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France, Financial Crisis and the 1848 Revolutions

France, Financial Crisis and the 1848 Revolutions When the revolut ion of 1848 broke out, the economy was affected by a deep financial crisis, which reduced the initiative of the republic's decision makers. But the republic's launching deepened this crisis which undermined the country's money market. Thus authorities tried to relax these tensions at the risk of neglecting growth.

The results of the agricultural and cyclical crisis between 1845 and 1848 were immediate on the Parisian and provincial markets. During the boom of the 1840s, industries had in cr eased debt and their working capital. With the recession, these firms, which were over stocked and greedy for liquid assets, increased the demands for credit, especially as their customers delayed payments while dictating terms to their suppliers. The classical crisis in credit meant a decline in payments on the debt to the banks, then, up the line, to the regional issuing banks to the Bank of France.

The Bank of France's regents supervised the deterioration of its bullion reserves. The gol d stockpile was reduced by outflow to Switzerland and Germany due to the trading in the big fairs and to Russia and Spain to purchase grain to off set famine brought on by the agricultural crisis. The Bank of France was supported by a loan from the English bank firm of Baring, but, as its commitments mounted, it preferred to restrain the rediscount and to move the bank rate from 4 to 5 percent in January 1847.

Banks were collapsing, torn between the burden of debt and the rise in price of cr edit: some bankers from Lyon, such as Bontoux and Delhante, suspended payments in 1847-1848, especially as anxious depositors rushed to withdraw their funds. A crisis of confidence spread among banks and the stock exchange, where share prices slumped, particularly for railway companies hit hard by deflation of the "railway mania". The state itself was paralysed by the shrinkage of its margin of budgetary maneuver. Immediately it had to finance the purchase of grain; then in the medium range, the l arge pub lic projects increased the budget deficit in the 1840s, as Thiers referred to them, the "follies of peace". Its floating debt grew, which reduced elasticity in expenditures, particularly with mistrust seized the money market.

And yet the Parisian market recovered from the contraction. The rise in the bank rate and interest rates was sufficient to attract capital seeking investment opportunities, and Paris retained its function in international transactions, which brought on gold d eposits. The economical recovery occurred in the last quarter of 1847 lightened the pressure on companies' accounts. The Bank of France's monetary reserves reached 150 million francs in June 1847: 43 percent of the value of notes in circulation were covered by specie on deposit in the central bank. That enabled the regents to lower the bank rate to 4 percent in September 1847, indicating that the investors' and liquid assets holders' confidence had been revitalized since the crisis had not brought on a general c rash.

Moreover, the Russian government granted a long-term credit to France by subscribing 50 million of state bonds, which allowed France to pay for purchases of Russian grain. In fact, the state hardly seemed solidly attached by budgetary tensions, because it called on the money market, profiting from recovery of confidence. The French treasury issued short-term bonds of 193 million francs from April to June 1847; it floated a long-term loan of 350 million in August 1847. Als o the state co uld try to help troubled industries, in particular the railway companies. It afforded them some liquidity, returning a portion of their security bonds, according them small advances of a few millions. One thing is sure: at the turn of 1848, the cyclical financial crisis seemed over, even if the companies' health remained fragile.

But this structural fragility was even more apparent when the shock of the revolution struck a grave blow to the Parisian market. A panic reanimate the financial c risis and blocked money markets. At the stock exchange, closed from February 23 to March 6, stocks slumped at the reopening, especially public bonds. On the credit market, creditors hastened to recover their capital, thus choking their debtors; massive withdrawals in bank deposits, led to a "crisis in letters of change", payment in cash replaced the credit to suppliers and commercial discount. Banks were caught between the deposits' withdrawals and the immobilization of bills of credit and debts. Betwee n February and April, a bank crash involved two hundred fifty suspensions of payment by banks. Consequently, the rediscount of the Bank of France itself was frozen since the "third signature" that banks required on bills of credit became difficult to obtain. A credit crisis gnawed at economy; in several regions, such as in the Rhone valley, many firms resorted to specie exchanges, what caused a stagnation in trade. On March 15, the Bank of France had to suspend cash payments to reimb urse its notes, the convertibility of paper money for bullion, because its gold stockpile had dropped from 140 million francs on February 26 to 60 million on March 15, a sign of the degree of monetary panic, thus the "forced rate" was instituted. Everywhere reigned penury in means of payment, of bills, of letters of credit, and even of bank notes, with the push toward saving. A newspaper remarked, "Without confidence, no money, no commerce."

Despite political and social tensions, the rep ublic struggled to red uce the crisis its own birth had brought on. Financiers, some of whom soon regained power as deputies or ministers like the banker Goudchaux, higher officials and Bank of France regents sought ideas for recovery. The Bank of France, addressed the problem of cash flow; it increased the forced rate by the issuing small value bank-notes in denominations of a hundred francs instead of five hundred francs, as well as extending even further the date of payment; it asked for the opening o f discount banks ( comptoirs d'escompte) to furnish the "third signature" required for rediscount commercial paper. Despite the state's delay in its reaction, these measures were adopted in March.

Thus, discount banks were created in each department, similar to the eleven establishments created in 1830, to give a new impetus to commercial credit, to discount the two-signature bills from 60 to 105 days; sixty-five new discount banks appeared between March 18 and November 11. T he new banks regained the market's confidence in the structure of their capital, which associated the state, municipalities and trade. In addition, in March, forty-nine "bonded warehouses" (magasins généraux) provided some companies with official "warehouse warrants", receipts for the deposit of stocked goods; sub-discount banks (sous-comptoirs d'escompte) for the building trade, book trade, haberdashery, textiles, metal and colonial products trade accepted these w arrants as collateral, which provided the Bank of France with discountable "paper." The acceptance of unsold goods in those warehouses allowed companies to lighten accounts and to clear the market for about 700 million francs within two years. A commercial credit chain therefore reappeared, crowned by the central bank, since this letter rediscounted the discount banks' portfolio: nearly 44 percent of the Parisian discount bank's paper was accepted in this manner.

The state's ability to ma neuver remained to be restored , which would enable it to draw investors back once more, to call for funds, and to give elasticity to the budget. Reassuring ministers yoked themselves to that task between June 1848 and October 1849 with the Orleanist Duclerc, the banker Goudchaux, the Orleanist Passy (former finance minister in 1836 and 1839), and the banker Fould. The treasury was reduced to extremities after the revolution; it had to extend its date of payment by six months, particularly for the floatin g debt. The crisis in state cred it limited the treasury in issuing new securities, treasury bonds or government bonds. A proof of this was given when the city of Paris's loan was only placed with difficulty in March-April 1849 or when the quoted price of state bonds continued to fall in 1849-1850. The state was forced to increase its financial resources, hence an extraordinary rise by 45 percent in direct taxes enacted on March 18, 1848, the "45 centimes", that was extremely unpopular, especially among small farmers in southern France w here violent resistance erupted during spring and summer 1848.

Without cash, the state was unable to contribute to the budget sustaining the economy, for example with a huge program of public works or financing the railway construction. The ministry of finance and the assembly's budget committee gave the rejuvenation of public credit priority at the expense of expansionist tactics: "The state will have more credit, when it does not ask for it " (Fould). Th e budgets of 1849-52 cut expenditure s on public works in a austere savings program. This approach sought to reduce the budget's deficit, to limit the need to call on the financial market, and to stop increases in the floating debt. Thus, by the quasi-deflationist choice, the conservative majority managed the crisis in the public finance. Furthermore, in 1850-51, the economic recovery tended to increase tax collections. The government prepared the consolidation of the floating debt and lowered the intere st rate on treasury bonds. This marke t confirmed the choice, the quoted prices on state bonds rose once more in 1850.

Little by little, thanks to fluctuations in the political situation and the "social fear" of the party of order, "confidence" was restored, particularly during the year 1850. The policy of budgetary savings reassured investors that the state's inclinations were sound; the Bank of France strengthened confidence in the paper money by a strict parsimony in issuing notes: in t he early 1850, only 440 million francs w ere in circulation, whereas a maximum limit of 1,200 million was possible. Thus, it could cancel the forced rate on legal tender on September 6, 1850: a clear sign of the money market's recovery. But the political swamp of 1851 tended to prolong the financial market's worries and to check the restoration of real confidence.

The financial market's reanimation allowed firms to improve finances, more or less paralyzed since 1845-48 by the "crisis in b ills of exchange" and immobilized by numer ous debts. A sign was the suspension of investments and the reappearance of cash-payment for the transactions. Despite the improvement in Bank of France liquid assets, its discount in 1851 was still one-third lower than in 1847. Already shakened by the pre-revolutionary agricultural, commercial and business cyclical crisis, the treasury of businesses were drained, whereas the recourse to bank credit and the financial market was difficult since February 1848. Th e railway companies' situation in particular vacillated, if they had not suspended operations entirely like the Lyon-Avignon line in October 1847, the Paris-Lyon taken over by the state in August 1848, and the Marseille-Avignon line placed under sequestration in November 1848. The Compagnie du Nord was hardly able to scrape together a small part of the money due its stockholders on a portion of its unexpended capital, when it was shaken by settling the debt due to suppliers and to the state in February-March 1848.

Whatever the concerned branches, the fall in profits were strong in 1848; business recovery remained vacillating until 1852; the collapse of many banks in 1848 strained firms' balance sheets even more, because banks required a speedy repayment of their debts. Employers therefore steered a zig-zag course, spreading out their own disbursements to suppliers while accelerating payment from customers; they struggled to uncover new credits from local bankers. The Comp agnie des Mines de la Loire thus postpone d the payment of its dividend and interest on its loan on March 8, 1848; it suspended payment to suppliers; but it delivered acknowledgement of indebtedness before it succeeded in issuing "circulation bonds" to pay wages, which somewhat dried up a little the exigencies on the outflow of its capital. The setting-up of discount banks facilitated the recovering of firms which could reestablish supplier credit and the liquidation of their inventory. To a certain degree, the freeze on investment was also a posit ive factor, since it lightened the societies' needs.

The majority of firms resistant to the crisis are those, like the Forges d'Allevard, which had gathered sufficient reserves during the boom. In fact, those which were fundamentally healthy disposed of a elasticity that permitted them to resume expansion quickly to coincide with brief recoveries in the business cycle during the years 1849-1852 and so to earn profits: the textile firm M&eacu te;quillet-Noblot thus supported a 224,000 franc los s in three financial years between 1845 and 1848; it wiped this out with 315,000 francs thanks to two financial years 1848 and 1850, just as the Mines de la Loire, whose finances were reestablished by January-March 1849. Thus, the financial crisis provoked by the cyclical recession and the political traumatism ended, with many differences between companies, branches and regions, even if "confidence" remained fragile in anticipation of 1852 elections.

Nevertheless, those financial crises left scars. In effect, these ephemeral troubles actually revealed a structural crisis in channels of public and private finance. The state lacked money to finance vast programs of public works; it had to maneuver between the budgetary deficit and some deflationists savings. Railways could not rely on a financial and banking market sufficiently large and solid; the duration of concessions -- 38 years for the Compagnie du Nord in 1845 -- proved insufficient t o attract steady investors, which encouraged financiers' speculations and impeded the sale of their stocks.

Banks and discount houses, like Gouin or Ganneron, which flourished in the years 1830-40 lacking financial standing and their own resources of deposits in sufficient quantity, depended too much of discounting by the Bank of France. In 1846-48 alone, the 829 banking bankruptcies accumulated 207 million francs of global liabilities, whereas the 1830-31 crisis had only involved 252 bankin g bankruptcies and 89 million francs of global liabilities . Finally, the provincial issuing banks seemed to be too poorly armed to assure refinancing of the local market. Consequently, if the financial hemorrhage was stopped, the fundamental dams to the cash flow remained resilient.

It was by improvisation that durable solutions were conceived, whose juxtaposition contributed to outline a new "financial system." The centralization of the rediscount and the creation of paper money with repu rchases from provincial issuing banks by the Bank of France in April-May 1848 for 90 million francs, reinforced the latter and tended to consolidate its mission of regulation of credit and monetary circulation. The setting up of discount banks indicated the necessity of a pyramid of more stable commercial banks, offering more guarantees; but their weak "financial standing" opened the way to reflections on the conception of big joint-stock deposit banks. The Saint-Simonian ideas once more were the order of the day after the hesitations of the years 1825-1845: the fin ancial markets had to be considerably extended by tapping savings. In 1852 the Pereires were ready to launch their revolutionary tool, the Crédit Mobilier, while business circles and high functionaries conceived the Crédit Foncier.

However, under the second republic and despite the marasma in the stock exchange, this latter knew a discrete mutation but profound mutation: the democratization of state bonds was the in deed the work of the regime, since the 280,000 holders of state bonds of March 1848 grew to nearly a million by September 1851, thanks particularly to the registration of savings bank books in the great ledger of the state bond. From now on, devotees of state bonds included savers, somewhat disillusioned by shares after the 1845-48 crisis, despite the creation of the railways' sub-bank (sous-comptoir des chemins de fer) in July 1850 enabling to provide subscribers of railway companies' shares with advance s against securities.

Thus, the Saint-Simonian pro jects of Pereire, of Talabot could henceforth rely on this huge mass of subscribers to launch the issuing of bonds for the Crédit Mobilier or for the big railway companies; the "bondholder's democracy" was the daughter of the Republic. It helped to create the basis for the foundation of the new joint-stock banks, like the Crédit Industriel et Commmercial in 1859, the Crédit Lyonnais in 1863 and the Sociét&eacut e; Générale in 1864. Nevertheless, what this democrac y lacked for success was the confidence in institutional and political stability, which impeded it from taking advantage of the economy's revival, the recovery of the state's and firms' finances and above all from forming the basis to finance vast programs of investments on sufficiently fluid money markets since the "confidence" was lacking.

Hubert Bonin (trnaslated by James G Chstain)

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© 2000 James Chastain.