT.25

Controlling these two aspects of the economy would give labor the ability toimplement the dirigiste economy that it had long sought: Control over credit,for the CGT, was the key to managing the economy. In the mid-1930s,‘nationalizing credit’ meant expelling private interests from the regents of theBank of France (the largest shareholders who chose the regents of the Bank ofFrance were called the ‘200 families’ and almost exclusively represented theinterests of big business) and using the central bank to control credit andinvestment. It also meant setting regulations for private banks, nationalizingsemipublic credit institutions and expanding their activities.The Popular Front Program26 included reforms regarding the banking

profession, the societes anonyms (most businesses fell into this category), andthe Bank of France.27 With regard to the latter, the Program stated thefollowing objectives: ‘Removing the credit and savings from the domination ofthe economic oligarchy, by the Bank of Francey. Enlarging the power of thegovernor, under the permanent control of a council composed of representa-tives of legislative power, or representatives of executive power and ofrepresentatives of the large forces of organized workers and industry,commerce, and agriculture.’ With regard to agriculture, the Program soughtto develop the Credit Agricole and to support the agricultural cooperatives thatwould extend credit to small farmers who could not qualify for loans under theexisting rules.Legislative action regarding the financial system only occurred for the Bank

of France, however. Many of the other proposed reforms never made it ontothe legislative agenda (e.g., reform of the societes anonymes and the bankingprofession) because they would never survive the Senate. Popular Frontrepresentatives would have to wait until after the war for the conservativeSenate to lose its power, thereby permitting the left to finally implement itsagenda.

The Bank of France Legislation:28 Revision of the statutes governing thecentral bank had become genuinely popular by 1936 because of its role infinancing business and agriculture, in addition to its more traditional centralbank activities. Left-wing writers had charted the family alliances of the bank’sregents and propagated the myth of the ‘200 families’. After 1930 the bank haddone little to attenuate hardship. It extended privileged credit to big firms but


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disdained small business and farmers and refused to help troubled localbanks:29

The Bank, it is said, has rested comfortably on its tradition. The discount isalways more or less reserved for a limited and privileged circle. But todaythings are aggravatedy. Farmers, artisans, and small businessmen are noty obtaining the smallest amount of credit, and are finding that this evenconcerns the guarantees of access to credit in extremely difficultsituationsy. Who therefore receives the supply of credit, and offers thenecessary guarantees for access to credit, other than those already found atthe head of the important enterprises and given considerable amounts ofcapital?30

The Bank of France competed directly with private banks, which led to theinvolvement in at least one major bank failure. As a champion of deflation, thecentral bank pursued a tight monetary policy and used its secret fund toinfluence the press. Above all, for a central bank to be in the hands of ahereditary oligarchy that shut out other interests and on occasion forced its willon the government seemed anachronistic and antidemocratic to the PopularFront interests.Blum and his Socialist finance minister Vincent Auriol justified reorganiza-

tion on the grounds that credit policy should serve the national economy; thereshould be an end to the bank’s unrepresentative management and itsdiscriminatory practices. But Blum and Auriol decided against nationalizingthe bank given the opposition of the Radicals, who feared allowing thegovernment to dictate monetary policy.31 Instead the two Socialist leaderssought only to overhaul the bank’s administration. They sponsored legislationthat replaced the regents with a new council and an executive heavily weightedin the state’s favor and democratized the shareholder’s assembly. It was passedon July 25 1936 (the Blum government took office on June 6 1936 making thislegislation one of the first to be passed). Only 77 Deputies, all from the right,opposed the legislation. The Senate passed the legislation as a way to appeasegrowing public anger, but prevented further legislation from altering otherimportant and related functions, such as allowing ‘open market’ buying andselling of securities, proscribing competition with private banks, or establishingan agency to monitor the money and credit markets. Because the prospect ofgetting more radical measures through the Senate was very unlikely, the Blum–Auriol team tabled any further action, especially since public support for thePopular Front’s agenda was quickly declining. In the end, the reorganizedbank changed its policies very little; for example, in 1936–1938, the discountpolicy was not liberalized. Nonetheless, within the next decade (with theprovisional government of 1944–1946) almost all the reforms recommended in1936 would be adopted.


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The Provisional Government, 1944–1946

Conservatives and Socialists had different visions for post-war France. Theconservative neoliberal perspective was articulated best with Courtin’sProgram, which sought a return to the free market of the Third Republic.Socialists, by contrast, sought to implement the reforms articulated duringthe Popular Front, which meant controlling credit via government-operatedbanks. Each viewpoint would have serious repercussions for the structureof the post-war financial system as well as the broader political economy.Ultimately, labor would win the political battle by a wide margin andFrance would become more reliant on banks than markets. I first discussthe goals of the Socialists and Neoliberals at the end of the war, and thenexamine the measures passed by the provisional government affecting thefinancial system.

The socialist program: While there were several visions for placing themanagement of the economy firmly under government control, Andre Philip’shad the broadest support from the left, and for this reason de Gaulle appointedhim the Comite Francaise de Liberation Nationale Commissaire in charge ofrelations with the Constituent Assembly and the study of post-war problems.32

In January 1944 Philip created several study commissions that broughttogether representatives of the external and internal resistance. He packed thecommission on economic problems with structural reformers from the left.General de Gaulle received the commission’s report in July 1944 as theprovisional government completed its preparations for its return toFrance.33

Philip pressed for structural reforms within 6 months of the landingssince the fervor for change would peak with the beginning of the newrepublic. Philip proposed comprehensive planning (and Keynesian counter-cyclical policies) to sustain full employment and economic development.He contrasted this mode of state management with the style of thepre-war parliament which had turned economic management over toexperts in economic liberalism who ‘intervened only reluctantly in orderto cure illnesses rather than prevent them, to salvage enterprises ratherthan organize them’.34 No unit of production lay outside statemanagement:

From the moment one admits the necessity of planning, private sectorsare no longer possible because no element of the economy should escapethe plan. Direction could be achieved by more or less flexible methods.Certain sectors could be socialized, others directed, and still otherssimply supervised. Nothing, however, would escape the impetus ofgovernmental authority, which is responsible for the survival and grandeurof the nation.35


15


In a planned economy, he argued, certain producers were so important thatthey had to be nationalized so that the state could effectively controlinvestment:

Finally and in all cases, there is in a planned economy, certain highlyessential productions which, by their importance and by their repercussionson the whole of industrial life, the state must absolutely assure the directionof if it wants to exert effective control on all investments.It is therefore indispensable that, upon the return to France, the state takesdirect management of all modes of land, sea, and air transport, of the mines,electrical utilities, iron and steel manufacturers, chemical producers, theinsurance industry and the banks. The socialization of these important sectorswill permit the state to have a hand on the sufficient instruments foreffectively controlling investments and assuring the direction of the rest ofthe national economy. 36

For directing the private sector, Philip advocated rejuvenating the Comitesd’Organization from the Vichy years, which he renamed ‘industrial groups.’Additionally, he proposed the creation of a National Economic Ministry as ‘acoordinating organ,’ whose primary purpose was to plan the national economyaccording to socialist guidelines. Accordingly, labor spokesmen sat on a host ofregulatory and advisory bodies comprising the system of wage, price, materials,credit, and other economic controls.

The conservative program: In the debates following WWII on how toregulate the French economy, Rene Courtin issued his report expressingthe neo-liberal (pro-business) perspective, which was the main alternativeto Philip’s socialist version. Courtin envisaged a ‘return to the market,economic freedom, and free trade’ that prevailed during the Third Republic.37

His vision for the French economy ultimately turned upon investment.‘‘‘Still more than an abundance of natural resources and raw materials thewealth of a nation derives from the importance of its equipment.’’ Thedevelopment of the stock of capital equipment depended on savings andinvestment. Do not look to the state, however, the neo-liberal economistadmonished: ‘‘the state has always been a wretched investor.’’’38 Neo-liberalssought to prevent the socialist agenda which would rely on state-runintermediaries.To highlight the pro-market bias of Courtin’s program, a socialist

commentator remarked, ‘For our part we shall consider the report that wassubmitted to us for our evaluation appropriate only in case our countrysubmits to an American economic and financial takeover and if we want tomaintain liberalism to its utmost and direct the economy only by financialmeans.’39 But to determine which program would be adopted, we mustconsider these groups’ political power.


16


Socialists and the financial system: In the immediate post-war environment,popular opinion accused big business of aiding the downfall of the FrenchRepublic. This anti-business sentiment pervaded the first years of theliberation. Labor, by contrast, was seen as opposing the Germans, and wascelebrated as defenders of the French Republic. A popular election held inOctober 1945 confirmed the leftward swing that had taken place in theelectorate, and so the left overwhelmingly dominated the policymaking processin the new Constituent Assembly.40

One of the first items on the agenda was the nationalization of banks sincecredit was a critical element for reconstructing and managing the economy.The scope of nationalization was limited, however, because De Gaulle, whowas sympathetic to big business, was able to postpone action for 15 months,allowing the fervor of the liberation to subside. He then used his authority tocircumscribe the nationalization of credit so that investment banking wasexcluded. After his resignation, the MRP (Popular Republican Movement) —the party most closely associated with him — succeeded in persuading hissuccessor, Gouin, to confine nationalization to a shortened list of sectors andthen fought, with some success, to limit the measures within these sectors.41

The banking act that was eventually passed on December 2, 1945 completedthe process begun by the Popular Front of eliminating private interests fromthe Bank of France, and nationalized the major commercial banks.42 Allrepresentatives from the left and center voted for it (461 out of 494representatives from mainland France voted for the law; 442 from the leftand center, and 19 from the right; 33 on the right voted against).43 The lawstructured French finance for the post-war period and gave the governmentgreater influence over the course of post-war economic development by placingthe volume and allocation of credit firmly under its control. The legislationestablished three agencies in charge of the financial system: the National CreditCouncil (CNC), the Bank of France, and the Control Commission. The CNCset the basic guidelines for credit policy, which were executed by the Bank ofFrance. The CNC was headed by the Minister of Finance, as appointed by theprime minister, and comprised of representatives from the government andfrom various sectors of the economy. It had a broad range of responsibilities,including credit policy, establishing detailed regulations on bank interest ratesand commissions, creating rules on entry or merger applications, imposingmodifications on the financial and legal structure of banks, and levyingsanctions on banks which violated its directives.The Bank of France would enforce the policy directives of the CNC, and

share policymaking powers through the governor of the Bank of France, whowould be ex-officio vice president of the CNC. The third agency, the ControlCommission, would exercise technical supervision over banks’ loan andinvestment operations. It would also supervise the banks to ensure compliance


17


with all bank regulations, including regulations issued by the other twoagencies. The Bank of France would be represented on the ControlCommission by the governor of the Bank of France, who would also bepresident of the Control Commission.The law nationalized the four largest deposit banks (or commercial banks:

these held around half of all banks’ assets and were the only banks withnationwide branch networks) and extended minor regulations over privateinvestment banks. The largest insurance companies were also nationalized. Thedeposit banks and insurance companies came under control of quadripartitegoverning boards (consumers, employees, managers, and government).44

The left-wing coalition in the Assembly overwhelmed political resistance tothese measures by business interests who tried to obstruct or shape thelegislation by exerting influence on the MRP. Business had lost its pre-warnational employers’ federation, the sympathetic political parties of the ThirdRepublic, and most of its friendly press. By mid-1946 the most significantstructural reforms were enacted. The second Constituent Assembly that met inthe summer and fall did not even discuss any further measures.French labor’s success in implementing direct control over national finance

stands in stark contrast to the German labor movement’s ability to achieveonly indirect control. Recall that indirect control allows private actors toborrow and lend in a decentralized marketplace, but to encourage bank lendingat the expense of arms-length finance with banks acting as policy allies of thegovernments. Immediately following WWII, German unions demanded laborparticipation ‘from below’ (i.e., at the shop-floor and plant level), ‘in themiddle’ (in the company boardrooms) and ‘from above’ (via national as well asstate-level economic planning agencies which were to guide — if not totallycontrol and/or own — the major segments of the German economy, as inFrance). While unions made gains ‘from below’ with codetermination, theyfailed to make headway ‘from above’ largely because of the start of the ColdWar. While it would be wrong to blame the Cold War alone for the freezing ofprogressive reforms during the late 1940s, there can be no doubt that this geo-political development represented a formidable obstacle to labor’s goals. Thisled to a considerable strengthening of capital as a result of American andBritish influence, and to an economy in which actors could participate freely inthe market, but with private banks serving as policy allies of the government(Zysman, 1983; Deeg, 1999).

The post-war era

The political strength of labor after the war was institutionalized with theConstitution of the Fourth Republic, adopted in October 1946. Specified in itspreamble were ‘the duty to work and the right to obtain employment’ and the


18


right to ‘health protection, material security, rest and leisure’ and ‘the means tolead a decent existence’ when unable to work. It assured everyone the right to‘take part in collective bargaining to determine working conditions and in themanagement of enterprises.’45

Much more powerful than the Council of the Republic (the Senate),important in the election of the Head of State, with full responsibility for lawsand budgets, the Assembly (the lower House) in effect controlled thegovernment.46

With the founding of the Fifth Republic in 1958, the new constitution wasless oriented to labor’s interests. According to its rules, the president would bepopularly elected, serve a 7-year term, and could seek reelection. The NationalAssembly and the Senate would enjoy coequal power. With regard to thebalance of political power between the executive and legislature, Huber (1996)illustrates that the president is more influential with regard to foreign policy,and the parliament is more powerful when it comes to domestic economicpolicy.47 Thus, farmers and labor would retain much of their newfound powerwith regard to domestic finance.

Farmers: With the new provisional government, small farmers now enjoyedpolitical influence more closely reflecting their proportion of the population;there was no longer a Senate to block their legislative initiatives.The Credit Agricole remained intact at the end of the war, despite laws from

1940–1943 permitting the state to use the Credit Agricole’s financingcapabilities for wartime use. The ordinances of October 17, 1944 and October20, 1945 sought to attract prisoners from during the war, or those deported andrecently repatriated, to rural employ by offering favorable credit terms. Thelaw of May 24, 1946 likewise targeted young people between the ages of 21 and35, with subsidized loans. In 1946, there were 661 loans totaling 140 millionFrancs; by 1959, there were 168,000 loans totaling 914 billion Francs for theseyoung rural workers.48 Legislation immediately following the war wasmotivated largely because of food shortages.49 While the extensive subsidiesand favorable credit terms were necessary in this regard, the continuance ofthese generous benefits beyond the immediate postwar shortages illustratesthat other political motives were at play.The total value of loans made by the Caisses de Credit Agricole grew from

171,467 in 1950 to 993,708 in 1959.50 Additionally, the balance of depositsincreased tremendously. By 1959, the deposits of the Credit Agricolerepresented about 11.2% of total deposits in the French banking system.Comparing this to its deposit base in the pre-war era illustrates the enormouschange, as seen in Table 3.Between 1950 and 1963, Credit Agricole medium and long-term loans rose

from 630 million francs to 13,000 million Francs.51 This expansion continuedas the bank financed, with considerable government subsidy, the technical and


19


infrastructural modernization of the countryside. Figure 4 illustrates thetremendous increase in government assistance to the Credit Agricole during thepost-war period in comparison to the pre-war era. Notice the steep inclinefollowing WWII and lasting until around 1950, which continues to rise at aslower pace until the early 1960 s. It is clear that the Gaullist government putthe brakes on the amount of credit diverted to the agricultural sector. Loanscontinued to grow, despite the leveling-off in government support; and becauseof its tremendous asset base, the Credit Agricole was often considered thelargest bank in the world.52 In 1975, it made 12.8% of all loans made to thenonfinancial sector in France.53 The Credit Agricole considerably increased itsservices to farmers in comparison to the pre-war period, in addition to offeringlow rates of interest and increasing the availability of credit, corresponding tofarmers’ far greater political power.54

1

10

100

1000

10000

1923

1925

1927

1929

1931

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

Figure 4 Value of advances from the State to the Credit Agricole (1923–1972) in million of Francs

(logarithmic scale). Source: adapted from Gueslin Andre, (1984) Histoire des Credit Agricoles,

p. 322.

Table 3 Composition of deposits in france (in millions of contemporary Francs)

Total Deposits (1) Credit Agricole (2) (2)/(1)

1913 18,581 4 0.0002%

1920 64,249 27 0.0004%

1930 156,705 999 0.006%

1937 180,105 1,297 0.007%

1959 11.2%

1975 1246.5 (billion FF) 147.9 (billion FF) 11.9%

Source: Gueslin, Andre, 1992. ‘Bank and State in France from the 1880 s to the 1930s: the

impossible advance of the banks’ in Finance and Financiers in European History 1880-1960, (ed.)

Cassis. For 1975. Original sources: for 1913 and 1937, Laufenburger, Enquete; for 1975, IBRO, and

Journal Officiel.


20


Labor: The politics of France’s postwar financing of large firms has beendiscussed in detail by other authors, so here I present a brief overview (e.g.,Zysman, 1983; Hall, 1986; Loriaux, 1991). The pattern of financing of largefirms resembles that of Japan — both countries had large firms that wereuncompetitive relative to their main foreign rivals (German and British firmsfor France and American firms for the Japanese). Consequently, governmentsin both nations bolstered banking services that could collect household savings,with the government then directing these funds, via public and semipublicbanks, to industries and firms of importance to the nation’s industrializingstrategy. International trade and capital flows increased as firms in bothnations made inroads into foreign markets (and as foreign firms made inroadsinto the French market in particular). This, in addition to rising debt levelsduring the seventies, placed strains on the government’s willingness to continuethe high levels of subsidized lending as it pursued macroeconomic prudence.With many large firms also having become competitive as a result of the‘miracle growth era’ of the 1950s and 1960s, they could now seek financingfrom international capital markets. The stagflation and oil crises of the 1970scaused a backlash to the right-wing government in France, and led to theunprecedented success of the Socialists in the 1981 election. Initially, theynationalized banks (and many large firms) to direct funding to industry so as topreserve employment levels, and to assist firms in trouble (directly controlling96% of all deposits!). A large part of their economic program was paid for byborrowing; they gambled that these funds would make growth possible again,but the economy became saddled with unsustainable debt levels. The growingcost of borrowing and debt payments led to measures to reduce publicexpenditures and to raise revenue which included privatizing the newlynationalized firms via share sales to private individuals and institutions (Hall,1986).However, the manner in which the government implemented these

privatizing policies remained consistent with the left’s desire to preserve firms’long-term focus, which helped to ensure employment stability. This wasachieved primarily by shifting from state-directed financing via banks to apattern of cross-shareholding (similar to Germany and Japan). Some wouldargue that French firms have since towards an Anglo-American model ofcorporate financing. For example, Morin (2000) points to the tremendousincrease in foreign share ownership, a large portion of which consists of NorthAmerican institutional investors, which went from 10% in 1985 to 50% by2001. This has led to the unraveling of share-ownerships, heightened takeoveractivity, and placed a new emphasis on shareholder value among CEOs.However, the government continues to assert its authority over French firmsdespite this apparent shift towards market financing (Roe, 2002). Whiletakeovers do occur, Finance Ministry approval has usually been necessary. It


21


has rarely approved a takeover without an employment protection plan inplace, with the offeror having to renounce laying off any employee at the targetfor 2–5 years. This naturally makes takeovers less attractive since restructuringwould be harder (as restructurings often lead to layoffs). Until 1999, the stateoften decided takeover results and, even when it withdrew from overall socialcontrol, it continued to seek to avoid takeovers that would yield ‘a socialmassacre’ with ‘massive layoff[s].’55

To limit the negative consequences from the recent rise in hostile offers, theFrench ministers proposed a takeover law in March 2000 that would require anoffering company to agree on some terms with the employees of the target. ‘Atakeover cannot succeed without taking into account employees’ views,’ saidthe French Finance Ministers, seeking to formalize what had been an informalpolicy.56 Moreover, French firms seeking to downsize have been excoriated inthe press by political leaders, who sometimes threatened to deny themdiscretionary government benefits if they persisted.57 And employee stockownership has been promoted as a way to resist takeovers, especially amongthose that would lead to layoffs and downsizing.58 Thus, although the Frenchgovernment has bolstered securities markets, it has done so in ways thatprotect labor from some of the potentially negative consequences.

Conclusions

The forgoing discussion clearly illustrates that nations can change, dramati-cally and quickly, from one kind of capitalism to another. In France’s case,WWII was the pivotal event that led to labor’s overwhelming political powerand ultimately to the heavy reliance on banking institutions. But the roots ofFrance’s post-war capitalism can be found in the pre-war policy prescriptionsof the Socialist Party as borrowed from the Belgian Henri de Man, who waslikewise inspired by the German experience. And while the VOC literaturefinds it difficult to place France squarely into the CME category (withGermany serving as the ideal-type here), labor’s policy objectives in Germanyand France after the war suggest that they fall along a continuum with respectto each other. The French labor movement was simply more successful atachieving its aims than the Germans. The German compromise led to indirectcontrol over credit, while the French achieved direct control, but otherwisepreserving many of the fundamental attributes of a decentralized marketeconomy.The state-run post-war financial structure lasted for decades. This is

remarkable considering de Gaulle’s powerful influence during the 1960s and inview of his attempts to water-down the Socialist agenda during the ConstituentAssembly. Rather than attempting to liberalize the financial system, he used


22


the existing financial structure to funnel money to key industries in order tocreate ‘national champions.’ The policies pursued during this period of right-wing politics in contrast to those pursued during France’s pre-war era highlightthe importance of the political institutions which provided the underlyingfoundation for France’s capitalist system. Granting greater political power tothe more representative lower house during the Fourth and Fifth Republics(and thereby to labor and farmers) created the political preconditions thatpreserved France’s post-war capitalist practices for decades.From the analysis presented here, there are two main implications for the

VOC literature that I would like to highlight: the role of farmers, and themechanisms of change. The VOC literature places firms at the center of itsanalysis, though little mention is made of farmers. Considering theirconsiderable political influence immediately following WWII when theinstitutions of contemporary capitalism were created leaves out an importantpart of the story. During the pre-war era, when there were more farmers as aproportion of the total population, but with political institutions favoring therural elite, bank loans to farmers relative to total business loans were less than3% prior to the 1930s. In 1975, by contrast, lending to farmers constitutedaround 12.8% of total loans to the nonfinancial sector. And these figuresactually understate the difference since pre-war firms often turned to securitiesmarkets for their financing needs, while post-war firms relied far more heavilyon bank lending.Since 1983 France has undertaken important liberalizing changes to its

financial system that have bolstered its domestic securities markets. At thesame time, however, agricultural finance has remained important, and retainedits links to banking institutions. Because French farmers tend to be too small toqualify for financing via capital markets, in contrast to the large corporatefarms in America, this group has continued to push for the preservation ofFrance’s banking-oriented practices. While their proportion of total nationalfinancing is relatively small, and continues to decline as the rest of the economygrows, their political influence remains important, particularly as a vetoagainst changes to the status quo. But farmers’ influence during the 1944–1946period was quite significant, and their impact on the creation of post-warcapitalist institutions is an area worth further investigation.Second, the VOC literature says little about how capitalist institutions

change. It primarily focuses on outcomes resulting from strategic interactionsamong actors within a specific institutional context that constrains thebargaining choices, while treating the existing institutions as exogenouslydetermined. Since institutions clearly play an important role — after all, theHall and Soskice volume is entitled ‘Varieties of Capitalism: the InstitutionalFoundations of Comparative Advantage’ – we must ask where these institutionscame from? And, can they change?


23


The main point of this analysis is that capitalist institutions can change,quickly and dramatically — it simply requires the political will to do so. Franceis a case in point. The newly created political institutions following WWIIcemented the power of the emergent interests that struck this bargain, andsubsequently led to specific kinds of capitalist institutions. As mentionedabove, examination of labor’s policy choices in France and Germany followingthe war reveals that French labor was simply more successful at obtaining itspreferred policy outcomes. Labor’s ability to construct the capitalistinstitutions it desired depended upon its bargaining strength with respect tobig business, the power of each group’s political allies, as well as the influenceof foreign powers, or lack thereof. In the case of Germany, Britain and theUnited States played a decisive role in preventing the adoption of institutionalpractices which may have otherwise resembled those in France (the UnitedStates played a similar role in Japan). The lesson from the French case, andaugmented by comparison with the German one, is that crisis periods create anopportunity for institutional change which is determined by the political powerof domestic interests, as well as the influence of foreign powers. More rigorousanalysis on how the strategic interaction of domestic and foreign interests leadsto various institutional outcomes during crisis periods is a second area worthyof closer investigation.

Acknowledgements

I thank Peter Gourevitch, Miles Kahler, two anonymous referees and the editors at French Politics

for their helpful comments.

Notes

1 In general, CMEs tend to rely more heavily on external financing than internal financing

(Schaberg, 1999; and Allen and Gale, 2000). However, this difference does not clearly capture

the salient features of CME and LME financial systems.

2 Gueslin (1992) offers ample evidence that relates to capital markets, banks overall were not

heavily relied upon in the pre-WWII era.

3 Bank financing also experienced a change from a reliance on private banking in the 1920s to

public banking in the 1930s (Gueslin, 1992, 85).

4 This is same argument used by neo-imperialist accounts regarding the conditions under which

loans are extended to developing countries by the IMF, and the developed countries.

5 There are two additional reasons why labor seeks to preserve a banking-oriented financial

system once it is already established: (1) long-term employment is more feasible where the

financial system provides capital that is not sensitive to fluctuations in short-term profitability,

as with bank lending (Aoki, 1994); bank lending fosters greater firm-specific investment in

human capital, creating incentives for the firm to keep workers employed during downturns in

the economy so that they will be available when the economy recovers (Iversen and Soskice,

2001).

6 Also see Verdier (2001).


24


7 One exception is corporate farms, which can obtain cheaper financing via capital markets

because of their large size. France, however, is well known for its small farms, so it is not

necessary to consider the role of corporate farms in this case.

8 See Huber, 1996, Rationalizing Parliament.

9 The party label is useful when there are electoral incentives to using it, and these accrue when the

party label acts as a useful heuristic for voters (Cox and McCubbins, 1995). That is, if a

legislator’s reelection chances are enhanced by following party advocated actions, then a

lawmaker is more likely to vote along party lines. In the French Third Republic, there were few

incentives for Senators to need the party label to enhance their reelection chances since they were

indirectly elected by local leaders, and therefore the party label would not serve as a useful

heuristic to these voters since they were probably much more knowledgeable about the

Senator.

10 During the Third Republic, cabinet turnovers were very common. Between the time of the

consolidation of the power of the French Republicans in 1879 and the fall of the Third Republic

in 1940, France was governed by a succession of 94 Cabinets, with an average life of 8 months.

During the same period, there were 44 prime ministers, occupying the position for an average of

16 months. In Great Britain, during the period between 1880 and 1940, there were only 21

Cabinets, with an average life of almost 3 years, and only 11 persons served as prime ministers,

occupying the position for an average of more than 5 years. Of the 94 French Cabinets of the

period, only eight remained in office for 2 years or more (none after 1928) and only 10 remained

in office between 1 and 2 years (Pierce, 1973, 21). While there was a great deal of continuity of

personnel and of policy throughout the numerous cabinets, the considerable instability of

ministries further contributed to the dominance of parliamentary control.

11 Gueslin’s book, Les Origines du Credit Agricole (1840-1914), offers a very thorough account of

the formation of the Credit Agricole.

12 Since the beginning of the Third Republic, and for 50 years prior to the formation of the Third

Republic with the Credit Foncier organized under Louis Napoleon to finance mortgage loans

backed by a state guarantee (according to Karl Born (1983, 104), Napoleon was returning a

favor to his supporters among the rural population), discussion had occurred regarding the

formation of an agricultural credit institution to help farmers get access to capital, and also to

help them deal with unforeseeable natural calamities such as worm and insect infestations,

phylloxera which hurt wine-makers, drought, and excess humidity (Henry and Regulier,

1986, 6).

13 A related issue which delayed the passage of the law for about 4 years was whether to create

popular banks which would cater to small businesses and individuals in addition to farmers, or

to create a credit facility which exclusively served agricultural financing needs. Because many

politicians opposed aiding labor, the latter option was finally passed with the 1894 law (Gueslin,

1978, 142).

14 There was considerable variation in the amount of money allocated to different departments,

which was not in proportion to the agricultural population. Gueslin (1978, 320) suggests that

some of the factors affecting the amount of money distributed to each department include such

things as the dominant agricultural speculation at the time, the size of the farmer, and the

politics of the agricultural office (local/regional).

15 Total loans grew from 1.9 million Francs in 1900 to over 104 million Francs in 1913.

16 According to the March 1911 census, there were 5,271,000 active male agriculturists. At the end

of 1910, the number of members of agricultural caisses was 151,621.

17 Boussard, Les Agriculteurs de la republique; Ministere de l’agriculture, Cent ans de Ministere de

l’agriculture; Sheingate, The Rise of the Agricultural Welfare State.

18 Minimum Program of the CGT.

19 Lorwin (1954, 52–53).


25


20 See Warwick, Paul (1977) The French Popular Front, for a thorough account of the legislative

record of the weakened Popular Front.

21 See Wright, 1964, p. 66.

22 Debates surrounding these issues are discussed in Michel Margairaz’s Les Propositions de

Politique Economique Financiere et Monetaire de la SFIO, de 1934 a 1936: La Reflation,

Universite de Paris, 1972.

23 De Man described his position in Au dela du Marxisme (Brussels, 1927) and Socialisme

constructif (1932). Peter Dodge also wrote a biography, Beyond Marxism: The Faith and Works

of Hendrik de Man (The Hague, 1966).

24 Quote from J. Itard, in Margairaz, p. 249.

25 E. LeFranc and J. Itard, ‘La classe ouvriere a un plan’ in Le Populaire, 13 March, 1935. Emilie

Lefranc was secretary of the Centre Confederal d’Education Ouvriere (Institut Superieur

Ouvrier et Colleges du Travail) and professor of French language and literature. Jean Itard was

a professor of mathematics at the l’Institut Superieur Ouvrier, a militant socialist and union

leader.

26 Dupeux, 1959, provides a copy of the original Program, pp. 180–83.

27 The Program colorfully entitled the main section seeking reforms of the financial system,

‘Against the pillage of savings for a better organization of credit’.

28 For reform of the Bank of France, see Jean Bouvier, Un Siecle de banque francaise (1973),

pp. 158-159, 178-190; Lucille Dromer, ‘Les Limites de la reforme de la Banque de France, juillet

1936,’ Recherches et travaux, Institut d’Histoire Economique et Sociale de l’Universite de Paris-

I, no. 7 (December 1978), pp. 52–70; Achille Dauphin-Meunier, La Banque de France (1936).

Examples of the left’s campaign against the bank are Albert Ayme-Martin, Nos Grands

Financiers contre la nation (1931); Francis Delaisi, La Banque de France aux mains des 200

familles (1936); Augustin Hamon, Les Maıtres de la France, 3 vols. (1936–1938).

29 Bouvier, p. 185.

30 Rapport Brunet: J.O. Documents parlementaires, Chambre des deputes 1936, Annexe no. 664,

pp. 1290–1306.

31 Dauphin-Meunier, La Banque de France, p. 199.

32 Andre Philip was a professor of economics who had investigated American production

techniques during the interwar years and published a study of de Man in 1928. He was an

advocate for Socialist reform from the 1930s on.

33 Kuisel, 1981, p. 173.

34 Philip, ‘Reformes economiques,’ p. 4.

35 Ibid., pp. 6–7.

36 Andre Philip’s report was published by the Parti Socialiste, Pour la Renovation de la

Republique, and entitled Les Reformes de Structure.

37 Kuisel (1981), p. 171.

38 Kuisel, 172, and Courtin, Rapport sur la politique economique d’apres guerre (Algiers, 1944),

p. 41.

39 Commissariat a l’Interieur, ‘Critique de rapport sur la politique economique d’apres guerre

presente par le Comite National d’Etudes de la resistance,’ June 1944 (AN F1a 3791).

40 An interim legislature preceding the ratification of a new constitution and the election of the

National Assembly in October 1946.

41 Kuisel, 1981, p. 208.

42 For information on the formulation and effect of this banking legislation, see Alhadeff’s six

chapters on French banking in Competition and Controls in Banking (1968), Wilson’s French

Banking Structure and Credit Policy (1957), the France chapter by Henry Germain-Martin in

Beckhart’s Banking Systems (1954) and Dupont’s Les Controle des Banques et la Direction du

Credit en France (1952).


26


43 A key law passed early on with the new government on February 22, 1945 (even before the

Banking Law) was a reform to realize the old trade union demand for a voice in management by

the establishment of labor-management planning committees. These works committees would

become obligatory in all firms with 100 or more workers, which included 7,000 to 8,000 firms

employing about 2.5 million workers (out of a total of 1,800,000 firms and 12.5 million wage

earners; agricultural workers are not included; see Pickles, 1953, French Politics, p. 54). Made

up of elected representatives of employees, presided over by the employer or plant manager, the

committees were given control of plant social welfare work and consultative powers in

production and economic decisions. The legislation fell short of the left-wing representatives’

hopes, who wanted works committees to be compulsory in all establishments employing 50

workers or more (which was achieved with the act of May 16, 1946, adding 750,000 more

workers), and who would share in the running of firms instead of merely being consulted about

management. With this act, workers had the right to be informed of the amount of profit made

and could make suggestions regarding the use of these profits (special provisions applied to

limited liability companies). A committee was empowered to inspect the books before the

annual general meeting and to call in an accountant to help members to understand the points at

issue. This was resented by right-wing members of the Assembly and by employers. The act of

May 16 1946 also provided for the inclusion of delegates fromWorks Committees on the boards

in an advisory capacity. For further discussion on the usefulness and powers of Works

Committees, see ILO, Labour Management Cooperation in France, 1950, pp. 186–188). A later

act imposed an obligation on the employers to consult (not merely to inform) them before

putting into force decisions regarding the general running of the firm.

44 Alhadeff, 1968.

45 See Gordon Wright, The Reshaping of French Democracy (New York, 1948) and Lorwin, The

French Labor Movement, pp. 104–105.

46 See Rioux, 1987. For parliamentary control of the executive and ministries, see Petry, in Laver

and Shepsle (1994, 136).

47 The parliamentary bias of France’s political institutions was clearly illustrated during the

1986–1988 period of cohabitation. Two conservative parties, the Gaullists and the UDF,

gained a narrow legislative victory in 1986. Consequently, Socialist President Francois

Mitterand was forced to name a Gaullist prime minister, Jacques Chirac. Except for some

issues concerning foreign relations and defense (on which Mitterand and the conservatives

largely agreed), Mitterand stood on the legislative sidelines while Chirac functioned as

France’s political executive. The conservative coalition implemented important policy reforms

opposed by Mitterand, such as the denationalization of many French industries, the

reinstitution of a two-round, single-member district electoral law, and changes in labor law

(Huber, 1996, 28).

48 Henry and Regulier, p. 74.

49 Kuisel (1981, 187).

50 Henry and Regulier.

51 INSEE 1986.

52 See, for example, N. Makuch et al., 1978, Le Credit Agricole (Paris: Berger, Levrault, 1978); and

Jean Claude Gaudibert, Le dernier empire francais (Paris: Seghers, 1977).

53 See Dimitri Vittas (ed.), Banking Systems Abroad (London: Inter-Bank Research Organisation,

1978), p. 129. Also in Zysman (1983, 120).

54 Carre, Dubois, and Malinvaud, 1975, p. 337.

55 Martine Orange, La Fin de l’Exception Francaise?, Le Monde, March 30, 1999, p. 19.

56 Frederic Pons, Un Brin d’Ethique dans les Fusions, Liberation, March 16, 2000, p.25; see also

Thomas Kamm, French Bill Takes Aim at Takeovers in Wake of Recent Merger Battles, Wall

Street Journal Europe, March 16, 2000, at p. 2 (indicating that the proposed law would require


27


‘a company launching a bid to meet with representatives of its target’s staff to discuss its projects

in detail’).

57 See, for example, David Owen, Michelin Slips After Provisions, Financial Times (London),

March 15, 2000, p. 32 (reporting that the Prime Minister’s ‘remarks were seen as a warning that

there were limits to the extent to which big French companies should adopt aggressive Anglo-

American profits-oriented tactics’).

58 Laurent Manduit, M. Jospin Ouvre avec Precaution le Dossier de l’Epargne Salariale, Le

Monde, Jan. 29, 2000, p. 6.

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