Chapter 284: Chapter 33, The Economic Crisis Erupts

Negotiations on all fronts were still underway when a crisis quietly emerged. The overproduction of the capitalist world had spilled over into the market, and in order to offload their excess stock, British capitalists intensified their dumping in countries around the world.

The Americans were the first to suffer the consequences. Even though Franz’s butterfly effect diverted a portion of international capital to Austria, it could not resolve the crisis in the United States.

From 1848 to 1858, Americans built 25,000 kilometers of railroad, 8,000 kilometers less than in history, so the railroad bubble was not as severe as it had been.

Regrettably, while the American railroad industry was booming, the surrounding industries were not stimulated. Under competition from British goods, both the metallurgical and the cotton spinning industries saw a slowdown in growth.

Rails, pig iron, locomotives, cotton cloth, hardware, machinery… they were all flooded with British products, severely stifling the growth of domestic industries.

Now that the British increased their dumping, these industries could not withstand the pressure. The cotton spinning industry, the first to be hit hard, ushered in the wave of bankruptcies.

This quickly spread to the stock market, where prices collapsed uncontrollably and more enterprises became entangled in the crisis.

A multitude of factories went bankrupt, and banks and financial companies naturally could not remain unaffected, with a massive amount of bad debt surfacing, triggering a run on the banks and their subsequent bankruptcy.

The economic crisis in the United States swiftly affected the United Kingdom, with a contraction in the market and a hit to British industrial exports, leading to widespread enterprise bankruptcies. The British capitalists, who were investors, suffered heavy losses as well.

Capitalists are sensitive to changes, and in order to stem their losses and prepare for a potential domestic economic crisis, British capitalists one by one began withdrawing capital from the American market.

Against this backdrop, in the autumn of 1857, a cash crunch occurred in the American financial market, and the entire banking system was paralyzed. In New York, 62 out of 63 banks ceased payment, with the discount rate going above 60%.

The economic crisis erupted across the United States. With no protection, the American market was vulnerable, and the crisis directly triggered the Civil War.

Northern capitalists needed cheaper labor to increase profits and tariff barriers to protect their interests, while the southern plantation owners wanted the opposite; they needed lower tariffs to export cotton and to buy cheap industrial goods.

Provoked by the economic crisis, northern industrialists decided to overturn the table, advocating the benefits of abolishing slavery and trade barriers, preparing to cut off the southern plantation owners’ revenue source from the root.

Obviously, this was not something the southern plantation owners could accept. They could tolerate the abolition of slavery, since the contract labor system was not much better than slavery, but the issue of tariffs was non-negotiable.

Why should we use northern industrial products that are of poor quality, inefficient, and expensive?

Moreover, with the increase in tariffs, exports of grains, cotton, and tobacco would suffer a deadly hit. For every additional dollar of tax, they would have to reduce one dollar of profit—it was outright robbery of their money.

With such severe conflicts of interest, reaching an agreement was impossible, with the southern plantation owners, who were at a disadvantage, starting to push for independence.

The outbreak of the economic crisis in the United States had little to do with Austria, as the trade volume between the two countries was very small, and both were agricultural exporters, with competition outweighing cooperation.

However, when the economic crisis spread to the United Kingdom, it became difficult for all European countries, including Austria, to stay insulated.

Vienna Palace

Prime Minister Felix spoke earnestly, “Your Majesty, the economic crisis that erupted in the United States has spread to the United Kingdom, and it won’t be long before it affects us.”

“Once the British withdraw their capital, many domestic enterprises will face a capital shortage, leading to an economic crisis.”

Franz replied nonchalantly, “This is the inevitable result. At least we have prepared for it in advance, and there will be no cash shortage domestically. As long as we ensure normal bank exchanges, the crisis will be within manageable limits.”

Everyone nodded. The Vienna Government had made many preparations to respond to the economic crisis, first by locking in a portion of the capital so it could not flow out, and then by issuing massive bonds to accumulate funds.

Now, even if some British and French capital is withdrawn, the Vienna Government still holds a large amount of British Pounds and Francs, which can be used for direct payments without causing an outflow of gold and silver.

Finance Minister Karl proposed, “Your Majesty, while the crisis is still within controllable limits, perhaps we can delay the implementation of the approval system for substantial capital flows.”

“After all, such a move would damage our reputation. Unless absolutely necessary, there is no need to take this step.”

In this era, capital could flow freely between nations, without any restrictions. The one who first braves this situation may become a hero, but there is a greater chance of becoming a martyr.

Once disliked by the capitalists, the future international trade would be highly unfavorable for Austria.

Franz thought for a moment and said, “There still needs to be approval. We can issue an announcement stating that any capital movement exceeding 100,000 Divine Shield must be declared 1-3 months in advance.

We guarantee that the flow of all legal capital will be unrestricted, and the origins of funds that cannot be determined must be clearly explained and proven not to be illegally obtained before they can leave the country.

The government can find more excuses, such as: certain criminal groups transferring funds; or some corrupt officials moving finances…

Taking action before the economic crisis erupts in Austria will prevent people from thinking that we are limiting the free flow of the economy.”

Checking the legality of funds will increase the government’s workload, but absorbing these extra costs is acceptable for the sake of combating crime.

As for limiting capital flows, that is not even worth mentioning; one can declare in advance. At most, it adds a layer of protection to the financial market, giving the government time to prepare.

Otherwise, the currency crisis that occurred in the United States serves as a warning. Suddenly, when a large amount of foreign capital decides to leave, the government has no time to respond and can only swallow the bitter pill.

“Yes, Your Majesty!”

Besides adding a financial firewall, the Vienna Government did nothing else. It was still the era of capitalist free-market economics, and too much government intervention in the economy would annoy many people.

Moreover, Franz didn’t know how to intervene anyway. Regardless, the indisputable fact was that industrial overcapacity existed, an insurmountable problem with no solution.

In 1857, Austria’s industrial capacity was more than four times that of 1847, far exceeding the world average, naturally resulting in industrial overcapacity.

That’s the inevitable outcome of industrialization; the efficiency of machine production far exceeded that of manual labor, and the market clearly couldn’t keep up with the growth of industrial capacity.

Therefore, following the first Industrial Revolution, the capitalist world would experience an economic crisis periodically.

Looking for new markets at this time was frankly nonsensical. With economic crises erupting in countries across the world, where could one find a market?

This is not like later times, where a market exists wherever people do. The current productive forces are limited, the social wealth they create is limited, and the vast majority of people simply have no purchasing power.

Take the Russian Empire as an example; with a population of over seventy million, it ranks as the largest in Europe on the surface, a seemingly large market.

In reality, aside from those ten million nobles and free citizens, the rest were serfs. With no personal freedom, what purchasing power could they have?

This limited market had already been divvied up, and expecting to increase exports meant waiting for the Tsarist Government to complete reforms of the serf system!

Depending on the colonial market was also absurd. Apart from a few colonies like India, Cuba, the Philippines, and Southeast Asia, most of the overseas colonies were in a state of underdevelopment.

With few emigrants and the locals lacking purchasing power, finding buyers for industrial products was a challenge.

Under these circumstances, once industrial overcapacity appeared, an economic crisis was inevitable. The best choice was not to stifle it but to let the crisis erupt.

Survival of the fittest, the strong survive while the weak perish. This is also a driver of scientific and technological progress; companies that don’t want to be squeezed out by competitors must promptly update their equipment and eliminate outdated capacities.

Even copycat enterprises must strive, or they will die, if they are not fast enough in response, strong enough in imitation, or low enough in cost.

Time swiftly passed, and by the end of 1857, the economic crisis had spread from the United Kingdom to France. By early 1858, the crisis continued to expand to Belgium, Austria, the Germany Region…

Apart from the Russian Empire, which had not yet completed its reforms, no one on the European Continent was spared from the economic crisis. Countries suffered heavy losses under its impact.