Economic crises

Front matter

Class jM^a:!!!

Book AJ 8

Copyright N*:"

Chapter I

The growth and differentiation of industrial institutions which have taken place within the present century have brought many new and perplexing problems to the man of affairs and the student of economics. None of these problems takes a firmer hold upon the fundamentals of economic society than does that of crises, and few of them receive more attention or create more controversy.

The crisis is practically of nineteenth-century origin, and it is an acute malady to which business appears to be increasingly subject. These crises are periodically recurring convulsions which paralyze the course of trade, give rise to violent fluctuations of values, and leave behind them crippled industries, bankrupt or suspicious capitaHsts, and impoverished laborers as the result of their visits.

It is often desirable to begin a treatise with a definition. Descriptions and definitions, however, shade off almost imperceptibly into one another, and what may be called a descriptive definition is sometimes best suited to the purpose. Two such descriptions of an industrial cycle containing a crisis are here offered. The first, taken from the Tracts of Lord Overstone, is as follows : ** State of quiescence, improvement, growing confidence, prosperity, excitement, overtrading, convulsions, pressure, stagnation, distress, ending again in quiescence." ^ A somewhat more extended description from the pen of Frederick Engels is as follows : " 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.

1 The symptoms of a crisis are thus catalogued by Max Wirth : " I. Abnormal activity in floating enterprises, and boldness in speculation. 2. Unusual activity in stock-jobbing: viz. the desire to found stock corporations in order to use all possible means to force the stocks rapidly to a high figure, and then sell out at a profit, leaving the corporation to those in vi^hose hands the stock, like an unlucky card, is found at last. A rule in such cases is that a good business is operated by one's self or a few companions, but a bad one is formed into a stock company. 3. Unusual excitement and gullibility of the public caused by the report of large profits. 4. Rapid increase of luxury. 5. Sharp rise of the price of necessaries, articles of luxury, raw^ materials, and provisions. 6. Rise in the price of real estate. 7. Strong demand for labor, and rise in wages. 8. Unusual expansion of credit and credit instrumentalities in consequence of which a rapid and unusual increase in discount. 9. Large demand for cash, and, in consequence of this demand, a decline in stocks." — " Handbuch des Bankwesens," 3 Aufl., p. 62. The same is also contained in the " Geschichte der Handelskrisen," by Max Wirth.

Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsalable, hard cash disappears, credit vanishes, factories are closed, the mass of the workmen are in want of the means of subsistence, because they have produced too much 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 filters 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 steeple-chase 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." 2

If we confine our thought to the culminating period of a crisis, we may define it more concisely than is done above, in the following terms : A crisis is the sudden application of a critical conservatism

2 " Socialism : Utopian and Scientific " (trans, by Edward Aveling), London, 1892, pp. 64, 65. The steps are given by another author thus : " A round of variations expressed as follows, is pretty sure to run its course at least once in the life of each generation : •torpor, prudence, health, plethora, blood-letting'; or thus: 'stagnation, economy, productive industry, accumulation, enterprise, expansion, collapse.' " — T. F. Plunkett, " Money Panics and Specie Payments," Pittstield, Mass., 1873, p. 9.

to business transactions, leading to such a demand for liquidation as to cause a widespread inability among business men to meet their obligations.^

Herkner follows Roscher in defining crises as consisting of a disturbance in the equilibrium between production and effective demand.*

In the work of definition the most important point is to establish the proper distinction between crises and industrial depressions. Either of these two classes of phenomena may appear

8 Wagner says : " Crises imply . . . the overwhelming and simultaneous occurrence of inability on the part of independent entrepreneurs to pay their debts." — " Krisen," in Rentzsch, " Handworterbuch," p. 26. Clement Juglar thus defines crisis : " The commercial crisis, as in disease, is a critical period. The all-important question asked by those caught in embarrassment is whether they will hold out or succumb. The crisis is the touchstone which reveals the soHdity of commercial houses." — Say's " Dictionnaire," Sec. I. Mr. Horace White gives the following : " Commercial crises are disturbances of the course of trade at given times, arising from the necessity of readjusting its conditions to the common standard and measure of value." — Article "Commercial Crises," Lalor's " Cyclopaedia," Vol. I, p. 523.

* To this Schaffle also agrees. Herkner, in Conrad's " Handworterbuch," Bd. IV, Sec. i, p. 891. Schaffle, " Handelspolitik," in Bluntschli's "Deutsches Staatsworterbuch," Bd. IV, p. 638. Schaffle criticises the definitions offered by Mill, Juglar, and Max Wirth, and also the definition of Coquehn, in the "Dictionnaire de I'Economie Politique," that crises are the sudden disappearances of credit. This calls to mind a remark made by John Mills in "The Bank Charter Act and the Late Panic," p. 6, where, in speaking of the crisis of 1866, he says: "A voluminous magazine writer on this subject considers the main evil to have been a want of currency, which is about as explicit as the jocular diagnosis that a man died of * want of breath.' "

independently of the other ; in fact, the presence of one is more or less a guarantee of immunity from the other. By some writers the crisis proper is called an ''active crisis," while an industrial depression is called a ''passive crisis."^ The pathologic terminology which is frequently employed in the discussion of crises ^ enables us to express very well the distinction between crises and depressions. The first are acute, the second chronic maladies of industry. The causes of the first lead rapidly to a climax of unnatural and unstable conditions which in the panic find their rupture and give place to extreme stagnation. The causes of depression appear to be more enduring. They weigh down business by handicapping disabilities which exert a steady pressure, producing dejection and prostration. A crisis results when business is carried to a high point from which it is precipitated. A depression marks the struggle of industry under a weight of adverse conditions.

According as crises have more or less conspicuously involved disturbances of the medium of exchange, of financial institutions, or of productive or commercial industry, they have been denominated monetary, financial, commercial, or industrial crises. These varying designations are useful to indicate the causes or characteristics of individual crises. A more general term and one which

5 De Viti de Marco, cited by Lexis in Schonberg's " Handbuch," 2 Aufl., Vol. II, Ch. XXI, Sec. 51.

6 Neuwirth, Roscher, and Schaffle, for example, use this.

involves commitment to no view or school is economic crisisJ

While the crash or panic is the particular feature which characterizes the modern crisis, no consideration of the subject, which is limited to this culminating period of the disturbance, can be complete. The circumstances leading up to the climax can only be distinguished by the study of the evolution of a crisis.^

''' Wagner uses the phrase " credit crises " because he especially emphasizes the abuse of credit as a cause of crises. "Overstocking of the market is usually an accompaniment of crises. The name overproduction crisis usually suffices therefore, but it does not express so exactly the nature of the evil as the name credit crisis. The expression money crisis is indefinite, since the word money has many meanings; capital crisis is not accurate enough; commercial crisis is one-sided, for crises are not affairs concerning commercial circles alone." — Rentzsch, " Handworterbuch," p. 526.

The following division of crises is given by Max Wirth : " In the first place, there are two sorts of crises to distinguish : -— I. Crises of the circulating medium, and

II. Crises of capital.

The first are divided into such as follow distressing experiences or defective arrangements of the credit and money machinery of industry: («) a congestion of the circulating medium; {b) those which follow an immoderate issue of irredeemable paper currency, which causes a sudden rise of prices and unstable fluctuations.

Those capital crises which fall under II may be subdivided into : (a) acute diseases of production, of stock market speculation especially accompanied by the founding of new enterprises, and of real estate values; (3) commercial crises proper and overstocking of the product market."

^ It is the business of the student to examine these years of business history, and construct in theory a complex of forces which will account for the phenomena. Oechelhauser says : " In our opinion, high and low prices do not stand opposed as good

The concentration of distress upon one portion of the industrial cycle which the term " crisis " implies is the result of modern economic practices. The division of function which was first planned between man and man has been extended to applybetween regions and countries. The organic relations which have resulted have produced a dependency of part on part. The life history of any industry is of import to all. Particularly, however, have the institutions connected with finance and credit worked an economy of effort based upon the existence of normal conditions. The crisis reaches each industry through the interdependence of industries, but chiefly through the relation of all industries to monetary and credit institutions.

The importance of crises as a subject of study is commensurate with the loss which they inflict. The industrial life of the nineteenth century cannot be completely presented without considering them. As Diihring has well pointed out health and disease are but two complementary phases under which the processes of life manifest themselves. To understand the social organism completely we must study it in disease as well as in health.9

and bad, or prosperous times and calamitous times, but they together form two phases of the same critical evolution. The last crisis took its start in the unusual advance of prices over values, not with the revolution of prices." — « Die Wirthschaftliche Krises," p. 24.

^ E. Diihring, " Cursus der National- und Socialokonomie," Part V, Ch. I, p. 225. Cf. Cossa, "An Introduction to the Study

The striking and unusual character of the phenomena composing a crisis calls attention to them, but sets them in a light which is, on the whole, not favorable to their proper scientific observation. It is hard to recognize in the crisis the result of a combination of familiar forces. The interest which invests crises attracts many to their study who come inadequately equipped by previous training in the observation and interpretation of economic phenomena. Again, in the study of so pronounced a subject, arraying interests so sharply against one another, it is natural that opinions should prevail which are pronounced rather than judicious. A voluminous partisan literature exists on the subject of crises which impedes scientific research. The study of crises is difficult, since the crisis is a period of rapid transition. Conditions are not permanent enough to permit of elaborate examination and classification. The forces which are in control are an entirely different compound of human motives than that which usually prevails.

The gradual appearance of crises within a comparatively recent period and as an accompaniment of the present industrial system, gives to them at once a definite significance. They have come to us in company with industrial freedom and individualism, with the factory system, the extension of foreign commerce, the use of credit, and the other features which mark the economic life of

of Political Economy," London, 1893, Theoretics, Ch, IV, Sec. 2, pp. 47, 48.

this century. The order in which the leading industrial nations began to experience crises is a significant fact, as is to-day the varying degrees of intensity with which these storms expend themselves in different countries. It helps to direct inquiry to know that crises are more severe and frequent in the United States than in any other country. They are felt in progressively diminishing force in England, Germany, France, Holland, and Switzerland. The comparative study of the history of crises suggests the wisdom, of observing the extent to which various nations have developed foreign trade and adopted credit and banks. The study of race psychology is not foreign to the subject, nor the observation of national honesty, education, natural conservatism, and the speed and energy of life.^^ The comparative method alone renders it possible duly to subordinate the political situation, the peculiar system of currency prevailing, the banking system adopted by a nation, or the bankruptcy legislation in force.

Especially significant for comparative study is

1^ After stating that crises fall where the credit system is well developed, Mr. Horace White says : " It is an observed fact that nations of Teutonic origin (including the English, American, German, Dutch, and Scandinavian) are most frequently and severely affected with commercial crises." — Lalor's "Cyclopaedia," Vol. I, p. 524.

De Tocqueville considered that the temperament of democratic nations was particularly favorable to crises, since in them economic ambitions are supreme. — " Democracy in America," Boston, 1873, Vol. II, Bk. II, Ch. XIX, prf»92.

the international or world crisis. The widespread disturbance which occurred between the years 1836 and 1839 in most nations, and the crises of the years 1857, 1873, and 1882, deserve to be designated world-crises.^^ The crisis of 1825, which affected England and America together with some other countries, and which arose through the disturbance of the cotton trade, may perhaps be ranked as the first international crisis. In 1847 the condition of England very seriously affected the money markets of Paris, New York, and Amsterdam. The most widespread and enduring international crisis was probably that of 1873. This susceptibility of the whole crisis area of the world to be drawn from time to time into one con-

11 The following table is presented by Juglar in Say's " Dictionnaire," to show the solidity of France, England, and the United States in the matter of crises. Crises of more or less severity have occurred at the dates indicated : —

France

England

United States

1804 .... 1803 ....

1836-39

1836-39

1837-39

. 1864-66 1873 .

Compare this list with the one given in Ch. VII.

vulsion, shows a high degree of economic interdependence.

The question whether crises are increasing in severity has been a much mooted one. The matter presents a different appearance according to whether a long or short industrial period is considered. Taking the entire history of crises into account, an increase in the severity of crises seems certain. During the last half century, however, crises appear to be losing something of their intensity, but to be approaching the character of industrial depressions as the period of recovery after a crisis is lengthened.^^

The place which the subject of crises should occupy, in a systematic treatise upon political economy, is not definitely fixed. For German economists, who divide their works into theoretical and practical economics, the matter presents little difficulty, although the discussion of crises is by no means always placed in the latter division.^^ For those who hold rigidly to the English

^2 In the " First Annual Report of the Commissioner of Labor," upon " Industrial Depressions," occurs the following : " As already stated, the features of regularity and contemporaneousness of crises and depressions have been apparent since the commencement of this century. Crises and panics, with more or less of industrial depression accompanying them, have occurred in various countries, but there were not such strong connecting influences and facts and associated conditions as have been observed during the past fifty years." — Ch. I, p. 15.

13 « A review of the literature of crises discovers the fact that the position which this theory has occupied in economic science has been an extremely varied one. Without considering that the sub-

II division of the science into Production, Exchange, Distribution, and Consumption, the adjustment of the subject into the general scheme of arrangement is more difficult. The crisis involves so many economic functions that it cannot be adequately treated within the boundaries of any one of the departments of economic science. Important considerations arise when the subject is looked upon from each of the view-points, — Production, Exchange, Distribution, and Consumption. It lies athwart these lines of demarkation. From the standpoint of crises it is possible to judge every important economic tendency, and study every economic institution. If crises are disturbances of the equilibrium between production and consumption, they evidently concern both these functions as well as the methods of adjusting the two with which Exchange and Distribution have to do. In accordance with this view we find such writers as Professor R. T. Ely, presenting some special aspects of the subject of crises in each of the divisions of theoretical economics, while emphasizing especially the connection between crises and the

ject is taken up at times in the general, then in the special, part of economic science, and sometimes in both, we find its position in General Economics variable. Often it is treated under Production, as a disturbance of the same; again and most frequently it is taken up in Exchange; at times in Consumption, as is the practice with Roscher, who considers all crises to be disturbances of the balance between production and consumption. Rodbertus- Jagetzow considers crises under the caption Distribution." — Was- SERRAB, •* Preise und Krisen," p. 39.

process of consumption. Francis A. Walker, in his " Political Economy," set apart for the consideration of crises a portion of the last chapter under the subject of Exchange, entitling it ''The Reaction of Exchange upon Production." i* J. S. Mill lays some of the fundamental propositions necessary to his development of the subject in Book I, on Production, others in Book II, on Distribution, and he finally brings out his theory in Book IV, entitled, " Influence of the Progress of Society on Production and Distribution."

Turning to the theories which have been constructed to account for crises, we have first to notice some of the limitations of economic theory which concern us. As is to be expected in the case of so striking and intricate a subject, a truly enormous number of theories have been expounded to explain crises. The " First Annual Report of the Commissioner of Labor," which was devoted to the subject of industrial crises and depressions, enumerates the following assigned causes of crises : Railway speculation, under-, over-, misdirected, and unsteady consumption, contracted, inflated, depreciated, or fluctuating currency, machinery, various kinds of laws, debt, intemperance, monopoly, speculation, tariff, and taxation. These are but a few of the particular arraignments, while bad sanitary conditions, free passes, education too exclusively intellectual, coolie, convict, female, child, and im-

1* " Political Economy" (advanced course), Part III, Ch. VII. 13 ported labor come in for a share of the blame. The enumeration rounds well up to the border of the ridiculous with the mention of such causes as absence of caste, and instinctive and widespread indolence. Concerning the collapse of 1878, Mr. Walter Stanley Jevons wrote, in his essays on Currency and Finance : " It is curious to notice the variety of the explanations offered by commercial writers concerning the course of the present state of trade. Foreign competition, beer drinking, over-production, trades-unionism, war, peace, want of gold, superabundance of silver. Lord Beaconsfield, Sir Stafford Northcote, their extravagant expenditure, the Government policy, the Glasgow bank directors, Mr. Edison and the electric light, are a few of the happy and consistent suggestions continually made to explain the present disastrous collapse of industry and credit." To this list a malicious reader might add " sun-spots." 1^

The literature devoted to crises is full of discussions of the purely local and incidental features of individual crises. The external and apparent has

1^ Many opinions concerning the origin of crises have been expressed by economic writers which have not been taken up to any extent by students of the subject, Laveleye emphasizes the derangement of the balance of trade leading to the exportation of precious metals as the cause of contractions of credit liable to bring on crises. Bonamy Price attributes crises to a diminution of the means of buying. Nasse dwells upon the effect of changes due to progress. Leroy-Beaulieu brings forward the importance of commercial treaties and of commercial legislation in general.

always been seized upon. Without comparative study it is impossible to establish a perspective within the subject which permits the subordination of local and incidental causes to those more fundamental. The literature which appears during and immediately after a crisis, and which contains only an analysis of that crisis, cannot be expected to contribute much to a well-balanced discussion of the subject. Writers who only venture into the field when stirred by local happenings, are likely to be permeated by local prejudices and inflamed by prevailing social and economic controversies.^^ When it has been determined that any crisis is unusual in character and in its causes departs from the type, then we must look with distrust upon all literature known to have been particularly inspired by it. The crises of the latter part of the seventeenth century and the first part of this century seem, as a rule, to have been the result of peculiar and unusual combinations of events. The conditions under which they occurred are so different from those prevaiHng since, that it may be safely said that little of value can be found in discussions published prior to 1837.

1^ " As is often the case, in the study of crises and in distinguishing their successive periods, theory has gone ahead of practice. It need not excite surprise that that theory was for iwenty-five years considered one of the most obscure in economics. Each author, maintaining his own point of view, has indicated such causes of crises as best agree with the system of thought he has accepted or built up." — Clement Juglar in Say's " Dictionnaire."

In the literature of crises the tendency has until recently been strong to consider the last link in a chain of causes as the only one of importance. The crash of a panic has been observed to the neglect of the pre-crisis period in which the secret of causes lies.^*^ Financial and credit institutions have received undue attention because through them unstable conditions are first brought to rupture.

Not only are the varying phases of the history of commercial convulsions reflected in theories of crises, but so also are the prevailing social and economic ideas. As Friederich A. Lange has said, "We examine a science, and we find in its doctrines only the mirror of social conditions." ^^ It is human nature that good results or qualities should be referred most easily to causes or objects which already have a favorable character in our estimation. Bad actions are laid at the door of those whom we believe to be bad. Crises have been time out of number laid at the door of the opposite political party, the disliked financial sys-

1'^ " In all economic questions, one can note the tendency of observers to trace great consequences back to some single cause which, by accident, is known or understood by them. This tendency has especially manifested itself in the judgments which have been formed regarding the causes of periods of speculation and commercial crises, and in general regarding phenomena connected with money and credit." — A. Wagner, "Die Geld- und Credittheorie der Peel'schen Bankacte," p. 257.

18 "History of Materialism" (2d ed.), Boston, 1879-81, Vol. Ill, p. 233.

tern, and the economic class with whose interest one's own is not coincident. This kind of work is on an intellectual level with the practices of those villagers of past centuries who evolved the idea of a witch, attributing the sickness and deaths of the community to the influence of old women who were primarily disliked for their ugly appearance and temper.

The history of crises has often been made an arsenal from which were to be drafted arguments for political and economic polemics. The theory of crises has been a handle in many arguments, and has been subordinated to the purpose of first one popular discussion and then another.

As between the French, German, and English literatures of the subject some comparisons may be made. In France, the literature of crises was for a long and important period a mere side-light in the discussion of the freedom of bank-note issue. French scientific economic literature, in common with the English, brings the subject of crises into connection with the dispute over the law of markets or over-production. English writers for some time only mentioned crises to connect them in one way or another with the expositions of the "Currency School" or to use them in the defence or attack of the Peel Bank Act of 1844.

That the theory of crises should have been until the last three decades involved in abstract discussions of over-production, currency, and international trade is not, broadly speaking, accidental. c 17

Before the period mentioned the ideals and methods of the exact sciences prevailed and influenced economics. Such subjects were naturally chosen as best fitted these methods, and economics was built with the idea of an exact science in mind. More recently the biological sciences have been built up. They now exert an influence as ideals, while the inductive method appropriate to them has extended its influence.

Germany brings a double contribution, namely, that of the socialists and that of scientific economists. These two are relatively distinct. The contribution of the socialists to the subject is very considerable. German scientific literature is not greatly influenced so far as the theory of crises is concerned by socialistic thought, and is free from prolonged entanglement with any other discussions such as arose in England or France. It is in Germany, therefore, that we find the most systematic and unprejudiced discussions of crises.

Before proceeding to consider the various theories of crises it may be well to say a word concerning diversities of view. The differences of position taken by writers is very frequently more apparent than real. Of a number of investigators who perceive that crises result from a divergence between supply and demand, some will speak of over-production and others of under-consumption. Of a number who examine the fluctuation of demand and single out as the cause of crises the failure of the effective demand of wage-earning

i8 classes, some will maintain that the institution of private property permits capitalists to defraud wage-earners and will, with Rodbertus, hold a socialistic theory. Others, like Robert Owen, will see most clearly the influence of machinery in these results, and will frame a mechanical and technical problem. Others still may, with Brentano, look upon the condition of the wage-earner as due primarily to his intelligence and providence or improvidence, and will thus constitute out of the matter a moral problem.

Let us proceed to the statement, in as favorable a light as may be, of the chief theories explaining crises. The presentation in the following chapters will be dominated by the idea of making each new point of view a position from which certain important aspects of the subject may be best elucidated. The chapters which follow form, therefore, at once a systematic discussion of crises and a presentation of the chief theories of crises.

I. Definition : (a) of a crisis cycle ; of a crisis ; (3) distinction between crises and depressions ; (c) types of crises — the monetary, financial, commercial, and industrial crises ; the economic crisis.

II. The culmination of a crisis cycle in a crisis accounted for by the solidarity of economic interests and modern credit.

III. Importance of the study commensurate with the losses inflicted by crises. Social ills reveal important aspects of social forces.

IV. Difficulty of study caused by (a) the complex, striking, unusual, and temporary character of the phenomena ; (d) untrained observation ; (c) partisan opinions.

V. Guiding general facts : (a) crises appeared with the present industrial system, with industrial freedom, the factory system, foreign commerce, and credit ; (d) geographical distribution of crises — the world crisis.

VI. Place of subject in economic treatises. It does not adjust itself to the four-part division of economics into Production, Exchange, Distribution, and Consumption.

VII. Limitations of economic theory : —

(a) Large number of theories advanced. {d) Discussions devoted to local and incidental features. (^) Literature growing out of abnormal economic crises likely to be worthless.

(d) Little work of value prior to 1837.

(e) Undue prominence of the " crash " and of credit

institutions in studies of crises. (/") Theory of crises used as a handle in various economic and political discussions.