After the Franco-Prussian war, France was forced to pay Prussia 5 billion Francs. What did Prussia do with French currency? Did people use French currency in Prussia? Was there some sort of conversion that had to take place? If so, how was it done? Did they just melt the coins down and create their own currency?
What happened?
It was a bit more complicated, the 5 billion francs is the simplified total value of the indemnity. The indemnity was to be paid in several installments and with exception of 125,000,000 in notes of the Bank of France and 325,000,000 for the railroad in Alsace-Lorraine the payment needed to be in:
*Gold or silver. *Notes of the Bank of England. *Notes of the Bank of Prussia. *Notes of the Banque Royale des Pays Bas (Netherlands) *Notes of the National Bank of Belgium. *Bills of exchange on these countries.
Installments:
Thirty days after order was established in Paris: 500,000,000 During 187I: I,000,000,000 By May 1, 1872: 500,000,000 By March 2, 1874: 3,000,000,000
Some privileges of payment in advance were allowed, but only after due notice and not on account.
And to show how diverse the payments were of the first 2 billions :
Alsace-Lorraine railroad: 325,098,400.00 fr. Bank of France notes: 125,000,000.00 French gold: 109,001,502.85 French silver: 63,016,695.00 German coin and notes: 62,554,115.93
Bills:
Thalers: 312,650,509.01 Frankfort florins: 25,816,752.37 Marks, banco: 116,575,592.13 Dutch florins: 250,540,821.46 Belgian francs: 147,004,546.40 Pounds sterling: 624,699,832.28
The balance changed in the last 3 billion were a lot less foreign currency was used due to the treaty which stipulated:
These stipulated that only gold and silver, or bills directly convertible into them, should be considered " liberative," and that if the French goveminment chose to exercise its option of paying in bills drawn on certain foreign countries, it must bear the expenses incurred by the German government in converting them into German funds.
Because of this and the high rates the Germans asked for this conversion the French did the converting them self.
Funnily enough the supply of silver in France actually went up and part of the reason was that France bought silver from the Bank of Hamburg when the exchange rate was good. They minted the silver in five-franc pieces which they send to Germany. Germany was switching to the gold standard with the new Reichmark and needed gold which they exchanged for gold with the French.
The source is report on the economic effects in France and Germany (and the UK to an extend), it is very interesting to read. Just asking the question of what would happen when there is an huge exchange of wealth in a very short period of time. It affects everything in the economy, how do you absorb all this wealth? It's 14 pages, well worth the read.