^Table of Contents

ECONOMIC CRISES


Translated from Charles Coquelin, "Crises commerciales" in
Charles Coquelin, Gilbert-Urbain Guillaumin, Dictionnaire de l'économie politique, Guillaumin et cie., 1864
(Original French text here; French text of Le crédit et les banques here.)


An economic crisis is a sudden dislocation of business that hinders its progress and to a certain degree suspends its course. Such a crisis ordinarily manifests itself as a certain kind of general loss in confidence, which brings about a fall in commercial securities and public bonds through a reduction or cessation in discounting by the banks, through a glut in suddenly unmarketable merchandise, and finally through a more or less absolute interruption in circulation. As a consequence, great numbers of collapses always follow. The number of failures in commerce increases, the most marginal firms crumble, and those remaining in business endure sizable losses. In addition, since stocks suffer a depreciation corresponding to that of other securities, disasters on the exchanges accompany failures in commerce. As a last consequence of the same phenomenon, a great number of factories suspend or slow down their operations and leave part of their work force on the street. Thus labor suffers and salaries decline, annuities go down, goods are sold at a loss or remain unsold. All classes of society are affected: It is, while the crisis lasts, a sort of universal disarray.

This dislocation of business should be merely temporary, else it would no longer be a simple crisis; it would be a chronic malady that would promptly lead to the ruin or decline of the country affected by it.

Economic crises as just defined seem to belong exclusively to modern times. In this century in particular they have been observed to recur frequently in Europe, notably in England and in France, where they have become almost periodic. It is not that commerce and industry did not suffer much in earlier times from political disturbances, from foreign or civil wars and from all the different kinds of plagues that torment humanity. But the harm did not come about suddenly through a violent, widely felt explosion. It was on the contrary felt by degrees, little by little, to the extent that the ravages of war or the other disasters it followed spread. The harm was often more extensive than it commonly is in our times, to the point of reducing peoples to a state of poverty similar to that of the unhappy population of Ireland in recent memory, for example; the unexpectedness, the explosion that constitutes the essential character of crises was never noted, however. Thus one may say with assurance enough that economic crises are phenomena peculiar to our time.

It is easy to account for this fact; it is essentially connected with the development of credit, the existence of which is wholly modern. If it is true that credit was not entirely unknown in previous times, it was at least kept within such narrow limits that it had only a feeble influence upon the general flow of circulation. Today, on the other hand, credit has developed and is so extensive, epecially in the most advanced countries (e.g. in England), that almost all commercial transactions depend on credit. In this situation, it is understandable how the same causes of disturbance may have a more brusque and sudden effect on commerce. When business is conducted on a cash basis, or by bartering product for product, it would scarcely take anything less than physical violence or an absolute lack of security to halt its progress. But it is not in the nature of things that violence should systematically and suddenly break out over the entire area of a large country, nor even that insecurity should follow a general state of security. The progress of the harm is in these cases always gradual and slow enough. On the other hand, when most commercial transactions are bound together by credit and when the mutual confidence of the contracting parties is therefore a necessary element, it suffices that some commotion disturb this confidence at a given time, putting the future execution of the contracted engagements into doubt, for transactions to halt all at once. In this situation it is not surprising that the problem spreads rapidly, like a train of powder, and that it engulfs all of commerce in short order.

To a certain extent this explains, without accounting for the typical causes of these occurrences, how it is that the countries enjoying the greatest amount of credit are ordinarily more exposed to economic crises, and how it is that crises commonly occur with a greater intensity there than elsewhere. Since one is dealing with a much greater number of transactions made on credit, the interruption caused by a loss of confidence is also more widespread in these countries. Not that in any situation such a loss of confidence could be absolute: There is always in every country a large number of necessary and indispensable transactions relating to man's basic needs, whose course cannot be blocked by any accident. It hardly ever happens, moreover, that credit disappears entirely, although it may be profoundly impaired for a certain time. But it is no less in the nature of things and is as well constantly the case that in those countries enjoying the most credit the influence of such crises makes itself most sharply felt.

It is particularly in these same countries that such disturbances are sometimes observed to take place apparently without cause, or at least without any fact external to commerce materially hindering trade. In former times, when the flow of business halted it was always easy to determine the cause of the disorder. It was ordinarily the result of a domestic revolution, a foreign invasion, a great famine, an epidemic or some other observable disaster whose entirely physical influence was clearly perceptible. In modern times, however, the course of trade has often been seen to be suddenly disturbed without some occurrence of this kind taking place, at least in countries where credit reigns. England, for example, enjoyed total peace and was afflicted by no physical calamity when the terrible crisis of 1825-26 broke out, causing terrible disasters. It was the same in 1837, when England, France and the American Union, stricken suddenly as if by an electric shock, saw the flow of trade halted. In these two cases and the several other similar ones, what was the cause of the disorder? Whatever it was, and we shall shortly examine it, it was clearly not external to, but rather inherent in the very operations of commerce or the fundamental structure of credit. The disturbance of business was spontaneous, so to speak, and it is this spontaneity that constitutes one of the most curious phenomena of our times.

Upon observing the coincidence of these unfortunate accidents with the development of credit, some have concluded that the use of credit is itself evil, or at least that it is an untrustworthy aid to commerce, always making it pay too dearly for the services it renders. Surely this conclusion is not reasonable. For it to be true, it would be necessary to suppose that the outbreak of an economic crisis makes a country lose more than it had gained by using credit in stable times. But this hypothesis is at odds with reason, all the more because the crisis is in the final analysis nothing but a momentary disappearance of credit; it does not disturb any other relations but those credit had formed, since all those that take place on a cash basis remain intact. The only result, as a consequence, is a more or less lengthy and more or less total suspension of the very advantages of which credit was the source. Let us refer to what we have said elsewhere on the same subject:

"Economic crises, as they are sometimes observed to occur, are generally nothing other than momentary disappearances of credit. Since this is the case, it is natural that they should never happen except where credit exists, for the simple reason that one can only lose that which one has. It also seems natural that when they occur the shock will be greater according to the extent credit reigns. Philosophers told us long ago that only those who possess are exposed to losses, and it is precisely those who possess the most who are exposed to the greatest losses. This is why the richest countries, those favored with credit, are more subject than others to the disturbances called economic crises. Does this mean that credit is a source of harm? From the fact that they are exposed to losing it from time to time, for a few dark days, should one conclude that they are wrong to take advantage of it when they can, to profit from it when it exists? Even were they exposed to seeing it disappear once and for all, which is not the case, would they be wrong to seek its benefits? This would be the advice of the moralists who preach disdain for wealth; is it that of economists and statesmen? By this argument it is not only credit they should avoid, but everything that leads to private and public wealth. In order not to leave men exposed to the vagaries of fortune, they would lead them to the simplicity of the golden age; so as not to leave farmers exposed to the ravages of hail, they would prevent them from cultivating their fields."

It seems that instead of making economic crises into a weapon against the very use of credit, one should rather, even as one deplores them and tries to avert them if possible, consider them a fair price for the advantages assured by credit as long as it exists. If it is true that a disturbance of this type, when complicated by no external cause, is nothing other than the momentary suspension of operations that depend on credit, the very malaise it engenders is proof of the fecundity of this powerful agent. By the void it leaves in commercial relations when it becomes absent, one should have some idea of the place it had occupied and of the extent of the advantages owed it. After all, the only result of its absence is to bring society suddenly back to the point where it would have been had society always been deprived of its cooperation. All the transactions that take place with the aid of currency continue as before; only those for which credit was the base are interrupted. Society thus has in reality lost nothing but what it owed to credit, while it retains the hope of recovering it later. The more intense the crisis, the greater society's idea of the power of this agent should be, and far from concluding from these fortuitous eclipses that it should renounce credit forever, society should merely seek to recover it and to establish it more firmly in the future.

It is no less true that economic crises are severe trials for modern societies. It is painful to see lost all at once, with no apparent cause, so many of the advantages one had possessed. True, the crises pass, and their duration is usually fairly limited when no external circumstance complicates matters, but as short as they may be, they leave cruel traces of their passage. Great numbers of personal fortunes collapse, and all the rest are more or less affected. Part of society sees the fruit of several years' saving annihilated in several days, and very often demoralization spreads among workers following these disasters, which confuse the calculations of human prudence. It is therefore of the greatest interest to study the causes of these disastrous accidents so as to succeed, if possible, in avoiding them.

It is never too difficult to account for these crises when they are due to some serious event taking place in the world outside the circle of commercial operations. Any political disturbance strong enough to throw some disorder into society naturally disturbs commerce and causes a crisis. It is in this manner that the revolutions of 1830 and 1848 in France were each followed by a long dislocation felt by all of commerce. Similar effects can sometimes even be produced by an event that is quite good in itself, but which changes the order in previously established relations too suddenly and too generally. The peace of 1814, for example, as fortunate as it was for all of Europe, and for England in particular, caused in the latter country a profound crisis because it forced an entirely new course upon trade and interrupted relations that had previously been established. In such cases, as we have said, there is no need to look into the causes of the harm because they are immediately evident, and it is that much less necessary because the origin of these crises is completely political and so one should seek the remedy, if it exists, in the field of politics.

Let us then examine those crises that are spontaneous, so to speak, and whose original cause, whatever it may be, is within commerce itself. There have been a great number of these since the beginning of this century, and we have already mentioned that their recurrence is almost periodic. The periods in France fall into the following arrangement: 1811, 1819, 1825, 1830-31, 1837 and 1846. We include within the number of spontaneous crises that of 1830, although it had a political disturbance for one of its determining causes, because the political events in this case did hardly anything but aggravate the already existing commercial difficulties that in any case were going to result in some kind of catastrophe of their own accord. The dates are about the same for England, especially after the peace. Indeed, after this time the interests of nations doing commerce became more unified, their commercial existence became similar in many ways, they experienced the same influences for good or ill, although these influences were more or less pronounced for each of them depending on the extent of their credit.

Many attempts have been made to account for these singular catastrophes, which are even more anomalous because they often erupt in the course of the most authentic indications of prosperity. Since they are cotemporaneous with the development of the great manufacturing industries, whose existence in Europe hardly dates back a century even in the most advanced countries, and also with the establishment of great credit institutions, also of rather recent origin, these crises have naturally been connected with one or the other of the two phenomena. It is, moreover, difficult to avoid recognizing that there is often some connection. Thus the ordinary causes of economic crises properly defined have often been summarized in the following manner: excessive development or false direction of productive forces in manufacturing, and the abuse of credit promoted by banking institutions. To these two causes, which are often tied to each other, one may add as a third excessive commercial speculation, but even in the minds of those who cite it this circumstance is connected so closely to the abuse of credit that it is difficult to make of it a special and distinct cause.

Let us now see with the aid of these facts and hypotheses how the most famous economic crises are explained. Let us first hear J.B. Say's version, which accounts for the crisis that broke out in 1825 in the manner he recounts. It is perhaps the explanation that has most often caught the attention of political writers:

"The economic crisis that took place in England is an effective example of the inconveniences that may arise from the unlimited ability to multiply the medium of circulation. The banks took advantage of this opportunity and discounted an overlarge amount of bills with their notes. By means of these discounts, the heads of many enterprises could use their capital to extend their businesses disproportionately. The multiplication of the medium of circulation caused the value of the gold that legally backed it to fall. Since a pound sterling in gold was from this time on worth a bit more than a pound sterling in notes, the holders of notes rushed to the bank to obtain reimbursement. Mr. Senior, professor of political economy at Oxford University, assures us that the exportation of gold in the year 1824 alone rose to 4,400,000 pounds sterling. The bank, obliged by law to reimburse its notes in metallic currency, found it necessary to buy up gold at any price and to have it minted at considerable cost and loss; to avoid these losses, it called in its notes and ceased to circulate new ones. It was thus necessary for it to cease discounting bills. The provincial banks were in turn constrained to do the same thing, and business suddenly found itself without the advances upon which it had counted, either for forming new enterprises or for enlarging old ones. As the obligations that merchants had discounted fell due, the debt had to be discharged; each merchant, no longer finding any advances at the banks, was forced to use all the resources at his disposal. Merchandise was sold at half cost; the assets of an enterprise could not be sold at any price; a multitude of workers remained unemployed, since all types of merchandise had fallen below their costs of production; many businessmen and bankers declared bankruptcy after having put into circulation notes payable to the bearer for a sum greater than their personal fortunes could cover, having nothing to back their issues any longer but the obligations of private citizens of whom many were bankrupt."

There is certainly a true side to this explanation. For example, it is always the case that the crisis is preceded, if not by exaggerated emissions of notes (which is questionable), at least by excessive discounting on the part of the public banks; i.e., at a level much superior to that of previous years. It is no less certain that the spirit of speculation, doubtlessly favored by the abundant discounting, ran rampant and that commerce ventured upon hazardous paths, where it stayed only one step ahead of disaster. But these explanations are clearly not sufficient, for there would still remain a question concerning the nature of the first mover, the original cause of this abuse and of the speculative adventures that followed it. Furthermore, there is in the passage just cited a serious error of fact, which is all the more important to correct as it is made so often.

According to J.B. Say, who merely echoes a quite common opinion in this regard, the crisis would first appear like this: there would be on the part of the public what the English call "a run on the bank," i.e., the bearers of bank-notes would rush en masse to have them reimbursed. "The bearers of notes," he says, "rushed to the banks to obtain reimbursement," and it is supposed to be this which, by exhausting the capital of the establishment, would have left it in no condition to continue discounting. In reality, nothing is more inexact. As we have mentioned elsewhere, economic crises are not normally of such a character: It is not true, although it is endlessly repeated, that in such cases the public rushes en masse to have its notes reimbursed. If this were true, the natural result would be that the sum of notes in circulation during these critical moments would be much less considerable than it is at other times. Very well, it is normally the contrary which takes place! The total figure for circulation almost always exceeds the normal figure in such moments. The mere inspection of the following table, relating particularly to the crisis of 1825, should be rather convincing:


CIRCULATION OF THE BANK OF LONDON
____________________________________________________
DATES NOTES
of less than 5 pounds of more than 5 pounds
____________________________________________________
August   1822 855 330 16 609 460
February 1823 681 500 17 710 740
August   1823 548 480 18 682 760
February 1824 486 150 19 250 860
August   1824 443 140 19 688 980
February 1825 416 730 20 337 030
August   1825 396 343 19 002 500
February 1826 1 375 250 24 092 660
____________________________________________________

It is in 1825 that the crisis occurred, and it is at the beginning of 1826 that it reached its maximum intensity. If the hypothesis upon which the argument was based were exact, one would have seen the total figure reach its lowest point at the beginning of 1826. On the contrary, we see that the figure rises as the crisis becomes more severe. From a bit more than 17 million pounds in 1822, it climbs to more than 20 million in 1825 (notes both of more and less than five pounds included) and to more than 25 million in February of 1826.

It seems that in the face of such significant facts which, moreover, are in accord with those observed in all other similar circumstances, the endless repetition that the eagerness of the public to demand the reimbursement of notes causes the catastrophe should cease. If it is true that during the crisis the metallic reserves of the public banks are exhausted, and it cannot be doubted that this is the case, it is not because they are demanded more often than usual for reimbursement of their notes; it is merely because they are requested to reimburse the deposits in current account, with respect to which they are debtors. As far as they are concerned, the result is the same in any case; since it proceeds from a completely different principle, however, it should lead to an explanation of the phenomenon in question different from the ordinary one.

The same crisis of 1825 has been explained in a slightly different manner, though one similar in many ways and no more satisfying to us, by an English writer otherwise quite competent in these matters, Mr. J. Wilson, who has long been the editor-in-chief of the Economist. According to Mr. Wilson, the evil should simply be attributed to a sort of speculative fever that takes possession of everyone's head at a given moment, not completely without cause, but without any other cause than the attractive appearance of certain operations.

"In the course of the year 1824," he says, "two types of circumstances tended to produce an incitement to speculation. The great success that followed all the loans to various countries on the continent, with a sole exception, and the high price that foreign capital had reached had created among our capitalists a great appetite for similar placements. Several circumstances also contributed to placing foreign mines in a favorable light. But one of the most important facts, having a decisive influence on the panic of 1825 and giving this crisis a distinct character, is that the importation of merchandise was generally low in 1824 and barely equal to consumption, with the result that there was a considerable rise in prices, especially near the end of the year. All these circumstances joined together near the end of 1824 to give rise to a fever of speculation in the first months of 1825."

Thus the excitement produced by the seductive appearance of certain firms is supposed to be the sole circumstance causing everyone to be misled at once, and producing in consequence a universal disarray. That which proves there was a more general cause to this fever of speculation, however, is the variety of objects to which it was attached. The following is an enumeration by the same author:

  1. Speculation on foreign loans;

  2. Speculation on the exploitation of foreign mines;

  3. Speculation within the country on land and estates, whose prices suddenly rose sharply, particularly in the neighborhood of large cities;

  4. Speculation on companies of various types, such as those possessing mines, railroads or steamboats, making loans, selling insurance, etc.

  5. Speculation on all types of merchandise.

It is hardly possible, one will admit, that the same spirit would appear from so many different directions at once, if it had not been awakened by a general and common cause. It is this first cause that should be sought, and the preceding does not give it. That the abuse of credit is found as one approaches each of the economic crises that have occurred since the beginning of the century, and that it is a determining cause, is hardly doubtful. It is no less doubtful that excessive speculation characterized each of these periods and played a great part in the disorder that occurred. But where the abuse of credit originates, and why the speculative spirit seizes upon everyone at a given moment, still remains to be explained. To say that these are fevers that suddenly break out is to say nothing or to be satisfied with mere words; it is not natural that maladies of this sort break out without being provoked, and that which decisively demonstrates that there is a hidden cause is the fact that the pattern of these calamities is almost periodic.

We believe we have found a more satisfying explanation in the defective structure of credit; that is to say, to express our idea more clearly, in the existence of privileged banks and in the manner in which these privileged banks function. We will attempt to render this truth understandable, but let us first recall the facts.

It has already been seen that it is not correct to say that, in moments of crisis, the public goes en masse to obtain reimbursement for its notes. This is hardly ever seen except in truly exceptional cases such as, for example, during a political revolution or a foreign invasion, which place the future existence of the banks into doubt. What is true is that a great number of private citizens direct themselves to the same banks to withdraw the money that they had deposited in current account, and that the amount of these deposits, ordinarily considerable, diminishes greatly. What is also true is that as the amount of deposits decreases, the amount of discounting increases, so that the metallic reserves, attacked on two fronts (both by the withdrawal of deposits and by the increase in discounting), dwindle perceptibly.

Let us establish these new observations with several figures.

Approaching the crisis of 1825-26, in the month of August 1824, the total amount of money on deposit at the Bank of London, belonging both to private citizens and to government, was 10,097,850 pounds sterling. It even rose a bit higher, to £10,168,780 in the month of February 1825, just when the crisis was about to begin. In the following August, however, it was not more than £6,410,560, a decrease of nearly four million pounds in six months. At the same time discounting grew rapidly: the portfolio of the bank, which was only £17,467,370 in August 1823, had already risen to £20,904,550 in August 1824, to £25,106,050 in August 1825, and reached the enormous figure of £32,918,580 in the following February, at the worst point in the crisis.

Similar facts may be observed in all other such circumstances. Nearing the crisis of 1837, and during its whole duration, the circulation of the Bank of London varied very little. Far from finding a void, one notes a slight increase. Here are the figures for five different periods starting in 1833:


Year Circulation (pounds)
___________________________________________
December 31, 1833 17 469 000
December 28, 1834 17 070 000
December 26, 1835 16 564 000
December 13, 1836 17 361 000
February  12, 1837 17 868 000

The circulation was therefore a bit greater at the beginning of 1837, at the worst of the crisis, than it had been before. This testifies to the fact that the public, far from showing that supposed eagerness to obtain reimbursement for its notes at the bank, was instead ready to accept a greater number. The amount of deposits, however, had been £20,370,000 in December 1835, but fell to £13,330,000 in December 1836. On the other hand, the amount of advances made by the bank, although quite variable for several years, had grown considerably overall. From £24,567,000 in the month of December 1833, it rose to £31,085,000 in February 1837. The metallic reserve, which had never reached less than £10,200,000 (in December 1833), fell to £4,032,000 in February 1837.

If one passes from England to France, one finds that the facts are perfectly in accord with what has just been observed. During the crisis of 1846-47, one of the most serious France has undergone excepting those with a political character, the circulation of the Bank of France did not decline at all; on the contrary, the average figure was superior to that of preceding years, which proves that in France as well as in England it is not the readiness of the public to obtain reimbursement for notes that causes the catastrophe. During the time when the figure for circulation remained high, that for deposits perceptibly declined; at the same time, the sum of the advances made by the bank, in the form of discounts or otherwise, became greater each day. Rapid declines in deposits, notable growth in discounting: Such are the characteristic circumstances that may be observed in the crisis of 1846 as in all others, and this brings about, as always, the final result. Indeed, since the metallic reserves of the banks are doubly exhausted, both by the growth in advances they are led to make and by the withdrawal of the deposits that had been entrusted to them, they soon see themselves constrained by the risk of falling to tighten their credit if not to suppress it entirely.

After thus having established the precise facts it will be easier for us to trace them to their first cause. This cause is none other, as we have said, than the monopoly enjoyed by certain privileged banks. From this monopoly there results, under normal conditions, a glut of funds resulting from saving, and after several years a sort of overflow of these same funds, which seek employment despite the obstacles placed before them. It is necessary to make this clearer.

Let us suppose a state of affairs where there exists no public bank authorized to issue notes payable to the bearer on sight. In this case, what happens to the funds coming from the savings of private individuals? It is difficult to use them, as it always is where there exist no great establishments capable of collecting the funds and making them fruitful. (One may refer to what was said on this subject in the article BANK.) But as difficult and inconvenient as it is to use all these funds, a certain part is always utilized, and they never become obstructed to the point of creating a public danger. The industrial entrepreneurs, i.e. those who possess an establishment of their own, attempt to reinvest their savings in their own businesses, which they enlarge as a result. As for those who have no establishment of their own, and this is always the greatest number, they find themselves in a more difficult position. They are ordinarily reduced to keeping their savings in their own posession, in chests or in money bags, until their amount reaches a level high enough to allow them to acquire a small estate; even more often they dissipate their savings, having no other immediate use for them. Some, however, place them with private bankers, who ordinarily pay interest on the funds entrusted to them while intending to lend them to business through discounting or otherwise, in order to yield an interest superior to that which they themselves pay. Furthermore, there exists in this state of affairs, in addition to banks proper, a certain number of private discount brokers who make a profession of using their own capital to discount the commercial paper they are presented. They are ordinarily former merchants retired from business who find it convenient to put the fortune they have acquired to good use through discounting. The paper they prefer to discount is almost always that of merchants with whom they had formerly had business connections or who are engaged in the profession they have left, because they are in a better condition to appreciate their worth.

This is what occurs in every trading country where there is no privileged bank, nor public bank of whatever sort. It was the situation of France and of England before the institution of the banks of Paris and of London. It is still that of every country where there does not exist an establishment of this sort. In this state, the allocation of funds coming from savings is irregular and imperfect. This is easy to understand, and we have already sufficiently explained it elsewhere (see BANK). A great amount of saving is lost due to lack of use. In addition, the rate of interest is high, for the private bankers and the discount brokers, who always operate quite irregularly and on a very small scale, are obliged to receive a fairly high rate of interest to maintain their position. It is thus a situation quite inferior to that of a country where great banking institutions can be created freely, but since in the final analysis an accumulation of capital of a certain importance can always be utilized, through discounting or otherwise, there is never a serious obstruction to be concerned with.

It is no longer the same situation where there exists a privileged public bank. The major concern of an establishment of this type is to compete unfairly with private bankers and with discount brokers, a competition that the latter cannot sustain. Armed as it is with special and exclusive privileges, with the right to issue notes payable to the bearer on sight, and by means of its issues to increase the sum of capital at its disposal by raising capital from the public at no cost, without any sacrifice of interests, it finds itself capable of discounting at a much lower rate than that of the private establishments, even while receiving higher profits.

Let us then suppose that before the establishment of the privileged bank the ordinary discount rate was six per cent. This was a rate just sufficient to permit the discount brokers to receive a reasonable profit on their capital. Indeed, by discounting at six per cent, they really received a much lower profit in the last analysis, since they still had to deduct incidental expenses and the loss of time and interest resulting from the fortuitous unemployment of their capital, without counting the real losses to which they were exposed by the failure of their loans to come in. As for the private bankers, obliged as they were to attract disposable funds and to pay a reasonable rate of interest to those who conferred them their capital, they too could hardly discount at less than six per cent without taking losses or exhausting the very source of their profit. However, for a bank armed with the privilege of issuing notes payable on sight, the case is different. Admitting hypothetically that it possesses 50 million francs in capital of its own, if, by virtue of the privilege it enjoys, it may put into circulation a value of 100 million in notes (which is not at all excessive as experience proves), it will be in a condition to increase the total figure of its advances to 150 million francs. Nothing would prohibit it then from reducing its discount rate to four per cent, and under these conditions, entirely unsustainable for the discount brokers, it would still receive a profit of twelve per cent on its real capital. True, it is necessary that such a bank keep on hand some reserves to answer the demands for the reimbursement of notes as they are made. It must, moreover, pay administrative costs. But it will be seen that the influence exercised by its operations has the effect of creating other resources for it immediately, and there remains the fact that in this situation a bank can discount at four per cent while receiving a rate of return three or four times as large on its real capital.

In the presence of an establishment functioning with such advantages it is understandable that the position of the discount brokers is no longer tenable. They would not be able to compete with the privileged bank except by contenting themselves with receiving an insignificant rate of return on their capital, after many inconveniences and risks; they would in addition suffer much more in this unequal situation inasmuch as the bank, which surpasses them by far in size and in the regularity of its discounting, would always take the best commercial paper away from them and leave them only what it had rejected. The position of the private bankers is hardly better. How likely are they to discount regularly at four per cent while paying a sufficient rate of interest on the funds deposited with them to keep them there? Everywhere that a privileged bank is established, while the discount brokers disappear, the private bankers usually confine themselves to serving as intermediaries between the bank and the public. If here and there a few of the best situated ones still discount bills for their own account, it is generally with the aid of floating capital on which they pay little or no interest but which they control only temporarily, while waiting for the holders to find a use for it.

What happens in this new state of affairs to the capital that previously entered commerce by means of discount brokers or private bankers? It accumulates and backs up. Its holders seek to place it elsewhere, in the acquisition of real estate, in the purchase of luxuries or finally in joint-stock companies—but the number of these placements is not infinite; it does not grow suddenly by virtue of a mass of disposable capital. It is only industry and commerce that can offer an indefinite outlet and constant employment for the capital resulting from saving. But this outlet is now closed to them, as has just been seen, as a consequence of the operations of the privileged bank, so that there is always a more or less considerable sum that remains without employment. It accumulates even faster to the extent that the bank has made it even easier for commerce through abundant discounting and moderation of the interest it demands.

Since, however, these superfluous funds must lodge somewhere while waiting for effective employment, a part, receiving a very low rate of interest, is usually deposited with the private bankers. Another part, often larger, is placed in the hands of the privileged bank. This is what allows the privileged establishment to keep increasing its discounting by rendering entirely disposable its own capital and that which it has artificially created for itself by the issue of notes.

It is here that a doubly unnatural situation appears, and one fraught with perils from every point of view. We see, on the one hand, a mass of floating capital in search of an advantageous placement it does not find, as if struck with sterility in the hands of its holders. On the other hand, a privileged bank, not content to employ its own capital usefully as well as that which it has created by the emission of notes, directly or indirectly takes advantage of these same idle funds that it had deprived of a use and which have provisionally been left in its hands. A doubly unnatural situation, we say, in that on the one hand the accumulation of unemployed capital cannot be prolonged indefinitely, and on the other hand, by using the capital of which it has only provisional care and which may one day be withdrawn all at once, the bank always remains exposed to the danger of an insufficiency.

One can now understand the origin of the fever of speculation mentioned by Mr. J. Wilson, a fever that agitates the soul of everyone at a given moment. It is born precisely out of the need to utilize at any price the floating capital for which employment is nowhere to be found.

To complete the exposition of the consequences of this unnatural situation, we cannot do better than to recall what we have said about it elsewhere:

"There is a moment, in effect, when the glut of capital in the market becomes so great that it is necessary to find a use for it at any price. The holders cannot eternally resign themselves to receiving no interest or a derisive rate of only two and one-half to three per cent from a contingent and precarious placement. They thus call loudly for the outlets they cannot find. After that, it is quite simple: the promoters come to their aid, and the genie of speculation awakens.

"It is customary to cry out loudly in such cases, both against the promoters and against those who are called their dupes. Of course, the directors of the bank are always the first to set the example for a general outcry. However, in all honesty, if the picture I have just sketched is true, could such a state of affairs be prolonged without end, growing worse all the time? Doubtlessly the bank could not ask for more, the bank whose profits grow incessantly and which makes money from everything, so to speak, but it cannot be the same for those whom it dispossesses. As for speculators, whose path the capitalists follow, are they themselves so guilty if they yield to so many pressing invitations?

"Great plans are imagined in order to open great outlets for all these unoccupied funds. The first comer sets the flame, and all the rest follows. Everywhere huge enterprises are projected, sometimes for the exploitation of coal mines, sometimes for the construction of a vast railroad network, sometimes for the clearing of uncultivated land or even, if it is in England that the scene takes place, for the large-scale exploitation of the gold or silver mines of the new world. All these projects are welcomed with transports of joy. At this time no one is afraid of great enterprises; on the contrary, the most vast and daring ones are those with the greatest chances of success because they best answer to the real needs of the situation. The subscription lists are opened and are filled in the twinkling of an eye. Everyone is attracted to them: the capitalists because they are only too happy to find this long awaited opening, the industrialists and the traders in the spirit of imitation, and because the facilities they have up to then found to discount their notes allow them to make use of some money from their business. Soon companies are formed and the appeals for funds begin. At this point one sees the dark side of the picture appear, and obstacles arise on all sides."

The preceding sufficiently explains how the spirit of speculation at certain moments is necessarily born out of the obstructions to capital that are produced by the privileged banks. If one now wishes to account for the final consequences, one must remember the false position in which these same privileged banks place themselves by depending for their operations on the inactive funds of which they are only the temporary custodians. But let us continue the citation:

"As soon as the appeals for funds begin, each person rushes to withdraw his capital. One rushes to the privileged bank where he keeps it on reserve, another to his bank where it brings him nothing but a mediocre interest. The banker, whose coffers are emptying, also calls upon the common reservoir—the privileged bank—to fill them either by withdrawing a portion of the capital that he has there in current account, or by presenting a greater number of notes to discount. Thus the metallic reserve of the bank is beseiged from all sides. In the first month, ten million francs are withdrawn, a second ten million in the next month, as much in the third month, then again and again with the result that the huge reserve melts away perceptibly. To crown the misfortune, the needs of the state always increase at the same time because it feels the reaction to the scarcity that appears elsewhere. The public treasury thus withdraws its deposits at the same time as private individuals. From 200 million francs, including state funds, the metallic reserve of the bank falls to 60, to 40, to 30 million and perhaps less within a few months. Yesterday, it exceeded by far a third of the bank's obligations—a brilliant state of affairs in which there was an exuberance of power, even a plethora. Today, it does not equal more than a ninth, for the bank still owes 30 million francs in deposits and 250 million in notes: a totally abnormal situation, one that it is impossible to maintain and which loudly calls for a prompt remedy."

Here, then, is the origin and the ordinary course of the unfortunate dislocations called economic crises. We are naturally leaving out those determined by a political disturbance. As for those that arise spontaneously, so to speak, they all have the same character and the same source: They are clearly tied to the existence of privileged banks. The essential points may be resumed as follows: The action of a privileged bank inevitably produces a glut of capital. This glut, which fills the cellars of the bank with inactive assets, then induces it to operate partially on the capital whose use it enjoys only temporarily. Finally, as a result of this same glut, which keeps growing, the furor of speculation is awakened, the capital of which the bank was only the depository is withdrawn in the middle of the difficulties that only excessive speculation awakens, and the crisis begins. This is the natural order and the rigorous progression of events.

A time of repose and sluggishness necessarily follows every dislocation of this type. The spirit of speculation slumbers for awhile, frightened by the recent disasters. Capital becomes more distrustful, and moreover the state of relative exhaustion in which the country finds itself means that funds are more easily placed. Since the same cause continues to operate, however, the glut starts again little by little, and produces at the end of a certain period the same effects. This is how the crises become somewhat periodic.

Doubtlessly an excess of speculation is a determining cause of these disturbances, and also in all cases the abuse of credit is to be found, but the original cause lies no less in the exclusive privilege enjoyed by one establishment, as has just been seen. Before such establishments existed, economic crises were completely unknown: They will cease occurring either when this institution has been suppressed, or when a system of free banking is proclaimed and all capitalists are given the permission to compete with it on equal terms.

If it should be asked how the freedom to establish new banks next to those that exist could make the danger of such crises disappear, it seems to us that the answer is simple. From the day when, as an effect of the issues and discounting of a first bank, there was on the market a certain mass of disposable capital that might threaten to back up, the holders of the capital would unite, and forming a company of the same type, would discount in competition with the bank, under equal conditions because like it they would enjoy the ability to issue notes. If a second bank did not suffice to absorb all the disposable funds, a third, fourth or even greater number would form, according to the extent of the need for them. Thus the danger of an accumulation would disappear. In addition, since each of these banks would be reduced more and more to using nothing but its own capital augmented only by the amount of its emission of notes, without ever having at its disposal a considerable sum of floating capital subject to recall, one would also see the danger of an insufficiency disappear, a danger that for privileged banks always remains notorious. Under this system, the spirit of speculation would clearly be provoked and overexcited to a far lesser degree than it is under the present circumstances, and even should it sometimes reawaken, it would never bring with it the disastrous effects that have been observed.

CH. COQUELIN

Translator: Paul Blair

^Table of Contents