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Investment and the 1848 Revolution

Investment and the 1848 Revolution Whereas the shock of the 1846-47 crisis shaded off and the supply of current credit apparently balanced with demand by the end of 1847, the economy suffered a psychological trauma when the February revolution, by allowing universal suffrage, seemed of open the way to political and social excesses. Employers and several strata of the bourgeoisie henceforth were offended by a "social fear" which paralysed the spirit of enterprise and the taste for private initiative. Labrousse asserted, "The repression of June could pass; economic life, on its whole, did not recover. A deadly decline continued." Whereas this judgment may be too severe since a general revival of production began in mid-1848, this recovery lacked strength in several branches and was still shaken by sharp fluctuations because it followed the rhythm of political events.

The half-year before the elections of 1849 and the five or six quarters preceding the coup d'état were especially affected by a business paralysis. The consultative chamber of Rouxbaix concluded, "The expectation of the redoubtable date of 1852 paralyses our industry and makes trade tremble. It is only the critical question of renewal of the two powers of state which causes the difficulties." Thus, one understands the pedagogical range of Louis Napoleon Bonaparte's electoral manifestos of 1848: "To restore order means to recover confidence, to remedy by credit the momentary lack of resources, to restore finances, to revive trade." And his message of November 4, 1848 and Bordeaux speech on October 9, 1852: "When political preoccupations stop pressing our finances, it will be easy to restore credit under good conditions for the treasury." Therefore, the "economic miracle" of December 2 was based upon restoring confidence which supported the reopening of the credit gates and reduced entrepreneurial venture to a simple recognition of productive and business cycle risks, without any political or social interferences, at least for a few years.

The fear of social troubles and the institutional doubts incited some company managers to defer their investment projects and to be satisfied with inexpensive improvements, lowering the cost of production at little expense. A global disinvestment of collapsing of companies led to the closing of the least efficient factories. The yearly investment volume declined 2.6 percent from its high point in 1847 and 1848; then it collapsed by 15 percent between 1847 and 1848 as a result of the cyclical crisis of the engineering industries and the political crisis; in 1850 the volume was 26.8 percent lower than the 1846 level. The investment in factories and productive equipment declined by 18.2 percent between 1847 and 1849; despite this chronological lag and the lesser importance of the drop, it stabilized at an average of 12 to 13 percent under the 1847 level before the latter was finally exceeded in 1853. The Second Republic was clearly hit by an investment depression between two upward motions in 1842-1846/47 and 1850/53 to 1857.

Part of the global investment's shrinkage was due to the withdrawal of the railway investments. After deflation of the "railway mania" in 1846 to 1848, railway companies lacked financing. Their own available capital exhausted; call on new "paid-up" capital turned out to be delicate, and even more raising new assets on the financial market since savers could not be attracted: the value of stock exchange shares fell, quite often under their face value: compared with the 627.5 million in paid capital gathered by 20 railway companies , the losses to their stockholders was of 278 million francs between 1847 and 1849; only three other companies increased the value of their shares to subscribers, on the whole 30.3 million francs. Railway investment therefore became a highly speculative risk, which deterred issuing new securities or calling on bank credits. That explains why companies had to be sold off, taken over by the state, or operated only on completed sections without resuming work on projects to connect them.

Private initiative therefore was asphyxiated. Moreover, several companies decided to give up their concession (Lyon-Avignon, Bordeaux-Sète). So, the authorities discussed the possibility of a state take over of railway investment. In May-June 1848, after refusing the project of minister Duclerc on a company's nationalization, "the repurchase", a huge investment program tempted the assembly, but it just continued work on a few significant portions of the Paris-Lyon line repurchased in August 1848 and improved the financial conditions of several concessions by extending their duration, these including the Compagnie du Nord, the Tours-Nantes and the Orléans-Bordeaux line.

A strict budgetary policy cut credits for railway investment from 86 million francs in 1848 to 47 million francs in 1851 and to 44 million francs in 1852. The sequestrated Avignon-Marseille line was completed in 1849 thanks to a public loan of 30 million francs, the money due to suppliers. On the other hand, deputies failed to define the method of infusing private money into financing the network, because of strong dissensions within the parliamentary committees and the state's machinery. The Paris-Lyon line's construction was deferred, as annual allocations remain modest in 1849-1851. Thus just 1,400 km of railway tracks were built in France between 1848 and 1852 (150 km in 1850) which reduced the market for the iron and mechanical industries and therefore their own desire to invest.

The same debates on the size and goals of the country's capital expenditures animated the July Monarchy and Second Republic. After the June 1848 elections, public opinion increased the impetus to public works spending to dampen the social crisis while aiding the economic recovery by modernizing the means of transportation. The general council of bridges and ways, the state's engineers, favored ambitious programs supported by the assembly's public works committee. Nevertheless, they came up against the desire of the budget committee and of the "party of order" to reduce the budget's deficit and the national debt with a severe saving's policy. Public works's credits declined from 216 million france to 167 in 1849, 66 in 1850, and 64.5 million francs in 1851.

Roads, ports, rivers and canals absorbed half of the budget, the rest being used for railways. Raising loan was out of question since budget authorities like the finance minister Fould wished to increase the government bonds' value, which prevented their favoring any new call on the financial market: " The less state will ask for credits, the more credit it will receive," declared Fould. Moreover, he thought that the state's withdrawal from the market would free up money for private investment. "How did we render elasticity, make credit buoyant? By declaring that we would not call on it," Fould maintained, without discerning the weakness of the entrepreneurial spirit. The level of investment in public works, including railways, consequently declined by 32 percent between 1846 and the trough in the 1850s and only regained its value in 1853. No "contacyclical" policy has therefore was engaged which could have revived languishing investment. Public investment was not transmitted to investment in productive investments. Indeed, the republic was anxious to avoid what Thiers called " the follies of peace", i.e. great public works projects, which caused the republic to neglect the positive repercussions of public investments. Thus the suspension of city planning projects convinced investment promoters not to underwrite real estate ventures, which helps to explain the depression in the building trades between 1847 and 1852.

total investment plants & equipment public works

1846 2.2 9.8 0.7 (percent)

1847 -2.6 7.3 -5.3

1848 -15 -12.1 -15.5

1849 -11.3 -6.9 -3.4

1850 -0.3 2.3 -1.9

1851 7.8 6.3 8.8

1852 16 19.8 14.3

(M. Lévy-Leboyer and F. Bourguignon, p.293)

Thus, the ordinary cyclical crisis of surplus capacity and over-production of 1845-47 in textiles and the over-investment in financing railways relative to their capacities recorded in 1846-48 prolonged an investment depression provoked by the employers' psychological crisis and by the state's budgetary economies. Thus the years of the second republic may be considered a neutral period in the setting up of the productive system of the first industrialization, particularly since it came between the two strong boom periods.

Hubert Bonin

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