Everything is Going Well

6 In the period leading up to a crisis, capital is generally flowing and available at low cost : "easy credit makes it possible to engage in business that is liquidated with the greatest of ease owing to price stability and increases, which further activate rapid trade" (Juglar 1900, 642). Major projects are advanced without a need to give specifics: “it does not matter because circumstances can be infinitely variable” (Coquelin 1859, 270). Profits grow in this environment. Capitalists, followed closely by savers, try to get more and more out of their money "and speculation is stimulated” (Coquelin 1859, 270).

7 While initial investments are always well supervised and follow the rules of the art of business management, the prospect of significant profits will have the gradual consequence of “building badly-located factories or producing excessive quantities of certain types of goods taking average spending habits into consideration” (Courcelle-Seneuil 1909, 52). Misguided to a certain extent, these investments will have a disastrous effect on the economy as a whole.

The Turnaround

8 Trend reversal will not come as a complete surprise to anyone who analyzes society.

9

Signs of great prosperity are symptomatic of impending crises. These include: companies and speculation of all kinds; a rise in commodity, land, and property prices; demand for workers; salary increases; a drop in interest rates; the naivety of the general public questioning nothing on the back of one success; and the love of gambling and the desire to become rich in a short space of time that captures people’s imaginations in a growing economic climate, as, for example, with the lottery. Growing luxury leads to overspending, which is not regulated according to income, but to the nominal estimate of capital based on trading prices.

10 It is not surprising, therefore, that the reversal is triggered by a loss of confidence in the future. “All it takes for a crisis to erupt is a loss of confidence, whether justifiable or not, for a drop in confidence produces a real reduction in the amount of available capital” (Courcelle-Seneuil 1909, 55). “It only takes the fall of one large company or credit institution for all businesses, dependent on such fragile foundations, to collapse” (Juglar 1900, 642). [6]

11 Unlike its current usage, the term “crisis” is used here to denote a very brief period (fifteen to twenty days maximum) during which

12

everything is shaken to the core and nothing seems to stack up anymore. Not only are the reckless knocked down, but the most cautious do not even know at what price they will come out of the storm. All credit, all confidence is gone, and it is a general every-man-for-himself stampede.

13 During this brief period, nobody is able to find new investors to develop their activities. [7]

14

Extremely rapid and profitable up until this point, the flow of trade suddenly comes to a halt. Those who hoped to sell, and especially those who represent the last link in the supply chain, do not know what to do with their goods anymore; they cannot sell them either internally or externally, but still have to meet their financial obligations.

15 The outcome of such a situation, “is always the same” (Coquelin 1859, 270). Funds begin to be withdrawn. “Those who have lost their own equity or the capital of others try to replace it with loans. Everyone rushes to the markets, causing rates to rise in that market” (Courcelle-Seneuil 1909, 53). Faced with the progressive withdrawal of funds, banks are caught off guard. “The owners of availabilities become alarmed and recall their funds, either keeping them or using them in operations made profitable by the general and exceptional decline of goods” (Courcelle-Seneuil 1909, 53).

Disastrous Consequences

16 While the crisis per se only lasts a few days, liquidation is a “long and painful period, when (...) nothing works anymore.” The liquidation period can last “two, three, even four years” (Juglar 1900, 642]. The bank initially tries

17

to weather the storm. It increases its discounts, both because it is actually being presented with (...) a large number of bills of exchange, and because it hopes to thereby meet the new needs that emerge. The bank also issues a large number of promissory notes but, given that circulation already has more that it can manage, they are rejected. Almost as soon as they are issued, these notes have to be repaid and contribute, along with everything else, to reducing the reserve that continues to decline.

18 Alarm bells begin to sound for the public, and the banks start to get twitchy. In a state of deep despair, banks strengthen their discounts

19

by rejecting a large percentage of the bills of exchange that are presented to them. This is the final deathblow to trade. The whole situation explodes and everything is in ruins. There is universal meltdown. New businesses, which were launched under such brilliant auspices, fail because payments have stopped. Advances that were made and construction work that was begun are all lost. At the same time, many old institutions crumble, while all the rest are shaken. There is disarray all around.

20 Coquelin was realistic about the consequences of the crisis:

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For the bank, however, the remedy it uses is effective. At first, it looks as though it will go down along with everything else. This is not the case, however. The only victims are the unfortunate people who had expanded their operations on the back of loans granted by the bank, and who thought they could rely on the continuity of its support.

22

Borrowers who had counted on normal practices being maintained and on the renewal of loans either find their work tools snatched away or are forced to complete work no matter what the cost to them. The relative value of assets, whose realization is difficult, drops quickly, causing heavy losses for debtors. Then come the bankruptcies, industrial disablements, and suspension or reduction of all credit-based businesses. It is well known how easily one loss leads to another, and how ruin begets ruin.

23

Products no longer circulate and, instead, remain in the store or warehouse. Having paid for the deferrals, or ruinous expedients in the case of real estate, they are watched over in the hope that the upward movement that has always been so favorable will not abandon them.

24 Then, with markets dropping off, prices fall and losses are reported.

25

There is less, or even zero, credit available. It is difficult for entrepreneurs, who need loans in order to operate, not to become vulnerable. They may even have to suspend activities completely or complete projects at a loss. The fact that they bear the full weight of the crisis is to the advantage of those who have cash at their disposal.

26 It is not just the country in which the first institution collapses that will be affected, but “all the world's markets that operate with the help of credit. There is thus solidarity among them” (Juglar 1900, 642).

27 When the economy totally collapses, there is only one commodity that retains a high level of stability: precious metal. “People no longer ask banks for credit, promissory notes, or an open account to make transfers or compensation, they ask for metal or rather bullion” (Juglar 1900, 643).

And Then ... It Starts All Over Again

28 Coquelin was the first to put forward the idea of regularity in crises: “We shall see how the exercise of privilege leads almost inevitably to a generation of periodic crises” (Coquelin 1859, 258); “M. H.-C. Carey had clearly already shown in 1838 the primary cause of these disturbances, the return of which are almost periodic” (Coquelin 1859, 286). It is because Coquelin experienced the crises of 1804, 1810, 1813-1814, 1818, 1825, 1830, 1836-1839, 1847, and 1857 that he was able to notice the regularity of this phenomenon. Juglar [8] would go on to complete his analysis by showing continuously recurring periods (cycles). “We should get used to the idea of the periodic return of these commercial disturbances, which, until now at least, seem to be a prerequisite for the development of heavy industry” (Juglar 1862, 6). Once liquidation is over, therefore, the process starts all over again. [9] “Soon, following partial settlement of credit agreements, equilibrium is established and business starts up again” (Courcelle-Seneuil 1909, 53).

29 All the economists agree, therefore, that the source of financial crises is the banking system and its use, and particularly abuse, of credit. The description of the crises process from a dynamic point of view, as we hope we have illustrated here, in the words of the authors of the period, remains fascinating today for the obvious current relevance of the discourse of these three economists. The next step, therefore, is clearly to look for a remedy for the disasters observed. In addition to these three experts, the entire body of economists from the French school of the nineteenth century contributed to the debate on the best solutions for controlling and even preventing crises.

Adjustment between Production and Consumption

34 Jean-Baptiste Say left a deep impression on the nineteenth century French school thinkers. His famous law of market is the most notable finding to have come out of his work. It shows that a product, from the moment it is finished, affords a market for other products of the same value. If “every supply creates its own demand,” it is impossible for a crisis of overproduction to occur. Only sectoral crises can occur, without encroaching upon the overall balance.

35 A number of economists also emphasize the risk of this insulated imbalance. Joseph Garnier stresses that “each producer must aim to produce only what he knows how to produce well and sell appropriately. In other words, production, in order to be real, must be proportionate to the needs of the buyers” (Garnier 1873, 266-7). Garnier tells us that it is only through experience and observation that businesses will manage to avoid mismatches between supply and demand. Alfred Jourdan makes a point of reminding us that crises do not result from the abundance of production, but from “the disproportion between the various types of production” (Jourdan 1882, 651).

36 It was not until the twentieth century, most notably through the work of John Maynard Keynes, that this approach came to be widely challenged and the issue of the appropriate level of demand as the foundation of economic equilibrium came to the fore.

The Return to Morality

37 The French school of economists presented above confined themselves to Say’s analysis to show that crises are a priori “impossible.” The only imbalances are related to adjustment problems, which only affect a few isolated sectors. Other economists, without challenging existing work, point out that businesses have their part to play in avoiding economic crises. They point to the morality of managers to avoid falling into a vicious cycle.

38 According to Henri Baudrillart, the only thing that needs prohibiting is excessive lending, which finds itself at the heart of crises. Credit must, therefore, respond to economic precepts: “Political economics describes the nature, measures the strength, and points out the limits of credit. Credit is subject to the general law of prudence and moderation, and is called on to temper the boldness in human nature and the risk in its applications” (Baudrillart 1883, 546). Baudrillart highlights the moral aspect of the behavior of economic players: “The most moralizing and productive of instruments when adhering to scientific regulations, it becomes the most demoralizing and most ruinous of agents as soon as it moves away from it” (Baudrillart 1883, 546).

39 This moral rule, dictated by science, comes from “several economists [who] said, and repeated moreover, that one third bullion, relative to the amount of notes issued, was a suitable proportion” (Baudrillart 1883, 314-5) to avoid a crisis. “Any issuing of notes has its limits. Science cannot predict this in numbers, but we know from experience” (Baudrillart 1883, 315).

40 Rossi adds that “The blame does not lie in human intelligence, but in human passions and greed. It lies in those who aspire to achieve great wealth overnight, instead of that successive and honorable wealth that comes from work, the real product of strongly supported and honorably conducted labor.” Rossi (1865, 329)

41 Unfortunately, the history of crises shows that appealing to reason by asking businesses to limit themselves to “reasonable” actions is not very effective!

Freedom of the Banks

42 The most common solution in the nineteenth century, however, especially in the second half, is the one that advocates freedom of the banks. This approach is entirely consistent with the movement of the French school of economists who advocate freedom and competition as the ideal panacea for all economic difficulties.

43

As a general rule, science teaches us that a regime of freedom across trade and industry is more active and productive than a regime of privilege and prior authorization. This is now a fundamental certainty, which no economist, no man of education, would dare challenge today.

44 The distribution of loans in the first half of the nineteenth century is indeed the result of banking companies in an almost monopolistic situation. The only solution for avoiding crises thus appears to be competition, because otherwise “we will lurch [...] from one crisis to the next, from one collapse to the next, until the final destruction of public credit and all private institutions” (Coquelin 1859, 254).

45 Through competition, [11] risks would be better distributed and economic freedom would be the miracle solution: “commercial crises do not usually have any other source [than the bank's exclusive privilege], and (...) the sole remedy can be found in this very freedom that we reject” (Coquelin 1859, 254). “On the whole, absolute freedom would be as good, if not better, than the wisest regulations” (Courcelle-Seneuil 1909, 470). It is no longer necessary, therefore, to worry about future crises because “banks are good at policing themselves, and are forced to do so in order to provide for their own security” (Courcelle-Seneuil 1909, 470). Banks would then have “a natural and necessary limit” (Courcelle-Seneuil 1909, 229) for the issuing of discounts.

46 Courcelle-Seneuil states that a bank cannot be blamed for increasing the amount of capital available “for that would make the services it provides a crime” (Courcelle-Seneuil 1909, 231). According to an approach based on the theory of large numbers, the fact that there are a large number of banking institutions means that all banks will not go down the wrong road collectively.

47

Is it possible to imagine all the banks making a mistake at the same time? I might just as well assume that all the locomotives on our railways might derail on the same day and at the same time, and we find ourselves deprived of major transport.

48 Following this argument to its logical conclusion, a single case of bankruptcy can only be possible if there is only one bank that makes a mistake and causes the whole system to collapse. “It is supremely unjust to accuse the banks of causing commercial crises, since it is as much in their interest as everybody else's to only discount the right accounts, and they are in a better position to realize this than anyone else” (Courcelle-Seneuil 1867, 72-3). This element comes from the source of the crises, found in production and trade errors as opposed to credit. The banks would, therefore, only play an indirect role in the development of crises.

49 Clément Juglar would be the first to challenge this approach. His early research focuses on the analysis of economic crises in France, England, and the United States. In the latter country, the freedom of banks prevailed throughout the nineteenth century, but did not prevent periodic crises.

Unavoidable Crises

50 These three propositions from the economists have the virtue of taking their place within the social debates of that time. By their own admission, however, the remedies are often ineffective in the face of the inexorable arrival of crises. The crises then end up being seen as a bad period that will pass, like “accidents inherent in progressive prosperity. Better to have prosperity, with its temporary drawbacks, than the status quo or inactivity, which is a permanent crisis” (Garnier 1873, 266). “The crises emerge as a kind of periodic disease inherent in our economic situation” (Levasseur 1893, 260). “Crisis [is] a temporary ill for a greater good” (Beauregard 1889, 59).

51 Ultimately, for these nineteenth century economists, crises appear inevitable.

52

There is no remedy against crises inasmuch as crises are inevitable. No measure is capable of warding them off. At best, we can mitigate the effects, shorten their duration, and quell the panic that comes with them. Crises are accidents in the economic life of nations, in the same way they crop up in the life of individuals. It is feverish activity, it is fever.

53 Clément Juglar, who can be considered the most prolific researcher on this phenomenon in the nineteenth century, refers to the immutability of economic crisis even from his very first publication: “crisis recur with such constancy, such regularity, that we must take a stand” (Juglar 1862, 6). History has, unfortunately, proven him right.