It is easy to think of economic and financial crises that have had stunning political consequences. Sometimes this goes so far as to turn normally arcane fiscal and monetary questions into objects of fierce public debate. The reverse can also happen. Political events can and have changed the context of economic and financial decision-making with the effect that new ideas are embraced and old principles, however entrenched, are quickly discarded. During the Revolution of 1848 in France, both the French state and the Banque de France resorted to a heightened degree of financial intervention uncharacteristic of the times.
France experienced an economic boom in the 1840s during which firms increased debt while financial conditions were good. The second half of the decade saw the end of the boom and the worst political crisis in France since the French Revolution. It began with an agricultural crisis brought on by a poor harvest in 1846. This was predicted as early as the spring, allowing purchases of foreign grain to take place months before harvest time. However, the sorry state of French agriculture triggered a financial panic.
There were delays in payment between firms and their suppliers and delays in payment on bank loans. For the Banque de France, imports of foreign grain caused an outflow of gold from France. The gold reserves of the Banque de France fell from 252 million francs in July 1846 to eighty million in January 1847. Nearly one-hundred million francs left the bank in October and November of 1846 alone.
To stabilize its reserves, the Banque de France increased its interest rate from 4%, where it had stood for almost twenty-seven straight years, to 5% in January 1847. It also sold French securities it held to Russia in order to replenish its gold, thus returning some of the gold sent there in payment of Russian grain. The financial crisis had worsened during the course of 1846. Banks suspended withdrawals and the Banque de France was slow to offer support.
However, the central bank was successful in its objective, reversing the emissions of gold. Bullion reserves flowed back to France. Taking advantage of the higher interest rate there, British investors transferred some 25.5 million francs, or about one million pounds sterling, to France. Another 50 million francs in bullion reserves were imported from Russia as part of the Banque de France’s sale of portfolio securities to that country.
Pleased with this success, the Banque de France interest rate was reduced back to 4% in December 1847. Helping matters further, the French state provided support to troubled industries, most notably the railways; three railroad companies had failed during the crisis. Now, the panic seemed over.
After a year of economic recuperation, political events came to a head in early 1848. The French parliament and monarchy could not agree on electoral reform. Even among conservatives, some members of parliament wanted to grant concessions to popular demands but the cabinet disagreed. There was also frustration with the regime’s corruption and the high cost of food, given the agricultural problems.
Count d’Argout, the governor of the Banque de France, had just published the bank’s report on the prior year when revolution broke out in February 1848. The public, at least in Paris, was satisfied by neither the resignation of the cabinet nor the king’s abdication. So, a republic was declared and a new provisional government formed. The events in Paris kickstarted a wave of revolutions in Europe that would see changes in government, new constitutions, or both, in several other countries.
The revolution ushered in renewed financial panic. There was yet another credit crunch as creditors called in loans and bank customers withdrew deposits. Banks closed, at least momentarily locking up firms’ cash. There were 829 banking bankruptcies between 1846 and 1848. This came just as vendors began demanding cash payment, no longer accepting purchases on credit.
Every firm was now demanding quick payment from its customers while also trying to spread out their own payments to suppliers. The lubricants of trade now evaporating, the financial troubles threatened to spill into the larger economy, just as the political situation was most fragile. It was not a given that the military and the provinces outside Paris would respect the new government and an economic disaster would not make the provisional government’s work any easier.
The stock exchange in Paris was closed from February 23 to March 6, 1848. When it reopened, the market for securities crashed. As compared to their prices on February 23, French five percent state bonds fell from 116 francs to 89 francs each. The price of Banque de France stock declined from 3,180 to 2,400 francs. Railway company shares also fell.
Much like the crisis of 1846, this one also saw a flight of gold from France, this time even faster than before. The gold reserves of the Banque de France fell from 140 million francs on February 26, 1848 to just below sixty million on March 15. The French Treasury was also withdrawing funds from the bank. In response, redemptions of Banque de France notes into bullion were suspended. However, this event was supplemented by neither an increase in interest rates to attract new gold reserves nor a reduction in credit by being more tight-fisted in discounting bills.
Discounting bills, that is buying short-term commercial obligations at a small discount, was the principal way central banks interacted directly with the money markets at the time. By discounting bills, a bank was essentially providing credit for commerce. In 1847 alone, the Banque de France had discounted 960,000 bills, averaging 1,380 francs each, for an average term of 46 days.
In March, new government-backed discount banks were formed across the country to discount bills which could then be re-discounted by the Banque de France. The government provided capital to these new banks in the form of equity investments and loans extended to them. The measure allowed commercial credit to revive. The government also supported the existing banks. When the firm Caisse Gouin and Co. closed on account of not getting a large enough loan from the Banque de France, the government stepped in to give it a larger loan and the bank re-opened.
In the aftermath of the Revolution of 1848, the state’s interventions in the economy were broadened. A railway bank was established in 1850 to advance money against railway shares. New bonded warehouses were formed that provided warehouse receipts in exchange for inventories deposited there and these receipts could be lent against. New state-backed banks were also founded to advance money on metals, dry goods, textiles, and other products.
The provisional government established upon the monarchy’s overthrow also sought to guarantee work to all citizens, then a novel aim. In the short run though, the government was unable to increase spending on new public works given its poor financial position; the credit markets were not open enough to permit large scale borrowing. Instead, the state budgets after 1848 cut spending to reduce the budget deficit. However, by 1850-51, investors’ confidence in the state had increased.
The post-revolution period also changed the Banque de France, which saw new leaders installed in the 1850s. Change did not happen often; Count d’Argout, the bank’s governor, had served as the head of the bank from 1836 through 1857. The subsequent years saw more active management of interest rates. Whereas the Banque de France did not change interest rates once in the twenty-seven years leading up to 1847, it would now be adjusted an average of twice per year, and even more often later in 1850s and 1860s.
French political and financial life was changed in the aftermath of 1848. As French economic historian Hubert Bonin put it, France became a ‘bondholder’s democracy’. Universal male suffrage had the potential to usher in a new era without revolutions. Public debt was also democratized as the number of holders of public bonds grew from 280,000 at the time of the revolution to nearly a million by 1851. Despite the panic, there was growing mass interest in securities, at least safer debt securities, and the emergence of large new joint-stock banks in the aftermath of the destruction. These were features of financial development that would change the course of financial history in France.
The economic and political events of the Revolution of 1848 in France is illustrative of the feedback loop between finance and politics. The revolution was a political event with financial consequences even if it was also an example of the more common scenario, at least in stable developed countries, of an economic event with political consequences. A combined political and economic crisis like that of 1848 produced a much stronger response from the state and the Banque de France than would have a more traditional financial crisis like that of 1846. The events of 1848 were so threatening to the status quo that certain laissez faire principles that would otherwise define the century were at least temporarily ignored.
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Read about Napoleon’s role in the early history of the Banque de France. Also, learn of one of the most notable of the joint stock banks founded after the Revolution of 1848, Crédit Mobilier. Consider subscribing to this blog’s newsletter here.
1. Bonin, Hubert. “France, Financial Crisis and the 1848 Revolutions.” Translated by James G. Chastain, Encyclopedia of Revolutions of 1848, 26 Oct. 2000.
2. Bopp, Karl R. “Bank of France Policy: Brief Survey of Instruments, 1800-1914.” American Journal of Economics and Sociology, vol. 11, no. 3, 1952, pp. 229–244.
3. “Foreign Correspondence.” The Economist, 12 Feb. 1848.
4. “Domestic Improvement in France.” The Economist, 4 Mar. 1848.
5. “Foreign Correspondence.” The Economist, 11 Mar. 1848.
6. Liesse, Andre. “Evolution of Credit and Banks in France.” National Monetary Commission, 1909.