<h2>CHAPTER 37</h2>
<h3>CRISES AND INDUSTRIAL DEPRESSIONS</h3>
<h4>§ I. DEFINITION AND DESCRIPTION OF CRISES</h4>
<div class="sidenote">Broader definition of a crisis</div>
<p>1. <i>In a broad sense, a crisis is a decisive moment or turning point;
hence, in industry, a collapse of prosperity.</i> In the course of a fever
the crisis is the point where there is a turn for the better or for the
worse. The figure of speech as applied to industrial conditions would
seem to fail, in that what precedes is apparently exuberant health, not
disease. Business conditions do not move along uniformly. There are
waves of prosperity. Profits are apparently great, then may be suddenly
swept away. The profits of the prosperous time are partly illusory, or
exist only on paper. The situation has all the unhealthiness of the
fever-patient. Men trade in promises and when the crisis comes, they
have only promises for profits. The discussion of business management
and profits is not complete without a consideration of this rhythmic
movement of confidence and prices.</p>
<p>A crisis in the business affairs of an individual, in the sense of a
collapse of prosperity, may occur from many mischances. A local crisis
may be felt in some one neighborhood as a result of flood, of fire, or
of other accidents. Such a case was that which occurred in 1864, in
Manchester, England, when the cotton factories were compelled to close
because the supply of cotton was cut off by the blockade of the ports of
the South in the Civil War. Such a local crisis sometimes results from a
change of transportation,<span class="pagenum"><SPAN name="Page_346" id="Page_346">[Pg 346]</SPAN></span> throwing a town out of the line of trade.
These have been mentioned in discussing chance and risk; but the
phenomenon known generally as an industrial crisis is of wider extent
and of a more peculiar nature.</p>
<div class="sidenote">Various types of crises</div>
<p>2. <i>In a more special sense a financial crisis is the confusion and loss
that mark the end of a period of rising prices; an industrial depression
is the period of hard times that follows.</i> The word crisis suggests a
brief period, a moment, something that is severe, sudden, and soon over.
The term financial panic is frequently used as a synonym for financial
crisis. A crisis in the narrower sense has to do with prices—is always
connected with money in some way. While, therefore, crises may be
divided into industrial, speculative, and financial, according to their
immediate occasion, all of them are financial in the sense that they
have to do with a change in the general price level. A crisis is a jolt
to prices which shatters the credit of some banks, brokers, merchants,
and manufacturers. Crises are thus peculiar to the money economy and to
a developed industry. Not every business misfortune is to be called an
industrial crisis, but only those where prices and credit are generally
depressed. A long period of hard times is sometimes called a crisis, but
it is better to distinguish it by the term industrial depression.</p>
<div class="sidenote">Industrial conditions preceding a crisis</div>
<p>3. <i>The period leading up to a crisis is one of general prosperity.</i>
Industry in successive decades does not pass through an unvarying series
of changes, but history repeats itself with sufficient regularity to
justify the view that a certain series of changes is typical in modern
industry. When prices are at the lowest point many factories are closed,
and much labor is unemployed. Conditions are worse in some industries
than in others. General economy and great caution prevail; few new
enterprises are undertaken. To those having available money this is a
good time to buy, and property begins to change hands. Then hoarded
money begins to come out of its hiding-places. Money flows in from other
countries, particularly if business conditions<span class="pagenum"><SPAN name="Page_347" id="Page_347">[Pg 347]</SPAN></span> are better abroad than
here, for low prices make a country a good place in which to buy. At the
same time that the money in circulation thus increases, there is a
general return of confidence that increases credit. Not only are there
more dollars, but each does more work. Then old enterprises are resumed
and new ones are undertaken. The purchase of materials in larger
quantities causes a rise in prices and an increase in costs. The surplus
labor on the margin of efficiency gets employment, and wages begin to
increase. The only classes not sharing in this improvement are the
receivers of fixed incomes. As prices rise, the purchasing power of
their incomes gradually falls.</p>
<div class="sidenote">The crisis and its results</div>
<p>4. <i>The crisis is a moment of widespread loss, which is followed by a
long period of small profits to most enterprises, and of enforced
economy.</i> As prices cease to go up rapidly, the question arises in many
minds whether the movement can continue, and if not, when it will cease.
Men wish to hold on for the last profits, and are willing to risk
something to gain them. When foreign prices do not rise in as great
proportion as domestic prices, foreign imports are stimulated and the
quantity of exports falls. This disturbs the equilibrium of money and
requires at length large and continued exportation of specie. This
checks prices, and, reducing the specie reserves of the banks, compels
them to be more cautious. The fall in the value of many stocks and
securities held by the banks forces many brokers and speculators to
convert their resources into ready money. This is the moment of danger;
weak enterprises find their foundations crumbling, and there are many
failures. The falling prices, the shattered credit, and the financial
losses force many factories to close; many workmen are thrown out of
employment, and business must again enter upon a period of retrenchment,
for it has completed the cycle of changing prices.</p>
<p><span class="pagenum"><SPAN name="Page_348" id="Page_348">[Pg 348]</SPAN></span></p>
<h4>§ II. CRISES IN THE NINETEENTH CENTURY</h4>
<div class="sidenote">No financial crises in the Middle Ages</div>
<p>1. <i>The periods of industrial hardship in the Middle Ages were connected
with adverse conditions of production, not with the collapse of prices.</i>
Periods of exceptional hardship in medieval times were mostly due to
political oppression, famine, wars, pestilence, and scourges of nature.
There being very little of the money economy, there was no development
of credit and of credit prices. The money economy began, as has been
noted, in the cities. As the use of money spread, as larger commercial
enterprises were undertaken, as borrowing and the payment of interest
became common, there began to appear in city trading circles, on a small
scale, the phenomena of the modern crisis.</p>
<div class="sidenote">European crises of the eighteenth and nineteenth centuries</div>
<p>2. <i>In Europe general industrial crises date from 1763 and have occurred
at more or less regular intervals since.</i> It frequently is said that the
cycle, or period, of crises is ten years, but it takes an elastic
imagination to find support for this in history. The crises of the
eighteenth century occurred in 1763, 1783, 1793, these dates marking the
close of wars of some magnitude. The crises were not widespread or
general, but were more marked in England, which was most developed
industrially and in its money economy. Likewise in the nineteenth
century, the crises were of unequal force in the various countries,
usually being severer in England. The English crises may be roughly
dated 1803, 1825, 1838, 1847, 1857, 1864, 1875, 1890. These were
attributed to various causes; that of 1825 to over-trading abroad; that
of 1847 to railroad-building; that of 1864 to the interruption of the
cotton trade and of commerce, as a result of the Civil War in America.
While in many parts of England the crisis of 1864 was unusually severe,
in other countries it was of little moment. Germany, after several years
of great speculative prosperity, had a most severe crisis in 1875; while
France (a somewhat significant fact),<span class="pagenum"><SPAN name="Page_349" id="Page_349">[Pg 349]</SPAN></span> although prostrated by the war of
1870-71, losing a large amount of wealth, and paying a thousand millions
of dollars to Germany as a war indemnity, escaped a commercial crisis
almost entirely at that time.</p>
<div class="sidenote">Crises in the United States</div>
<p>3. <i>In the United States there have been five marked crises: the first
in 1817, the last in 1893.</i> These crises were of date 1817-20, 1837-39,
1857, 1873, 1893. Major crises thus occurred about twenty years apart,
and minor crises in several instances alternated with them, notably in
1866, 1884, and we might add, 1903. These crises were the culmination of
different kinds of speculation, usually spoken of as their causes. The
crisis of 1817 was due to over-trading and to the immense importation
following the war of 1812 and the resumption of commerce with Europe in
1816. In 1837-39 came in quick succession two crises, not quite distinct
from each other, the second similar to the relapse of a fever patient.
The immediate occasions were over-speculation in lands, a great issue of
bank money, national expansion, and over-confidence, possibly in some
degree the heedless financial measures of Andrew Jackson. The crisis of
1857 followed a period of great prosperity marked by the discovery of
gold in California in 1848, by great expansion of commerce, by the
building of railroads, and by a great increase in foreign trade. The
crisis of 1873, probably the severest in our history, is attributable to
great speculation, especially to railroad-building on an unexampled
scale following the war. The blow, when it fell, was intensified by the
contraction of currency leading to the return to a specie basis and
lower prices. The crisis of 1884, a comparatively slight one, occasioned
(rather than caused) by the discussion of the money question, was
followed by some years of noticeable depression. The years 1889 to 1892
witnessed a prosperity that culminated in a crisis in September, 1893,
(likewise generally explained as due to the unsettled state of our
monetary system) followed by a period of depression lasting until 1897.</p>
<p><span class="pagenum"><SPAN name="Page_350" id="Page_350">[Pg 350]</SPAN></span></p>
<p>The period from 1897 to 1903 has been marked by great prosperity and by
rising prices. The over-hasty prophecies of collapse in the last two
years have thus far been falsified,<SPAN name="FNanchor_3_3" id="FNanchor_3_3"></SPAN><SPAN href="#Footnote_3_3" class="fnanchor">[3]</SPAN> but there is now a general
feeling of distrust in investing circles. Already there has been a
reduction of dividends in leading industries, and here and there a fall
in the value of stocks. High prices have greatly checked building. The
great credit advances made on "industrials," the stocks of manufacturing
corporations, are one of the main sources of danger. Caution, however,
has been learned by experience; the banking interests are more closely
coördinated and give better mutual support than in the past, and a
considerable decline in stocks has already occurred without as yet
affecting general prices of commodities. Various novel features in the
situation make prophecy difficult, but a period of liquidation and lower
prices appears to be at hand.</p>
<div class="sidenote">General features of crises</div>
<p>4. <i>Irregular in time, and unlike in their immediate occasions, crises
show some general features.</i> The chief of these are told in the brief
story of the course of prices. Crises are less severe in countries with
less developed money and credit systems. They are harder in the United
States and England than in Germany, harder in Germany than in France,
harder in western Europe than in eastern Europe, harder in Christendom
than in heathendom. They are less severe in rural districts, where
prosperity depends more on crop conditions, and business has in it less
of financial speculation. Their effects are least felt in the staple
industries, for when hard times come, people economize on the less
essential things. The glove-factory, the silk-factory, the
golf-club-factory are more likely to close than the flouring-mill. They
are felt less by classes with fixed incomes than<span class="pagenum"><SPAN name="Page_351" id="Page_351">[Pg 351]</SPAN></span> by those with variable
ones. They affect wages and salaries less than profits. The rate of
wages is affected only in a moderate degree, but laborers suffer in the
loss of employment. The money-lender who has eliminated chance as far as
possible and has taken a low rate of interest loses little; the
risk-taker who draws his income from dividends on stock probably loses
much.</p>
<h4>§ III. VARIOUS EXPLANATIONS OF CRISES</h4>
<div class="sidenote">Glut theories of crises</div>
<p>1. <i>Over-production and under-consumption theories are those most widely
held.</i> In the first annual report of the United States Commissioner of
Labor (1886) is given a long list of theories, more or less wild, that
have been advanced in explanation of crises. It is simply a catalogue,
not a logical grouping. Most of the views can be classed as
under-consumption or over-production theories, which are but two aspects
of the same idea. One view is that too many things are produced, another
that too few are consumed. The over-production theorist, seeing that
warehouses are filled with goods that cannot be disposed of for what
they cost, that factories are shut down and men are out of employment
for lack of demand, declares that productive power has grown too great.
The under-consumption theorist, seeing the same facts, says that the
trouble is lack of purchasing power. He admits that there are people who
would like to buy these things, but he asserts that such people lack
money because production grows faster than wages, wages being fixed, as
he believes, by the minimum of subsistence—a theory akin to the iron
law of wages. In both over-production and under-consumption theories the
inequality of demand and supply is looked upon as a general one. There
is supposed to be not merely an unequal and mistaken distribution of
production, but a general excess of productive power.</p>
<div class="sidenote">Defects of glut theories</div>
<p>The wide vogue held by these views would justify a fuller discussion and
disproof of them here, did space permit. It<span class="pagenum"><SPAN name="Page_352" id="Page_352">[Pg 352]</SPAN></span> must suffice to indicate
merely that they have the same taint of illogicalness as the "fallacy of
waste," the "fallacy of saving" and, still closer likeness, the "fallacy
of luxury." They overlook the fact that an income, either of money or of
other goods, coming even to the wealthiest, will be used in some way. It
may be used either for immediate consumption or for further indirect use
in durable form. Through miscalculation there may be, at a given moment,
too many consumption goods of a particular kind, but the durable
applications can find no limit until the inconceivable day when the
material world is no longer capable of improvement. At the time of a
crisis, there is unquestionably a bad apportionment of productive
agents, and a still worse adjustment of their valuations, but these in
no wise negative the basic economic fact of the scarcity of wealth.</p>
<div class="sidenote">Money theories of crises</div>
<p>2. <i>Another group of theories explains the crises as being due to money,
either too much or too little.</i> The unregulated issue of bank-notes has
been assigned as the cause of crises, especially under the circumstances
accompanying such crises as those of 1837 and 1857 in America, when
bank-note issues chanced to be the agency most marked in the undue and
unsound expansion of credit. The issue of government paper money,
leading to inflation and speculation, is assigned as a cause leading up
to such a crisis as that of 1873, following our Civil War. The reverse
view is taken by the advocates of a cheap and plentiful money. They say
that these crises were caused, not by the expansion, but by the
reduction of bank-notes; for example, not by the inflation of prices
through the issue of greenbacks in 1862 to 1865, but by the contraction
of the currency from 1866 to 1873.</p>
<div class="sidenote">Their inadequacy</div>
<p>There is only a fragment of truth in these various views. It is always
lack of money at the moment of the crisis that causes any particular
failure, and in that sense it is always lack of money that causes a
crisis. But the question is, whether in any reasonable sense it can be
said that it was<span class="pagenum"><SPAN name="Page_353" id="Page_353">[Pg 353]</SPAN></span> lack of a circulating medium before the crisis that
brought it on. There is no support for this view, except in the rare
case when the money standard is undergoing a rapid change, as in the
United States from 1866 to 1873, and the statement then needs much
modification and explanation. The money theories of crises are nearer to
the truth than are the over-production type, for the crisis is always
connected with money and prices. But it cannot be said that the absolute
amount of money in circulation in the period preceding crises gives
occasion to them. In a few instances a rapid change in the amount has
had an important effect, but this fact does not explain crises in
general.</p>
<p>Lack of confidence is said to be a cause of crises. This is a truism,
but the lack of confidence is not without reason and cause.
Over-confidence in the period of expanding prices is succeeded by
extreme depression when many false hopes are shattered.</p>
<div class="sidenote">Capitalization theory of crises</div>
<p>3. <i>Crises must be explained essentially as the forcible and sudden
movement of readjustment in the mistaken capitalization of productive
agents.</i> Capitalization runs through all industry. The value of
everything that lasts for more than a moment is built in part upon rents
that are not actual, but expectative, whose amount, therefore, is a
matter of guesswork, or "speculation." Many unknown factors enter into
the estimate of future rents. The universal tendency to rhythm in motion
(material or psychic) manifests itself in an overestimate or
underestimate of rent and of every other factor in value. This is
emphasized by a psychological factor called the "hypnotism of the
crowd," Most men follow a leader in investment as in other things. The
spirit of speculation grows till it becomes almost a frenzy, and people
rush toward this or that investment, throwing capitalization in some
industries far out of equilibrium with that in others.</p>
<p>The use of credit enhances the rhythm of price. A large part of business
is done practically on margins. If the value<span class="pagenum"><SPAN name="Page_354" id="Page_354">[Pg 354]</SPAN></span> of a thing fully paid for
falls in the hands of the owner, he alone loses; but if the value of a
thing only partly paid for falls so much that the owner is forced to
default in his payment, the loss may be transmitted along the line of
credit to every one in the series of transactions. A credit system,
highly developed, is a house of cards at a time of financial stress.
There is an element of credit in all modern business. Enterprisers enter
into strenuous rivalry to secure the profits of a rise, ever hoping to
get out whole before the crisis comes.</p>
<div class="sidenote">Psychological nature and objective conditions of crises</div>
<p>The fundamental cause of crises thus is seen to be psychological; it is
the rhythmic miscalculation of rents and of capital value, occurring to
some degree throughout industry, but particularly in certain lines. But
this subjective cause in men is given full opportunity for action only
when certain favoring objective conditions are present. Most noteworthy
of these besides the credit system is a dynamic condition of industry.
The past century has opened up new fields for investment on an
unexampled scale. Investment has advanced both intensively and
extensively in a series of great waves. New machinery and processes have
given undreamed of opportunities for enterprise in the older countries,
and the physical frontier of investment has moved outward with the march
of millions of immigrants to people the fertile wilderness. Such factors
disturb the equilibrium of prices both in time and space, give a
powerful impulse toward higher values in the older lands, and stimulate
the hopes of all investors. When the balance between the capitalizations
of various industries and between the rents of the various periods
proves to be false, the inevitable readjustment causes suffering and
loss to many, but particularly in the inflated industries. But, because
of the mutual relations of men in business, few even of those who have
kept freest from speculation can quite escape the evils.</p>
<div class="sidenote">Widespread effects on incomes</div>
<p>4. <i>Crises must be discussed in connection with other subjects than
profits.</i> In the text-books the subject of the<span class="pagenum"><SPAN name="Page_355" id="Page_355">[Pg 355]</SPAN></span> crisis is variously
classified. It may well be discussed with money, credit, and banking. It
has its bearings on wages, justice in distribution, the theory of
interest, and the consumption of wealth. But the reasons for taking it
up in connection with the subject of profits are strongest. In no other
connection is the presence of the element of speculation and of chance
profit and loss in business so forcibly seen.</p>
<div class="sidenote">Their probable mitigation</div>
<p>The income of every class of society is to some extent affected by these
more or less periodic fluctuations. They are in part the price paid for
progress under the constantly shifting conditions of our dynamic
industry. In part they are the proof of industrial maladjustment. The
force of the shocks will no doubt be much reduced by better banking and
business methods, and by a sound currency system. More important still,
the development of moderation, conservatism, and a less speculative
spirit among the leaders of business will do much toward softening the
asperity of these scourges of industry.</p>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_357" id="Page_357">[Pg 357]</SPAN></span></p>
<h2>PART III</h2>
<h3>THE SOCIAL ASPECTS OF VALUE</h3>
<hr class="chap" />
<p><span class="pagenum"><SPAN name="Page_359" id="Page_359">[Pg 359]</SPAN></span></p>
<h2>DIVISION A—RELATION OF PRIVATE INCOME TO SOCIAL WELFARE</h2>
<hr class="chap" />
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