Commercial crises and free banking by Charles Coquelin (1848)


by Charles Coquelin 



[English translation by F. G. Skinner, Esq., of Washington, for the Merchants’ Magazine, October 1849.]


Never, perhaps, has the attention of the country been directed to those questions that belong to the development of public wealth and credit more anxiously than now. Vainly is it said that a return of public confidence alone will bring about a better state of things. It cannot be. After 1830, three years and more were necessary to replace France in what some have been pleased to call her normal state—that is, in a condition similar to that of the last years of the Restoration. Under a democratic republic, when they are naturally, and, with reason, more exacting, and where opportunities for agitation are more frequent, it will require, perhaps, ten years (if salutary reforms do not come to our aid) to reinstate us in the position we held before the last revolution. Is this a result so much to be desired? Are we to look for nothing beyond the prosperity of the last eighteen years? It has been estimated that the gross annual production of England, equally distributed among her people, would give for each person, and for each day’s labor, 1 franc 45 centimes. A similar estimate for the whole of the United States would give daily to each individual 1 franc 70 centimes, and, in the most prosperous part of that country (New England), 1 franc 87 centimes per day. If, in such a situation, it was altogether unreasonable (I will not say utterly ridiculous) to promise to each laborer 5 francs a day, while the duration of labor was to be abridged, or, in other words, the production to be diminished, it is scarcely less so to pretend that France should rest satisfied with such a result, and that there is nothing to be done to improve it.

To ameliorate this condition is the great task devolved upon our legislators. A failure will not be unattended with danger. The question is not to vote subsidies that only cover the sores, and aggravate, instead of healing the disease; still less is it, to proclaim the right to labor, or the right to assistance: deplorable errors—fatal contradictions, that tend to nothing less than to make France a vast lazar-house of mendicity. The question is to reform the abuses by which our social system is being devoured, to enfranchise labor, that (say what you will) is still enslaved, and to rescue, by permitting it to work out its own salvation.

Among the measures best fitted to revive labor by remunerating industrial pursuits and commerce, none are more efficacious than those which tend to the establishment of credit. It has often been said, and it cannot be too frequently repeated, that “credit is the soul of commerce”. Without credit, no commerce—without commerce, no labor. Let us seek, then, to build up that credit, which, unfortunately, has never been much extended in France. To effect this, neither great efforts, nor eccentric measures (that would certainly fail in effect) are necessary. There is but one thing requisite—liberty. Not the deceptive liberty that it is pretended we enjoy, but a true liberty that has no accounts to settle with monopoly.

As the establishment of banks has so far almost everywhere been followed by commercial perturbations more or less serious, that have become in certain countries in some degree periodical, it has generally been thought that these fatal accidents are the inevitable results of these institutions. As a natural deduction, it has been supposed that an increase of them would only tend to render these crises more serious. If a single bank, for instance, established in Paris or London, with special privileges, and acting under government control, is now, even in spite of itself, by issue of notes and by its discounts, the cause of such cruel disasters, what would be the case if several banks were seated side by side in the same place, and operating together? Certainly they would strive one with the other, to give to commerce that feverish excitement, the danger of which experience has so often revealed to us. Then the delirium of speculation, and the folly of speculation, which every now and then turn all heads, will become the normal state of the country. We shall proceed from crisis to crisis, from fall to fall, to the final ruin of public credit, and the destruction of all private undertakings. Thus it is that we tremble even at the thought of the division of the banking privilege for the endowment of new institutions of a similar character. As to the idea of proclaiming the entire freedom of such institutions, of permitting any individual at his option to set up a bank, it would appear to many a monstrous folly. What will be said, then, if it were proved in principle and in fact, that it is precisely in the exclusive privilege of the bank that the evil is to be found? — that commercial crises have, in general, no other source, and that the only applicable remedy is that “free banking” so fiercely repelled!

True this is not what M. Thiers, then president of the Council, said in 1840, in the debate relative to the re-charter of the Bank of France. According to that statesman, experience has proved that two or more banks could not, without immense danger, operate together in the same city; that their rivalry would be, for the country and themselves, the source of serious, often fatal embarrassments; but I look through history in vain, to find the facts upon which this assertion is based. Indeed, I know of no country in which quite the contrary has not been proved by experience. Already, as early even as the last century, Adam Smith (who was surely no favorer of banks) asserted that those institutions founded in Scotland had becomefirmer, more reliable, and steadier in their operations, in proportion as their numbers had increased. “Public security”, said he, “so far from diminishing, has only increased by the recent multiplication of banking companies, in the united kingdoms of England and Scotland.” And yet the banks founded were then constituted on a very bad principle, since by the law of 1703 (still in force at that time), they could not consist of more than six partners, which of course prevented them from acquiring all the expansion necessary to such institutions.What has since occurred in England, but more particularly in Scotland, has only confirmed these views. In no part of the world do the banks operate with as much regularity, and with such security to themselves and the public, as in that part of the United States designated New England, and which is composed of the six following States: Rhode Island, Connecticut, Massachusetts, Maine, Vermont, and New Hampshire; yet nowhere is there a greater latitude allowed to banking, and nowhere is the number of these institutions greater in proportion to the number of inhabitants. In 1830, according to Mr. Gallatin, there were in this portion of the American Union, 172 banks, for a population of 1 862 000 souls; or one bank for every 10 825 inhabitants.

Among the six States, there are two distinguished by a still greater tolerance; a tolerance so great that there is, in fact, no restriction whatever. True, there is in Massachusetts a tax of 1% on the capital of banks, but in Rhode Island, even this tax does not exist. The consequence is, that in these two States, the proportion of banks to population is even greater than elsewhere, for there is one for every 6 200 inhabitants, and it is remarkable that these two States are precisely those that have suffered least from the fatal convulsions that have several times shaken the whole commercial world.

In Rhode Island particularly, banks may be said to swarm. In 1830 they numbered no less than 47, for a population of 97 000 souls, which gives the almost fabulous proportion of one bank for every 2 064 inhabitants. By this calculation, and following these proportions, France would require no less than 16 000 banks. Now, with this unlimited development of institutions founded on credit, is it, perchance, thought, that this little district is affected more than any other with those moral diseases provocative of crisis? So far from this, it is, on the contrary, peculiarly exempt from them. Credit is certainly very much extended; capital and labor are abundant, and production active. Further, it may be said, that the population derives from it a greater degree of material comfort than has ever yet been enjoyed by any other people, but speculation is rarely carried to a dangerous excess. Commerce there, though enterprising in the highest degree, rarely overleaps the bounds of prudence; and even the boldest speculations never wander beyond the limits of possibility. The issues of the banks there are more measured, more prudent, and (if the expression may be used) more correct than anywhere else in the world. And if commerce there has sometimes been interrupted in its course, it is only because it felt without the power of entire escape from the reaction of crisis, the seat of which was elsewhere.

It is, then, not true, that the source of disorder is to be found in the multiplicity of banks. On the contrary, they act as a check to it. And, in fact, where have commercial crises always commenced? In London and in Paris, the localities of banks armed with exclusive privileges. These are their usual seats. There they incubated, and thence extend their ravages far and wide. True, the American Union has sometimes contributed its full share to these troubles; particularly when it also had a central privileged bank, and when in the majority of the States composing the Union, restrictions on banks were numerous; but it is beyond all doubt that their main sources are to be found first in London, then in Paris.

I will now endeavor to explain the revelations that experience has made in regard to this matter. It will be seen how the exercise of privilege leads, in a manner almost inevitable, to the production of periodical crises.The character, also, (generally misunderstood) of these crises, will be better understood by what I have to advance on this subject. To place my idea in the clearest light, I must first be allowed to make use of an hypothesis. It will afterwards be easy to show by tables of the principle crises that have occurred in England and France, how nearly this hypothesis accords with reality.


Let us suppose that in the capital city of a great empire, a privileged bank is founded with a capital of 60 000 000 francs. Its mission is to make advances to commerce in different ways—particularly by discounting such substantial securities as are presented for the purpose. If the bank operated with its own capital only, it might lend it all out. In this case, supposing that it loaned at 4%, upon such security as to avoid all chance of loss, it would obtain, as the gross product of its capital, 2 400 000 francs; expenses deducted, 300 000 francs. The net profits would be 2 100 000 francs; thus leaving a dividend of 3,5% to stockholders. This manner of operating would yield as little fruit to the bank as to the public; and as the bank has the faculty of issuing notes payable to the bearer at sight, or in other words, circulating notes, it makes use of it. Instead of discounting negotiable paper with specie, it gives its own notes. Of these notes let us admit that there remains in circulation a value equal to the capital of the bank, that is, 60 000 000 francs. The advances of the bank increase by not as much, however, as the entire amount. To meet the payment of notes that may be presented, it is customary to retain in bank a portion of the capital, say 20 000 000 francs. In this situation, here is how the account stands:—

Advances in specie                                         francs 40 000 000
                      notes 60 000 000
              Total amount advances 100 000 000
Interest, at 4% 4 000 000
Deduct expenses 500 000
                    Remainder 3 500 000

or 5,8% on capital.

Nevertheless, while the issue of the notes of the bank increases the amount advanced to commerce, it does not fail also to exercise a certain influence upon capital. It compels a portion of money heretofore used in making discounts to commerce to seek investment elsewhere. The bank, by entering into a rivalry with the capitalists that loaned their money to commerce—either directly or through the medium of a private banker—displaces their capital, or in other words, drives it to seek other investments. Doubtless the total amount of advances made to commerce, has increased, but not in proportion with this increased issue—besides private discounters cannot make loans on the same terms as the bank; and even with equal advantages the latter will always obtain the preference. Here, then, is a certain amount of capital thrown out of employment, that must seek investment elsewhere. What becomes of it? A portion of it is carried on change, to seek investment in the funds which naturally go up; and another portion is applied to the purchase of all kinds of public stock, that promise a certain security. Nevertheless, as the amount of these investments is not elastic, as it does not increase in proportion with the demand, there remains always a certain amount of capital yet to be invested, that vainly seeks to do so. Among these capitalists, some not being able to find an immediate investment, or deeming those offering not good enough, deposit their money in bank, awaiting an opportunity. Thus the amount of specie in the bank is increased by the deposit of a portion of the capital that it has displaced, it rises then from twenty to say fifty millions, thirty millions of which belong to the depositors. Now let us follow this displacement step by step, and it will be seen that after a certain period, it must, by a rigorous chain of consequences, end in an inevitable crisis. Fortified in appearance, at least, by this influx of foreign capital (the amount of which, in ordinary times, remains about the same), and unwilling to see languishing in useless inaction, all this idle specie, the bank increases its discounts. It does more; it invests forty millions of its own capital either in the public funds, or in similar securities, which yield like the discounts, an interest of 4%. Its specie is reduced then to forty millions, ten only of which belong to it. Nevertheless, its credit and influence grow in proportion to the flow of capital through its hands. It finds itself in a position to make still larger issues, and carries the amount up to say one hundred millions—a circulation supposed to be moderate, as in this case it is, in proportion to the metallic basis only as 2,5 to 1. In this situation, the account stands thus:—The bank has invested, either in notes discounted, or in public funds—

Specie                                                          francs 50 000 000
             Bank notes 100 000 000
              Total 150 000 000
Interest, at 4% 6 000 000
Deduct expenses 600 000
                    Remainder 5 400 000

or 9% on the capital.

But the new issue of notes made by the bank, and the discounts still increasing, increase the amount of idle specie, and the difficulty of investment. The rivalry among capitalists, both great and small, becomes each day more active; and they seek to find new opportunities for placing their money. Their embarrassment already betrays itself by some irregular investments. On change the flood of capital increases, the funds rise, and interest falls—agitation begins, and gaming absorbs a portion of the idle capital. The remainder seeks refuge in the bank, to await a better opportunity, and the amount of deposits grows from fifty to eighty millions. To complete this picture, we must add that in proportion as the mass of disposable funds increases with individuals, so does it generally in the hands of government, so that the public treasury that keeps a running account with the bank pours at the same time into its coffers a very sensible amount of surplus. This circumstance, however, may be omitted, as it is not absolutely necessary to our calculation.

When once the amount of deposits confided to the bank reaches this point, it conceives that it may now dispense with keeping any of its own capital, and it invests the whole of it either in the funds or in treasury bonds; thus rivaling the capitalists with his own funds in the only field that is open to him. We have it now operating in its loans and discounts only with the funds of others. Its specie rises, nevertheless, to eighty millions, without counting the deposit made by the public treasury. In this condition, why should it not go on to increase its issues? It runs them up, then, from one hundred and fifty to two hundred millions still a moderate amount, as it bears to the specie in hand a proportion of only 2,5 to 1. In this case, the investments and profits are stated thus:—

Specie                                                francs 60 000 000
Notes 200 000 000
              Total 260 000 000
Interest, at 4% 10 400 000
Deduct expenses 800 000
                    Remainder 9 600 000

or 16% of capital.

One thing in this system will strike the attention—it is the revolting inequality that it engenders. While the stockholders of the bank, without incurring any serious risk, receive 16% dividends, the unfortunate capitalist, whose funds are used by the bank, gets none at all—or if he does with difficulty find a perilous investment, he only receives, at great risk, a very slender interest.

Is it necessary, also, to state, that this system encourages agitation and stock gambling, by depriving capital of all other employment. But what, above all things, must attract attention, is the imminent peril that such a state of things must give rise to. When the issues of the bank have grown to a certain extent, the mass of capital to be disposed of, and seeking investment, becomes enormous, not indeed through the whole extent of the country (for there exist no regular means of apportioning it), but over the whole extent acted on by the bank, and particularly in the city where it is seated. The engorgement manifested becomes such that it actually becomes difficult to find any use for money. As a consequence, the flood of bank deposits continues to swell. This hypothesis might be extended still farther. Suppose, for instance, issues amounting, like those of the Bank of France, to 250 000 000 francs; or like those of the Bank of England, to 400 000 000 francs; but where the necessity? What precedes is sufficient to show the irresistible tendency of facts. The consequences may already be seen. When this point is reached, we may be certain that the crisis is near at hand. Why is it, it will be asked, that all this superabundant specie does not find its way out of the country? A large amount, certainly, does flow off, but how? It is not through the capitalist, who alone has the right to dispose of it, for he seeks investments near him, and has no foreign relations. It is through the medium of commerce, to which it is loaned by the banks. Here, however, is the manner in which this outward flow is effected, without even the merchants themselves suspecting it. In consequence of the abundance of money on the spot, the demand for merchandise increases, and prices go up. Home prices, for a time, becoming higher than those abroad, exportation diminishes, and importation increases. The difference is paid in specie, until the plethora ceases. Considered in itself, this exportation of money would not be an evil; so far from it, it would be a real benefit. Instead of hoarding up a mass of sterile metal, commerce would take it abroad, to be converted into raw material, productive machinery, or merchandise of various kinds, that would return to be added to the productive capital of the country. What more favorable to the growth of general comfort? Unfortunately, in the hypothesis in which we are placed, this exported specie remains due to the capitalists who have deposited it in a running account with the bank, or with their private bankers. It is liable to be drawn out by them at any moment, and it certainly will be, when a good opportunity for investment offers. Then it must be recalled from a distance, and it may be conceived with what trouble. Thus this exportation, which, under other circumstances, would become the source of material benefit, becomes, in these, the occasion of great peril.

Be it as it may, it is evident that this outward flow of specie lessens in no degree the difficulties of the situation as far as the number of investments to be made are concerned, for they are as great as ever. If the capitalist has not this specie actually in hand, it is always understood that he has it either in the vaults of the bank, whence he can draw it at will, or in the safe of his private banker, whence he can draw it on very short notice. He is not, then, on this account, either less embarrassed, or less eager. Thus, so far from the export of specie having corrected the plethora that had been felt, it has only added another danger. There is a moment, in fact, when the engorgement of capital in the market becomes such, that it must find employment at any price. The holders cannot resign themselves to be forever without interest, or to receive, from precarious and uncertain investments, a derisive interest of 2,5%. A great cry is then made for outlets, that they do not find. Then it is that projectors, schemers spring up, and the genius of speculation awakes.

As is usual in such cases, a great outcry is raised, the projectors and their (so called) dupes are denounced, and, as is natural, the bank directors are always the first to open the cry. In good faith, however, the picture which I have just drawn is true. Can such a state of things, becoming more and more aggravated, prolong itself indefinitely?

The bank whose profits are constantly increasing, and who, to use the expressions, “turns everything to money”, doubtless would ask for nothing better; but that cannot be the case with those she thus deprives of interest; and as it is she whose fortunes the capitalists follow, are they then so culpable in acceding to the pressing invitations addressed to them? Gigantic plans, then, are invented, to open an outlet for this idle capital. Anybody sets the ball in motion, and everybody else follows. On all sides immense enterprises are projected. Now it is mining, again it an immense system of railroads. Sometimes wild or marsh lands are to be reclaimed; or, if the scene passes in England, the gold and silver mines of South America are to be worked on a large scale. All these projects are received with transport. Then there is no undertaking so great as to cause alarm; on the contrary, the most gigantic and the boldest have the best chances of success, because they respond better to the true wants of the case. Subscription lists are opened, and filled in an instant. The capitalist, because he is too happy to find at last the outlet that he has so long looked for, the manufacturer and the merchant, by an instinct of imitation, and because the facility with which, thus far, they have obtained discounts, permits them to turn aside some money from their regular business.

The different companies are soon under way, and a call for money commences. Then the reverse of the medal appears, and embarrassment springs up on all sides. Each one hastens to call in his means. This one runs to the bank, where he kept them in reserve—that one to his bankers, where they yielded him a very slender interest. The private banker, whose safe is becoming empty, seeks to fill it at the common reservoir, the privileged bank, either by withdrawing a portion of his funds kept there on running account, or by getting larger discounts. Thus the metallic basis of the bank is broken in upon, on all sides. The first month, ten millions are withdrawn, ten millions the second; a like amount the third, and so continuing, until the large reserve melts visibly away. As a climax to misfortune, it is always just at this time, that the wants of the government increase, because it feels the reaction of scarcity manifested elsewhere.The treasury then withdraws its deposits, simultaneously with private individuals. From two hundred millions, including the government funds, the specie in bank falls to 60, 40, 30 millions, and perhaps lower, in a few months. Yesterday the specie far exceeded the third of the bank’s liabilities; a strong position showing even an exuberance of strength; today it no longer equals the ninth part of them, for the bank yet owes 30 millions of deposits, and has to redeem 250 millions of notes and deposits—a situation altogether unnatural, impossible to be maintained, and which cries aloud for prompt remedies. What will the bank do, however, to escape? At first it endeavors to brave the storm. It multiplies its discounts as much because (as has just been seen) more demands are presented, as because it hopes thus to satisfy the new wants that now reveal themselves. It issues, also, a greater number of notes, but as the circulation is already full, they are rejected. Scarcely emitted, these notes are presented for payment, and contribute, with everything else, to diminish the still sinking specie reserve. The alarm spreads among the public, and the bank begins to tremble for itself. It might sell stock, but it must necessarily be at loss. All securities have given way, because the demand is less. Yesterday, each portion of capital created two buyers—the owner of the capital, and the bank which used it until called for. Today they have both disappeared. There are now two buyers less, and one seller more. Thus there is a rapid decline in all stocks. Already even the exchange has witnessed some disasters. The sale of 50 or 60 millions of State stocks, at such a moment, is not to be thought of. Recourse must be had to expedients. Happy the bank, if, in so critical a situation, it can find, at a given point, a foreign sovereign willing to relieve it of its stock, or a bank in a neighboring country to come to its assistance with a loan. [1] When the round of expedients is exhausted without success, resort is then had to the great, the supreme remedy. The bank suddenly contracts its discounts, either by raising the rate of interest, or by throwing out a large portion of the paper presented for discount. To commerce this is the death stroke—the “coup de grace”. Then the mine explodes, and the surrounding country is covered with ruins. The breaking up is general. The new enterprises, commenced under such brilliant auspices, miscarry, because the supplies are stopped. The money advanced, and the work done, are lost. At the same time, a great number of old and reputable commercial houses crumble to the dust, and all the others are shaken. The disorder is universal. The remedy applied, however, proves, for the bank, entirely efficacious. It would seem, at first, that it ought to be carried away in the common wreck. But no, the only victims are the unfortunate individuals who had extended their operations upon the faith of the credits it had granted, and who had thought that they might rely upon a continued support. From that moment everything is overthrown—new enterprises and old houses. The capitalists, awaking from their deluding dreams, seeing everything tottering around them, no longer daring to confide in anybody or in anything, gather up the wrecks of their property, and hasten with it to the bank, the high position of which alone can reassure them. Is it not the only establishment? The privileged establishment protected by the State? Where can confidence be placed, if not here? Thus the accumulation of deposits recommences, to end again, some years later, in the same results. It may be conceived, however, that if, at such a moment, any unforeseen event were to occur, such as a great political commotion, the bank itself might be swept away, unless authorized by law to suspend cash payments, by giving a forced circulation to its notes. These, then, are the natural consequences of the one privileged bank system. Its first fruit is a revolting inequality in the division of profits; its last result, a catastrophe. It gives all to some, nothing to others. It robs these, to enrich those; and so far from compensating for this great fault, by offering to the public greater security, it surrounds it, on the contrary, with snares and dangers. Commerce is stimulated today and abandoned tomorrow. It is urged to undertakings that it is not afterwards allowed to carry out, and is thereby exposed to incalculable losses. It is an odious system, that, once properly understood, would not be for a moment tolerated by any civilized community.

If, now, it were asked, how the liberty of instituting new banks could remedy these evils, it seems to me the reply is very simple. From the day when, by the effect of the issues of the first bank, there would be in the market a certain amount of capital to be invested, the owners of this capital would unite to establish a second bank, that, by doing the same business, they might partake of the profits of the first. From that moment, the inequality complained of just now, in the division of profits, the dangers of engorgement in the market, and the sudden withdrawal of deposits, would cease. The facilities afforded to commerce would be as great, if not greater. There would only be this capital difference, that the funds, being henceforward loaned by those to whom they belong, would no longer be liable to those sudden withdrawals, so ruinous to all honest enterprise.


Minutely considered, in their particular circumstances and details, the commercial crises that have at different times occurred in France and England, will be found each to have its peculiar character—but generally considered as regards their predominating traits, and the causes that produced them, they are all alike. The most recent of these crises, that of 1846 and 1847, we will take as our term of comparison.

In 1844, the situation of the Bank of France was this:—Its discounts, including advances upon stocks, bullion, etc., had risen to the sum of 807 257 949 francs. This amount was a little below that of preceding years, and the bank complained of it bitterly. Private individuals loaned their funds at less than 4%, the rate fixed by the bank—thus depriving the latter of a portion of business, and restricting the field of its operations. As a consequence, its profits had fallen off, as in fact it had only realized that year the moderate interest of 9%, without, however, including State stocks bought with its own capital, and which made a return of 4 952 585 francs, which after all swelled to 18% the dividends of its stockholders. This amount, however, was too little to satisfy the directors. In the meantime, private capitalists were obliged to content themselves with a hardly earned 3% upon funds deposited, and that not without risk, with private bankers, to enable these to discount at a rate equal, or inferior, to that of the bank; or, on the other hand, if for greater security they deposited with the bank itself, they were obliged to resign themselves to do without any interest at all. The bank, nevertheless, accustomed to better dividends, found this condition a hard one, and aspired to greater profits. The ascending grade of the operations of the central establishment, excluding that of the branches, is as follows: —

Years. Discounts and


Gross receipts. Dividends.
1844 809 257 949 6 124 510   9%.
1845 1 101 408 383 8 441 478 12,4
1846 1 294 264 462 9 809 206 14,4

Thus the advances of the bank increased successively, from 809 000 000 francs in 1844, to 1 294 000 000 francs in 1846. From 9% its profits advanced to 14,4, excluding always the 4 952 585 francs of annual revenue from its own capital, while its whole business operations were carried on with the funds of others.

While the amount of discounts swelled thus from year to year, the bank coffers maintained themselves in a flourishing condition, notwithstanding circumstances otherwise unfavorable. Though the scarcity of breadstuffs had necessitated from the very commencement of 1846, a large exportation of specie, the amount in hand at the end of the first quarter of that last year was 202 530 000 francs—a condition apparently brilliant, and secure from all casualties. Unfortunately, this amount consisted almost entirely of private capital waiting for investment, and at any moment liable to be drawn out. Can we not here recognize the characteristic trait of this extraordinary condition of things brought about by privilege? Should we be astonished, then, if embarrassments arise, in such a state of things? No one, however, has more clearly pointed out the evils and perils of this unhealthy state than the Censors of the bank themselves, in their report of 1847. “For some time”, say they, “the bank has been reproached with leaving unproductive a considerable amount of capital, and with making too moderate a use of the immense credit acquired by the wisdom, method, and regularity of its operations. No account was taken of the extraordinary resources required by the increased development which characterizes its progress, and that of its branches, for several years past.

“The fact seemed to be unknown, that the large sums contained in the vaults and safes of the bank belonged, in a great measure, to the running account of the public, and particularly to that of the treasury; or that the bank was only the guardian of this wealth, and that its duty was imperative to watch over and preserve this deposit thus confided to it, and that it might unexpectedly be deprived of it by accidental circumstances, entirely beyond its own control. These provisions that had struck the attention of your administrators, have, unfortunately, been realized.

It is impossible to place the finger upon the sore with greater precision, to point out more clearly the evil and its consequences. The censors in this case were only too moderate. It was not a large portion, but the whole of the specie in the bank that belonged to strangers, and was liable to immediate withdrawal. With attention we may perceive here a double evil. On the one hand, a large amount of capital remains barren, and on the other, notwithstanding the exaggerated strength of its foundation, the imminent danger of its being swept away. Certainly they had cause, who complained of such sums being kept in an unproductive state, when trade might derive so much benefit from their use; but the bank was not wrong, either, when it asserted that it could not employ them without danger. Perhaps, even, it ought to have given greater weight to this wise and legitimate prevision. The fact is, that the exclusive privileges granted to a single establishment, had created a false position, in which the only choice was between two evils, without being able entirely to avoid one or the other—either to leave an enormous amount of capital unemployed, or to run blindfold upon danger. Suppose, on the contrary, that it had been permitted to establish a second bank, operating in the same way with the first—the new establishment, founded upon a part of the before unemployed capital, would have loaned it to commerce, thus increasing its resources by the like amount, and as this time the capital would not be liable to recall (it being then bank stock, and not a deposit), all danger of a crisis would immediately have disappeared.

In the position in which the bank had placed itself, what ought to have occurred did really happen. Already railroad enterprises, that had been for some time matured, opened a new and wide outlet for sleeping capital. The moment had been expected when in them a sure investment would be found. With a little more foresight, the bank directors might have descried this critical moment in the distance, and with a little attention and vigilance, they might have parried its effects; but attention and vigilance are rarely the qualities of privileged establishments.

Too happy in the continued increase of its discounts, promising a fruitful year and superb dividends, the bank looked no farther, and pursued the tenor of its way, without heeding the gathering storm. Soon payments on railroad stock began to be made; and towards the end of the year, the withdrawal of funds deposited in the bank began to make itself felt. The amount of specie that, up to the end of the second year, had maintained itself at 202 894 000 francs, and continued to rise during the second quarter of the third year, fell, at the end of the third, to 174 469 000 francs; at the expiration of the year, it did not exceed 71 040 200 francs—a falling off of more than 131 000 000 francs in six months. Here, however, is the statement of the successive reductions, from the report of the governor of the bank himself: —

In the month of July the amount was reduced                      francs 17 538 000
                           August 2 904 000
                           September 27 210 000
                           October 53 164 000
                           November 43 235 000
                           December 18 191 000
And finally from the 1st to the 14th January, 1847 10 604 000
              Total 172 847 000

Such, then, was the situation of the bank, at the end of the operations of 1846, and at the beginning of the year 1847; a position so false and so critical, that, for any other than a privileged establishment, it would infallibly have ended in complete prostration. What did the bank do to extract itself? According to the expression of the censors, measures of the highest precaution were judged necessary, which, in fact, means that expedients were resorted to. In the first place, the bank bought from the treasury, at a premium, 15 millions of uncurrent coin, (pieces of 15 and 30 sols), that had remained on deposit in the bank cellars. These were re-cast into current coin. Besides this, it procured in the market, and in the provinces, 4 or 5 millions of gold and silver, in different shapes, and, finally, it borrowed, from English capitalists, 25 millions, in the shape of ingots and dollars, that were immediately coined at the mint in Paris. Miserable expedients, these, clearly enough stamped with improvidence and disorder! Yet all these measures did not appear to be sufficient; recourse was at last had to something more decisive. The bank resigned itself to ask of commerce a few temporary sacrifices (these are the words of the report), and the rate of interest was suddenly raised from 4 to 5%. It was only trade, after all, that could repair, and that at its own expense, the errors of the bank, and it would have been lucky if it could have escaped with a momentary increase in the rate of discount, and if the general discredit (the natural consequences of these flagrant embarrassments) had not dealt it much severer blows. Notwithstanding all these expedients, and all these sacrifices, the crisis had not reached its last period. As the directors of the bank had foreseen, the withdrawal of specie did not cease with the end of 1846; indeed, the evil did not appear in all its gravity, until the first month of 1847. To turn it aside, redoubled precautions and new expedients were to be devised; and there was great cause for congratulation, when, in the beginning of March, the Emperor of Russia bought of the bank 50 000 000 of government stock, that certainly, under the circumstances, could not have been sold on the Paris exchange, without producing another shock. Was this enough of expedients? To save the bank, nothing less was necessary than the support of two governments and that of the English capitalists, without all of which the bank of France, notwithstanding the brilliant position that before it had flattered itself to be in, would not, perhaps, have escaped a complete suspension of payments.

Finally, the extraordinary depreciation of all sorts of negotiable securities, and of most kinds of merchandise, having turned back the outward flow of specie, the crisis lost somewhat of its intensity; not, however, without the experience of incalculable injury on the part of commerce, from the loss of credit, the increase of interest, and, above all, the depreciation of all sorts of securities in its possession.

In this same year, 1846, in which the bank had realized such handsome profits, failures in the commercial world were numerous, and there is nothing that ought to surprise in this, after what has been seen above. In Paris alone, from the 1st of August, 1846, to the 31st of July, 1847, there were 1 139 failures, with a total debit of 68 474 803 francs; yet it may be well believed that this amount of debt, large as it is, is but a feeble representation of the actual damage incurred.

Such are the real consequences of privilege in all their truth. Let it not be said that the crisis is due to other causes, as, for instance, the active speculation in railroads. Doubtless this is the immediate cause, but was not this excess in speculation produced by the privilege of the bank, in cutting off from capitalists the ordinary and regular means of employing their funds? According to the governor, we must look for the cause particularly to the scarcity of breadstuffs; but an importation of 2,5 millions hectolitres of grain in the first quarter of 1846, from the governor’s own avowal, had made no visible impression upon the reserved fund of the bank; on the contrary, it went up from 208 millions to 252 millions ; and in the second half, when the importation did not exceed 2 264 000 hectolitres, the reserve fund diminished by 172 000 000. It is evident that, whatever may have been the disastrous consequences of the scarcity, we cannot attribute to it the principle of the financial crisis ; and, moreover, had the speculations in railroads been still more active, and the famine still greater, both combined would not thus have shaken the bank and the whole commercial world, if this establishment had been in a better condition; but in the position in which it had placed itself, it was evident that, sooner or later, it must have found itself seriously embarrassed.

I have dwelt at some length on this crisis of 1846-1847, because it is nearer to us, and it was not without a certain influence on the events which followed. We must not, however, suppose, that it offers anything exceptional in its development, and in its course. All those crises that France has undergone since the definitive establishment of the bank—for instance, in 1811, in 1819, in 1825-1826, and in 1837, with a few accidental peculiarities, have had a similar character. They were preceded and followed by the same circumstances; so true is it that the first cause does not change. Each time the discounts of the bank are perceived to swell from year to year, as also its profits—this symptom infallibly announces an approaching crisis. See the results for the five years from 1807 to 1811:—

Years. Notes discounted. Profits.
1807                                     francs 333 267 000 2 456 200
1808 557 495 000 4 152 400
1809 545 446 000 4 243 800
1810 715 038 000 6 057 700
1811 391 162 000 4 791 100

Thus the total of securities discounted, that had only amounted, in 1807, to 333 267 000 francs, increased, in 1810, to the comparatively enormous sum of 715 038 000 francs; and the amount of profits had nearly trebled in the same time. It was the foreshadowing of serious embarrassments, that, in fact, manifested themselves towards the last of the year 1810, and in the following year. The crisis of 1819, was preceded and followed by precisely similar circumstances. See the results of the five years following 1815: —

Years. Notes discounted. Profits.
1815                                      francs 203 565 000 1 278 400
1816 419 996 000 3 203 600
1817 547 451 000 4 608 300
1818 615 999 000 4 848 200
1819 387 429 000 2 692 100

Here, again, we see the total amount of discounts swelling from year to year, and finally attaining an enormous amount in the very year which precedes and determines the crisis. The maximum and the minimum of notes in hand rises in the same way, as also the profits, which, from 1 278 400 francs in 1815, advance progressively to the sum of 4 848 200 francs in 1818. The same results as regards the crisis of 1825-1826, occurring after ten years of peace. The total of discounts, 384 645 000 francs, in 1821, went up, in 1824, to 489 346 000 francs; and in 1825, the very year in which the embarrassments commenced, they amounted to 638 249 000. Thus, each time that the discounts by the bank increased in an unusual manner, the profits increased in the same proportion, and this double result, apparently so favorable, was the certain forerunner of an approaching catastrophe.

Seeing the invariable coincidence of the same facts, it can hardly be permitted to mistake the true cause of these perturbations. It is evidently to the unusual increase of bank discounts that the evil is to be attributed. We shall, however, see these inductions confirmed, by examples other than those of our own country. Are we to infer, from this, that the extension of credit to commerce is in itself an evil? The belief is not permitted to us, after having attentively observed what occurs where free banking is allowed; and, moreover, it is contrary to reason. No, this extension in itself has salutary effects. Here, monopoly alone engenders the evil, by the creation of a position doubly false; false for the capitalist placed by it in a position in which it becomes impossible to give his capital regular employment—false again for the bank induced by it to operate only, or chiefly, with the funds of others. Cut off this principle of disorder, by proclaiming the entire liberty of banking, and benefits alone will remain from the use of credit.


In England, where credit and banking have for a long time held so prominent a place, writings on these important subjects may certainly be counted by hundreds, if not by thousands; and as the inherent vices of the English system have unfortunately engendered many crises, the study of these phenomena has naturally received much attention. Among the most recent of these writings are to be distinguished those of Messrs. Tooke, Lloyd, and Torrens, and particularly the work of Mr. T. Wilson, editor of the Economist, and member of Parliament. [2] Whatever may, however, be the merit of several of their works, in which are often to be found ingenious views and profound reflections, I will venture to say that their authors have almost always gone astray, not from want of knowledge, but rather from refining too much. Their chief mistake has been to dwell upon the particular circumstances of commercial crises, without studying sufficiently their general and dominating character—to consider their variations instead of their traits of resemblance, and, consequently, stopping almost always at the immediate or secondary causes by which they are determined, instead of going up to the primordial cause which engenders them. An American writer, Mr. H. C. Carey, of Philadelphia, already known by several excellent works, appears to me to have been more fortunate, in this respect, than the English writers. [3] Perhaps, also, these last, too near the theater of events, and better placed to seize its details, have not been, for the same reason, able to take in as readily the “tout ensemble”. So far back as 1838, Mr. Carey had clearly shown the first cause of these perturbations, the return of which is almost periodical. That cause is not different in England from what it is in France, and that it should be so may be readily understood, from the fact that the system of the two countries is the same, except that the privileged bank of England operates on a much larger scale than that of France, and that it encounters a greater number of secondary institutions in the provinces. We shall see that facts and figures are not less significant on the other side of the channel than on this; but to render these facts and figures more conclusive, another element must be added. Notwithstanding the plain indications of experience, a great number of men in England persist in seeing the first cause of the evil in the abuse of the issues of notes, which, at certain seasons, as they supposed, would exceed just limits, and derange the circulation. It was because of this idea, that, as far back as 1826, English banks were forbidden to issue notes of a smaller denomination than five pounds. The same idea led to the proposition, by Sir Robert Peel, and the adoption by Parliament, of the famous bill of 1844, that limits the issues of English banks. It is necessary, then, to show the rule for these emissions. It will be seen that, while they were somewhat irregular, up to 1826, a period when none but private banks existed in the counties, composed of less than six associates, they became, on the contrary, after the creation of the joint stock banks, so regular and steady that it was difficult to remark any sensible difference, even at the periods of the most serious crises.

Let us see, first, how the circulation, the discounts, the deposits, and the specie, of the Bank of England regulated themselves, at the approach of the terrible crisis of 1825-1826: —

Notes less than £5. Notes more than £5. Deposits. Loans. Specie.
August, 1822 £855 330 £16 609 460 £6 399 440 £17 290 510 £10 097 960
February, 1823 681 500 17 710 740 7 181 100 18 319 730 10 384 230
August, 1823 548 480 18 682 760 7 827 350 17 469 390 12 658 240
February 7, 1824 486 130 19 250 860 10 097 850 18 872 000 13 810 060
August, 1824 443 140 19 688 980 9 679 810 20 904 530 11 787 470
February 7, 1825 416 730 20 337 030 10 168 780 24 951 330 8 779 100
August, 1825 396 343 19 002 500 6 410 560 25 106 030 3 634 320
February, 1826 1 375 250 24 092 660 6 935 940 32 918 580 2 459 510

What does this table show? First, the loans swell gradually from £17 290 510 in 1822, to £25 000 000 towards the middle of 1825, the period immediately preceding the crisis, and to more than £32 000 000 at the beginning of 1826, when the explosion took place. Is it now evident that this growing development of discounts must have displaced, and rendered idle, a large amount of private capital, thus deprived of employment.This may be judged of, moreover, by the continual increase of deposits, which rose, in February, 1825, to £10 168 780—an enormous sum, when it is considered that these deposits yielded nothing to their owners.

This state of things was, no doubt, well calculated to excite speculation; nor must we be astonished to see its spirit everywhere aroused. Hear, however, the English writers, and they will tell you it was brought about by particular causes, forgetting but one, and the most important of them all. For instance, Mr. Wilson, though his work has great merit, says:—“In the course of the year 1824, speculation was overstimulated by two sorts of circumstances. The great success of loans to different continental governments, during the five preceding years, with a single exception, and the high price to which foreign stock had risen, had caused among our capitalists a great thirst for similar investments. Circumstances contributed, also, to place foreign mines in a more favorable light. But one of the circumstances most felt as having led, finally, to the panic of 1825, and giving to that crisis a distinct character, is that the importations of goods were generally small, in 1824, and barely equal to the consumption; so that a considerable rise in prices manifested itself, particularly toward the close of the year. All these circumstances concurred, toward the end of 1824, to produce a speculative fever, in the first months of 1825.” [4]

What clearly proves that there must have been a more general cause for this fever of speculation, is the very variety of objects to which it attached itself. I give here the enumeration by the same writer:—“1st. Speculation in foreign loans. 2nd. Speculation in foreign mining. 3rd. Speculation in the country itself, in land and houses, which went up suddenly to very high prices, particularly in the vicinity of large cities. 4th. Speculation in insurance, mining, railroad, steamboat, and other stocks, loans,etc. 5th. Speculation in all kinds of merchandise.” Is it possible, I ask, that the same spirit should have been aroused everywhere at the same moment, if it had not been by a common and general cause? Now this cause was nothing more than the excessive development of bank discounts, and the impossibility that the capitalists could, in view of the privileges of the bank, find, elsewhere, regular employment for their capital.

It may be seen, in the preceding table, that the specie, which had risen, in February, 1824, to £13 800 000, fell to £2 459 000, in February, 1826; which makes a decrease of more that £11 000 000 sterling, in two years. More, it fell to even less than £2 000 000, and the bank saw itself reduced so low that it would probably have failed, if it had not found, in time, in its coffers, a million sterling, in notes of a smaller denomination than five pounds, which it hastened to issue, to satisfy its most pressing wants.

Another thing in this table must strike the reader. It is that in 1825, and particularly at the commencement of 1826, the specie in the bank did not nearly equal the deposits that it owed, and hence the deduction that it operated exclusively with the funds of others, for which it paid no interest whatever. As to the issue of notes, it may be seen that it was, at this period, subjected to considerable variations, which have not been nearly so much felt since joint stock banks have spread over the country. “If the people of England”, Mr. Carey [5] very judiciously remarks, “had had the privilege of establishing another bank, on the principle of limited responsibility on the part of the stockholders, and such an one as could have absorbed, in 1824, the excess of deposits, the specie would have been moved into another street, instead of going to another country”, and the bank would have declared smaller dividends, but the country would have escaped the severest disasters.

The crisis of 1837, quite as severe as that of 1826, does not differ from it in its essential circumstances. The different phases of the circulation, discounts, funds in hand, and deposits, in the years that preceded, were as follows:—

Circulation. Deposits. Advances. In bank.
December 31, 1833 £17 469 000 £15 160 000 £24 567 000 £10 200 000
                  28, 1834 17 070 000 13 019 000 25 551 000 6 978 000
                  26, 1835 16 564 000 20 370 000 31 764 000 7 718 000
                  13, 1837 17 361 000 13 330 000 28 971 000 4 545 000
February   12, 1839 17 868 000 14 230 000 31 085 000 4 032 000

It is always the same fact reproducing itself. The advances or discounts increase, capital becomes superabundant in the country, the amount of deposits rises from 15 to 20 millions sterling, the stockholders of the bank receive large dividends, and other capitalists know not what to do with their funds, for which they get nothing. They finally seek investments abroad, instead of employing their capital at home, and the withdrawal of deposits commences. For a moment, the bank endeavors to limit its operations (December, 1836), but it results in general distress, and failures begin. The bank is then constrained to extend its discounts again, in the face of continued sinking of its specie, and at the risk of ending in a complete suspension of specie payments.

The figures that we have just grouped, are remarkable on more than one account. Beginning with the month of December, 1833 [6], the specie commences to diminish, whereas the amount of deposits continues to swell. From that time, the sum in the bank is very inferior to that of the deposits, and by the month of December, 1835, the period when the withdrawal commences, the disproportion becomes enormous, which proves that the bank gives way more and more to the fatal practice of operating with funds not its own, without having bound them to its fortunes, by paying interest on them.

Another circumstance, not less worthy of attention, is, that during all this period of agitation, the total amount of the circulation varies little, and much less, for instance, than in the years anterior to 1826. This circumstance proves, first, that the joint stock banks established in the provinces in consequence of the law of 1826, had furnished an element of regularity which did not exist before, and that I was right in declaring, in the beginning, that the more banks are multiplied, the more subject they are to the rule. We must hence conclude that it is not in the irregular or intemperate emission of notes that the evil lies, since, even at the most critical periods, these issues have varied very little in England, and that it is a mistaken idea of certain English economists, with Sir Robert Peel at their head, who thought, by endeavoring to limit them, to prevent the return of commercial crises. They sought the evil where it did not exist, and refused to see where it did. It is in this light, particularly, that the bill of 1844, otherwise so badly combined in its practical dispositions, is a gross error.


In the face of these very significant facts, what must be the thoughts of these blind and obstinate men, who go about denouncing what they call the tyranny of capital, as the cause of our social evils? Is there any sense whatever, in this denunciation? If there is, where is it? Certainly there are great evils in the society that surrounds us; but is it not puerile to attribute them to a pretended tyranny exercised by capital over labor? By what signs does this pretended tyranny reveal itself? It cannot be to the interest of capital to oppress labor, without which it can do nothing, and which, on the contrary, it must follow and seek out with eagerness, in every direction. In fact, however, it is not the case. The truth is, that in the condition of things, of which I have just drawn a faithful picture, capital itself is frightfully oppressed by an iniquitous monopoly. This truth, moreover, applies (mark it) as well to the small capital as the great one, and it must not be forgotten that the mechanic or the laborer becomes himself a capitalist, the moment the fruits of his economy begin to accumulate on his hands. Our socialists would then be nearer the mark if they attributed the evils of the present state of things to the exercise of tyranny over capital; but then they would be obliged to concede that what they call the “bourgeoisie”, suffer quite as much as what they call the people, and this acknowledgement might perhaps interfere with their plans.

Tyranny over all kinds of capital is the distinguishing character of the system of privileged banks. The result in ordinary times is, for holders of capital, loss of interest and cruel embarrassment, and for the country, a fatal paralysis of a great part of the public stocks, an habitual stagnation of business, and, finally, in the effort to escape, a catastrophe. If labor suffers from this state of things, which is not to be doubted, it is because it must, per force, feel the reaction of all the disorders with which capital is affected.

It becomes necessary, now, to explain how it is that free banking would prove a certain remedy for all these evils. Let us suppose, that in 1844 or 1845, it had been permitted to establish another bank in Paris. The new one would have collected, to form its stock, all the idle capital lying useless in the cellars of the bank, and elsewhere. Discounts of good notes would not have diminished on that account, for the two banks would have competed for them. Thus, business, instead of being impeded, would have been more active than ever; but a greater part of the idle capital having now found employment, speculation in railroads would not have been so rife. In any case, the new bank, being responsible to no one for the funds loaned by it, (since they belonged to itself), might have allowed this speculation to spread in its own way, without being in the least affected by it. As to the first bank, being now deprived of a large part of the deposits heretofore confided to it, it would have felt, from that moment, the necessity of recalling its own proper capital, until now almost entirely absorbed in the purchase of stocks, and instead of operating almost exclusively with the funds of others, it would have used its own, and thus have been fortified against the future crises. In this situation, railroad speculation, and even short crops, might have supervened, without causing the slightest shock.

If the establishment of a second bank had not proved sufficient (which is very probable) to absorb all the idle capital, a third might have been instituted, which would have strengthened the position still more. Discounts would doubtless have increased, but to the great benefit of commerce and manufactures, and without danger to the country. The three banks being each day restrained more and more to the use of their own proper funds, the possibility of a crisis would have been farther and farther removed. Each one, however, would have added something to its own resources, by the issue of a certain quantity of notes; but unless the denomination of these notes had been lowered, the amount of circulation would not, on that account, have swelled, for this circulation is regulated by the public, without the bank having anything to do with it. Thus, trade might have taken a free course, without dreading any perturbation whatever; but it is hardly necessary to say that the existing bank would have seen its profits sensibly diminished. After the establishment of a first rival bank, it would have seen its profits diminish not by a half, since the total amount of discounts might have increased, but perhaps by a third; for instance, from 16 to 10%. A third bank would have reduced the profits to 7 or 8%, and a fourth to 5 or 6, which is yet such a respectable rate of interest that a majority of capitalists would be glad to get it if it could be done without risk or labor.

If it is asked where this multiplication of banks is to cease, the reply is simple. It would stop at the moment when the profits derived for them would not exceed those to be obtained in other directions. In a word, if France desires to better her condition, this is the route to pursue, and it is a road as easy as it is safe. It is by free banking that present evils are to be remedied, and a prosperous future secured. Let us hasten, then, to proclaim this salutary principle. Some other measures, it is true, would still be necessary. For instance, commercial association must be freed from the bonds now imposed upon it, for it would be useless to have permitted companies to do bank business, if their regular organization remained—nearly impossible, as it now is, by the present system of legislation. Perhaps, also, to accelerate the return of credit, it would be necessary to abrogate the usury laws—laws bad at all times, and particularly injurious at the present moment; but these last measures are, as it were, corollaries of the others. Let us proclaim that the French people may, in the exercise of a natural right, transact all kinds of banking business in their own way, as they understand it, either individually or in companies. This is the principle in all its latitude, and as it ought to be understood and proclaimed.On this condition, and on this alone, will manufactures and commerce rise from their ruins, to become more flourishing than they ever were before.

C. C.


[1] This was done for the Bank of France, both by the Emperor of Russia, and the Bank of England.

[2] Capital, Currency, and Banking. London: 1847.

[3] The Credit System in France, Great Britain, and the United States. By H. C. Carey. Philadelphia: 1838.

[4] Capital, Currency, and Banking, p. 172.

[5] Credit System, Chap. VIII.

[6] It had even risen to £11 078 600, in the month of September, preceding.

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