A Safe Asset Interpretation of the Poincare Stabilization (1926-1929)

In the follow-up to the 1926 financial crisis in France, a new government led by Raymond Poincaré attempted to restore monetary stability by restructuring public debt. This policy led to a sharp decrease in the outstanding amount of floating debt, which had become a standard source of funding since World War I. Based on archival work, this paper argues that the withdrawal of liquid public securities from financial markets led to a safe asset shortage. Cash freed by the withdrawal of these securities first flew to deposits at Treasury. When this transitory scheme ended, banks faced a low-rate environment favouring search-for-yield behaviours. The expansion of international credit for leading banks, a few months before the 1929 crash, evidences such behaviours. These results renew our understanding of the expansion of the banking sector in France during the 1920s. In addition, they shed new lights on the role of public debt for financial stability in an open economy