CRISES
THE NATURE OF AN ECONOMIC CRISIS
[231]A definition of an economic "crisis" is, like most other
definitions, very difficult to construct. By way of introduction we
shall quote a few chosen somewhat at random. Adolph Wagner, the German
economist, expresses his idea by saying: "Crises imply ... the
overwhelming and simultaneous occurrence of inability on the part of
independent _entrepreneurs_ to pay their debts." This is similar to the
statement of John Stuart Mill: "There is said to be a commercial crisis
when a great number of merchants and traders at once either have, or
apprehend that they shall have, a difficulty in meeting their
engagements." Professor E. D. Jones says: "A crisis is the sudden
application of a critical conservatism to business transactions, leading
to such a demand for liquidation as to cause a widespread inability
among business men to meet their obligations." Senator Theodore E.
Burton states: "The word crisis, if employed with entire accuracy,
describes a period of acute disturbance in the business world, the
prevailing features of which are the breakdown of credit and prices and
the destruction of confidence. It has especially to do with the
relations of debtor and creditor."
None of these definitions gives so clear an idea as does a brief
description. Probably no one has ever pictured the crisis and the
associated events more effectively than did Frederick Engels in his
little volume, _Socialism: Utopian and Scientific_:
As a matter of fact, since 1825, when the first general
crisis broke out, the whole industrial and commercial world,
production and exchange among all civilized peoples and
their more or less barbaric hangers-on, are thrown out of
joint about once every ten years. Commerce is at a
standstill, the markets are glutted, products accumulate, as
multitudinous as they are unsaleable, hard cash disappears,
credit vanishes, factories are closed, the mass of the
workers are in want of the means of subsistence; bankruptcy
follows upon bankruptcy, execution upon execution. The
stagnation lasts for years; productive forces and products
are wasted and destroyed wholesale, until the accumulated
mass of commodities finally filter off, more or less
depreciated in value, until production and exchange
gradually begin to move again. Little by little the pace
quickens. It becomes a trot. The industrial trot breaks into
a canter, the canter in turn grows into the headlong gallop
of a perfect steeplechase of industry, commercial credit,
and speculation, which finally, after breakneck leaps, ends
where it began--in the ditch of a crisis. And so over and
over again.
Perhaps even this vivid word picture will be less impressive to some
than a few facts as to the serious effects of the crisis and the
depression that follows it. Professor Wesley C. Mitchell in his recent
volume entitled _Business Cycles_ has recorded the significant features
of the crisis of 1907 in England and the United States and the following
points have been taken from his account. By the middle of the summer
evidences of difficulty had begun to appear in England. British railway
stocks had fallen off in price; the shipbuilding yards had few new
contracts; costs of production had become so great that many
manufacturers were refusing to take new business at the ruling
quotations; the building trades were dull; the ratio of net to gross
railway receipts declined; commodity prices began to drop; bank
clearings fell off; imports gained less rapidly; and the percentage of
trade union members unemployed rose from 2.8 per cent. at the end of
April to 3.6 per cent. by the close of August. These difficulties came
to a climax in the latter half of the year, being intensified by the
crash in the United States. The bank rate of the Bank of England rose
from 4-1/2 to 7 per cent., where it remained for nearly two months.
During this period the market rate averaged from 5-1/2 to 6-1/2 per
cent. Imports and exports showed smaller and smaller increases over the
preceding year and in the early months of 1908 began to decline;
clearings fell off sharply and trade union unemployment increased to
nearly 10 per cent. during the latter months of 1908.
In the United States, where the crisis degenerated into a panic,
conditions were much worse. In advance of the actual outbreak of the
panic there was for months evidence of a tension in the investment
market. Copper especially fell in price and was followed by copper
stocks. This precipitated difficulty among a group of banks that were
more or less closely identified with the copper interests. Runs were
started and a number of banks were forced to suspend payments. A
scramble for cash followed, spreading from New York throughout the
United States and accompanied by very serious consequences. Among the
worst of the effects were a premium on currency which rose at one time
as high as 4 per cent.; the necessity of introducing numerous
substitutes for cash; a demoralization of the domestic and foreign
exchange markets that caused heavy losses both to bankers and to
business men, while the amount and the prices of securities dealt in on
the stock exchanges seriously declined. During November and December
currency was at a premium of from 1/8 to 4 per cent. Call loan rates
were erratic, going as high as 125 per cent. in the latter part of
October and fluctuating between 5 and 25 per cent. as late as during the
latter half of December. During November there was a decline in the
amount of time loans and the quoted rates ranged from 6 to 7 per cent.
in October, 12 to 16 per cent. in November, and 8 to 12 per cent. in
December. Worse still was the stoppage of business by those enterprises
that could not pay the high rates and could make no special arrangements
to secure lower ones. Business failures in the United States which had
been as low as 161 in the last week of 1906, were 300 for the week
ending December 19, 1907, and 435 for the week ending January 9, 1908.
In the second quarter of 1907 there were 2,471 and for the first quarter
of 1908 there were 4,909.
These derangements of business would seem to be of interest primarily to
the bankers and brokers or to the large borrowers--to the capitalist
class. The counterpart of the picture is to be found in the effect of
the crisis upon the man of small means and upon the poor. Inability to
borrow may mean considerable inconvenience or even financial ruin for
the man of large affairs but it does not usually mean actual suffering.
Nevertheless his failure to secure funds and the necessity of selling
his securities or commodities at a low price may force him to close his
factory, to delay extensions, or at least to curtail operations. He
receives fewer orders for goods and as a result buys smaller amounts of
raw materials and lessens his own output.
This means reductions of wages and discharge of workmen. Some writers
have urged that the workingman receives a fixed wage and does not assume
industrial risks, which are borne by the capitalist or entrepreneur.
Such a statement is fallacious. The employee participates in the risks
of modern industry and suffers from a business derangement far more
severely than his employer. The capitalist secures less profits but with
his accumulated savings ordinarily endures no real privation, while
large numbers of the workers with little or no savings face actual
hunger or starvation. Demands upon charitable organizations increase,
bread lines grow longer, and suffering becomes widespread and intense
until the crisis and the ensuing depression are over....
THE CRISIS OF 1907 IN THE LIGHT OF HISTORY
[232]... From one point of view ... every economic crisis is a financial
crisis. For since values are expressed in terms of money, and since the
modern business superstructure is erected on the basis of credit, every
economic revulsion expresses itself through the medium of a change in
prices; and since the bank is the center of credit operations, every
crisis inevitably involves a revolution in the conditions of credit.
From this point of view, all crises may be declared to be financial
crises.
From another standpoint, however, a distinction may be drawn between
financial crises proper and commercial or industrial crises in the
larger sense. There may be a financial panic or crisis due primarily to
temporary and sudden oscillations in the condition of the money market
or in the price of securities. Such oscillations, sharp and sudden
though they be, may have but little relation, whether of effect or of
cause, to the general commercial and industrial interests. Of this
character, for instance, were the original Black Friday in England, in
1745, its namesake, the famous Black Friday in 1869 in New York, as well
as many spasmodic fluctuations due either to political rumors like that
which followed the Venezuelan Message of 1895, or to temporary
speculative manipulations, like the Northern Pacific "squeeze" of 1901.
Of a distinctly different nature are those wider disturbances which are
traceable to more general economic causes and which, even though they
culminate in acute financial trouble, are followed by an industrial and
commercial depression of more or less magnitude.
Into which category is to be put the crisis of 1907; and if in the
latter, what were its causes?
At the outset it must be remembered that crises are essentially modern
phenomena. We have had financial transactions, and that, too, on a large
scale, for many centuries and in many civilizations. But crises, in
contradistinction to temporary panics, have existed in England only
since the middle of the eighteenth, and in other countries only since
the beginning of the nineteenth, century. The first crisis in England,
barring the financial flurry connected with the South Sea Scheme in
1720, was that of 1763, followed by the minor disturbances of 1772 and
1783, and the more widespread convulsions of 1793, 1810, and 1825. The
first crisis in the United States was that of 1817; and it was not until
1837 that we find the first international crisis, spreading from the
United States to England and then to France. In Germany the period of
important crises was ushered in even later.
Crises, in other words, are products of modern economic life. Modern
economic life, however, has as its basal characteristic industrial
capitalism, with the factory system and the newer methods of production
for a wide market. This transition to modern industrial capitalism began
in England in the latter half of the eighteenth century, was initiated
in America in the first two decades of the nineteenth century, and took
place on the continent at a later date, last of all in Germany. The
explanation of crises must therefore be sought in some feature of our
modern capitalistic life.
The current explanations may be divided into two categories. Of these
the first includes what might be termed the superficial theories. Thus
it is commonly stated that the outbreak of a crisis is due to lack of
confidence--as if the lack of confidence was not in itself the very
thing which needs to be explained. Of still slighter value is the
attempt to associate a crisis with some particular governmental policy,
or with some action of a country's executive. Such puerile
interpretations have commonly been confined to countries like the United
States, where the political passions of a democracy have had the fullest
sway. Thus the crisis of 1893 was ascribed by the Republicans to the
impending Democratic tariff of 1894; and the crisis of 1907 has by some
been termed the "Roosevelt panic," utterly oblivious of the fact that
from the time of President Jackson, who was held responsible for the
troubles of 1837, every successive crisis has had its presidential
scapegoat, and has been followed by a political revulsion. The crisis of
1857 helped to weaken the Democrats; the crisis of 1873 resulted in a
popular majority for Tilden; the crisis of 1884 put Cleveland into the
presidential chair; and the crisis of 1893, with the ensuing depression,
brought the Republicans back to power.
Opposed to these popular, but wholly unfounded, interpretations is the
second class of explanations, which seek to burrow beneath the surface
and to discover the more occult and fundamental causes of the
periodicity of crises. Here we find an interesting and progressive
series of attempts to grapple with the difficulties of the problem. For
a long time economists and business men advanced the theory of
overproduction, forgetful of the fact that there really cannot be any
such phenomenon as too much actual production of wealth.
With the disappearance of this doctrine there came into prominence its
variant, which put the emphasis on relative, rather than absolute, or
universal overproduction, that is, the overproduction of some things and
the underproduction of others. This theory also failed to command
general assent, for the reason that no one could show in what respects
there was any underproduction of wealth, or any lack of particular
products during the years preceding a crisis. Others again, have sought
the causal fact in underconsumption, alleging that the larger
consumption of wealth will in itself take up all the slack of
production, and thus obviate a crisis. This explanation also is
inadequate, because it overlooks the fact that the real falling off in
consumption comes after the crisis has developed and not before; in
fact, the period of prosperity which precedes a crisis is generally
marked by a prodigious increase in consumption.
The socialists, again, seek to explain crises by the existence of
private property in the means of production, and contend that if we were
to cease the exploitation of the laborer by the modern capitalistic
method, crises would disappear. While, however, agreeing in this general
conclusion, they differ in their detailed analyses. Thus Rodbertus
maintains that the secret of crises is to be found in the fact that the
progress of industry causes a continually greater output of product,
while the exclusion of the laboring classes from any participation in
this increased productivity involves a relative diminution in demand,
and thus ultimately a fall in price, culminating in a crisis. Marx, on
the other hand, puts the emphasis on the fact that the necessary fall in
the rate of profits (which, according to him, is a result of the surplus
value, or exploitation theory) is incompatible with the greatly
increased productivity of fixed capital inherent in the present system,
and that the clashing of these two incongruous tendencies of modern
industrial life brings about a relative overproduction of capital, and
gives rise to periodical explosions. This view, finally, is sharply
criticised by the latest and ablest of the socialist theorists,
Tugan-Baranowsky, who in turn maintains that crises are due primarily to
the fact that under the modern system it is impossible to invest the
fresh accumulations of capital proportionally in all branches of
industry, and that it is this relative disproportion of accumulated
capital to the particular demand that causes the anarchy of the market
and the recurrent convulsions of industry.
While the socialist scholars have undoubtedly made valuable
contributions to the discussion of the problem, they, like the earlier
economists, have erred in laying stress on the question of technical
production rather than, as is done by the more recent economic thinkers,
on that of business enterprise and capitalization. This is manifestly
not the place to elaborate a general theory of crises. If we attempt,
however, to give the bare outline of the modern explanation. It would be
approximately as follows:
The problem of crises or industrial depressions is one of relative
capitalization. Under the present system of enterprise, production is
carried on in mass for a prospective market, rather than as formerly in
small quantities to fill a definite order. Even if it be contended that
certain factories nowadays are busy with producing to order, it is none
the less true that numerous plants are continually being erected in the
expectation that orders will be received in the future. The good times,
or periods of rising prices, may be due to many causes--either in
general to an augmented gold output, or in particular to the increase in
the demand for some special product, whether in the iron industry
through a new navy program, or in the clothing industry through the
outbreak of a war, or in any other industry through a change of fashion
or what not. Prices first rise in the particular enterprise, production
augments, the movement spreads to other lines of business, and the new
enterprises are financed by loans from the banks or trust companies, or
by the sale of securities on a capitalization proportionate to the
anticipated earnings. In times of buoyancy we are continually
capitalizing anticipated earnings and future hopes, and we do this
through the utilization of credit on a large scale. We build railways,
put millions into steel plants, "boom" land sites, and form combinations
of all kinds, employing the credit facilities granted by the banks, or
throwing the securities on the stock market. We "water" the stock or, if
that be forbidden by law, we drive the market quotations to a high
point, because we think that this is warranted by prospective earnings.
Sometimes we say that we capitalize the good will or, in the case of
quasi-public enterprises, the franchise; but in all cases we capitalize
the future because we believe that we shall earn an income which will
justify this capitalization.
The peculiarity, however, of an up-grade movement which rests on modern
credit facilities is that we wear magnifying glasses or look at the
future in too roseate a light. It is a natural tendency of human nature
to capitalize one's hopes and expectations too liberally. If this is
done on a continually larger scale, the capitalization becomes so great
that actual earnings do not come up to our anticipations or the fear of
a discrepancy between actual and estimated earnings begins to obsess us.
It becomes necessary to reduce the capitalization to its true
dimensions, _i. e._, to a sum proportioned to actual earnings. This
process of readjustment of overcapitalized values obviously involves
loss; but readjustment there must be. If the realization of its
necessity is sudden, we have a crisis or panic.
In the height of the period of exaltation or prosperity, something
happens to disturb confidence. A chance occurrence, a mere rumor, may
suffice. Some bank considers its credit too heavily engaged, or suspects
the adequacy of the collateral. Just at the flood of the tide, when new
demands are constantly being made, it finds itself unable or unwilling
to respond. Its refusal starts or intensifies the feeling of insecurity,
and with the inability of some important concern to meet its
obligations, a failure occurs and the crisis is precipitated. If, on the
other hand, the situation is well handled, and if the readjustment of
the overcapitalized values to actual earning capacity can be brought
about more gradually, we have, in lieu of a crisis, a liquidation and a
period of depression which lasts until the up-grade movement again sets
in.
Crises, therefore, are not necessarily the result of increased technical
production. The important point is not production, but capitalization.
There may be overcapitalization, without overproduction. Overproduction
of particular things may indeed accompany overcapitalization, but the
stress must be laid, not on the relation between production and
consumption, as the old writers assumed, but on the discrepancy between
the investment and its returns.
While the general features of a crisis are thus everywhere the same, the
details differ in each case. Sometimes it is the banks that fail first,
sometimes the general business enterprises. Sometimes it is the railway
securities that first feel the strain, at other times "the industrials,"
and at still other times the raw materials. Sometimes the bolt comes out
of the clear sky with prices at a maximum, sometimes it is only the last
stage of a period of liquidation with progressively lower prices. But
however unpredictable and seemingly inscrutable the actual course of
events, the fundamental explanation is always the necessary readjustment
of capitalization to actual earning capacity.
That this is true of all our crises can be seen from a hasty review. The
crisis of 1817 was the result of the first utilization of modern
capitalist methods in America. The period of the War of 1812 was marked
by three facts: first, the industrial revolution in New England and the
introduction of the factory system in the textile industry; second, the
great development of internal improvements through canal and turnpike
companies; third, the sudden multiplication of banks to finance the new
enterprises. The consequence was the so-called "Golden Age," which
lasted for several years, until checked by the immense imports from
England after the war, and destroyed by the collapse of the
overcapitalized undertakings. It was well into the twenties before the
country recovered from the industrial depression, and then came the
second up-grade movement, which culminated in 1837. This was primarily a
land and transportation, rather than a purely industrial, phenomenon.
The canals and turnpikes in the East were now being replaced by
railways, and the spread of slavery caused a rush of cotton planters,
not only to the black belt, but to the pine barrens and hill country of
the South. It was primarily land values that were being overcapitalized,
and the process went on to such an extent that the annual land revenues
of the Government now exceeded the total governmental receipts from all
sources of a few years before. Finally, to finance this land movement
there were called into being hundreds of the "coon-box" banks, that
found a champion in President Jackson in his war against the Bank of the
United States. As the period of exaltation had been unexampled, so the
collapse was proportionally great. The crisis of 1837, followed as it
was by those of 1839 and 1841, was still more serious than that of 1817.
It was again well-nigh a decade before the readjustment of values had
been completed. The following decade was in turn marked by five striking
facts: first, the gold discoveries of California and Australia, which
soon initiated a general rise of prices; second, the consummation of the
revolution in the media of transportation by land and water, and the
settlement of the entire Mississippi Valley, the most fertile portion of
the continent; third, the abolition of the corn laws in England and the
opening up of a market for our incipient surplus of wheat; fourth, the
era of industrial invention which resulted in the application of
capitalistic methods to new classes of enterprise besides the old
textile industries; and fifth, the development of free banking with the
"wild-cat" institutions to provide the credit facilities for this
prodigious overcapitalization. The crisis of 1857, which was the
inevitable result, was perhaps still more acute than its predecessors.
The continuance of its depressing influence on industry, however, was
checked by the economic effects of the Civil War, which gave an
artificial stimulus to many forms of enterprise.
In the period immediately succeeding the war, great changes again
occurred. The transcontinental roads were completed and the Eastern
trunk lines consolidated; the great wheat fields of the country were
opened up under the new homestead laws, and the period of large exports
began; the Bessemer process revolutionized the iron industry, and the
factory system was now applied to boots, sewing-machines, and
agricultural implements; the great copper and silver deposits were
developed, and the petroleum output grew apace; while the greenbacks and
the greenback movement fomented the process of inflation. The
discrepancy between the capitalization and the actual earning capacity
of the country's business enterprises again became so overwhelming that
the necessary readjustment took the form of the convulsion of 1873--a
convulsion the depressing effects of which were felt with almost
increasing severity for six years.
The crises of 1884 and 1893 were both less intensive and more
short-lived than their predecessors, for reasons which it is now not
difficult to explain. The resumption of specie payment in 1879 was
rendered possible, and was followed by a series of abundant crops which
revivified enterprise, and which were aided by the use of agricultural
machinery on a large scale. The energy and the capital of the nation,
however, were devoted in increasing measure to the transportation
industry. This resulted in a perfect orgy of new railroad construction,
the entire mileage of the country increasing in five years by 50 per
cent. As the overcapitalization was primarily a railway
overcapitalization, the resulting reaction of 1884 was essentially a
railway crisis, leading to but indirect and temporary disturbances in
industry at large. Within a year or two recovery was general, and the
prosperous years from 1886 onward were reflected in the existence of a
huge surplus of governmental revenues. The live-stock and meat-packing
business attained its high-water mark; the textile industries made great
progress in the finer grades, and the ready-made clothing industry
assumed vast dimensions; the iron and steel industry was revolutionized
anew by the invention of the open-hearth process and the utilization of
cheap ore from the Lake Superior region; the South was being quickly
developed by the Northern capital that poured into the cotton mills and
the coal and iron mines; electricity was applied to industry on an
increasing scale, and the country took rapid strides in its evolution
from an agricultural to an industrial community.
The movement of overcapitalization, however, was somewhat checked by two
important facts: the downward tilt of world prices in general, which had
been falling since 1873 and which were fast reaching their lowest point;
and the relative shrinkage, not only in the amount of the wheat crop,
but also in the value of both the wheat and the cotton crops. The
resulting reaction of 1893, which was itself partly due to the ill-timed
experiments with silver legislation, was as a consequence neither so
profound nor so long-continued, since the discrepancy between
anticipated and actual values turned out not to be so excessive.
When we come particularly to the crisis of 1907, we find that the
general causes were very much the same. The last decade has been
characterized by the most unexampled prosperity in our history. The most
striking initial cause is the prodigious increase in the gold supply.
Whereas the annual average value of the output of gold was under one
hundred millions in the first half of the eighties, and only a hundred
and twelve millions in the second half, it has grown with such enormous
strides that during the past two years it has reached an annual value of
about four hundred millions. The result has been a constant rise of
prices from the minimum level of 1896. The rapid accumulation of gold,
much of which went into the bank reserves, enabled the financial
institutions to expand their credit facilities many fold, and as a
consequence enterprise flourished in every direction. During the last
decade the record crops of cereals and cotton, the extension of dry
farming, the effects of irrigation on fruit culture, the development of
truck farms, and the unparalleled increase of immigration led to a
remarkable enhancement of land values throughout the length and breadth
of the land; the output of coal doubled, that of petroleum more than
doubled, and that of pig iron, as well as of steel, actually trebled;
the huge combinations of capital, now spreading to every form of
enterprise, effected prodigious economies and revolutionized business
methods; and the transition from the agricultural to the industrial
phase of economic development proceeded with unlooked-for celerity.
Values were pushed up on all sides and the hopes of a prosperous
community were capitalized with a recklessness born of unbounded faith.
The pace was too rapid; the reaction was bound to ensue. In the late
autumn of 1907 the revulsion was precipitated, with all the familiar
accompaniments of an acute panic such as the collapse of several
financial institutions, the sudden curtailment of loans, leading to the
failures of some prominent business concerns, the hoarding of money, the
appearance of a premium on currency, going to over 3 per cent., and the
frantic efforts of the financiers to relieve the situation by the
importation of gold, the issue of clearing-house certificates and the
interference of Government through the dubious expedients of the placing
of a new bond issue and the emission of Treasury loan certificates.
The crisis of 1907, however, is on the whole not comparable either to
that of 1857 or to that of 1873, for reasons which have thus far perhaps
not been adequately discussed. These reasons may be classed under five
heads.
In the first place, the very magnitude of the country's resources has
been a favorable factor. The unparalleled prosperity of the past decade
has made possible the accumulation of a vast reserve in the case, not
only of the great corporations, but also of the average business man.
This reserve has acted as a buffer to the shock of reaction, and has
softened the impact through a speedy restoration of confidence in the
excellence of the country's assets and in the real solvency of business.
Secondly, the crops, while not those of a bumper year, have been large
and valuable. It is significant that almost each of our great crises in
the past has been preceded either by the failure of the harvest at home
or by the existence of such a bountiful output abroad as greatly to
reduce prices. It must be remembered that, notwithstanding all recent
developments, this country is still primarily agricultural, and that
upon the varying extent of our great staple crops depends in large
measure the effective demand which sets and keeps in motion the wheels
of business activity. By a fortunate coincidence, the crisis was
attended by a phenomenon which in ordinary times would have spelled
prosperity, and which in this extraordinary conjuncture helped to bring
back normal conditions.
In the third place, the overcapitalization of values was somewhat less
conspicuous than hitherto in our greatest industry--that of
transportation. Some of our former crises have, as we know, been brought
on primarily by the speculative building of railroads. But whereas in
the early eighties the annual increase of construction reached ten and
eleven thousand miles, during the past five years, with a railway system
three times as large, the annual increment of new construction was only
four or five thousand miles. The consequence has been that with the
rapid upbuilding of the country the railways have grown up to their
capitalization, until it is now reasonably certain that there has been
for some little time scarcely any actual overcapitalization. A striking
proof of the absence of any real discrepancy between normal values and
the capitalization of actual earning capacity is afforded by the
congestion of traffic of a year or two ago; and even with only normal
business activity it is computed that, in order to prevent this
congestion in future and to maintain the railways at a reasonable
standard of efficiency, there will be required an annual investment of
over a billion dollars.
Fourthly, the crisis of 1907 was preceded by a period of gradual
liquidation. General prices of commodities, with a few notable
exceptions like that of copper, were indeed high until well-nigh the
outbreak of the panic. But the prices of securities had for some time
undergone a marked shrinkage. Some, quite mistakenly, attribute this
shrinkage to lack of confidence engendered by the governmental policy
toward industry; others, with equal readiness and no less extravagance,
ascribe it to the distress caused by the exposure of the methods of
"high finance" in positions of trusteeship. In reality, however, the
depreciation in securities was caused chiefly by the rise in the rate of
interest. In fact the one phenomenon is really the other; for where
earnings remain unchanged, the capitalization of the earnings depends on
the rate of interest. If it be objected that the price of stocks fell
because of the apprehended decrease of future earnings, due to lack of
confidence, the retort is obvious that this would not suffice to explain
the equal or still greater fall in the capital value of bonds, private
or public, with a fixed rate of interest. The depreciation was not
national, but international, in character; and it applied not only to
our railway and industrial securities, but to the English "Consols" as
well.
The rise in the interest rate, which explains the fall in the capital
value of securities, was due to several causes. First and foremost is
the increase in the gold output. For, as is now well established by
economic theory and reinforced by the observations of practical men,
while any increase in the supply of loanable funds on the call-money
market temporarily reduces the "money rate," an increase in the general
supply of standard money in the community, on the contrary, raises not
only the price level of all commodities, but the price for the use of
capital, which we call the general rate of interest. The increase of
money as the standard of value inevitably tends to increase the general
rate of interest. Again, since the rate of interest is always adjusted
to the earnings of the fund of capital at the margin of its employment,
the rate of interest has risen because there has been relatively less
capital available for employment. The fund of free capital has been
rapidly diminishing during the past few years. Hundreds of millions were
destroyed in the Boer and Japanese wars; hundreds of millions more
disappeared through the destruction of San Francisco and Valparaiso; and
countless millions in addition have been utilized to finance the more or
less dubious schemes which have sprung up in all countries during the
years of prosperity. Even though there was no great overcapitalization
of railroads and even though many of the industrial enterprises were
really legitimate, the discounting of the future was not quite ample,
and the capital was invested more rapidly than the immediate returns
would warrant. The replacement fund, in other words, was neither quite
large enough nor quite active enough; and with the gradual exhaustion of
the available free capital, interest rates necessarily rose and security
values as a consequence fell.
The period of liquidation was thus a fortunate event. By checking the
movement of exaltation and preventing the level of prices from being so
extreme, it kept the reaction from being so great. Where the crest of
the wave is lower, the shock of its break is less. Had the ascent of
prices and values gone on unhindered, the convulsion of 1907 would have
been far more severe. From this point of view, even those who mistakenly
persist in ascribing the lack of confidence to the President ought in
reality to be grateful to him; for to the extent that he may be said to
have superinduced the liquidation of the spring and summer, he assuredly
contributed to mitigate the shock of the inevitable reaction in the
autumn.
The fifth and final cause of the lesser magnitude of the crisis is the
development of trusts. Until we attain the right perspective, it is
always difficult to get a correct view of the far-reaching changes which
are taking place under our very eyes. Especially true is this of such a
veritable revolution as is typified by the modern concentration and
integration of industry into the vast combinations known as trusts.
There are indeed many disquieting and untoward symptoms in the
development of which this is not the place to speak. But as against the
undoubted perils of what we are all now coming to recognize as an
inevitable process, we sometimes forget to put at least one
countervailing advantage which is of especial importance in this
connection. The modern trust, as typified in its most developed form by
the United States Steel Corporation, is apt to exert an undeniably
steadying influence on prices. Precisely because of the immense
interests at stake, and the danger of a reaction, the trust with its
consummately able management tends toward conservatism. As compared with
the action of a horde of small competitors under similar conditions, it
is apt during a period of prosperity to refrain from marking up prices
to the top notch, and is likely to make a more adequate provision for
the contingencies of the market. With this greater moderation is apt to
be associated a more accurate prevision, which succeeds in a more
correct adjustment of present investment to future needs. The drift of
business enterprise in its newer form is thus toward a relative checking
of the discrepancy between estimated and actual earnings, or, in other
words, toward a retardation in the process of overcapitalization. The
history of trusts is still too recent, and in not all of them are we yet
able to discern the working out of what ultimately will come to be
recognized as the real laws of their evolution. To those, however, who
comprehend what this revolution in business enterprise really implies,
it can scarcely be doubted that the fruit of this steadying influence
and of the better adaptation of the present to the future is already
perceptible. Notwithstanding the quite unexampled prosperity of the last
decade, the tempo of overcapitalization has been relatively less rapid
and the process of readjustment throughout the world of enterprise has
therefore been less extreme. Industry has slackened rather than
collapsed, and the disturbance itself has been comparatively
short-lived, with the prospects of an early rebound. The influence of
trusts in moderating crises and in minimizing depressions will doubtless
become more apparent with each ensuing decade in the history of modern
industry.
While the general causes which are responsible for the crisis of 1907
have been recounted above, there still remains one point of fundamental
importance. If we compare our economic history with that of Europe, we
observe that acute financial crises have there almost passed away.
England has had no severe convulsion since 1866, and in France and
Germany also the disturbances are more and more assuming the form of
periodic industrial depressions rather than of acute financial crises.
The responsibility for the continuance in this country of a phenomenon
which is in large measure vanishing elsewhere rests beyond all
peradventure of doubt on the inadequacy of our currency system.
CURRENT THEORIES OF CRISES
TWO POINTS OF AGREEMENT
[233]Wide divergences of opinion continue to exist among competent
writers upon crises; but in recent years substantial agreement has been
reached upon two points of fundamental importance.
Crises are no longer treated as sudden catastrophes which interrupt the
"normal" course of business, as episodes which can be understood without
investigation of the intervening years. On the contrary, the crisis is
regarded as but the most dramatic and the briefest of the three phases
of a business cycle--prosperity, crisis, and depression.[234] Modern
discussions endeavor to show why a crisis is followed by depression,
and depression by prosperity, quite as much as to show why prosperity is
followed by a crisis. In a word, the theory of crises has grown into the
theory of business cycles.[235]
This wider grasp of the problem has discredited the view that crises are
due to abnormal conditions which tempt industry and trade to forsake
their beaten paths and temporarily befog the judgment of business men
and investors, or to misguided legislation, unsound business practices,
imperfect banking organization, and the like.[236] As business cycles
have continued to run their round decade after decade in all nations of
highly developed business organization, the idea that each crisis may be
accounted for by some special cause has become less tenable. On the
contrary, the explanations in favor to-day ascribe the recurrence of
crises after periods of prosperity to some inherent characteristic of
economic organization or activity. The complex processes which make up
business life are analyzed to discover why they inevitably work out a
change from good times to bad and from bad times to good. The influence
of special conditions is admitted, of course, but rather as a factor
which complicates the process than as the leading cause of crises.
BEVERIDGE'S "COMPETITION THEORY"
Among these theories which seek to account not for crises but for the
cyclical fluctuations of economic activity, the "competition theory"
tentatively advanced by Beveridge is one of the simplest.
In most instances, he begins, production is carried on by several or
many establishments, each acting independently, and each seeking to do
as large a share of the business as possible. Whenever the demand for
their wares increases, each competitor tries to engross a larger portion
of the market. "Inevitably, therefore, all the producers together tend
to overshoot the demand and to glut the market for a time. This is a
result not of wild speculation nor of miscalculation of the total
demand; it must be a normal incident wherever competition has a place at
all." Such activity among producers constitutes the period of
prosperity. But sooner or later the glutting of the market becomes
apparent, and then the crisis comes, because the goods cannot all be
sold at a profit. Prices fall, production is checked, and a period of
depression ensues. Gradually, however, the slackened rate of production
allows the accumulated stocks to be cleared, perhaps below cost price,
perhaps by waiting until demand grows up to supply. When this excess of
demand over supply has once again become patent, business recovers.
Depression yields to prosperity, competitors again vie with each other
to increase their shares in the output, after a few years the market is
glutted again, and a new crisis comes, to be followed once more by
depression. Thus business cycles are due in the last resort to "the
simple and well nigh universal fact of industrial competition."[237]
MAY'S THEORY OF THE DISCREPANCY BETWEEN WAGES AND PRODUCTIVITY
Like Beveridge, May conceives crises to result immediately from the
glutting of markets for industrial products. But May offers a quite
different analysis of the cause of gluts. The continually growing
productivity of industry makes necessary a corresponding growth of the
market, if disaster is to be avoided. But to enable producers to sell
their growing output promptly prices must be reduced and wages must be
raised in proportion as the supply of goods increases. For it is only by
combining an increase in the money income of the mass of the population
with a decrease in the cost of commodities that a country's home markets
can be kept expanding with the progress of industrial methods. Periods
of prosperity attended by rising prices necessarily violate this
condition of business hygiene and inevitably end by glutting markets.
Then come crises, which restore the body politic to health by forcing
down prices to the point where consumers can purchase the supplies which
are offered. The germ of the trouble, then, is the tendency of prices to
rise during periods of increasing productivity. Accordingly, May urges
as remedy a legal limitation of the rate of profits, in order that
producers may be forced to reduce prices as they increase output.[238]
HOBSON'S THEORY OF OVER-SAVING
A third explanation of how markets come to be glutted periodically is
offered by Hobson's theory of over-saving. Hobson holds that at any
given time "there is an exact proportion of the current income which, in
accordance with existing arts of production and existing foresight, is
required to set up new capital so as to make provision for the maximum
consumption throughout the near future." Now, if in a period of
prosperity the rate of consumption should rise _pari passu_ with the
rate of production, there is no inherent reason why the prosperity might
not continue indefinitely. But in modern societies, a considerable
portion of the wealth produced belongs to a small class. In active times
their incomes rise more rapidly than their consumption and the surplus
income is perforce saved. There results for the community as a whole a
slight deficiency of spending and a corresponding excess of saving. The
wealthy class seeks to invest its new savings in productive
enterprises--thereby increasing the supply of goods and also increasing
the incomes from which further savings will be made. This process runs
cumulatively during the years of prosperity until finally the markets
become congested with goods which cannot be sold at a profit. Then
prices fall, liquidation ensues, capital is written down, and the
incomes of the wealthy class are so reduced that savings fall below the
proper proportion to spending. During this period of depression the glut
of goods weighing upon the market is gradually worked off, and the
prospect of profitable investment slowly returns. Saving rises again to
the right proportion to spending and good times prevail for a season.
But after a while the chronic impulse towards over-saving becomes fully
operative once more, and soon or late begets another congestion of the
markets and this congestion begets another depression. Proximately,
then, the cause of alternating prosperity and depression is the
tendency toward over-saving; ultimately it is the existence of the
surplus incomes which lead to over-saving.[239]
HULL'S THEORY OF THE CHANGING COSTS OF CONSTRUCTION
An American business man, George H. Hull, has recently drawn from his
experience of practical affairs conclusions which resemble those drawn
by [a German] Professor Spiethoff, from his theoretical analysis of
economic records. High prices of construction, runs his thesis, is the
hitherto "unknown cause of the mysterious depressions" from which the
industrial nations suffer.
In demonstrating the thesis, Hull contends that agriculture, commerce,
and finance fluctuate within relatively narrow limits. Agriculture
provides the necessities of life, commerce distributes them, and finance
adjusts the bills. The volume of all this business is fairly constant,
because the demand for necessities is incapable of sudden expansion or
contraction. Industry, on the contrary, may expand or contract
indefinitely--especially that part of industry devoted to construction
work. For the sources of "booms" and depressions, therefore, we must
look to the enterprises which build and equip houses, stores, factories,
railways, docks, and the like.
Of the huge total of construction, which Hull believes to make over
three-quarters of all industrial operations, at least two-thirds, even
in the busiest of years, consists of repairs, replacements, and such
extensions as are required by the growth of population. This portion of
construction is necessary and must be executed every year. But the
remaining portion is "optional construction," and is undertaken or not
according as investors see a liberal or a meagre profit in providing new
equipment.
Now, when the costs of construction fall low enough to arouse "the
bargain-counter instinct," many of "the far-seeing ones who hold the
purse-strings of the country" let heavy contracts, and their example is
followed by the less shrewd. The addition of the resulting new business
to the regular volume of "necessity construction" plus the provision of
ordinary consumers' goods creates a "boom." But, after a year or two,
contractors discover that their order books call for more work than they
can get labor and materials to finish on contract time. When this
oversold condition of the contracting trades is realized, the prices of
labor and of raw materials rise rapidly. The estimated cost of
construction on new contracts then becomes excessive. Shrewd investors
therefore begin to defer the execution of their plans for extending
permanent equipment, and the letting of fresh contracts declines apace.
As they gradually complete work on their old contracts, all the
enterprises making iron, steel, lumber, cement, brick, stone, etc., then
face a serious shrinkage of business. Just as the execution of the large
contracts for "optional construction," let in the low-priced period,
brought on prosperity, so the smallness of such contracts, let in the
high-price period, now brings on depression. Then the prices of
construction fall until they arouse "the bargain-counter instinct" of
investors once more, and the cycle begins afresh.
While Hull grants that panics are often caused by strictly financial
disorders, he holds that all industrial depressions are caused by high
prices of construction, and foreshadowed by high prices of iron.
Consequently he believes that depressions could be prevented from
occurring if the Government would collect and publish monthly "all
pertinent information in relation to the existing volume of construction
under contract for future months, and all pertinent information in
relation to the capacity of the country to produce construction
materials to meet the demand thus indicated."[240]
SOMBART'S THEORY OF THE UNEVEN EXPANSION IN THE PRODUCTION OF ORGANIC
AND INORGANIC GOODS
Sombart, like many of the recent German writers, finds ill-proportioned
production the chief cause of crises; but he thinks it inaccurate to say
that the overproduction is in industrial equipment. For during the
German "boom" which collapsed in 1900-01, overproduction was quite as
marked in industries making equipment for electric lighting systems,
telephone plants, street railways, dwellings, bicycles, etc., as in
industries making machines. The real lack of proportion he sees in the
unlike degree of expansion in industries using organic and inorganic
materials. The inorganic industries, typified by steel, can expand to an
enormous extent within a brief period without being seriously hampered
by scarcity of raw materials. The organic industries, typified by
cotton-spinning, on the contrary, are always in precarious dependence
upon the year's harvests. In the organic industries, one may say, the
condition of business is determined by the harvests; in the inorganic
industries the condition of business determines the production of raw
materials. The modern crisis, then, following upon a period of
prosperity, is substantially the result of the different rhythm of
production in the organic and inorganic realms. The organic industries
dependent upon harvests cannot keep pace with the inorganic when the
latter are being rapidly extended by heavy investments of capital.[241]
CARVER'S THEORY OF THE DISSIMILAR PRICE FLUCTUATIONS OF PRODUCERS' AND
CONSUMERS' GOODS
Carver has suggested a way of accounting for business cycles by applying
the laws of value which govern producers' goods. He points out that a
comparatively small change in a factory's selling prices will cause a
much greater change in its profits, if volume of output and expenses
remain the same. Since the value of the factory as a going concern is
the capitalized value of its prospective profits, a large increase of
profits will cause a large increase of the factory's value, provided the
high profits are expected to continue long. Hence the law that "the
value of producers' goods tends to fluctuate more violently than the
value of consumers' goods." It follows that:
"A slight rise in the price of consumers' goods will so
increase the value of the producers' goods which enter into
their production as to lead to larger investments in
producers' goods. The resulting larger market for producers'
goods again stimulates the production of such goods, and
withdraws productive energy from the creation of consumers'
goods. This for the time tends to raise the price of
consumers' goods still higher, and this again to stimulate
still further the creation of producers' goods. There is no
check to this tendency until the new stock of producers'
goods begin to pour upon the market an increased flow of
consumers' goods. This tends to produce a fall in their
value, which in turn produces a still greater fall in the
value of producers' goods, and so the process goes."
Thus, once more, prosperity breeds crisis and depression; but this time
the reason is found in the dissimilar fluctuations which the laws of
value establish for the goods which people use and the equipment with
which they are made.[242]
FISHER'S THEORY OF THE LAGGING ADJUSTMENT OF INTEREST
Another interesting suggestion comes from Irving Fisher. By statistics
he has shown that when for any reason prices begin to rise, interest
rates advance, but not fast enough to offset the decline in the
purchasing power of the principal caused by the rise of prices. During
such periods, accordingly, borrowers on the whole get the better of
lenders and make high profits. Since the borrowers consist largely of
active business men, precisely the class of greatest foresight, they
grasp the situation more quickly than lenders. As a result of their
desire to profit by their opportunity, loans are rapidly extended. This
extension is effected largely by the lending of bank credits, that is,
by the increasing of deposit currency. The greater volume of the
currency combines with more rapid circulation of money and checks to
increase prices again, and so to start the whole process anew on a
higher level. "There is thus set up a vicious circle, which will
continue just as long as the rate of interest fails to make a proper
adjustment to put on the brakes and prevent over-borrowing."
"But the rise in interest, though belated, is progressive, and, as soon
as it overtakes the rate of rise in prices, the whole situation is
changed." Borrowers can no longer hope to make great profits, and the
demand for loans ceases to expand. Further, the higher rate of interest
reduces the price of many of the securities used as collateral for
loans. Business men "who have counted on renewing their loans at the
former rates and for the former amounts are unable to do so. It follows
that some of them are destined to fail." There follow suspicions
regarding the solvency of the banks, runs for cash, forced curtailment
of loans, and exceedingly high rates of interest--in short, the
phenomena of crisis.
The contraction of loans is accompanied by a reduction of deposit
currency and a slower circulation both of money and of checks. Hence
prices decline. Again the rate of interest follows; but just as it was
slow to rise so now it is slow to fall. Then the business men who borrow
find that the sluggish adjustment of interest reduces their profits.
Therefore loans, and the deposits based on loans, contract again. But
the shrinking volume of deposit currency causes a further fall of
prices, and once more interest lags behind and renews the process. Thus
the phase of depressions runs cumulatively until at last the progressive
reduction of interest has overtaken the fall of prices. At this point
business men find their profits rising to the normal level. Borrowing
becomes freer, the volume of deposit currency swells, prices start
upward, and the cycle begins afresh.[243]
* * * * *
Beveridge ascribes crises to industrial competition, May to the
disproportion between the increase in wages and in productivity, Hobson
to over-saving,... Hull to high costs of construction, Lescure to
declining prospects of profits,... [Seligman] to a discrepancy between
anticipated profits and current capitalization, Sombart to the unlike
rhythm of production in the organic and inorganic realms, Carver to the
dissimilar price fluctuations of producers' and consumers' goods, Fisher
to the slowness with which interest rates are adjusted to changes in the
price level.
One seeking to understand the recurrent ebb and flow of economic
activity characteristic of the present day finds these numerous
explanations both suggestive and perplexing. All are plausible, but
which is valid? None necessarily excludes all the others, but which is
the most important? Each may account for certain phenomena; does any one
account for all the phenomena? Or can these rival explanations be
combined in such a fashion as to make a consistent theory which is
wholly adequate?
MITCHELL'S THEORY OF BUSINESS CYCLES
[244]Only by putting any theory to the practical test of accounting for
actual business experience can its value be determined. The case for the
present theory, therefore, and also the case against it, is to be found
not in the easy summary which follows, but in the difficult chapters
which precede,[245] or better still in an independent effort to use it
in interpreting the ceaseless ebb and flow of economic activity.
1. THE CUMULATION OF PROSPERITY
With whatever phase of the business cycle analysis begins, it must take
for granted the conditions brought about by the preceding phase,
postponing explanation of these assumptions until it has worked around
the cycle and come again to its starting point.
A revival of activity, then, starts with this legacy from depression: a
level of prices low in comparison with the prices of prosperity, drastic
reductions in the costs of doing business, narrow margins of profit,
liberal bank reserves, a conservative policy in capitalizing business
enterprises and in granting credits, moderate stocks of goods, and
cautious buying.
For reasons which will appear in the sequel, such conditions are
accompanied by an expansion in the physical volume of trade. Though slow
at first, this expansion is cumulative. Now it is only a question of
time when an increase in the amount of business transacted which grows
more rapid as it proceeds will turn dullness into activity. Left to
itself, this transformation is effected by slow degrees; but it is often
hastened by some propitious event arising from other than domestic
business sources, such as exceptionally profitable harvests, heavy
purchases of supplies by Government, or a marked increase in the export
demand for the products of home industry.
Even when a revival of activity is confined at first within a narrow
range of industries or within some single section of the country, it
soon spreads to other parts of the business field. For the active
enterprises must buy more materials, wares, and current supplies from
other enterprises, the latter from still others, and so on without
assignable limits. Meanwhile all enterprises which become busier employ
more labor, use more borrowed money, and make higher profits. There
results an increase in family incomes and an expansion of consumers'
demand, which likewise spreads out in ever widening circles. Shopkeepers
pass on larger orders for consumers' goods to wholesale merchants,
manufacturers, importers, and producers of raw materials. All these
enterprises require more supplies of various kinds for handling their
growing trade, and increase the sums which they pay out to employes,
lenders, and proprietors--thus stimulating afresh the demand for both
producers' and consumers' goods. Soon or late this expansion of orders
reaches back to the enterprises from which the impetus to greater
activity was first received, and then this whole complicated series of
reactions begins afresh at a higher pitch of intensity. All this while,
the revival of activity is instilling a feeling of optimism among
business men, and this feeling both justifies itself and heightens the
forces which engendered it by making every one readier to buy with
freedom.
While the price level is often sagging slowly when a revival begins, the
cumulative expansion in the physical volume of trade presently stops the
fall and starts a rise. For, when enterprises have in sight as much
business as they can handle with their existing facilities of standard
efficiency, they stand out for higher prices on additional orders. This
policy prevails even in the most keenly competitive trades, because
additional orders can be executed only by breaking in new hands,
starting old machinery, buying new equipment, or making some other
change which involves increased expense. The expectation of its coming
hastens the advance. Buyers are anxious to secure or to contract for
large supplies while the low level of quotations continues, and the
first definite signs of an upward trend of quotations brings out a
sudden rush of orders.
Like the increase in the physical volume of business, the rise of prices
spreads rapidly; for every advance of quotations puts pressure upon some
one to recoup himself by making a compensatory advance in the prices of
what he has to sell. The resulting changes in prices are far from even,
not only as between different commodities, but also as between different
parts of the system of prices. Retail prices lag behind wholesale, the
prices of staple consumers' behind the prices of staple producers'
goods, and the prices of finished products behind the prices of their
raw materials. Among raw materials, the prices of mineral products
reflect the changed business conditions more regularly than do the
prices of raw animal, farm, or forest products. Wages rise often more
promptly, but always in less degree than wholesale prices; discount
rates rise sometimes more slowly than commodities and sometimes more
rapidly; interest rates on long loans always more sluggishly in the
early stages of revival, while the prices of stocks--particularly of
common stocks--both precede and exceed commodity prices on the rise. The
causes of these differences in the promptness and the energy with which
various classes of prices respond to the stimulus of business activity
are found partly in differences of organization between the markets for
commodities, labor, loans, and securities; partly in the technical
circumstances affecting the relative demand for and supply of these
several classes of goods; and partly in the adjusting of selling prices
to changes in the aggregate of buying prices which a business enterprise
pays, rather than to changes in the prices of the particular goods
bought for resale.
In the great majority of enterprises, larger profits result from these
divergent price fluctuations coupled with the greater physical volume of
sales. For, while the prices of raw materials and of wares bought for
resale usually, and the prices of bank loans often, rise faster than
selling prices, the prices of labor lag far behind, and the prices which
make up supplementary costs, _i. e._, interest, rent, depreciation,
insurance, salaries for general officials and the like, are mainly
stereotyped for a time by old agreements regarding salaries, leases, and
bonds.
This increase of profits, combined with the prevalence of business
optimism, leads to a marked expansion of investments. Of course the
heavy orders for machinery, the large contracts for new construction,
etc., which result, swell still further the physical volume of business,
and render yet stronger the forces which are driving prices upward.
Indeed, the salient characteristic of this phase of the business cycle
is the cumulative working of the various processes which are converting
a revival of trade into intense prosperity. Not only does every increase
in the physical volume of trade cause other increases, every convert to
optimism makes new converts, and every advance of prices furnishes an
incentive for fresh advances; but the growth of trade also helps to
spread optimism and to raise prices, while optimism and rising prices
both support each other and stimulate the growth of trade. Finally, as
has just been said, the changes going forward in these three factors
swell profits and encourage investments, while high profits and heavy
investments react by augmenting trade, justifying optimism, and raising
prices.
2. HOW PROSPERITY BREEDS A CRISIS
While the processes just sketched work cumulatively for a time to
enhance prosperity, they also cause a slow accumulation of stresses
within the balanced system of business--stresses which ultimately
undermine the conditions upon which prosperity rests.
Among these stresses is the gradual increase in the costs of doing
business. The decline in supplementary costs per unit of output ceases
when enterprises have once secured all the business they can handle
with their standard equipment, and a slow increase of these costs begins
when the expiration of old contracts makes necessary renewals at the
high rates of interest, rent, and salaries which prevail in prosperity.
Meanwhile prime costs, wages and raw materials, rise at a relatively
rapid rate. Equipment which is antiquated and plants which are ill
located or otherwise work at some disadvantage are brought again into
operation. The price of labor rises, not only because standard rates of
wages go up, but also because of the prevalence of higher pay for
overtime. More serious still is the fact that the efficiency of labor
declines, because overtime brings weariness, because of the employment
of "undesirables," and because crews cannot be driven at top speed when
jobs are more numerous than men to fill them. The prices of raw
materials continue to rise faster on the average than the selling prices
of products. Finally, the numerous small wastes, incident to the conduct
of business enterprises, creep up when managers are hurried by a press
of orders demanding prompt delivery.
A second stress is the accumulating tension of the investment and money
markets. The supply of funds available at the old rates of interest for
the purchase of bonds, for lending on mortgages, and the like, fails to
keep pace with the rapidly swelling demand. It becomes difficult to
negotiate new issues of securities except on onerous terms, and men of
affairs complain of the "scarcity of capital." Nor does the supply of
bank loans grow fast enough to keep up with the demand. For the supply
is limited by the reserves which bankers hold against their expanding
demand liabilities. Full employment and active retail trade cause such a
large amount of money to remain suspended in active circulation that the
cash left in the banks increases rather slowly, even when the gold
output is rising most rapidly. On the other hand, the demand for bank
loans grows not only with the physical volume of trade, but also with
the rise of prices, and with the desire of men of affairs to use their
own funds for controlling as many business ventures as possible.
Moreover, this demand is relatively inelastic, since many borrowers
think they can pay high rates of discount for a few months and still
make profits on their turnover, and since the corporations which are
unwilling to sell long-time bonds at the hard terms which have come to
prevail try to raise part of the funds they require by discounting one-
or two-year notes.
Tension in the bond and money markets is unfavorable to the continuance
of prosperity, not only because high rates of interest reduce the
prospective margins of profit, but also because they check the expansion
in the volume of trade out of which prosperity developed. Many projected
ventures are relinquished or postponed, either because borrowers
conclude that the interest would absorb too much of their profits, or
because lenders refuse to extend their commitments farther.
There is one important group of enterprises which suffers an especially
severe check from this cause in conjunction with high prices--the group
which depends primarily upon the demand for industrial equipment. In the
earlier stages of prosperity, this group usually enjoys a season of
exceptionally intense activity. But when the market for bonds becomes
stringent, and--what is often more important--when the cost of
construction has become high, business enterprises and individual
capitalists alike defer the execution of many plans for extending old
and erecting new plants. As a result, contracts for this kind of work
become less numerous as the climax of prosperity approaches. Then the
steel mills, foundries, machine factories, copper smelters, quarries,
lumber mills, cement plants, construction companies, general
contractors, and the like find their orders for future delivery falling
off. While for the present they may be working at high pressure to
complete old contracts within the stipulated time, they face a serious
restriction of trade in the near future.
The imposing fabric of prosperity is built with a liberal factor of
safety: but the larger grows the structure the more severe become these
internal stresses. The only effective means of preventing disaster while
continuing to build is to raise selling prices time after time high
enough to offset the encroachments of costs upon profits, to cancel the
advancing rates of interest, and to keep investors willing to contract
for fresh industrial equipment.
But it is impossible to keep selling prices rising for an indefinite
time. In default of other checks, the inadequacy of cash reserves would
ultimately compel the banks to refuse a further expansion of loans upon
any terms. But before this stage has been reached, the rise of prices is
stopped by the consequences of its own inevitable inequalities. These
inequalities become more glaring the higher the general level is forced;
after a time they threaten serious reduction of profits to certain
business enterprises, and the troubles of these victims dissolve that
confidence in the security of credits with which the whole towering
structure of prosperity has been cemented.
What, then, are the lines of business in which selling prices cannot be
raised sufficiently to prevent a reduction of profits? There are certain
lines in which selling prices are stereotyped by law, by public
commissions, by contracts of long term, by custom, or by business
policy, and in which no advance, or but meagre advances can be made.
There are other lines in which prices are always subject to the
incalculable chances of the harvests, and in which the market value of
all accumulated stocks of materials and finished goods wavers with the
crop reports. There are always some lines in which the recent
construction of new equipment has increased the capacity for production
faster than the demand for their wares has expanded under the repressing
influence of the high prices which must be charged to prevent a
reduction of profits. The unwillingness of investors to let fresh
contracts threatens loss not only to contracting firms of all sorts, but
also to all the enterprises from whom they buy materials and supplies.
The high rates of interest not only check the current demand for wares
of various kinds, but also clog the effort to maintain prices by keeping
large stocks of goods off the market until they can be sold to better
advantage. Finally, the very success of other enterprises in raising
selling prices fast enough to defend their profits aggravates the
difficulties of the men who are in trouble. For to the latter every
further rise of prices for products which they buy means a further
strain upon their already stretched resources.
As prosperity approaches its height, then, a sharp contrast develops
between the business prospects of different enterprises. Many, probably
the majority, are making more money than at any previous stage of the
business cycle. But an important minority, at least, face the prospect
of declining profits. The more intense prosperity becomes, the larger
grows this threatened group. It is only a question of time when these
conditions, bred by prosperity, will force some radical readjustment.
Now such a decline of profits threatens worse consequences than the
failure to realize expected dividends. For it arouses doubt concerning
the security of outstanding credits. Business credit is based primarily
upon the capitalized value of present and prospective profits, and the
volume of credits outstanding at the zenith of prosperity is adjusted to
the great expectations which prevail when the volume of trade is
enormous, when prices are high, and when men of affairs are optimistic.
The rise of interest rates has already narrowed the margins of security
behind credits by reducing the capitalized value of given profits. When
profits themselves begin to waver the case becomes worse. Cautious
creditors fear lest the shrinkage in the market rating of the business
enterprises which owe them money will leave no adequate security for
repayment. Hence they begin to refuse renewals of old loans to the
enterprises which cannot stave off a decline of profits, and to press
for a settlement of outstanding accounts.
Thus prosperity ultimately brings on conditions which start a
liquidation of the huge credits which it has piled up. And in the course
of this liquidation prosperity merges into crisis.
3. CRISES AND PANICS
Once begun, the process of liquidation extends rapidly, partly because
most enterprises which are called upon to settle their maturing
obligations in turn put similar pressure upon their own debtors, and
partly because, despite all efforts to keep secret what is going
forward, news presently leaks out and other creditors take alarm.
While this financial readjustment is under way, the problem of making
profits on current transactions is subordinated to the more vital
problem of maintaining solvency. Business managers concentrate their
energies upon providing for their outstanding liabilities and upon
nursing their financial resources, instead of upon pushing their sales.
In consequence, the volume of new orders falls off rapidly. That is, the
factors which were already dimming the prospects of profits in certain
lines of business are reinforced and extended. Even when the
overwhelming majority of enterprises meet the demand for payment with
success, the tenor of business developments therefore undergoes a
change. Expansion gives place to contraction, though without a violent
wrench. Discount rates rise higher than usual, securities and
commodities fall in price, and as old orders are completed working
forces are reduced; but there is no epidemic of bankruptcies, no run
upon banks, and no spasmodic interruption of the ordinary business
processes.
At the opposite extreme from crises of this mild order stand the crises
which degenerate into panics. When the process of liquidation reaches a
weak link in the chain of interlocking credits and the bankruptcy of
some conspicuous enterprise spreads unreasoning alarm among the business
public, then the banks are suddenly forced to meet a double strain--a
sharp increase in the demand for loans, and a sharp increase in the
demand for repayment of deposits. If the banks prove able to honor both
demands without flinching, the alarm quickly subsides. But if, as has
happened twice in America since 1890, many solvent business men are
refused accommodation at any price, and if depositors are refused
payment in full, the alarm turns into panic. A restriction of payments
by the banks gives rise to a premium upon currency, to hoarding of cash,
and to the use of various unlawful substitutes for money. A refusal by
the banks to expand their loans, still more a policy of contraction,
sends interest rates up to three or four times their usual figures, and
causes forced suspensions and bankruptcies. There follow appeals to the
Government for extraordinary aid, frantic efforts to import gold, the
issue of clearing-house loan certificates, and an increase of bank-note
circulation as rapid as the existing system permits. Collections fall
into arrears, domestic-exchange rates are dislocated, workmen are
discharged because employers cannot get money for pay-rolls or fear lest
they cannot get pay for goods when delivered, stocks fall to extremely
low levels, even the best bonds decline somewhat in price, commodity
markets are disorganized by sacrifice sales, and the volume of business
is violently contracted.
That crises still degenerate on occasion into panics in America, but not
in England, France, or Germany, arises primarily from differences in
banking organization and practice. In each of the three European
countries, the banking system as a whole is so organized by the
prevalence of branch banking and the existence of a central bank that
reserves which bear a small proportion to the aggregate demand
liabilities of all the offices can be applied when and where they are
most needed. The central bank not only carries a reserve which is far in
excess of immediate requirements in ordinary times, but also uses this
reserve boldly in times of stress, presenting in both these respects a
marked contrast to the policy of American banks. As a result, European
business men need not fear either a refusal to lend or a restriction of
payments by the banks on which they depend. And panic has small chance
to develop where the depositor can get his money at need and the solvent
business man can borrow. [Written before the establishment of the
Federal Reserve system.]
4. DEPRESSION
The close of a panic is usually followed by the reopening of numerous
enterprises which had been shut during the weeks of severest pressure.
But this prompt revival of activity is partial and short-lived. It is
based chiefly upon the finishing of orders received but not completely
executed in the preceding period of prosperity, or upon the effort to
work up and market large stocks of materials already on hand or
contracted for. It comes to an end as this work is gradually finished,
because new orders are not forthcoming in sufficient volume to keep the
mills and factories busy.
There follows a period during which depression spreads over the whole
field of business and grows more severe. Consumers' demand declines in
consequence of wholesale discharges of wage-earners, the gradual
exhaustion of past savings, and the reduction of other classes of family
incomes. With consumers' demand falls the business demand for raw
materials, current supplies, and equipment used in making consumers'
goods. Still more severe is the shrinkage of investors' demand for
construction work of all kinds, since few individuals or enterprises
care to sink money in new business ventures so long as trade remains
depressed and the price level is declining. The contraction in the
physical volume of business which results from these several shrinkages
in demand is cumulative, since every reduction of employment causes a
reduction of consumers' demand, and every decline in consumers' demand
depresses current business demand and discourages investment, thereby
causing further discharges of employes and reducing consumers' demand
once more.
With the contraction in the physical volume of trade goes a fall of
prices. For, when current orders are insufficient to employ the existing
equipment for production, competition for what business is to be had
becomes keener. This decline spreads through the regular commercial
channels which connect one enterprise with another, and is cumulative,
since every reduction in price facilitates, if it does not force,
reductions in other prices, and the latter reductions react in their
turn to cause fresh reductions at the starting point.
As the rise of prices which accompanied revival, so the fall which
accompanies depression is characterized by certain regularly recurring
differences in degree. Wholesale prices fall faster than retail, the
prices of producers' goods faster than those of consumers' goods, and
the prices of raw materials faster than those of manufactured products.
The prices of raw mineral products follow a more regular course than
those of raw forest, farm, or animal products. As compared with general
index numbers of commodity prices at wholesale, index numbers of wages
and interest on long-time loans decline in less degree, while index
numbers of discount rates and of stocks decline in greater degree. The
only important group of prices to rise in the face of depression is
that of high-grade bonds.
Of course the contraction in the physical volume of trade and the fall
of prices reduce the margin of present and prospective profits, spread
discouragement among business men, and check enterprise. But they also
set in motion certain processes of readjustment by which depression is
gradually overcome.
The prime costs of doing business are reduced by the rapid fall in the
prices of raw materials and of bank loans, by the marked increase in the
efficiency of labor which comes when employment is scarce and men are
anxious to hold their jobs, and by close economy on the part of
managers. Supplementary costs also are reduced by reorganizing
enterprises which have actually become or which threaten to become
insolvent, by the sale of other enterprises at low figures, by reduction
of rentals and refunding of loans, by charging off bad debts and writing
down depreciated properties, and by admitting that a recapitalization of
business enterprises--corresponding to the lower prices of stocks--has
been effected on the basis of lower profits.
While these reductions in costs are still being made, the demand for
goods ceases to shrink and then begins slowly to expand--a change which
usually comes in the second or third year of depression. Accumulated
stocks left over from prosperity are gradually exhausted, and current
consumption requires current production. Clothing, furniture, machinery
and other moderately durable articles which have been used as long as
possible are finally discarded and replaced. Population continues to
increase at a fairly uniform rate: the new mouths must be fed and the
new backs clothed. New tastes appear among consumers and new methods
among producers, giving rise to demand for novel products. Most
important of all, the investment demand for industrial equipment
revives; for though saving may slacken it does not cease, with the
cessation of foreclosure sales and corporate reorganizations the
opportunities to buy into old enterprises at bargain prices become
fewer, capitalists become less timid as the crisis recedes into the
past, the low rates of interest on long-term bonds encourage borrowing,
the accumulated technical improvements of several years may be utilized,
and contracts can be let on most favorable conditions as to cost and
prompt execution.
Once these various forces have set the physical volume of trade to
expanding again, the increase proves cumulative, though for a time the
pace of growth is kept slow by the continued sagging of prices. But
while the latter maintains the pressure upon business men and prevents
the increased volume of orders from producing a rapid rise of profits,
still business prospects become gradually brighter. Old debts have been
paid, accumulated stocks of commodities have been absorbed, weak
enterprises have been reorganized, the banks are strong-all the clouds
upon the financial horizon have disappeared. Everything is ready for a
revival of activity, which will begin whenever some fortunate
circumstance gives a sudden fillip to demand, or, in the absence of such
an event, when the slow growth of the volume of business has filled
order books and paved the way for a new rise of prices. Such is the
stage of the business cycle with which the analysis began, and, having
accounted for its own beginning, the analysis ends.
MOORE'S "RAINFALL" THEORY
[246]To Professor Moore the fundamental problem of economic dynamics is
to formulate the law governing the "ebb and flow of economic life" which
is "the most general and characteristic phenomenon of a changing
society." The motto of the department of agriculture of the United
States--"Agriculture is the foundation of manufacture and commerce"--is
significant and that the farmer is at the mercy of the weather is
proverbial. There may be such a close connection between the weather,
the crops, and crises that we shall be able to find in weather changes
the cause of crises.
An examination of all the numerous factors involved in the problem would
be a stupendous task and Professor Moore limits himself to a
consideration of a selected few. "The variation in the quantity of the
rainfall is one of the weather changes known to have a marked effect
upon the yield of the crops." Hence the inquiry is directed to an
examination of the "appropriate data with reference to three things: (1)
the periodicity of rainfall; (2) the effect of rainfall on the crops;
(3) the relation of the yield of the crops to economic cycles." The
study is a statistical one conducted with the greatest of care to avoid
error and the conclusions are deserving of the most careful
consideration. All generalizations are made carefully and used
cautiously with a full realization that a limited area--the upper
Mississippi Valley--has been used and a period of only seventy-two years
surveyed. Of the numerous climatic factors only rainfall has been
examined.
Remembering that these limitations are fully realized we may state the
conclusions in Professor Moore's own words: "The fundamental, persistent
cause of the cycles in the yield of the crops is the cyclical movement
in the weather conditions represented by the rhythmically changing
amount of rainfall; the cyclical movement in the yield of the crops is
the fundamental, persistent cause of economic cycles." This should be
supplemented with a statement of the law that has been sought and which
may be formulated thus:
The weather conditions represented by the rainfall in the
central part of the United States, and probably in other
continental areas, pass through cycles of approximately
thirty-three years and eight years in duration, causing like
cycles in the yield per acre of the crops; these cycles of
crops constitute the natural, material current which drags
upon its surface the lagging, rhythmically changing values
and prices with which the economist is more immediately
concerned....
In conclusion we may merely observe that many theories are obviously
presented to defend some of the other views of their advocates. The
connection of the socialist theory with the socialistic idea of value is
an obvious one. It may also be true that interest in some particular
phase of study may cause the investigator to overlook the importance of
other elements in the problem. Thus to Professor Moore climatic
conditions seem of great importance, while Professor Mitchell relegates
them to a very minor position. As time passes it will doubtless be
possible to estimate the significance of each factor with more accuracy.
When this is done a more satisfactory theory can be formulated and
methods of prevention and alleviation employed to better advantage.
STRINGENT MONEY AND FINANCIAL PANICS[247]
Is there any tendency for financial panics to occur more frequently in
the seasons of the year when the money market is normally stringent? It
has been found that the two periods of the year in which the money
market is most likely to be strained are the periods of the spring trade
revival (about March and April) and that of the crop-moving demand in
the fall; and that the two periods of the easiest money market are the
"readjustment period," extending from about the middle of January to
about the first of March, and the period of the summer depression,
extending through the summer months. Of the eight panics which have
occurred since 1873, four occurred in the fall or early winter (_i. e._,
those of 1873, 1890, 1899, and 1907); and one (_i. e._, that of 1903)
extended from March until well along in November. Out of a total of
twenty-one minor panics or "panicky periods" occurring between 1876 and
1908, inclusive, nine occurred during the fall and early winter, eight
during the spring, one began in May and extended into June, three
occurred during the summer months, and one occurred in February. The
evidence accordingly points to a tendency for the panics to occur during
the seasons normally characterized by a stringent money market.
HOW BANKS SHOULD HANDLE PANICS
[248]Whatever persons--one bank or many banks--in any country hold the
banking reserve of that country, ought at the very beginning of an
unfavourable foreign exchange at once to raise the rate of interest, so
as to prevent their reserve from being diminished farther, and so as to
replenish it by imports of bullion....
A domestic drain is very different. Such a drain arises from a
disturbance of credit within the country, and the difficulty of dealing
with it is the greater, because it is often caused, or at least often
enhanced, by a foreign drain. Times without number the public have been
alarmed mainly because they saw that the banking reserve was already
low, and that it was daily getting lower. The two maladies--an external
drain and an internal--often attack the money market at once. What then
ought to be done?
In opposition to what might be at first sight supposed, the best way for
the bank or banks who have the custody of the bank reserve to deal with
a drain arising from internal discredit, is to lend freely. The first
instinct of every one is the contrary. There being a large demand on a
fund which you want to preserve, the most obvious way to preserve it is
to hoard it--to get in as much as you can, and to let nothing go out
which you can help. But every banker knows that this is not the way to
diminish discredit. This discredit means, "an opinion that you have not
got any money," and to dissipate that opinion, you must, if possible,
show that you have money: you must employ it for the public benefit in
order that the public may know that you have it. The time for economy
and for accumulation is before. A good banker will have accumulated in
ordinary times the reserve he is to make use of in extraordinary times.
Ordinarily discredit does not at first settle on any particular bank,
still less does it at first concentrate itself on the bank or banks
holding the principal cash reserve. These banks are almost sure to be
those in best credit, or they would not be in that position, and, having
the reserve, they are likely to look stronger and seem stronger than any
others. At first, incipient panic amounts to a kind of vague
conversation: Is A B as good as he used to be? Has not C D lost money?
and a thousand such questions. A hundred people are talked about, and a
thousand think--"Am I talked about, or am I not?" "Is my credit as good
as it used to be, or is it less?" And every day, as a panic grows, this
floating suspicion becomes both more intense and more diffused; it
attacks more persons, and attacks them all more virulently than at
first. All men of experience, therefore, try to "strengthen themselves,"
as it is called, in the early stage of a panic; they borrow money while
they can; they come to their banker and offer bills for discount, which
commonly they would not have offered for days or weeks to come. And if
the merchant be a regular customer, a banker does not like to refuse,
because if he does he will be said, or may be said, to be in want of
money, and so may attract the panic to himself. Not only merchants but
all persons under pecuniary liabilities--present or imminent--feel this
wish to "strengthen themselves," and in proportion to those
liabilities....
A panic, in a word, is a species of neuralgia, and according to the
rules of science you must not starve it. The holders of the cash reserve
must be ready not only to keep it for their own liabilities, but to
advance it most freely for the liabilities of others. They must lend to
merchants, to minor bankers, to "this man and that man," whenever the
security is good. In wild periods of alarm, one failure makes many, and
the best way to prevent the derivative failures is to arrest the primary
failure which causes them. The way in which the panic of 1825 was
stopped by advancing money has been described in so broad and graphic a
way that the passage has become classical. "We lent it," said Mr.
Harmon, on behalf of the Bank of England, "by every possible means and
in modes we had never adopted before; we took in stock on security, we
purchased Exchequer bills, we made advances on Exchequer bills, we not
only discounted outright, but we made advances on the deposit of bills
of exchange to an immense amount, in short, by every possible means
consistent with the safety of the bank, and we were not on some
occasions over-nice. Seeing the dreadful state in which the public were,
we rendered every assistance in our power." After a day or two of this
treatment, the entire panic subsided, and the "City" was quite calm.
The problem of managing a panic must not be thought of as mainly a
"banking" problem. It is primarily a mercantile one. All merchants are
under liabilities; they have bills to meet soon,... are dependent on
borrowing money, and large merchants are dependent on borrowing much
money. At the slightest symptom of panic many merchants want to borrow
more than usual; they think they will supply themselves with the means
of meeting their bills while those means are still forthcoming. If the
bankers gratify the merchants, they must lend largely just when they
like it least; if they do not gratify them, there is a panic.
On the surface there seems a great inconsistency in all this. First, you
establish in some bank or banks a certain reserve; you make of it or
them a kind of ultimate treasury, where the last shilling of the country
is deposited and kept. And then you go on to say that this final
treasury is also to be the last lending-house; that out of it unbounded,
or at any rate immense, advances are to be made when no one else lends.
This seems like saying--first, that the reserve should be kept, and then
that it should not be kept. But there is no puzzle in the matter. The
ultimate banking reserve of a country (by whomsoever kept) is not kept
out of show, but for certain essential purposes, and one of those
purposes is the meeting of a demand for cash caused by an alarm within
the country. It is not unreasonable that our ultimate treasure in
particular cases should be lent; on the contrary, we keep that treasure
for the very reason that in particular cases it should be lent.
When reduced to abstract principle, the subject comes to this. An
"alarm" is an opinion that the money of certain persons will not pay
their creditors when those creditors want to be paid. If possible, that
alarm is best met by enabling those persons to pay their creditors to
the very moment. For this purpose only a little money is wanted. If that
alarm is not so met, it aggravates into a panic, which is an opinion
that most people, or very many people, will not pay their creditors; and
this too can only be met by enabling all those persons to pay what they
owe, which takes a great deal of money. No one has enough money, or
anything like enough, but the holders of the bank reserve....
... Before 1844, an issue of notes [of the Bank of England], as in
1825, to quell a panic entirely internal did not diminish the bullion
reserve. The notes went out, but they did not return. They were issued
as loans to the public, but the public wanted no more; they never
presented them for payment; they never asked that sovereigns should be
given for them. But the acceptance of a great liability during an
augmenting alarm, though not as bad as an equal advance of cash, [_i.
e._, specie] is the thing next worst. At any moment the cash may be
demanded. Supposing the panic to grow, it will be demanded, and the
reserve will be lessened accordingly....
"On extraordinary occasions," says Ricardo, "a general panic may seize
the country, when every one becomes desirous of possessing himself of
the precious metals as the most convenient mode of realizing or
concealing his property--against such panic banks have no security on
any system." The bank or banks which hold the reserve may last a little
longer than the others; but if apprehension pass a certain bound, they
must perish too. The use of credit is, that it enables debtors to use a
certain part of the money their creditors have lent them. If all those
creditors demand all that money at once, they cannot have it, for that
which their debtors have used, is for the time employed, and not to be
obtained. With the advantages of credit we must take the disadvantages,
too; but to lessen them as much as we can; we must keep a great store of
ready money always available, and advance out of it very freely in
periods of panic, and in times of incipient alarm.
FOOTNOTES:
[231] E. M. Patterson, _The Theories Advanced in Explanation of Economic
Crises. Annals of American Academy of Political and Social Science_,
Vol. 59, May, 1915, pp. 133-6.
[232] Address by Edwin R. A. Seligman, _The Crisis of 1907 in the Light
of History_, in _The Currency Problem and the Present Financial
Situation_, A Series of Addresses Delivered at Columbia University,
1907-1908, ix-xxv. The Columbia University Press, 1908.
[233] Wesley Clair Mitchell, _Business Cycles_, _pp._ 5-19. The
University of California Press. Berkeley, 1913.
[234] The not infrequent statement that prosperity sometimes merges into
depression without the intervention of a crisis means simply that the
writers understand by crisis a violent disturbance of business
conditions. It is in closer accord with every-day usage to call such
occurrences "panics," and to apply the term "crisis" to the transition
from prosperity to depression even when accomplished quietly. On closer
inspection, a business cycle is often found to be complicated by minor
changes, such as the interruption of depression by a premature
resumption of activity, the occurrence of a pause or even a slight
crisis in the midst of prosperity, and the like. But for the present it
is wise to confine attention to the broadest features of the cycle.
[235] Compare W. Sombart, _Versuch, einer Systematik der
Wirtschaftskrisen_, Archiv fuer Sozialwissenschaft, 1904, pp. 1-21.
[236] The first type of theories mentioned in the preceding section.
[237] W. H. Beveridge, _Unemployment_, ed. 3 (London, 1912), chapter iv.
[238] R.E. May, _Das Grundgesetz der Wirtschaftskrisen_ (Berlin, 1902).
[239] I have followed Mr. Hobson's latest exposition, _The Industrial
System_ (London, 1909), chapters iii and xviii.
[240] George H. Hull, _Industrial Depressions_ (New York, 1911), p. 218.
[241] W. Sombart, _Die Stoerungen im deutschen Wirtschaftsleben_,
Schriften des Vereins fuer Socialpolitik, vol. 113, pp. 130-133.
[242] T. N. Carver, "A Suggestion for a Theory of Industrial
Depressions," _Quarterly Journal of Economics_, May, 1903, pp. 497-500.
[243] Irving Fisher, _The Purchasing Power of Money_ (New York, 1911),
chapter iv, and chapter xi, Secs. 15, 16, 17. Compare the same writer's
summary statement of his theory in _Moody's Magazine_, February, 1909,
pp. 110-114, and H. G. Brown's paper "Typical Commercial Crises _versus_
A Money Panic," _Yale Review_, August, 1910.
[244] Adapted from Wesley Clair Mitchell, _Business Cycles_, pp.
571-579. The University of California Press. 1913.
[245] The extract here reproduced is from the concluding chapter of the
work indicated.--EDITOR.
[246] E. M. Patterson, _The Theories Advanced in Explanation of Economic
Crises_. _Annals of American Academy of Political and Social Science_,
Vol. 59, May, 1915, pp. 140, 141, 147.
[247] E. W. Kemmerer, _Seasonal Variations in the Relative Demand for
Currency and Capital in the United States_, p. 232. Publications of the
National Monetary Commission, Senate Document No. 588, 61st Congress, 2d
Session.
[248] Walter Bagehot, _Lombard Street_, pp. 46-56. Charles Scribner's
Sons. New York. 1892. (First Edition, 1873.)