Threat of a Capital Levy, Expected Devaluation and Interest Rates in Inter-War France

The aim of this paper is to isolate and measure the respective importance of political and economic aspects in two critical episodes of the French inter-war period: the stabilization process of the mid-1920s and the reluctance to abandon the gold standard during the 1930s. We do this by separating expectations of taxation and of devaluation that are implicitly included in the prices of various categories of French bonds. On the 1924–6 crisis, we show first that there was no expectation of government default; second that a substantial part of the high level of interest rates in 1925 can be explained by expectations of a capital levy or other taxation devices; third that hyperinflation was not expected, even at the moment of maximum price rise, since implied five-year interest rates were lower than 20% and since the expected value of the franc was not as low as the spot value. For the 1930s, we show that expectations of a depreciation of the franc explain the rise in interest rates, so that no independent effect of fiscal policy was expected.