Banque de France

The Banque de France (BdF) was established in 1800, under the aegis of bankers and Napoleon Bonaparte, who was then First Consul of France. At that time, a few promi- nent bankers were advocating the creation of a private bank of issue, independent of political powers, in order to face up to a state of deflation and lack of cash in the French economy. Bonaparte, who was striving to consolidate public finances and restore mon- etary stability in the aftermath of the French Revolution, agreed to provide public funds to the BdF: he regarded the BdF as a tool for fulfilling his objectives. In 1803, he passed a law in order to provide it with an official charter, which notably endowed it with the exclusive right to issue banknotes in Paris for a period of 15 years. Shortly thereafter, the BdF experienced a bank run owing to the issuance of large amounts of banknotes to finance public spending that eroded public confidence in banknotes. In response, in 1806, Napoleon decided to monitor a reform designed to allow him to exert better control over the BdF's activities. This reform, which was complemented in 1808 with an impe- rial decree providing for the "basic statutes" of the BdF and for the creation of discount offices in main French cities, promoted a relatively balanced power relationship between the State and private shareholders, which was to run until 1936. During that period, the BdF's right to issue banknotes was extended and the network of its discount offices expanded. To deal with the financial crisis that arose from the 1848 Revolution and later from the Franco-Prussian war (1870) and the First World War (1914), the BdF's notes became fiat money for some time. They became fiat money for good in 1936. Legal tender was first experimented with in the 1848-50 and 1870-75 periods, before being definitively enforced in 1875.

The balanced power relationship between the State and private shareholders intro- duced in 1806 was amended by the Front Populaire government in 1936. Finally, the BdF was nationalized in 1945. The purpose was to enable the State to impose a tighter control over the BdF's activities and ensure that general interest would prevail over private interest. The next important events were the revamping of the BdF's statutes in 1973, the enactment of its independence in 1993, and its affiliation to the European System of Central Banks in 1998. The 1973 statutes updated the organization and control of credit and the BdF's administration. The BdF's independence was a requirement of the Maastricht Treaty, and its affiliation to the European System of Central Banks fitted into the process of European monetary integration.

Although it was established in the form of a private bank designed to provide cash to the economy, the BdF was to maintain close links to the State. Actually, it became the State's banker, as it was committed to provide the State with advances on a regular basis. This commitment was considered a normal counterpart to the privilege of issuing notes. It was also a consequence of Bonaparte's original involvement in the BdF's establish- ment. In the course of time the State needed more and more cash, especially in times of war. However, these facilities in favour of the State came to an end in 1994 in accordance with the provisions of the Maastricht Treaty. It should be noted, too, that the BdF has, on behalf of the State, links with franc-zone member countries.

From 1914 onwards, the BdF was also vested with responsibilities in the management of foreign reserves and the stabilization of the French franc exchange rate. Credit granted by the BdF to the economy decreased until 1970, when it put a stop to that function. At the same time, the BdF was assigned responsibilities for the supervision of commercial banks and for the conduct of monetary policy. In this way, it progressively achieved the status of the commercial banks' central bank.

As a central bank, the BdF primarily got involved with the settlement of payments among commercial banks. It was committed to issue money in order to allow the latter to make payments between them and thus ensure the unity of the domestic currency. Issuance of the BdF's money took place through a number of different operations. For a long time, rediscounting transactions were predominant. However, from the beginning of the 1970s, open-market transactions became the rule, albeit with some ups and downs in the early stages.

The implementation of the European Monetary Union (EMU) brought about signifi- cant changes in the role of the BdF. As already mentioned, it was made independent of the State as from 1993. This means that it had henceforth to conduct monetary policy (aimed at price stability) on its own, without seeking or taking instructions from the French government or any external bodies. 1998 was marked by the establishment of the European Central Bank (ECB), the European System of Central Banks composed of EMU member countries' central banks, and the Eurosystem comprising the ECB and the central banks of member countries that had adopted the euro. This means that the BdF, just like its partners, lost its autonomy with respect to monetary policy and the regula- tion of the domestic banking system. Henceforth, it was the ECB that was in charge of monetary policy in the whole euro area. That is consistent with the implementation of the euro: the management of a single currency commands a single monetary policy.

As regards regulation of domestic banking systems, the ECB is being given enlarged banking supervision responsibilities. It should be noted that, for these reasons, national central banks of the Eurosystem are usually considered as mere branches of the ECB: the latter would act as the central bank of the whole euro area. However, this statement is inaccurate. So far, in fact, no generalized and centralized gross settlement mechanism analogous to the one managed by the BdF and any other central bank in sovereign coun- tries has been implemented (Rossi, 2012). From this point of view, the euro is not a fully fledged single currency, and the BdF is still an actual central bank, which is not the case with the ECB.

See also:

Banking supervision; Bank run; Cash; Central bank independence; Euro-area crisis; European Central Bank; European monetary union; Fiat money; Financial crisis; Open- market operations; Settlement system.