Chapter 874: Counterattacking the Shorts
"9.6 million francs in new gold exchange requests in just five days?" Joseph frowned slightly, looking toward Laffitte. "Please, give me the details."
"Yes, Your Highness." The manager of the Bank of France bowed slightly. "The identities of these clients vary, but they have all refused any alternative means of exchange. Furthermore, every request is for at least 300,000 francs.
"A few days ago, the exchanges were primarily concentrated at the Bank of France in Paris. Starting yesterday, however, banks in Reims and Orléans have also begun receiving exchange applications."
Brienne added from the side, "There are also numerous rumors circulating in the financial markets, claiming that the 'Bank of France's gold reserves are exhausted' or that 'the government will soon terminate the practice of exchanging paper notes for gold.'
"At the moment, the news hasn't spread widely among the general public, but we are already seeing citizens queuing at banks to exchange their notes for gold."
Joseph then asked Brienne, "What is the current 'non-convertible quota' for the franc?"
The "non-convertible quota" was a specialized financial term referring to the portion of national paper currency issued that exceeded the actual gold reserves.
Brienne answered immediately, "58 million francs, Your Highness."
Given France's current market size and economic condition, this over-issuance was well within the safety zone.
"We still have 740,000 ounces, Your Highness."
Seeing the Crown Prince's frown, Laffitte quickly added, "That is approximately equivalent to 70 million francs."
Joseph's expression turned solemn.
At the current rate of exchange, the gold reserves would be bled dry within a month.
Furthermore, such events never progressed linearly. The less gold the bank had in its vaults, the more severe the bank run would become.
Combined with the malicious spreading of rumors, it likely wouldn't be long before ten million francs worth of gold were being exchanged in a single day.
Once the bank's gold reserves were exhausted, it would immediately trigger a currency crisis and an economic collapse.
Brienne and Laffitte exchanged a look, and Brienne suggested, "Your Highness, to ensure financial stability in Paris, should we transfer some gold from other regions?"
Joseph shook his head immediately.
Paris held gold reserves worth 70 million francs. Under normal trade activities, where paper notes and gold flowed slowly, this was certainly sufficient.
If they moved massive amounts of gold just to counter a malicious short-selling attack, it would inevitably and severely affect other regions, especially foreign trade in the border provinces. Trading with nations like the Ottoman Empire and Russia still relied heavily on gold.
Brienne pivoted to another method. "Then we should expand the scope of the 'Remote Transfer Clause.' For instance, we could lower the activation threshold to 100 francs.
"Or, we could raise the large-sum exchange fee to 2%..."
Exchanging paper currency for large amounts of gold required paying a service fee to the bank. Currently, any amount over 5,000 francs incurred a 0.8% fee. In an era of inefficient banking, every nation operated this way.
Joseph said decisively, "No. Doing that will only increase market panic."
What was the most important factor in a financial game?
Confidence!
As long as the market had confidence, even a worthless rock would see a steady stream of capital poured into it.
Conversely, once market confidence collapsed, no matter how healthy your financial system was, it would be crushed by a bank run.
Brienne said anxiously, "Your Highness, according to the current trend, if we don't take measures, there will surely be a great disaster..."
Joseph tapped the armrest of his chair with his finger, quickly recalling various cases of financial speculative attacks from his previous life. Suddenly, his brow cleared.
What was there to panic about?
France's economic fundamentals were sound. In this situation, he had many cards to play.
Nations in the future that faced economic crises could often hold on for several years through various maneuvers.
Even if France's situation truly turned dire, he could simply copy a few classic moves to stabilize the bottom. Afterward, he could slowly recover by relying on fiscal revenue and the dividends of war.
He immediately looked at Brienne and said, "Confidence. First, we must provide the market with ample confidence."
"You mean?"
"Do the exact opposite of the measures you just suggested," Joseph said with a smile. "Decrease the usage rate of the 'Remote Transfer Clause.' Even if it is activated, try to deliver the gold within 15 days.
"Lower the large-sum exchange fee to 0.7%, and let the word out that the Bank of France has improved its operations and increased efficiency. Hint that the fee might be lowered to 0.5% in the future."
Both Brienne and Laffitte stared at him, their eyes wide with shock.
If they did that, the gold reserves that might have lasted a month could be gone in twenty days.
Ignoring their expressions entirely, Joseph continued to "assault" their nerves:
"Furthermore, this kind of large-scale shorting cannot rely solely on the instigator's own 'ammunition.' There must be many short positions appearing in the market.
"We will continue to operate in the opposite direction. We will throw out a massive number of 'long' trades for the franc—we're going to short gold!"
For the short-selling big players to break through the Bank of France's 70 million francs in gold reserves, they would need to prepare at least 60 million francs in paper notes as their "capital."
Such a massive sum would be a strain even for a state-level player, let alone private capital.
Therefore, they usually only prepared a portion of the capital—say, 30 million francs—and then used that money to incite the rest of the market to follow suit.
Once a trend was formed, private speculative capital would follow.
The instigator's 30 million would have a multi-fold effect.
The simplest way for that speculative capital to profit was to borrow large amounts of paper francs, exchange them for gold, and then wait for the franc to collapse and depreciate. Once it did, they would exchange the gold back for francs to repay their creditors.
For example, if someone borrowed one million francs now and bought 300 kilograms of gold to hoard.
After the currency depreciated, that 300 kilograms of gold might be worth five million francs.
They could then take one million to repay the loan, pay at most a hundred thousand or so in interest, and walk away with a profit of nearly four million!
Of course, this entire premise relied on the franc actually collapsing.
If it didn't collapse, the interest the shorts would have to pay would be lethal. One shouldn't underestimate a hundred thousand francs in interest; if you haven't made a profit, that is a staggering sum of money!
So, how could one stop speculative capital from following the trend?
It was simple: make it so they couldn't see any possibility of the franc collapsing.
Many classic "long-short wars" in history began with a forced "long" counter-attack. In comparison, the financial warfare of the eighteenth century was as "simple" as an infant.
Once a bullish trend for the currency was established, the shorts would very quickly lose everything.
Brienne said nervously, "Your Highness, if the situation doesn't improve, this will throw the national finances into a crisis..."
Joseph raised his hand to cut him off. "Trust me. Within half a month at most, the people exchanging gold will vanish.
"Besides, I have a powerful fallback measure I can use."
After Joseph discussed the plan to go long on the franc in detail with the two financial officials, another thought occurred to him.
"Now then, we must find out exactly who is behind this malicious exchange incident.
"Eman, please have Monsieur Fouché come to see me."
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