|Report by:||Jean-Pascal Bassino (Paul Valéry University)|
|Chairman:||Konosuke Odaka (Hitotsubashi University, Institute of Economic Research)|
|Discussants:||Osamu Saito (Hitotsubashi University, Institute of Economic Research)|
|Yoko Takada (Chiba Keiai Junior College, International Studies)|
|Mihoko Takahama (National Institute of Publich Health)|
|Eiji Tajika (Hitotsubashi University, Faculty of Economics)|
|Tran Van Tho (Obirin Univeristy, International Studies)|
|Hironobu Nakagawa (Hitotsubashi University, Institute of Economic Research)|
|Kyoji Fukao (Hitotsubashi University, Institute of Economic Research)|
Odaka: First, I would like to thank everyone for taking time out of your busy schedule to be with us here today.
Today, we will have reports on two discussion papers written by Mr. Jean-Pascal Bassino, who has provided considerable cooperation to our "Long-term Asian Statistics Database Project" in regard to economic statistics for prewar Vietnam. The two papers we will be discussing are DP98-7 Estimating population and labour force in Vietnam under French rule,1900-1954 by Maks Banens, Jean-Pascal Bassino and Eric Egretaud, and DP98-8: Exchange rates and exchange rate policies in Vietnam under French rule,1895-1954 by Jean-Pascal Bassino.
Today's discussion is divided into two sessions, Session I: "Exchange Rates and Exchange Rate Policies" and Session II: "Population and the Labor Force". For these two sessions, we would also like to have young researchers Mr. Nakagawa and Ms. Takahama present their comments on the discussion papers and today's reports
Historical Characteristics of Vietnam
Bassino: I would like to report on the results of our research on the economic history of Vietnam from the end of the 19th-century to 1954 (the end of French colonial rule). The period in Vietnam, from the end of the 19th-century to 1954, is an extremely interesting period with respect to the research of the economic history of Asia. Vietnam falls within the realm of Chinese cultural influence, but geographically, it is positioned as a Southeast Asian country. When I met Professor Pham Duc Duong, the Director of Vietnam's Institute of Southeast Asian Studies, two years ago, for presenting our research program, he insisted that Vietnam had successfully integrated aspects of the culture, sense of values, and technologies of China but in term of substratum is basically a Southeast Asian country.
Looking at the course of Vietnam's economic development, we see that there are some aspects of the development of pre-World War II Vietnam that are similar to the development seen in Japan and Korea, but there are also aspects of development common to Southeast Asia. Overseas Chinese merchants played an extremely large role in the economic development of Southeast Asia and also greatly affected the economic development of Vietnam. The elite of Vietnam, however, were also strongly aware of the economic development taking place in their own country and worked hard to support that development, an aspect of development also similar to that seen in Japan, Korea, and in some respects, Taiwan and other countries. For example, they technologies were imported technologies from other countries and students were sent overseas from Vietnam to study. This is extremely similar to what was happening in Japan and Korea. Members of the Vietnamese elite society first began going abroad to study in China and Japan at around the end of the 19th-century. Some also went to Europe, primarily France, and some even went to the United States.
The Exchange Rate Policies of Vietnam
Bassino: Now I would like to move on to the exchange rates and exchange rate policies of Vietnam. We studied this topic in the discussion paper (DP98-8) that I mentioned earlier, and today I will base my talk on that paper.
The exchange rate is an important topic in many regards, and in my research, I decided to expand the scope beyond the exchange rates of prewar Vietnam to consider exchange rate policies implied in the data. The results of my studies indicate that the control of the exchange rate was the most important issue the General Government of Indochina had to deal with.
This is because the General Government of Indochina had considerable interest in controlling international trade flows. The General Government was extremely sensitive to any changes taking place in its trading-partner countries and internationally traded goods, and apparently made very careful studies of the effects of exchange rates. However, the monitoring of exchange rates was handled primarily by the Banque de l'Indochine. This bank was a private sector bank that served as a central bank for the country, so all of its documents are private documents and are not readily available for study. Of course, there is also a large amount of data that was reported from private banks to the General Government. Still, it is very difficult to access and study data from private sector businesses themselves.
We would like to assemble as much data as possible related to exchange rates starting with the 19th-century, but in actuality, we are only able to obtain information about exchange rates between the French franc and the piastre (for the 19th century). We can obtain the data on the piastre exchange rates against other currencies only after the start of the 20th century. Starting around 1910, monthly average exchange rates become available in addition to yearly average exchange rates. Since Vietnam traded with various countries, exchange rates are available for the major Asian countries - Southeast Asia, China, Japan, India, etc. - in addition to rates for the franc and sterling. One interesting thing is that there were also records for some of the currencies used in China, primarily the currencies of Shanghai, Hong Kong and Yunnan. This is because the ultimate objective of France's entry into Vietnam was to move into southern China itself. The government of 19th-century France was planning to acquire Yunnan and the southern coast of China.
Odaka: This is a rather basic question, but, if we can establish the basic relationship between the piastre and French franc, shouldn't we be able to understand, for the most part, the relationship of other currencies to the piastre by looking at other markets, such as Singapore or Hong Kong?
Bassino: There were large seasonal trade deficits and surpluses in Asia, especially in Vietnam, eventually limited in time but with a high level of volatility. In addition, restriction on international movements of silver and gold existed in Vietnam, inducing therefore distortion on the currency market. However, I think it would be all right to use that data as a benchmark, or as (an index of) the monthly exchange rates for East Asia as a whole.
Odaka: Your discussion paper contains a graph plotting piastre exchange rates vis-a-vis various countries. However, if we do not know the systems under which each currency was used, we are unable to interpret the meaning of this graph. For example, was a currency on the silver standard, or was it on the gold standard ?
Bassino: We did some research into that. Hong Kong was the most important trading partner for Indochina as a whole, and for Vietnam in particular, and both the Hong Kong dollar and piastre were silver-based currencies until the 1930s. However, the piastre (already) in Hong Kong was used (only) in Hong Kong, and silver currencies could not be freely imported and exported between Hong Kong and Indochina. Starting around 1904, silver currencies (Mexican dollars) could not, officially, be freely moved.
Odaka: Why couldn't gold and silver be freely moved?
Bassino: That was a regulation established by the French government for commerce in French colonies. The Banque de l'Indochine was, to a degree, a central bank, however, it was not allowed to freely mint silver coins. Furthermore, the French government initially produced silver piastre that resembled the Mexican dollar, but there was a slight difference in the value of each, so (currency) speculation was possible. Therefore, the international shippment of silver coins was banned in order to stop this speculation.
The currency regulations were complex. Silver was used by the Vietnamese people, while (bank) notes were used primarily by French companies and ethnic Chinese businesses.
Odaka: Were the notes you mentioned convertible bank notes? If a person took a note to the bank, could it be converted into silver?
Bassino: Yes. Ethnic Chinese involved in trade, transportation banking or manufacturing in Vietnam had confidence in these notes, so there were no problems with using the notes. However, it became necessary to increase the circulation of silver coins as the economy developed. But France was in a state of confusion during World War I, and was not able to mint silver coins as quickly as needed.
Odaka: Where were the silver coins minted?
Bassino: In Paris. When the Banque de l'Indochine considered that an increase in silver coins circulation was necessary, it first made a request to the General Government of Indochina, then the Indochina General Government applied to France for the new silver coins. This took about two to three years. Actually, during the war, the gap quickly expanded between the ratio of circulation of the silver and notes held by the Banque de l'Indochine. At first, the ratio was usually about 1 to 3, but grew to a ratio of 1 to 12 in 1918-1919. Still, this did not have much effect in Vietnam. The import and export of silver was banned.
Odaka: Even so, wasn't there still smuggling?
Bassino: Yes, there was considerable smuggling. This is because there were already Mexican dollars (in use). The smuggling of Mexican dollars into the country was particularly common during World War I.
Odaka: Are there documents to that effect?
Bassino: Of course such documents do exist, but this was ultimately a problem from the standpoint of the General Government.
The Indochina currency (piastre) was silver, and this currency was already in use when France came to Vietnam. When the piastre was officialy established in 1873, the idea was that the Mexican dollar would initially be used, and then the currency would gradually be changed to a unique Vietnamese currency. They tried to emulate what England had done with its East Asian colonies (Hong Kong and Straits Settlments).
However, this was an exception in the way the French empire as a whole handled things. All other French colonies and protectorates used the French franc. The French franc was a gold currency, so it was handled in nearly the same way as the British sterling, and was a truly strong currency until around 1913. France used silver primarily in its trade with China. This was because France knew very well that it would be a disadvantage for it to change to a gold currency. However, starting at the end of the 19th-century, Southeast Asia and South Asia began shifting from the silver standard to the gold standard, making for rather complicated conditions.
Indochina was treated as an exception to the monetary exchange rate policies of France. France began to understand that, because a Vietnamese currency already existed, using that currency would be advantageous to the economic development of Indochina and would also be advantageous to France. It would not have been difficult to introduce the French franc up to (the start of) World War I, but there was really not much need to do so. From the time the Commission for Monetary Reform got underway in 1902 until (the start of) World War I, there was little agreement even within the General Government regarding exchange rate policies and currency systems. As a result, France decided to just continue using silver.
This situation changed, however, because of World War I. The effects of World War I basically made it difficult to support the gold standard of the French franc. The war resulted in a French trade deficit, but conversely, there was a trade surplus for Indochina as a whole and Vietnam in particular, a condition that continued even after the war.
After the war, there was a sudden change in the French franc exchange rate, with the value of the franc dropping and the piastre rising. There were only very minor fluctuations, however, in the sterling and the U.S. dollar. This could actually be considered to have been a worldwide trend. By 1921, the exchange rates for the dollar and sterling had pretty much returned to their prewar levels.
Even after the end of the war, the exchange rate value of the French franc continued to drop. Two opposite explanations were presented
- on the one hand, several mostly private lobbies argued that Indochina, not France, was responsible for this drop. Accordingly, they proposed to introduce the French franc as Indochina currency.
- on the other hand, various groups supported by Indochina General Governement insisted on the necessity for the piastre to convert to gold standard.
The idea to introduce the franc into Indochina gained popularity immediately after the war with expectations that gold and silver reserve of Indochina would help to improve the international balance of payments for the French empire as a whole. It is interesting to note that, although silver, with its stable exchange rate, was the most important currency for trade with the Asian countries, the Indochina General Government was also planning before the war to convert the piastre to a franc-peg gold currency in the future. However, considering the Asian trade situation, it was decided that the silver standard would be maintained.
The situation changed completely, however, by the 1930s. France eventually chose the French franc in 1930. Then, with difficulty, France removed the restrictions on gold. It was thought that if Indochina chose the franc peg, there could be a simultaneous conversion to a gold currency. However, the 1930s was a time of economic depression, so the reality was completely different from expectations. Many countries adopted policies banning gold export and currency values dropped around the world. This greatly affected trade for Indochina as a whole and Vietnam in particular. Sales of rice produced in Vietnam dropped in the Asian market, so trading companies attempted to sell the rice in France. There was a great increase in trade between Indochina and France in the 1930s.
This was the long-term trend of the exchange rate. We also analyzed short term exchange rate fluctuations, measuring the volatility using monthly averages. Our results show that the volatility of piastre with respect to various Asian currencies in the 1920s, when silver currencies were used, was rather low for both gold and silver currencies. The volatility of piastre exchange rate with respect to the sterling and U.S. dollar were also not so large. Conversely, in the 1930s, the volatility with respect to France had been eliminated, but the volatility with respect to other countries greatly increased.
However, many items could only be exported during certain periods of the year, so export companies could not really forecast monthly fluctuations in the Hong Kong and Singapore currencies and their exchange rates. There were also, however, various fluctuations taking place in the market as a whole, and we could say that these fluctuations actually helped to promote exports to France.
This paper - entitled "Exchange rates and exchange rate policies in Vietnam under French rule, 1895-1964" - investigates the long-term and short-term exchange rate patterns, in relation with exchange rate policies in Vietnam under French rule. The analysis relies on the collection of a comprehensive set of the Indochina's piastre exchange rates against the main Western currencies (French franc, US dollar, and Sterling) and most of Asian currencies.
Indochina was unique within the French colonial framework as a colonial territory which managed to keep constantly a separate monetary system. Its exchange rate regime, in fast, was the product of negotiations and conflicts witnin the colonial administration and business organizations in Indochina. Until 1930, vietnam continued to be on the silver standard, reflecting the magnitude and share of the trade with China and Hong Kong. However, following the post WW I economic situation and substantial depreciation of the French franc, the decision was made to peg the piastre to the French franc, a de facto shift to the gold standard. The analysis of exchange rate data posits that the main consequences are; 1)the isolation of the Indochina from its major trading partners in Asia and 2) high volatility of the piastre exchange rate against currencies of Asain countries.
[Comments] Hironobu Nakagawa
Odaka: Well, then, I would now like to ask Mr. Nakagawa to comment on Mr. Bassino's discussion paper and today's report.
Nakagawa: First, in regard to the style of this discussion paper, the paper takes an historical approach as well as a quantitative approach focusing on economic analysis. I think this paper offers an excellent balance of these two approaches.
In general, research on subjects such as exchange policies and exchange rates in developing nations prior to the breakdown of the Bretton Woods system tends to be merely descriptive and anecdotal, but this paper goes a step beyond that, reflecting a strong effort at the econometric analysis of data. In other words, what makes this paper unique is that it has informative value and provides us with the results of econometric analysis.
In terms of informative significance, as Dr. Bassino has already stated and as I am sure you have all realized, the paper contains numerous discoveries.
From an analytical standpoint, the exchange rate data included in the paper is, of course, what made the analysis possible. The data is available in monthly averages, so it can be used for time series analysis, making it extremely valuable data. I will touch on this later, but for now I would just like to say that if other data series could be included, the data could be applied to a variety of econometric analyses.
The paper evaluates the exchange rate system of Vietnam primarily by focusing on the volatility of nominal exchange rates. The paper indicates that the transition to the French franc-peg in 1930 resulted in large fluctuation in exchange rates, and suggests that this may have been more harmful than beneficial. As is generally known, the transition to the fixed exchange rate system is equivalent to abandoning one's country's own monetary policies. Of course, with strong US dollar and unvarying dollar price of gold under the Bretton Woods system after World War II, fixing exchange rates against the US dollar would bring stability to currencies. However, there were no such international systems in the 1930s. In contrast, at that time worldwide devaluation was taking place, leading to even greater exchange rate volatility.
I wonder, in regard to the transition to a peg system - of course, such transition would, in a sense, mean that piastre would be linked to the franc as well as to gold. As such, it could be said that the currency felt the effects of volatility with respect to other curencies - what would have happened if a different road had been chosen. I would think that the effects of worldwide currency devaluation would have resulted in increased volatility, regardless of the type of exchange rate policies adopted.
In addition to discussing nominal exchange rates, the paper touches upon the possibility of studying real exchange rates. As there is still not enough reliable data on prices, I think that the actual work on real exchange rates is something to be done in the future. However, it is very important to look at the dynamics of real exchange rates from the standpoint of international competitiveness. I truly hope that such analyses will be done. As stated in the "Conclusion" section of the paper, there are many recent techniques, such as cointegration, that can be used to examine the long-term relationship between the nominal exchange rates and prices. We should also be able to investigate statistically the validity of purchasing power parity in the long run.
I think this is an extension, but if the variables which share common trends are found to be cointegrated, we can construct an error correction model that can explain short-term fluctuations based on long-term relationships. The use of the model would also make the research of short-term dynamics an interesting idea. The model would make it possible to analyze the short-term properties of nominal exchange rates and to estimate the adjustment speed of nominal exchange rates and prices, and to estimate the causality between the two variables. In any event, there is virtually no research of this type being done - using such modern techniques and the type of data analyzed in this paper. I believe that the work by Dr. Bassino has made a great contribution in providing directions in future research.
Odaka: Thank you very much. Are there any questions. Mr. Bassino, would you like to respond to Mr. Nakagawa's comments?
Bassino: I would like to thank Mr. Nakagawa for his comments. To date, we have been analyzing only nominal exchange rates, but I am also interested in simultaneously analyzing real exchange rates as well. Using data from the League of Nations, we can understand the (exchange rate) situation for the 1920s and 1930s, to a degree, but there is little data for Indochina and China, in particular, so we felt that it would be difficult to obtain data related to inflation. We therefore decided not to pursue this at this stage of our research. When the results of this project make more data for the various countries available, we should be able to use that data to analyze the real exchange rates, in about two years.
Odaka: Does anyone else have an opinion or comment?
Tajika: I am not very familiar with exchange rates. Were the primary exports from Vietnam during its period of colonization sesame rubber and coffee?
Tran: Rice and coal.
Tajika: So rice was the number one export, followed by coal, right?
Bassino: Yes. However, coal exports were relatively low, compared with rice.
Tajika: So rubber and coffee came later?
Tajika: In any event, were there any special exchange rate policies as part of the colonization policies? Could there have been such policies?
Bassino: There weren't really colonial exchange rate policies; first, Indochina was not exactly a colony, in the full meaning of the word; four out of the five regions of Indochina were protectorates. More importantly, unlike other territories of the French Empire, Vietnam had a strong sense of independence from its ruling country, and its monetary system that centered around silver currency was maintained.
Tajika: Still, Vietnam itself was unable to set exchange rates.
Bassino: That's right. However, the French who controlled Vietnam were also unable to settle on one set of exchange rate policies. Trading companies involved in intra-Asian trade, and rice traders in particular, were the silver standard supporters since their main export markets were Hong Kong and China where silver currencies were used. Trading companies specializing in trade with France leaned toward a franc peg. There were debates within the General Government. As a result, it was decided in the 1920s that the existing silver standard, and not the franc peg, would be used.
Tran: Why was there such inconsistency?
Bassino: I can not say for sure at this stage (of our research), but perhaps, while the policy makers were French, they needed to choose economic policies and exchange rate policies that best served to promote the economic development of their colony. This is, of course, because they thought that the economic development of Vietnam would be profitable for France as well. Also, looking at the short term, during World War I and the 1920s in particular, the importing of gold was made possible by the trade surplus in Vietnam and Indochina as a whole, so the available gold could be used for France.
Reading the minutes of the exchange rate meetings, we can clearly see that there were two types of proposals. One type felt that, in the short term, it would be better for France to introduce the franc peg. The second type considered the long-term, on the other hand, feeling it would be better for the economic development of Vietnam to select silver or gold, which would provide many business opportunities in Asia and/or on the World market. This split in thinking existed within the private sector and even among government officials.
Tran: What were trading conditions between Vietnam and France like at that time?
Bassino: Vietnam had a trade surplus over all. However, they had a deficit with France.
Tran: That was true for the balance of trade payments. However, I would like to know what the trading conditions were.
Bassino: We don't have such financial and pricing data on commodity prices available yet, so that will be a subject for future research.
Takahama: From France's standpoint, was the fact that they had all other colonies convert to the French franc but left only Vietnam continue to use its piastre a result of French planning to create an advantageous situation for Vietnam? You mentioned Yunnan. Was the piastre left in place so that Vietnam could trade easily with southern China and other countries?
Bassino: Silver currency was used throughout Southeast Asia at the end of the 19th century, so silver was the easiest currency to use in that area. There was concerned that forcing the introduction of a completely unknown currency into Vietnam would make the situation even more complicated.
Odaka: Are there any other questions?
Fukao: It seems the time of the 1920s to the 1930s was unusual - with speculation, reduced monetary circulation, and competitive depreciation. Your paper doesn't seem to touch much on such international capital movement and speculation. You seem to focus on trade. What kinds of problems developed related to speculation? For example, if France had outstanding credit with its colonies, did France move to prevent the devaluation of currencies so that its credit value would not drop? Did this type of thing take place?
Bassino: Of course, such things took place.
In regard to the movement of capital, we do have a solid understanding of investments made directly from France. French-owned companies in Vietnam were making profits in the 1920s, so some French companies increased investments. But at the eve of the Great Depression, these companies began pressuring the government to convert to the franc peg. Still, the amounts of these investments were not so great compared with the level of trade surplus. Furthermore, there was another type of capital movement. This was the movement of capital by the overseas Chinese merchants, but we have absolutely no information about these flows.
Odaka: I'm afraid that's all the time we have, let's move on to the next session.