French banks were next faced with a long period of difficulties, beginning with the disruptions due to the First World War. As soon as the war broke out, the deposit banks were assailed by demands for withdrawals. The government decreed a moratorium in order to allow them to pay back deposits only gradually, and their public image was seriously impaired.
After the First World War, the restoration of deposits was difficult: many savers were impoverished by inflation and by the refusal of the USSR to recognize the debts of tsarist Russia, and the crises of the franc between 1923 and 1926 caused a flight of capital abroad. The banks' own capital was also eroded by inflation. Deposit banks began limiting themselves to granting very short-term credit by buying massive quantifies of treasury bills. The banking houses of the haute banque often
contented themselves with managing their previous positions. Investment
banks intervened mainly in central and Eastern Europe and in the colonies.
As for local banks, they enjoyed a certain renaissance during the 1920s
and they often helped industrial firms to finance their investments.
But these banking structures remained fragile, and it was only with the stabilization of the franc by Poincaré between 1926 and 1928 that the credit institutions were able to rebuild their resources. From the beginning of the Great Depression, local banks and new ones that had daringly loaned to industrialists during the boom of the 1920's became victims of a freezing of their credits and were exposed to massive demands for withdrawals on their deposits.
Bankruptcies occurred in 1930 and 1931, and the number of banks was reduced by a quarter. Only one large bank, the Banque Nationale de Crédit, founded in 1913, threatened to collapse. The Treasury (Trésor) helped it to liquidate and it was replaced by the Banque Nationale pour le Commerce et l'Industrie. The others, which had kept large liquid reserves, succeeded in overcoming the banking crisis. It was thereby not as serious as in the United States or in central Europe, but the banks came out of it weakened, and their size had diminished considerably: in 1936 the largest English bank, the Midland Bank, was a match for the seven leading banks of France put together.
This decline of the private sector was compensated for by increased state intervention. The state had had the Caisse des Dépôts et Consignations at its disposal since 1816, the main resource of which was the capital of the savings banks, and which supported the Treasury by buying annuities and treasury bills. In the 1930s, it was also responsible for rediscounting bills representative of medium-term credit. In 1918, the authorities created the Post Office cheques System, which expanded slowly.
In the 1920s, the banking structures of the public or mutualistic sector multiplied: the people's banks (banques populaires) and the agricultural savings banks enjoyed real expansion (following a law of 1920 creating 'l'Office national de Crédit Agricole', which ultimately turned into Caisse Nationale); the Crédit National founded in 1919, first financed the reconstruction of the war-devastated regions; then it specialized in long-term loans. In 1936 the Front Populaire 'reformed' the Banque de France: the bank directors (régents) were eliminated and from that time on the issuing institution was closely controlled by the government. In the same year, the Caisse des Marchés de l'Etat was created, responsible for credit to companies that worked for public markets, and thus it competed in the rearmament effort in France.
During the Second World War, the banks suffered from the collapse of the economy and the pressures of the occupying forces. The Vichy government put an end to the liberal regime in which the banks in France had always functioned: the law of 13 June 1941 defined and regulated the banks and set up institutions which would largely be maintained, under different names, after the Liberation (Commission de Contrôle des Banques, Conseil National de Crédit). There were 550 banks in France at the time.
Source: Alain Plessis