The Financial Repression Policy: the French Interwar case on Public Debt

Recently, Reinhart and Sbrancia (2011) proposed a new path of policymaking by demonstrating how public debt could be -and had been- liquidated by using a financial repression policy. In fact, we have learnt from History that public debt could be reduced without having to act too strongly on public expenses. However, stronger state regulations are necessary and central bankers should empower both the banking and financial sectors. The aim of this paper is to take that proposition of financial repression for granted and demonstrating it from the French interwar case. In fact, France succeeded to manage its huge public debt (inherited from WWI) thanks to a fixed discount rate policy which can be seen as a ceiling on interest rate policy. This central bank -or state- intervention is the leading measure of a financial repression policy (associated with a relevant banking and fiscal regulations). Moreover, the article draw from French history and economic theory a debt-reduction dynamics rule: if real interest rate on government is lower than the real growth rate, thus, the debt/GDP ratio will fall over the time. Moreover, to a broader extent, the article draw a general conclusion in terms of monetary policymaking (Konig 1993). The French case enlightens us to what extent discretionary power (not to say heterodox policy) -as opposed to a rule based approach- is useful so as to face the main macro issue and particularly the everlasting internal vs external stability dilemma.