Credit and crisis
Juglar’s analysis of crises is new because of his method - the systematic use of statistical data - the idea that crises are not accidents but periodic events and the analysis of the role played by credit in their development.
His thesis deviates both from Say’s ideas as well as what the free banking followers advocated. Say argued that a crisis finds its origins in an over-issue of notes; supporters of free banking thought it was the result of the behaviour of the privileged bank. Juglar’s (1863: 11) response is that the study of the circulation of the banknotes issued by the Bank of France and the Bank of England shows that it is not excessive in times of crisis and thus cannot be the cause of the latter. His starting point is the contrast between cash transactions, which necessitate payments in specie, and operations of credit, which only involve fiduciary money (bills of exchange, banknotes and cheques). He consequently rejected the idea that notes can be substituted for specie in cash transactions. For this reason, he rejected also the analysis of the currency school and the provisions of the Peel Act. For him, it is impossible to judge of the excess or the lack of circulation after the number of notes issued and the level of the metallic reserve. Only the foreign exchange indicates it.There is a crisis, Juglar wrote, when payments in specie are necessary in order to balance the credit market. In times of prosperity, when the bills they issued expire, traders can repay them with the bills they received. In case of a disequilibrium, they must resort to rediscount. Similarly, bills of exchange on foreign countries usually compensate those on the country. The movements of precious metals only intervene if this is not the case. It is thus possible to describe the origin of the crisis. During the period of prosperity, producers easily sell their products to traders who pay for their purchases by issuing bills of exchange.
This easy access to credit allows an increase in wholesale prices, which makes it difficult to sell goods on the spot market.This description of the cycle suggests three questions: What is the origin of the initial disequilibrium? How could this imbalance be detected? How could it be addressed? Based on statistical data concerning England, Juglar thought that price changes are independent from the issuance of banknotes. “Credit is what promotes business development and rising prices: trade itself is the first provider of credit, banks can only help to circulate it by substituting their promises to pay for those of the public. In whichever case, the issuance of notes is always secondary and results in the conclusion of the transaction, far from giving it birth” (Juglar 1868: 31). What is important in the triggering of the crisis is not the quantity of banknotes but the entire fiduciary circulation including bills of exchange. There is no measurement of this circulation. The sole criterion for the over-issue of paper money is therefore found in the comparison of its value with the value of precious metals. This is not without problems because a drain of species and the depreciation of money can have multiple causes that call for different answers. In case of a panic, the solution is the suspension of payments. When demands for species are intended to feed internal circulation, an increase in the issuance by the central bank is the right response. When the drain of species is the effect of an unfavourable foreign exchange, the discount rate should be increased. This analysis does not lead Juglar to dismiss the principle of free banking. He however admits that in such a system, each bank is not immediately aware of the consequences of the foreign exchange on its balance and does not take timely measures. The system must be regulated by a central bank, which would be in charge of clearing transactions and would be able to establish a strict control on all banks.