Napoleon III confronted with the Economic crisis of 1857-1858

Author(s) : WOLFF Jacques
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1857 was an important year for the Second Empire. It was the year of the first slump. Napoleon III did not remain inactive, however. By reviewing his projects in the light of the obstacles to those projects, he firstly came to the conclusion that an economic slowdown was likely. But he also came up with some ideas for overcoming it more or less completely. His projects are well-known. The first, also one of Napoleon I's, was to found a dynasty. By surviving – you might almost say, by overcoming death, or at any rate by appearing stronger than death, that dynasty would be remembered. The second project was to bring power to French society. In other words, to become a major power in Europe, at least continental Europe. This project manifested itself in the establishment of the Empire by waging war against Russia, thus aiming to prevent it from controlling the Straits,(1) and in the attempt to increase the Empire's influence over Europe (1854-1856). Soon thereafter (1859), it was also to appear in its support in the struggle for Italian unity against the Austrian Empire, thereby diminishing Austria's power in the centre of Europe and also limiting its pretentions of hegemony over the Germanic Confederation.(2) It was also reflected in Napoleon's desire to extend French influence throughout the world.(3)
Political power cannot be achieved without demographic and economic power, and large-scale and constantly renewable resources were therefore vital. Every effort was made to promote economic, monetary and financial development. The process of industrialisation, which had begun more than three-quarters of a century earlier(4) and which since 1830 had been accelerating, took off between 1851 and 1852 spurred on by growth in certain branches of industry such as the railways.(5)
Economic power must also allow for improvement in the welfare of the individual.(6) It was important to combat the lack of material goods and physical poverty. In 1844, Napoleon III wrote a pamphlet entitled “L'extinction du paupérisme”. He did not abandon his ideals. For him, an increase in the national product which was faster than the growth in population had to be reflected in an increase in the standard of living(7)(8).

This acquisition of power and well-being took the best part of a half century. Napoleon III knew that time was of the essence. He was 43 in 1851: the Prince Imperial was not to be born for another five years. The Empire had therefore to last until the end of the 1870s. In fact, from an economic point of view alone, Napoleon III's position was one of great uncertainty. Like the economists of the time, he did not understand completely the characteristics of economic development, for the simple reasons that a) not all of the data was available(9) and b) since the phenomenon of industrialisation was too recent, there was not enough past to look at with hindsight in order to understand recent phenomena and try to forecast future trends. However, this statement must be qualified.

He knew a certain amount, economists of the time had come to certain conclusions in this respect,(10) and he had no doubt thought hard about the matter during his stay in England. Thus, the medium-term fluctuations of economic activity were acknowledged and had been discussed. Emphasis had been placed on the movement from boom to bust, in other words, on the “slump”. These medium-term fluctuations had occurred in agriculture as well as trade and industry; and they were spreading.(11) They followed the movement of the British economy,(12) and they had profound economic (for example, drops in prices), social (unemployment) and political repercussions (riots and social unrest).(13) They had also been partly explained in different ways by Ricardo, Malthus and Say in the first quarter of the century. They had highlighted the replacement of workers by machines, the lack of demand and collective errors as to future requirements. There is no doubt that Napoleon III was convinced that such fluctuations were bound to reoccur, to a greater or lesser extent, sooner or later, and that he had to be ready to face up to the worst case scenario.

There were also those factors unbeknownst to him but of which we are aware today which make it easier for us to see how far luck was on his side. Fluctuations in economic activity do not only occur in the short and medium term. They also occur over the long term periods of about 25 years. It was not until the 1920s(14) that this cyclical process became apparent. An English economist was to discuss it at the beginning of the 1880s(15); he had been preceded by another little-known English economist of the 1840s.(16) Thus, long-term price rises and falls succeeded one another, that is: a rise from 1789 until 1812-1817, a fall from 1817 until 1848-1850; and another rise until 1872. In other words Napoleon III was, without knowing it, being carried along by a long-term upswing, one of the characteristics of which is that the medium-term fluctuations which constitute the upswing contain long powerful boom periods and relatively short, weak periods of depression.(17) However, he had no choice but to act, unaware of this favourable movement, which acted as a form of conditioning and made his task easier.

Thus the thorny and recurring issue with which Napoleon III was confronted as of 1851 was quite simply how to achieve the goals pursued when economic uncertainty continued to be so great. Would there be a fluctuation in economic activity and if so when, and to what extent? What would be its economic, political and social consequences? What would happen to the government? How would such difficulties be overcome? Each day the Emperor read reports arriving from French representative bodies in the principal foreign countries, taking note of the observations sent to him on all sides, studying the positions of the Banque de France, and endeavouring to anticipate developments as they happened, which was no mean feat! 1857 was the year when the long-feared difficulties were to surface.

A boom in general and a boom in particular, 1850/1851-1857

The expansion of the years 1850-1857 was general and characterised by certain specific features in France.
I – The boom in the United Kingdom and the United States
In both of these countries the boom was rapid and uncontrolled.
1) In the United Kingdom, expansion had two main causes. One was the discovery and the exploitation of land containing gold. This led in the first instance to an increase in the number of external markets (1850),(18) and in the second to a rise in the export of capital (and even of manpower) and in the demand for freight, which itself gave rise to an increase in freight prices.(19) There was a stimulation of the shipbuilding industry, with the tonnage of ships under construction and launched not only increasing per se but also increasing exponentially in rhythm with the building of new ship yards.

The other, more important, reason was the building of the railway network. With the drop in prices at the end of the 1840s, the drop in interest rates and salaries, and the savings made on overheads, profit prospects were improved. Net revenue per kilometre increased by 10%,(20) and this also applied to the revenue/equity capital ratio.(21) Rails were being manufactured not just for the domestic requirements but also foreign markets, in particular the United States.

The iron and steel and the mining industries were thus caught up in this process of development. New factories were built and new pits opened. Between 1850 and 1857, the production of cast iron increased by 60%.(22) Similarly, new textile mills were built in Lancashire,(23) and the number of textile businesses increased(24) as did spindles(25), looms and the number of workers.(26)

This boom was accompanied by a rapid rise in wholesale prices.(27) The price of corn almost doubled(28), as did the total quantity of discounts.(29)

2) The United States also went through a period of expansion marked by an increased economic intensity. The railways had a knock-on effect on the economy; the length of the railway network increased 2 1/2 times between 1851 and 1857 as a result of large-scale investment(30). Here again the sectors benefiting from general economic prosperity greatly increased their production (for example cast iron and coal). Town planning (the development of existing towns and the creation of new towns) pushed up the price of land. However, more than for building land, speculation focused on undeveloped land, which the State granted to immigrants and to its own citizens in return for finance, and which had been made accessible and economically viable by the railways.(31) Similarly, the production of consumer goods in greater quantities accompanied that of production goods. There was a strong development in credit(32) and the number of banks increased dramatically,(33) developing business still further between December 1856 and June 1857.(34)
However, before long, expansion slowed in both countries, as did the rise in prices, and widespread disillusionment set in. The gold mines failed to live up to the expectations of many and the recently-built railways did not produce the results hoped for. Production costs had been overestimated, and growth prospects diminished, with the monetary and financial situation deteriorating still further. Furthermore, large quantities of agricultural products had been stockpiled.
It would only have taken a small event to cause a slump and for the situation to be transformed from one of prosperity into depression.
II – Another boom in France

The specific nature of the medium-term boom was that it had become an integral part of political order. Expansion was both encouraged and supervised. Napoleon III ensured that it was regular in various ways, but the effort was not sufficient.

1) As of 1852, immediately after the coup d'Etat, a powerful impetus was given to railway companies, this sector being recognised as the driving force behind the other sectors of the economy and helping to create new industries. The authorities tried to find solutions to the inflexible nature of concession contracts prior to 1847(35); to do so, they altered the manner in which the State participated in the building of the new lines and the term of the concessions. The short-term concession gave way to the long-term concession, and State participation in kind (in the form of execution of a part of the work) was replaced by a financial participation, in the form of a subsidy. The various companies were merged so as to reduce overheads and to make State control easier.(36)

The fall in prices, salaries and interest rates apparent since 1848 made it possible and advantageous to create new lines. Under these circumstances, the measures thus introduced brought about a demand for a series of concessions, and people expected that at the end of the year new building would form “the beginning of a return to the industrial and commercial boom interrupted in 1847”.(37)
However, tension between the State and businesses soon become apparent.
On the one hand, with the benefit of hindsight, the government sought to limit interruptions in expansion and avoid a railway “fever” similar that which had preceded the 1847 slump. As of 1855, they decided to refuse all new concessions and thus development of the network rose from 590 in 1854 to 890 in 1855, falling back to 665 in 1856.

On the other hand, business interests of all kinds and guilds, seeing the matter only in the short-term, protested at this slowing-down in building, which by a knock-on effect affected industry as a whole.

The government then gave way and increased the number of concessions and thus kilometres of track. However, rather than simply making up for lost capacity, it made the mistake of authorising an unprecedented increase, thus wiping out all of its prior efforts at adjustment. In 1856, it gave concessions for 4,205 new kilometres, which led to the building of 1,263 kilometres in 1857, that is to say an increase of a little more than one third as compared to 1855 and almost double as compared to 1856. Control thus gave way to a tremendous variation.

Similarly, the problem of financing took on another dimension. Funds claimed for such building work rose, in absolute value, from 250 million French francs in 1852-1854 to 500 million in 1855 and 520 million in 1856. Their origin changed, and although between 1848 and 1851 two-thirds were supplied by the State, this figure was no more than 10% between 1852 and 1856. The knock-on effect on basic industries took place as in the other countries. The production of cast iron more than doubled(38) as it did for iron and steel,(39) it tripled for iron ore(40) and increased by 80% for coal.(41)

Production of consumer goods also increased (cotton and silk, for example) as did building in general, due to migration from the country to the towns and cities. This also applied to foreign trade and the revenue of private individuals.(42)

2) The second strategy for control concerned credit. The development of trade in quantity and in value was naturally accompanied by that of loans. The number of bills of exchange presented for discount increased (thus the portfolio average of the Banque de France rose from 115 million French francs in 1851 to 556 million in 1857, in other words an almost five-fold increase.(43) For nearly half a century, the effects of an expansion in credits, the ratio it must maintain with the banks' bullion reserves, and the various links between the items of the money supply in a convertibility system had been studied and understood. Oversized loans could only have negative impact on economic activity; there was a therefore a need for the volume and the cost of credit to be controlled.

In this climate of economic activity regulation, two measures were taken.

a) One, taken in 1855-1856, was the struggle against speculation. The Bourse had welcomed the government of Napoleon III, because it brought security to various interests, gave a boost to business and an impression of strength and durability. This had resulted in a rise in stock prices of almost 50% in two years.(44) The Paris market seemed to have become the European market. The quantity of listed securities had increased.(45) The mushrooming in borrowing by the State, the “départements”, the towns and cities, by the Crédit foncier bank, and by French and foreign railway companies, had been spectacular. As the news from the Crimean War fluctuated between a close and the prolongation of hostilities, so stock prices fluctuated, thus increasing the possibilities of making profit. The momentary fall in prices at the end of December 1855 had not dampened enthusiasm.

The government rapidly realised that savings were being syphoned off to the Bourse rather than being invested in railway companies and, above all, that speculation was rife. It thus decided to take measures to calm “feverish activity” down.

On 8 March, 1856, the Minister of the Interior, Billaud, asked the Chief of Police to seek out business agencies which claimed to have hidden information from “official spheres” and which traded in what they called their credit and information. On 9 March, Le Moniteur expressed the government's intention to resist “exaggerated” snowball effects, and the government itself decided “that no undertaking giving rise to an issue of new shares will be authorised this year”.

On 17 July, a law was passed for the purpose of combating over-frequent abuse and fraud in floated companies which, not being subject to government authorisation, were sprouting everywhere. It forbade companies with capital of less than 200,000 francs to divide that capital into shares of less than one hundred francs, and where companies exceeded that amount the minimum share was to be 500 francs. Furthermore, it required that a company could not be established definitively until all of the share capital was subscribed, and that each shareholder had paid at least a quarter of the shares bought, that said shares could not be traded until two-fifths of their amount had been paid up, and that they should be registered shares until fully paid up. It also set up a Supervisory Council.

On 1 January, 1857, an access fee of one franc was instituted for the Bourse des valeurs – stock exchange – and of fifty centimes for the Bourse des marchandises – commodity market – in favour of the City of Paris. A little later, the Crédit mobilier bank was refused the right to issue bonds.

Naturally, these measures were criticised(46) on the grounds that they caused the government to “restrict the general boom”. In this respect, the measure of March 9 1856 was blamed for the sluggishness of securities and stock and for the weakness which had begun to adversely affect the market; it was also accused of holding back the entrepreneurial spirit at the risk of “killing it completely.”

b) The other measure was the continuation of the Banque de France's exclusive right on 9 June, 1857.

The Act of 1840 had extended this exclusive right until 31 December, 1867 with the faculty of substituting for the said date that of 31 December, 1855. With this faculty abolished, it proved necessary to take steps. Attacks and criticism had become increasingly virulent because the considerable demand for credit brought about by the development of business, the decrease in cash resources and portfolio inflation had led the bank to take restrictive measures (raising of the discount rate to 6% in January 1856 and then, after a return to 5%, a rise to 6% again; the duration of discount was reduced from 90 to 75 and even 60 days, the amount of discounts having increased from 2.9 to 3.7 billion francs between 1854 and 1855). Furthermore, arrears from the Crimean War could be reduced by such a measure.

The capital of the Banque de France was then doubled (from 91,250 to 182,500 shares), the new shares being exclusively allocated to the owners of the old ones, which, according to the reasons given for the law, constituted “a means of increasing the credit of the Banque de France and, consequently, the strength of its share”. The one hundred million thus obtained was to be paid to the State in 1859 to lighten Treasury deficits in return for allocation to the Bank of the corresponding amount in 3% bonds during the month prior to each payment.(47)

Furthermore, the Banque de France was granted greater room for intervention. This included: making advance payments on the bonds of the Crédit foncier bank as it was able to do with public funds and the stocks of the railways and the City of Paris; raising its discount rate above 6%, depending on the circumstances; and finally, lowering the minimum limit of its notes to fifty francs. It also had to make a permanent advance payment to the Treasury of 80 million francs, to be reduced to 60 by annual repayments of 5 million.(48)

c) There is one area of action/management which is inseparable from currency, and credit: public finance, which had been forgotten, or rather badly understood. In fact, it was widely believed that the annual budget of the State had to be balanced with revenue and expenditure equal. This was a dogma which had always to be applied, and it was subject to the most severe economic sanctions.(49)

However, a distinction must be made between a voted budget and a realised budget, as the latter may differ greatly from the former and be thus more or less greatly unbalanced.(50) Above all, although this was not to be understood properly until the end of the Second World War, a balanced budget may have an expansionist effect on the economy due to the sole fact that expenditure has increased from one year to the next.(51) In this respect, the years 1855-1858 take on a completely different aspect.

Voted budgets increased. Thus, in 1855 there were 1.562 million francs of expenditure and 1.566 million francs of revenue (with an authorisation to issue Treasury bonds for 250 million francs). In 1856, it was 1.598 and 1.601. In 1857, it was 1.698 and 1.709, and in 1858, it was 1.717 and 1.737 million francs. In four years, expected expenditure increased by 155 million, a 10% rise on that of 1855.

As of 1856, realisation was quite different. In that year, expenditure stood at 2.195 million and income was 2.307 (regulating law of June 16 1859). In 1857, expenditure was 1.872 and income was 1.911 (law of July 6, 1860). In 1858, expenditure was 1.858 and income was 1.890 (law of July 3, 1861). The effects were complex and cannot be established with certainty. On the one hand, the differences between planned and realised budgets were clear, attaining, for expenditure 10% in 1857 and 1858, and 40% in 1856. On the other hand, there were considerable downward fluctuations between 1856 and 1857 (-13%), thus putting a brake on expansion coupled with the fact that income had always been greater than expenditure (by 2 to 5%). This may have had a slight slowdown effect. Perhaps, involuntarily, the budget contributed to regulating economic activity.

Thus, the conclusion can only be a qualified one. Napoleon III's intended to achieve strong and regular growth, and the means for taking action and achieving this goal were created, and new structures were set in place. However, the implementation of these measures was not yet perfect and, moreover, the implementation took place relatively late (1856). The acceleration of expansion could not be maintained.
The French economy was to suffer the effects of a slump which came from abroad and which it could not avoid.

An uneven slump, 1857-1858

The slump occurred in the third quarter of 1856, and its intensity was greater or lesser depending on the country. It was however relatively brief, particularly in France.
I – The role of the United States

The slump took hold in the United States in 1857. June, July and August were difficult months for business. And this difficulty was passed on to the banks owing to the ever-increasing quantity of bills presented for reimbursement and requests for discount.

The good harvest (in physical terms) in Europe dealt a mortal blow to agricultural speculation. Storage of agricultural products had greatly developed, and exports to Europe had decreased, creating a trade imbalance. The latter now had to be paid off in gold, while people sought to maintain high prices by further increasing stocks. Thus, the demand for credit increased at a time when its offer was decreasing given the insufficiency of the metallic base. From June to August the price of wheat dropped and there was a weakening of value in all kinds of goods. Railway shares began to fall on the New York stock exchange as of July. The process now began to accelerate.

In August, under the influence of a strong demand for credit, the Ohio Life and Insurance Company bank suspended its payments.(52) On 22 August, the banks, in agreement with trade, momentarily suspended their operations in New York.(53) They were followed at the beginning of September by the Maryland and Pennsylvania banks, and then by other large banks in Baltimore, Philadelphia and Boston. The discount rate sharply increased.(54) During the month of September, a rapid, violent fall in the price of railway shares occurred in New York,(55) and on 13 October, the banks, by joint agreement among themselves and with trade, suspended their bullion payments, before resuming them on 11 December.

The monetary and financial crisis was in effect over by the end of the year.
The repercussions for the economy were severe and drawn out. The growth of the railway system slowed down from 20 to 30%(56), while income decreased.(57) The number of bankruptcies increased(58) and trade remained very depressed during the first half of 1858. The decline in the raw materials industries was just as widespread.(59)
II – The spread to the United Kingdom

The American slump immediately spread to the United Kingdom. The first effect was an exchange crisis brought on by the trade imbalance. The Bank of England's reserve decreased by about a half(60) and on October 8 the discount rate went to 6% and on the 10th to 7%, but this did not prevent the outflow of gold. It was compounded, as in the United States, by a domestic credit crisis. The fall in prices had three effects: it affected the circulation of goods, it obliged traders to use credit, and it thus brought about the collapse of banks committed to hazardous operations.(61)

Once again the slump was brief but intense. In November, the reserves of the Bank of England decreased sharply(62), as did the notes reserve(63). On 12 November, the Chancellor of the Exchequer promised a compensation law in the event that the Bank of England was obliged to breach the provisions of the 1844 Banking Act. Up until 18 November, this brought about a strong demand for gold in order to pay off imports which no longer corresponded to imports or notes. The surplus issue of notes as compared to the figure set by the 1844 Act came to 0.928 million pounds on 20 November and was down to 15,000 pounds on 30 November.

Until 18 November, bullion was needed as this was a currency crisis. As of 19 November, the situation became one of settling a domestic crisis for which notes were enough. The portfolio of the Bank of England increased rapidly and the discount rate reached 10%. The outflow of gold ceased as of November 25 and the demand for credit reached its maximum level on December 2. Once again, the monetary and financial crisis was over by the end of the year.

The consequences were also severe. Railway building had already decreased before 1857,(64) and half of the expropriation permits went unused. Revenue fell.(65) As of the month of November, working time in the metallurgy industry was reduced(66) and at the end of the year some blast furnaces were shut down.(67) Salaries fell by 20%(68) and unemployment increased. Consumption of cotton fell,(69) while available stock increased and exports of cotton material decreased.
III – The slump in France

In France, the slump was different and can perhaps be described as relatively moderate compared with that of the United States and the United Kingdom. It began as a monetary crisis.

The resources of the Banque de France were subject to powerful fluctuation, decreasing by 27% between June and October(70) and reaching their lowest point on 20 November, having decreased by 14% in one month,(71) now representing only one third of the amount of notes in circulation. However, it is important to note that its portfolio increased,(72) which means there had been no restriction of the volume of credit and that manipulation of the discount rate had been widely used, the latter rising to 6% and then, as had become possible since the reform of 9 June, 1857, to 7, 8, 9, and finally 10%. The fall in share prices was considerable at the Paris Bourse but, it is noteworthy that that of government stock remained minimal, reaching only 25% and, in December, the level of the latter was higher than it had been in June.(73) Economic repercussions were not long in coming.

Railway construction slowed down. Lines had been built on the basis of badly prepared estimates, which were too optimistic or did not take account of price rises. The most recent lines were those with the lowest kilometre yield.(74) The number of kilometres thus decreased by 1,260 million in 1857 to 1,190 in 1858. The production of mineral products decreased by 7 to 9% (for example fuels and iron ore),(75) and that of steel by 6%(76), and unemployment increased by 7% in the coal mines.
The same applied to consumer goods. For example, consumption of cotton fell by 13% and the number of bankruptcies increased.

It is important to understand that the volume of discount in Paris had decreased by one half.(77) The slump, which was a currency crisis and a crisis of domestic credit, affected, to a greater or lesser extent, all of the economies of the day which were held together by more or less well-developed monetary, financial and economic framework.(78) It was followed by an economic recession, which also varied in length and intensity.

The French economy was least affected. The reason for this lay in the combination of a series of phenomena, namely: the situation/degree of industrialisation; the volume, nature, orientation and protection of foreign trade – which made it less subject to fluctuation than the American and British economies; the careful supervision of the unfolding of events; and the measures being taken by the Banque de France (slight increase in the volume of discount, manipulation of interest rates with a particularly noticeable rise). Above all, without doubt, the primary reason was the public's confidence in the government, a confidence reflected in the near-stability of 4.5% in 1852 and its increase in December to a level which was the highest of the year, and its confidence in the economic future, reflected in the return of the prices of the Paris-Orleans and the Nord railway company shares to a level approaching that of the highest, that of June.(79) Finally, the possibility of the introduction of an interest-guarantee clause in railway concession contracts (introduced in 1859) played a significant role by the end of the year in easing the recession, now seen simply as a situation which could be rapidly overcome.

A crisis permanently monitored and assessed

The economic, monetary and financial development of the principal countries was carefully monitored to assess the present, try to determine the most probable future trend and to envisage its repercussions. French representatives abroad kept the government and the Emperor informed daily, while the press provided analyses and commentaries. During the last quarter of 1857, the slump was Napoleon III's main preoccupation. The stakes were high, and with every day that passed he wondered whether it would have an effect on the government and if so, what effect that would be.
I – Information from the French embassies
Reports coming in from the French embassies were numerous, well documented and precise.

1) In the United States, the Comte de Sartiges, France's Minister in Washington, invited by the managers and directors of the new railway companies to take part in an inaugural trip in the central US States in honour of President Buchanan, some members of his cabinet and the diplomatic corps, wrote to Count Walewski, Minister of Foreign Affairs, on 21 June, 1857 and described the American speculation.
“Speculation naturally follows these two key elements (manpower and capital) for making a fortune rapidly, and the town (Chicago) is wholly taken over by speculation fever. The madness and the results are the same if not more so than those in New York and Saint-Louis. Land bought for 4,000 dollars three years ago was resold for 100,000 dollars six months ago and at present is worth 150,000 dollars.”

On 4 October, he sent a first analysis of the slump:
“The 30% fall which has just occurred in American railway shares was followed by a monetary crisis which seriously affects the existence of the banks on which the exchange system and credit institutions in the United States are based. The total number of banks founded with or without a charter is 1,416. These banks, in most of the United States, have just suspended their cash payments. The suspension of payments has caused notes in circulation issued by banks and authorised companies to depreciate and, at the same time, has occasioned a new fall in the prices of all industrial securities. Unable to negotiate these securities for cash, or even to have them accepted as a guarantee for borrowings, banks, companies, traders and owners with portfolios full of shares and bonds cannot face up to their commitments and bankruptcies and insolvency follow each other at an alarming pace […] Where credit is suddenly lacking for institutions organised in this manner, they can neither reimburse the paper they have issued in cash nor borrow on the guarantee of this self-same paper. Consequently, they must liquidate or suspend […] However, in this country, commercial and private transactions are almost exclusively based on the credit system, supplied or guaranteed by the banks. The result is that bankruptcies or even interruptions of payment upset financial relations among Americans themselves and with foreign countries … .”

On 12 October he added more detail to this analysis:
“Causes of the slump: cash flowing out of the country pursuant to exaggerated imports; rash speculation; finally, the main one (the one that Americans least like to admit), i.e., immense business undertakings of all kinds, those of the railways in particular, begun with capital coming only from the investment of shares and bonds by American companies in foreign markets, that of the United Kingdom in particular.”

He added:
“In the business community in the United States, one man's credit is based on nothing else than the credit of another man, and it suffices that there be a lack of confidence in a small portion of this community, for example a bank, or a company, or even private individuals, for the entire credit market to be brought to a standstill.”
On October 26, after the suspension of cash payments, which had taken place two weeks previously, he explained the consequences of the monetary crisis:
“In the manufacturing States of the North, the factories have fired two-thirds of their workers or closed down, and no-one can foresee when they will be able to start up again … At the beginning of the slump, some professed that, at the expense of individual disasters, general business affairs would pick up again shortly; but since then, after having set aside the secondary causes, people have been forced to recognise that the problem ran deep because it concerned the very credit system of the United States itself.”

When the monetary crisis began to ease, the French government was immediately advised of the fact on 15 November. “Gold is beginning to appear on the New York marketplace again, encouraged by the arrival of monetary cash from the United Kingdom … The shares of the railway companies have risen again. The British are sending precious metals to buy Southern cotton and railway company shares..” He noted as follows:
“As for the condition of the country from the point of view of trade, its factories and its agriculture, it has undergone too violent a shock to be able to return to normal as easily as the monetary market.”

On 8 December he sent a long report of President Buchanan's speech to the Congress of 7 December concerning the slump.

2) In the United Kingdom, the Consul General of France, Mr Gaillard de Ferry also delivered a penetrating analysis of the situation so as to inform the French government. On 19 December 1857 he presented his analysis:
“Cause of the British slump: that of the United States. Over there, trade abused the facilities granted to it by the American banking credit organisations… The result of this was that these institutions (the banks), wishing to use a large portion of their bullion reserves, foolishly converted it to public debt securities, railway shares and other securities difficult to realise at a given moment. It is not surprising, therefore, that a considerable, sudden demand for cash following a panic, justified or not, was sufficient to overturn the fragile edifice of American public credit.” Like Monsieur de Sartiges, his view of the forthcoming year was also a pessimistic one.
“Today, the financial crisis has passed and there is every reason to fear that the trade crisis is only at its beginning, because now accounts have to be settled, and goods bought at exorbitant prices have to be sold at a loss (25 to 70%). Bankruptcies will be numerous, for a long time to come yet, and trade and industry will not recover quickly.(80)

Thus, the Emperor possessed a key asset. He knew what was going to happen and in two important ways. As for the start of the monetary crisis which began in the United States and then spread to other countries, there was an interval which could be put to good use by taking advantage of it so as to be ready to confront the new situation. Thus, like the government, he was informed and he knew what was going to occur in a relatively short space of time. Under no circumstances would he be taken by surprise. This also applied to the end of the slump. As of November he knew that it was receding in the United States and that this would soon be happening at home. All he had to do was wait and “sit it out” for a few weeks and, above all, and this was fundamental, he had to be seen be dominating and influencing the course of events by appearing calm and confident and refusing to undertake any exceptional measures which might lead people to believe that the monetary situation was bad and was getting worse. In other words, he had to look as though he had nerves of steel, with ice running through his veins and the imperturbable visage of a poker player.

However, Napoleon III had already replaced this worry with another. He wondered what would be the actual economic repercussions of this monetary crisis. Would they be far-reaching? How long would they last?
II – The analyses and commentaries of the press
The French newspapers followed the slump very closely, although it is important to look at how they presented events and what their judgement of them was.

1) Le Journal des Débats was no doubt the oldest, most “statesmanlike” and also the largest newspaper of the Paris press. On 16 October, it wrote, concerning France:
“The situation of public income in our country is in sharp contrast with the general situation of foreign business. While in Germany as in the United States the capital markets are the victim of financial crises which have led to a regrettable excess of speculation – and such crises always increase the panic of the public and naturally result in trade problems which the United Kingdom and ourselves will suffer eventually – the operation of the economic life of our country however, carries on calmly and regularly under conditions of relative prosperity. Income from direct taxation is collected easily.”

On 26 October, still in a reassuring tone, it reported:
” … money is not rare, but it is holding back, it is wary … Sooner or later, leverage points will certainly exist, but who has the courage to take the initiative and to look beyond the momentary problems of the market? We would not have noticed the slump if America had not, in such giant leaps, made the same mistakes as ourselves.”

On 29 October, it gave a general summary of the situation:
“The slump by which the United States has been hit with increasing violence in the last month, and which is rightly of concern to Europe, is not very different from those which preceded it, except in its intensity.

This was completed on 13 November as follows:
“It was impossible that the upset in the British and American markets would not have an adverse effect on our own, which up till now had suffered less. Today, solidarity is the law of nations both when things are going well and when fortune turns.”
However, during the last quarter of the year, it kept its readers aware of the situation by publishing dispatches allowing them to follow the spread of the slump throughout the world. So they published news from Vienna (11 and 15 October), from Frankfurt (20 October), from Prague (1 December), from Berlin (2 and 5 December), from Stockholm (2, 4 and 5 December), from Warsaw (1 December), from Madrid (24 November and 4 December), and from Copenhagen (4 December).
All of them took rapid stock of the situation, indicating the bankruptcies and estimating the number of unemployed. They volunteered an assessment of the situation as can be seen on 5 December concerning Stockholm.
“The news is terrible and alarming. There is everywhere such an overabundance of the products which we are used to exporting (grain, iron, wood, etc.) that all of the shops are literally overflowing with them.”

2) The slump was also followed by the other newspapers. Thus, on 4 November Le Bulletin Commercial wrote as follows:
“The general situation of our trade has not improved. We are feeling at present more sharply than ever the aftershock of the wild speculation of Americans on goods and also on government bonds. And this is causing serious business to come to a halt.”

On 1 December, when the slump was abating, one editorialist proudly wrote:
“The results of the memorable slump of 1857 will mean certain glory for French trade. Cruelly struck from outside and crushed domestically by exorbitant terms and conditions of credit, lacking the resources on which it should have been able to count most, and overwhelmed by a general depreciation of prices, it nevertheless pulled through with no serious damage because it acted in accordance with healthy, cautious methods and resisted the seductive lures and artificial speculation which have driven so many other countries into inextricable difficulty and brought them to ruin.”

3) But beyond that there was another position. La Patrie, reflecting public anxiety, in the second fortnight of the month of November, wrote about the suspension of payments and a moratorium. It even stated that the only means to escape greater danger was for the government to issue a decree making notes legal tender.

The close of the debate and the end of the slump would seem to be marked by the letter from the Emperor published in Le Moniteur on 11 December. The text was as follows:
“We have been able to handle the slump and defy the morbid predictions of scare-mongerers by a few simple precautionary measures. I beg you to loudly deny all of the absurd difficulties which are attributed to the government. I have indeed decided to refrain from using these empirical means to which one has recourse only in those, fortunately very rare, cases where catastrophes beyond the powers of human prediction strike a country.”

A reading of the press thus reveals great differences with respect to the reports from the embassies. It was as though, given the situation of French newspapers in the 1850s, the aim was to be slow in providing the public with details on the unfolding of the crisis, to give a watered-down version of it, to show to what extent the French economy was only slightly affected by external influences and to praise the steady nerves and the wisdom of businessmen and the authorities. The press reassured and praised the action taken by the Emperor and maintained confidence in him.
Should this surprise us? Certainly not; after all this was no more than manipulation of the masses at work. Napoleon III and his government did what any other political power would have done, in other words prevent the appearance of any doubt as to the proper running of the country in the present and in the future.

31 December, 1857

On the last day of 1857 during the New Year celebrations, Napoleon III gave free reign to his thoughts while looking at his guests, his impenetrable face characterised by an enigmatic half smile. He could be satisfied but he could not let it show. The additional tensions which had been his lot for almost six months were abating, making possible a return to “normal”. He rapidly reviewed the events which had just unfolded, making a global summary of them.

The monetary crisis had been short-lived, one quarter approximately and of lesser intensity than that undergone by the United States and the United Kingdom. It had eliminated businesses which had been too imprudent, having become involved in impossible projects, believing that expansion would last forever. It continued by a relatively moderate period of depression of an acceptable duration. It did not leave a very lasting mark on people's minds as crises of greater intensity had already taken place in the past, such as those of 1836/1837 and 1847/1848.

The government had not been harmed and there had been no workers' riots requiring intervention by forces of order. No Royalist pretender had come forward and the Imperial Throne had not been criticised for showing weakness. Things were still on a solid basis and this would serve to discourage opponents of any kinds for some time to come. One does not attack a strong government in which a nation trusts.

The fundamental point is that, in this respect, he now thought that he had several years before such a phenomenon would reoccur. What interested him was not the short/medium term, the eighteen months or two years of stagnation which would follow, but the long term and the moment when, after the period of prosperity which would follow, a new slump would strike. Did he set it at a term of six years, the period during which no serious economic problems would occur? What we can say is that increased vigilance was called for as early as the beginning of the 1860s.

Napoleon's mind was already occupied with plans for these years, and his vision was far-reaching and large-scale. Above all, he could not escape one fact: that the development of the French economy depended more than would have been believed shortly before, on that of other countries, the United States and the United Kingdom. Consequently, he could only attain his goals with a more powerful, better founded economy. The vital thing was still to ensure rapid agricultural and industrial development, both of which needed to be improved and strengthened by the setting up of a modern banking system, the creation of new kinds of companies facilitating the gathering of large amounts of capital, and the implementation of new working relations.

However, domestic and external action could not be separated and mutually influenced each other. Development could be further accelerated by strengthening the links between the two leading world trade powers (France and the United Kingdom) on the basis of free trade, which would allow for a more efficient sharing out of production resources after a period of adaptation. Success in the Crimean War having given France a key influence in the Balkans, Egypt and Persia, the policy of hegemony could now be aimed at Italy and succeed in bringing down Austria. Finally, those political and economic areas where French influence was at its strongest could, over an even longer period still, be reinforced by the setting up of an initial monetary union based on the harmonisation of the existing monetary systems of a certain number of countries, a prelude to a more intense, more general association with other countries, thus procuring the advantages of a uniform system. The final goal was that of a monetary zone constituted around the franc, a national currency, a dominant currency, and an international currency.

Did Napoleon III on that 31 December derive more pleasure from the manner in which the slump had been overcome or from by the prospects which it opened up to him? The response is simple: a truly great politician is one who lives in the future.


– Bigo, R., Les banques françaises au cours du XIXe siècle, Sirey publishers, Paris, 1947.
– Burton, T.E., Financial crises and periods of industrial and commercial depression, D. Appleton, New York, 1902.
– Clapham, Sir J., The Bank of England. A History, Cambridge University Press. Cambridge, 1945, 2 volumes.
– Clement, A., “Des crises commerciales”, Journal des économistes, 1858, pp.185-187. – Dupont-Ferrier, P., Le marché financier de Paris sous le Second Empire, PUF, 1925
– Evans, D.M., The history of the commercial crisis 1857-1858 and the Stock Exchange panic of 1859, 1859. Reprinted, A.M. Kelley, New York, 1969.
– Gibbons, S.J., The banks of New York, their dealers, the clearing house and the panic of 1857, D. Appleton, New York, 1859.
– Hughes, J.R.T., Fluctuations in trade, industry and finance. A study of British economic development 1850-1860, Oxford University Press, Oxford, 1960.
– Hyndman, H.M., Commercial crises of the nineteenth century. 1892. Reprinted, A.M. Kelley, New York, 1967.
– Juglar, C., Des crises commerciales et de leur retour périodique en France, en Angleterre et aux Etats-Unis, Paris, 1862.
– Juglar, C., “Des crises commerciales et monétaires de 1800 à 1857”, Journal des Economistes, April and May 1857.
– Kindleberger, C.P., Histoire mondiale de la spéculation financière de 1700 à nos jours, 1989. French translation, Editions P.A.U. publishers, 1994.
– Lescure, J., Des crises périodiques de surproduction, Paris, 1938.
– Horn, E., “Le commerce extérieur et la crise à Hambourg”, Journal des Economistes, 1858, pp.245-253.
– Levasseur, E., “Influence de l'or sur la condition des personnes”, Journal des Economistes, 1858, pp.216-238.
– Levasseur, E., La question de l'or, Guillaumin, Paris 1858.
– Morgenstern, O., International financial transactions and business cycles, Princeton University Press, Princeton, 1959.
– Marion, M., Histoire financière de la France, Tome V, Paris, 1928.
– D'Ormesson, W., La grande crise commerciale de 1857: l'histoire recommence. Les causes, les remèdes, M. d'Hartoy. Suresnes, 1933.
– Rosenberg, H., Die WeltwirtschaftKrise von 1857-1859, W. Kohlhammer, Stuttgart-Berlin, 1934.
– Schaffle, A.E.F., Die HandelKrise von 1857 in Hamburg, mit besonderer Rücksicht auf das Bankwesen, dand Gesammelte Aufsätze, H. Raupp'schen. Tubingen, 1885, vol.5.
– Van Vleck, G.W., The panic of 1857: an analytical study, Columbia University Press, New York, 1953.
– Vallée, O. de, Les manieurs d'argent, Paris, 1856.
– Wirth, M., Geschichte der HandelsKrisen, Sauerlaender, Frankfurt, 1874.
– Zylberman, E., La croissance et les comptes économiques de la France sous le Second Empire, Thesis, Paris, 1969 (with a large biography).
And also:
– Marx-Engels, Correspondence, Letters from Marx to Engels on 15 August, 20 October, 13 and 24 November, 8, 18 and 25 December 1857.
Letters from Engels to Marx on 29 October, 15 November, 7, 11, 17 and 31 December 1857 and 6 January, 17 March, 9 April and 7 October 1858. 


(1) The Straits Convention (1841) barred the Constantinople route to Russia. In 1853, Russia suggested the breaking up of Turkey into smaller parts.
(2) Set up in 1815. Austria wished to isolate Prussia and to destroy the Zollverein, but failed in 1853 in its project for hegemony in Germany. Cf. J. Wolff, Histoire économique de l'Europe. 1000-2000, Economica. Paris, 1995.
(3) For example, the Chinese expedition (1860) or the French settlement in Annam. (4) Le Creusot dates from 1783.
(5) Cf. F. Braudel and E. Labrousse (eds.) Histoire économique de la France. Vol. III. PUF, Paris, 1976.
(6) For example, the monographs of Le Play on European workers.
(7) Cf. E. Zilberman.
(8) Cf. J. Fourastié, Les écrivains témoins de leur temps.
(9) La Statistique Générale de la France dates from 1837.
(10) Le Journal des Economistes was founded in 1841. The Dictionnaire d'Economie politique by Coquelin-Guillaumin, published in 1853, contains, in addition to the trade crisis section, the following sections: accumulation, speculation, money, balance of trade, bank, bank notes, Treasury bonds, budget, capital, clearing house, consumption, distribution of wealth, division of labour, public loans, savings, exports, finance, public wealth, private wealth, production costs, imports, taxes, machines, labour, precious metals, currency, supply and demand, paper money, poverty, production, net product, industrial progress, revenue, wealth, statistics, Treasury, customs union.
(11) However, according to Villèle in 1825, what happened in London did not dictate what happened in Paris. Cf. J. Wolff, Le financier Ouvrard, p. 224. Editions Tallandier. Paris 1992.
(12) However, the United States played a role in 1836-1839.
(13) One only has to think of the rebellion by the silk workers in Lyons at the beginning of the 1830s and the Chartist movement in the United Kingdom in the 1830-1840 period.
(14) Cf. N.D. Kondratieff, Les grands cycles de la conjoncture, 1922/1925.
(15) S. Jevons. 1884.
(16) Hyde Clark in 1847.
(17) On the other hand, during a period of price falls, boom periods are relatively short and weak, and depression periods long and powerful.
(18) It is important to remember the changes taking place in world gold production which prevailed partially during this period. A rise in production meant a rise in reserves/cash resources by the central banks, heightened possibilities of credit, fluctuations in the interest rate and a rise in the import demand from the producer country and in exports by the industrialised countries. Gold mines were discovered in California in 1849 and in Australia in 1850, thus meeting one of the conditions for expansion. Cf E. Levasseur, La question de l'or. Guillaumin. Paris, 1858. Gold production increased during 1841-1850 to 57.7 tonnes and from 1861 to 1866 to 199.3 tonnes, that is to say an annual mutiplication of more than six. California's production was 8 tonnes in 1848, 54.7 in 1851 and 120.6 in 1856, and that of Australia 18 tonnes in 1851 and 103.5 tonnes in 1856.
(19) Most likely doubling them.
(20) From 21 pounds 12 shillings in 1855 to 23 pounds 19 shillings in 1856.
(21) From 7.3 to 7.5 for the same years.
(22) From 2.25 to 3.6 million tonnes
(23) 81 in 1851
(24) From 4,600 in 1850 to 5,120 in 1856.
(25) From 26.6 to 33.5 million for the same dates.
(26) Respectively from 0.3 to 0.37 million and from 0.6 to 0.69 million.
(27) For example + 8% between 1853 and 1854.
(28) From 1 pound 18 shillings in 1851 to 3 pounds 16 shillings in 1856.
(29) From 25 million pounds in 1853 to 49 million pounds in 1857.
(30) More than one billion dollars, including 0.73 for 1855-1856.
(31) 1.6 million dollars in 1852-1853 and 11.5 in 1856.
(32) Cf C. Juglar, Des crises commerciales, 1862, p. 468 ff. Thus, between 1853 and 1857 discount rose from 322 million dollars to 684, that is to say + 100%, monetary circulation from 114 to 214 million, and deposits from 91 to 230 million. Metallic reserves rose from 35 to 59 million between 1847 and 1856.
(33) There were 707 of them in 1846, with a capital of 196 million and 1,416 in 1857 with a capital of 370 million.
(34) In New York, in August 1857, borrowings were equivalent to the sum of metal, notes and deposits. The banks attracted deposits by granting large interest on them and loaning them to speculators
(35) Cf Systermans, Des chemins de fer en France et à l'étranger, Annales Block, 1859, p.205.
(36) For example, the companies of Centre d'Orléans in Bordeaux and of Tours in Nantes, the companies of Lyon in Avignon, of Avignon in Marseilles, Arles in Beaucaire, Arles at the mines of La Grande Combe, Montpellier in Sete, Montpellier in Nimes, Rognac in Aix, and Marseilles in Toulon.
(37) J. Garnier in Les Annales Block, 1853, p.493.
(38) From 0.4 to 0.87 million tonnes
(39) From 0.25 to 0.58 million tonnes
(40) From 1 to 3 million tonnes
(41) From 4.4 to 7.9 million tonnes
(42) Thus the dividend paid by Crédit Mobilier represented 10% of the capital in 1853, 12% in 1854, 44% in 1855, but only 24% in 1856.
For its part, the salary of a coal miner rose, in nominal value, from 609 francs in 1853 to 700 in 1857 (+16%), that of an iron ore miner from 361 to 440 francs (+22%), and that of a metallurgy worker from 361 to 504 francs (+40%).
No doubt, in general there was a rise of 14 to 19% of the actual salary for men and 8% for women due to the rise in agricultural prices (the high prices of the hectolitre of corn persisted at 28 francs in 1855, 29 in 1856 and 30.75 in 1857).
Cf. E. Levasseur, "Influence de l'or sur la condition des personnes", Journal des Economistes, 1858, p. 216-238.
(43) This also applied to the United Kingdom, the United States, Germany and Austria.
(44) P. Dupont-Ferrier, Le marché financier de Paris sous le Second Empire, p.190.
(45) It was said that one could purchase or sell a million bonds without causing prices to vary by twenty-five centimes or sell 10,000 shares without greatly affecting prices (Aycard). This statement is well known. But if this is true, how can this increase in prices and the extent of speculation be explained?
(46) Journal des chemins de fer, January 21 1857.
(47) This price not being less than 75 francs. The bonds were taken from the 33.9 million francs belonging to the Caisse d'amortissement bank, which came from successive consolidation of its reserves.
(48) This was not the only issue of bonds carried out in 1857. The Caisse de dotation de l'armée bank, set up on April 28 1855, had an excess of 32 million francs for 1856 and an excess of 25 million was expected for 1857, and another of the same amount for 1858. This capital was to be used to lighten the Treasury's overdrafts by as much (Act of June 25 1857) and the amount of the 3% bonds necessary to give the exchange value thereof to the Caisse de dotation de l'armée bank was created. Consequently, it was a concealed loan similar to that granted parallel to the extension of the privilege of the Banque de France.
(49) People still talk today of "the golden rule of the budget", that is to say the latter being voted balanced.
(50) Not taking account of the imbalance brought about by mismatching of revenue and expenditure in the year.
(51) Cf the famous article by T. Haavelmo, "Multiplier effect of a balanced budget", Econometrica, 1945. T. Haavelmo received the Nobel prize for economics in 1989.
(52) Its liabilities amounted to 5 million dollars for capital of 2 million.
(53) The amount of loans granted by the banks exceeded by 12 million dollars their entire resources.
(54) 13 to 14% for some, such as Tougan-Baranovsky, 30 to 40% according to Mr de Laveleye.
(55) Thus, to take an example, the share of the Cleveland-Pittsburg company rose from 65.25 dollars on 15 December, 1856 to 9.25 and that of Erie from 60.3/8 to 13.75.
(56) Between 1856 and 1857 the network was increased by 14% (from 21,400 to 24,300 miles). The increase for 1858 was 2,000 miles and 1,647 miles in 1859.
(57) By 20% for the New York Central Railroad and the Baltimore-Ohio between 1857 and 1858.
(58) 4,937 in 1857 with liabilities of 291 million dollars.
(59) Between 1857 and 1858 the production of cast iron increased by 14% (from 0.798 to 0.705 million tonnes). 120 blast furnaces were stopped, throwing 40,000 workers into unemployment.
(60) 6.1 million pounds on 5 September and 3.2 on 17 October.
(61) Examples:Barings Bank, with liabilities of 5 million pounds on 27 October, the Western Bank of Scotland on 9 November with a loss of two million pounds and the Borough Bank of Liverpool "the twin sister" of New York.
(62) From 11.5 million pounds on 5 September to 9.5 on 17 October and 7.2 on 11 November.
(63) From 0.96 million to 0.3 on 12 November.
(64) At that date, there still remained 4,800 miles of railway line to be built.
(65) By 3.3% between 1857 and 1858.
(66) To 36 hours per week.
(67) 109 in England and Scotland making 34,000 workers unemployed.
(68) Foundry workers in Scotland earned 5 shillings in 1856, 3 to 4 shillings in 1857 and 3 to 3.6 shillings in 1858.
(69) 7% from 403,000 tonnes in 1856 to 374,000 in 1857. Exports of cotton material fell by 15%.
(70) 291 million francs on 20 June, 1857 and 212 on 20 October.
(71) To 181 million.
(72) From 569 to 622 million between 20 June and 20 October.
(73) Thus we have:
(at the highest)
(at the lowest)
 1,307 (-12.2%)
 840 (- 16.6%)
 687 (- 12.4%)
 620 (- 20.5%)
Banque de France
 2,720 (- 24%)
4.5% 1852
 90 (- 2%)
A comparison only has to be made with the fall in railway shares in the United States as set out earlier.
(74) Average revenue fell from 45,200 francs in 1857 to 41,400 in 1858 (-10%).
(75) From 7.9 million tonnes in 1857 to 7.35 for mineral fuels between 1857 and 1858. From 3.07 to 2.79 (-9%) for iron ore.
(76) Production of iron and steel decreased from 586,000 tonnes to 553,000 tonnes (-6%). However, cast iron fell much more sharply from 158,000 tonnes to 125,000 tonnes (- 21%).
(77) It was at 1,468 million in 1858 and 1,414 in 1859.
(78) Thus, deliberately, no account was taken of the spread of the crisis to Hamburg, Bremen, Copenhagen and Leipzig. Hamburg was the meeting point for trade between Germany and Russia on the one hand, and on the other that for America, the United Kingdom, the Scandinavian countries and France.
(79) The North (Nord) was considered to be the industrial region of the future.
(80) Setting aside the reports sent by Mr Cintrat, Consul General of France in Hamburg, to the Ministry of Foreign Affairs.
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