The cause of hard times

Preface

TO the views set forth in this little book the author asks that a fair and unprejudiced consideration may be given. As those views are new and have not yet penetrated into the professorial mind, they must stand or fall, not by the weight of authority or precedent, but by the strength or weakness of the arguments adduced in their support. Of the critics, if they shall deign to notice him, the author asks that they will endeavor to make sure that they understand his views before they attack them, and will not set up as his, and then proceed to demolish, views and arguments for which he is in no way

responsible.

URIEL H. CROCKER.

Boston, March, 1895.

TABLE OP CONTENTS.

Chapter Page

I. Principal Characteristics of Hard Times 7 II. The most Prominent Characteristic an Excessive Capacity of Production, and a resulting Amount of Products in Excess of the Demand for them 13

III. A General Excess of Production over Demand has been alleged by Economists to be Impossible 15

IT. The Arguments by which the Economists have supported their Position stated,

and their Validity doubted 18

V. The Position of the Economists shown to be a False One. There may be a General Excess of Production resulting from an Excessive Amount of the Machinery of Production 23

VI. Statements by other Writers confirmatory of the Views set forth in the preceding Chapter .27

IV TABLE OF CONTENTS.

Chapter Page VII. An Excessive Amount of the Machinery of Production accounted for as a Result of an Excessive Demand for Income-producing Investments 34

VIII. The Excessive Demand for Income-producing Investments arises from an Excessive Desire to Save rather than to

Spend 39

IX. How the Lost Equality between Production and Demand may best be restored 48 X. Why the recent Hard Times began when they did, and how soon we may expect

them to end 52

XI. Historical Facts confirming the Author's

Theory 57

XII. Some Practical Conclusions 63

XIII. The Origin of "Trusts" 71

XIV. The Difference between the Author's Views

and those of the Economists a Radical

One '4

XV. The Economists' Explanation of the " Tendency of Profits to a Minimum " shown to be Antiquated and Inadequate . . 77 XVI. Some Prognostications as to the Future . 79

Table Of Contents

Chapter

XVII. A more Technical Argument, addressed particularly to Professional Economists

XVIII. A Harvard Professor's Question . . .

Chapter I. Principal Characteristics Of Hard Times

THE people of the United States, and to a perhaps less extent those of Europe also, have recently been suffering from a period of extreme depression in trade, or, in other words, from what are called "hard times. " About twenty years ago there was a similar period of depression, and during the whole interval since that time there has been much trouble of the same kind. The evidences of the present depression are well known. Laboring men have found it impossible to obtain their usual employment. Manufacturing establishments have been unable to find any profitable use for all their machinery, and many of them have been compelled either to continue to turn out products at a loss, to cut down wages, or to close up altogether. The railroads of the country have been without their usual amount of passengers and of freight, and have been driven to curtail their expenses by a large dismissal of employees, — the weaker railroads having been forced into the hands of receivers, while the stronger, by reason of the falling off of their profits, have been compelled to reduce or to omit altogether the dividends to their stockholders. Shopkeepers have complained that their trade has fallen off, and that consequently they have been unable to pay to their landlords the usual rents. And, finally, capitalists have found so small a demand for their funds that money has been a drug in the market, and only loanable at rates of interest unprecedentedly low.

Under these circumstances it would seem to be a fact beyond dispute that the immediate cause of the depression is to be found in a falling off in the demand for the products of labor, — meaning by " demand," not that demand which seeks to obtain a product as a gift or for an inadequate price, but the demand which is ready and willing to pay to the producer a remunerative price for his product. It is surely the falling off in this demand that has deprived the shop-keeper of his trade, the manufacturer of a market for his products, the railroad of its freight and its passengers, the laborer of his employment, and the capitalist of the usual return of interest upon his money. It is also clear that an increase in this demand would set all the wheels of industry in motion, would restore his trade to the shop-keeper, would make busy again the machinery of the manufacturer, would load the railroads again with freight and with passengers, would give employment once more to all the great army of laboring men, and would cause capital to be again in demand and the current rate of interest to rise. These things are at last so plain that one can hardly find even a professor of political economy rash enough to denv them.

This strange condition of affairs, — this distress in the midst of plenty, — this superabundance of laborers and of the machinery of production, ready for employment, but unable to find it, — this apparently complete equipment of the world with factories and railroads and warehouses and willing hands, all eager to join in the work of creating and distributing products for the comfort and pleasure of mankind, but all held in check and forced to remain idle by some strange power that paralyzes them, — these phenomena would seem to furnish a subject of peculiar interest and of especial importance for the student of political economy. But, strangely, the professors of that science seldom touch upon this subject in their books or in the journals devoted to their special branch of learning. Indeed, it would almost seem as if it were a subject avoided by them from a feeling of their entire inability to grapple with it.

At the time of the great depression in trade that occurred about twenty years ago, the professors did indeed have some theories to air and some advice to give. Then, one of the leaders among them, Professor Bonamy Price, the Professor of Political Economy in the University of Oxford, England, announced in the Contemporary Review for April, 1877, (p. 787,) that the cause of the then existing trouble was "one and one only, — over-spending, over-consuming, destroying more wealth than is reproduced, and its necessary consequence, poverty." This theory was, however, plainly at variance with undisputed facts. A people suffering from "over-spending, over-consuming, destroying more wealth than is reproduced," cannot possibly find itself, as we found ourselves then, and again find ourselves to-day, possessed of multitudes of usable but unused products of labor, of an excess of idle machinery, and of multitudes of men and women unable to find employment. Poverty, which Professor Price correctly called the "necessary consequence " of over-spending, is always evidenced by a scarcity, rather than an abundance, of the products of labor, and by a large demand for labor to make good the previous waste. Apparently, indeed, the professors of political " economy " have felt bound to consider " economy " to be the remedy for all evils, and the want of " economy " the cause of every kind of mischief, and in their attempt to carry out these ideas they have been reduced, like Professor Price, to the necessity of explaining a condition of abundance by making it the result of waste, — of explaining a condition where men cannot find any work to do in the creation of products, by making that condition the result of a wasteful destruction and consequent scarcity of products.

If, then, we get no light from the professors, let us examine the subject for ourselves, and see whether we can discover the true cause of the phenomena which constitute the so-called "hard times," or "depression in trade."

CHAPTER H.

THE MOST PROMINENT CHARACTERISTIC AN EXCESSIVE CAPACITY OF PRODUCTION, AND A RESULTING AMOUNT OF PRODUCTS IN EXCESS OF THE DEMAND FOR THEM.

AS has been already stated, the one conclusion which we may draw, of the truth of which it would seem that there can be no dispute, is this, — that at the present time the capacity of production of this country, the capacity of its machinery and of its laboring classes to produce and distribute useful products, is far in excess of the remunerative demand for those products. There is surely nothing to keep idle machinery and willing hands from creating and distributing products, if those products can be disposed of at a profit to the producers. The fact is that the producers are all ready and waiting, but the buyers are wanting. Plainly the country's capacity of production has for the time run ahead of its demand for consumption, and this excess of capacity of production has only been made evident to the producers by an actual excess of production over the demand for consumption, ■ — by their discovery that they have stocks of goods on hand which are in excess of the amount which is called for at remunerative prices. This condition of affairs, this inequality between production and consumption, between supply and demand, may properly be called either " over-production " or " underconsumption. " Each term equally well describes the situation, and each has been employed by different writers, but that which has been most usually employed by economists has been "over-production."

Chapter III

A GENERAL EXCESS OF PRODUCTION OVER DEMAND HAS BEEN ALLEGED BY ECONO- MISTS TO BE IMPOSSIBLE.

AT this point, however, we encounter a difficulty. It is claimed by economists that, while over-production of a particular product is possible, and in fact often happens, a general over-production, or general excess of production over demand, is in the nature of things an utter impossibility. Thus John Stuart Mill, in his "Principles of Political Economy " (book 3, chapter 14, sections 1 and 3), says : " Because this phenomenon of over-supply and consequent inconvenience or loss to the producer or dealer may exist in the case of any one commodity whatever, many persons, including some distinguished political economists, have thought that it may exist with regard to all commodities, — that there may be a general over-production of wealth, a supply of commodities in the aggregate surpassing the demand, and a consequent depressed condition of all classes of producers. . . . There may easily be a greater quantity of any particular .commodity than is desired by those who have the ability to purchase, and it is abstractly conceivable that this might be the case with all commodities. The error is in not perceiving that, though all who have an equivalent to give might be fully provided with every consumable article which they desire, the fact that they go on adding to the production proves that this is not actually the case."

The great weight of the name of John Stuart Mill, and his reputation as a sound reasoner, have caused this conclusion of his to be accepted by economists as sacred truth. With the ordinary economist, to assert the possibility of general over-production is to commit the unpardonable sin. Thus, in an article by Moreton Frewen on " Gold Scarcity and the Depression in Trade," in the Nineteenth Century for October, 1885, we read:

" People of little education are accounting for low prices on the hypothesis of general over-production; but it is hardly necessary to point out that, while over-production in any particular trade is frequent, and quickly adjusts itself, general over-production is impossible. " And Mr. Edward Atkinson, in an address on the " Statistics of Consumption," printed in the Boston Sunday Herald for July 5, 1885, says: "I desire to examine the outside of the head of any one who pleads a general over-production, in order to see how his brain is constituted, and what element of common sense has been omitted in his make-up."

Chapter IV

THE ARGUMENTS BY WHICH THE ECONOMISTS HATE SUPPORTED THEIR POSITION STATED.

AND THEIR VALIDITY DOUBTED.

EVEX at the risk of incurring the contempt of Messrs. Frewen and Atkinson, and of the whole tribe of professors of Political Economy. I will venture to examine into the soundness of Mill's position. In the first place. I may mention that those who look only at the facts, not troubling themselves about theory, are unanimously of the opinion that a state of general over-production has existed during the past few years. The practical man asks what class of producers (not in the enjoyment of a monopoly) there is which has not felt and believed that its own class of products has been over-produced. If such a complaint came from a few only, the followers of Mill would admit that it might be well founded, as he allowed over-production in special branches to be possible ; but general over-production he claimed to be impossible. If people generally complain that they have been suffering from that, they must, according to his doctrine, be under a delusion. As an illustration how closely the modern economists hold to the views of Mill, the following words from Macvane's "Political Economy" (published in 1890) are here quoted : " Any one commodity, or any limited number of commodities, may be produced in excess of the demand at any time ; but it is quite impossible that all products should be in excess of the demand at one and the same time. If the supply of some things is excessive, the supply of other thinjs is deficient to the same extent." (Chap. 27, sect. 1.)

Is it possible that Mill and the theorists are right, and the practical men all deluded ? Is it possible that during all these hard times there have been, hidden somewhere, classes of products which, as is claimed by Professor Macvane, have been under-produced, — the supply of which has not been equal to the demand, for them, — and the under-production of which has been sufficient to offset the over-production of other things, and to reduce the average of production to an equality with the average of demand ? If there have been any such under-produced products, — products for which the demand has exceeded the supply, — there must certainly have been a great profit derivable from the business of furnishing those products to customers eager and able to pay for them. Can it be that in this enterprising nation no one has been able to discover what these under-produced products were, and to employ in their production some of the vast amount of idle capital which has so long been seeking in vain for some profitable employment ? It would seem to be impossible for even Professor Macvane to answer these questions in the affirmative.

If then observed facts appear to be so much at variance with theoretical conclusions, we can with more confidence examine into the arguments of the theorists. Mill's statement is that the " error " of those who have supposed general over-production to be possible consists " in not perceiving that, though all who have an equivalent to give might be fully provided with every consumable article which they desire, the fact that they go on adding to the production proves that this is not actually the case." In other words, Mill's argument is that no man creates a product except for the purpose of supplying himself with some other product which he desires, and that his production of his own product is always strictly proportioned to his desire to obtain other men's products in exchange for his own. Thus he limits the amount of the production of each individual to an amount which cannot exceed that of his own demand for the products of others, and consequently the production of the whole community, which is the aggregate of the production of all the individuals composing that community, must according to Mill be limited to and cannot exceed the aggregate of the demand of all those individuals, and thus a general over-production, or general excess of production over demand, is made impossible. But if it can be shown that men sometimes carry on production, not primarily and solely for the purpose of supplying themselves with the products of others, but for an entirely different and independent reason, Mill's argument necessarily falls to the ground.

Chapter V

THE POSITION OF THE ECONOMISTS SHOWN TO BE A FALSE ONE. — THERE MAY BE A GENERAL EXCESS OF PRODUCTION RESULT- ING FROM AN EXCESSIVE AMOUNT OF THE MACHINERY OF PRODUCTION.

THAT a powerful incentive to production, other than the desire of the producer to obtain the products of others, exists at the present day, cannot well be denied. This incentive is to be found in the willingness of the owners of the present immense amount of machinery of production to keep that machinery busy in the work of creating products, even when they can only dispose of those products for less than cost, rather than to suffer the greater loss that must come to them if that machinery is allowed to lie idle. They often continue for long periods to carry on production, not because they hope thereby to gain a supply of products exceeding what they already have, but with a sure knowledge that the daily result of their production is a decrease of their supply of products, a diminution of their wealth, a net loss. And the way in which this is brought about is as follows.

In recent years the machinery of production has been created so extensively that in very many branches of industry its capacity of production has been largely in excess of the demand for its products. And when this excessive machinery is, as is usually the case, the property of different competing producers, the now familiar result is brought about that these competitors find at last that there is no remunerative demand for all their products. Some producer's machinery must stop its work, or all the producers will find that it is impossible to dispose of their products except at less than the ordinary profit, or perhaps not otherwise than at a loss. But stoppage itself involves a loss, and ordinarily a greater loss than continued production. The owner of idle machinery has upon his hands a costly article of property, which involves him in continual expense for its care and for its protection from the weather, from fire, and from thieves, and which, in spite of all that he can do to preserve it, will rapidly deteriorate through rust and decay. He will also, by allowing his machinery to lie idle, suffer a further, and in most cases a more serious, loss from parting with and scattering beyond recall the skilled workmen who have been running that machinery, and from driving the customers, who have been in the habit of buying his products, to seek elsewhere for their usual supply; and it is well known that a course of trade once diverted is not easily restored to its old channel. Under these circumstances, it is evident that a large and powerful body of producers — namely, the owners of the immense amount of the machinery of production — may well be brought, and in many recent cases have actually been brought, to the creation of products to an amount not based upon and proportioned to the demand for those products, but based mainly on the producers' own desire to save and protect their machinery and their business. In order to save and protect these

26 THE CAUSE OF HARB TIMES.

important elements of wealth, they have been ready and willing to maintain and continue a production which has not only involved no profit, but which has often brought them actual loss. Thus we find it to be true that there may be a production which is, with the knowledge of the producer and intentionally, in excess of the producer's demand for the products of others; or, in other words, we find that the fact that men " go on adding to the production " does not prove that they are necessarily and solely actuated by a desire to increase their store of " consumable articles," but that they may be actuated only by a desire to lessen an unavoidable decrease of their store of such articles, and Mill's argument to prove the impossibility of general over-production is shown to be founded in error, and it is made plain that there may exist, and have in fact existed, periods of so-called general over-production ; — or, in other words, periods when there has been a general excess of products over and beyond the demand for them at prices remunerative to the producers.

Chapter VI

STATEMENTS BY OTHER WRITERS CONFIRMATORY OF THE VIEWS SET FORTH IN THE PRE- CEDING CHAPTER.

THE actual working of the process by which, first, an excessive amount of machinery is created, and afterwards that machinery is run at a loss by its. owner in his desire to save himself from the greater loss that would result from its stoppage, has been well described by Mr. Andrew Carnegie, a practical manufacturer, widely known and of recognized ability, in an article on " Trusts, " in the North American Review for February, 1889. Mr. Carnegie there says (pp. 141, 142) : —

"A demand exists for a certain article, beyond the capacity of existing works to supply it. Prices are high, and profits tempting. Every manufacturer of that article immediately proceeds to enlarge his works and increase their producing power. In addition to this, the unusual profits attract the attention of his principal managers, or of those who are interested to a greater or less degree in the factory. These communicate the knowledge of the prosperity of the works to others. New partnerships are formed, and new works erected, and before long the demand for the article is fully satisfied, and prices do not advance. In a short time the supply becomes greater than the demand ; there are a few tons or yards more in the market for sale than are required, and the prices begin to fall. They continue falling until the article is sold at cost to the less favorably situated or less ably managed factory, and even until the best managed and best equipped factory is not able to produce the article at the price at which it can be sold. Political economy says that here the trouble will end. Goods will not be produced at less than cost. This was true when Adam Smith wrote ; but it is not quite true to-day. When an article was produced by a small manufacturer, employing, probably at his own house, two or three journeymen and an apprentice or two, it was an easy matter for him to limit or even to stop production. As manufacturing is carried on to-day, in enormous establishments, with five or ten millions of capital invested, and with thousands of workers, it costs the manufacturer much less to run at a loss per ton or yard than to check his production. Stoppage would be serious indeed. The condition of cheap manufacture is running full. Twenty sources of expense are fixed charges, many of which stoppage would only increase. Therefore, the article is produced for months, and in some cases that I have known for years, not only without profit or without interest upon capital, but to the impairment of the capital invested. Manufacturers have balanced their books year after year, only to find their capital reduced at each successive balance. While continuing to produce may be costly, the manufacturer knows too well that a stoppage would be ruin. "

Mr. David A. Wells has made a similar statement in his " Recent Economic Changes, " published in 1889, (p. 73,) as follows: —

"It was formerly a general assumption that, when price no longer equalled the cost of production and a fair profit on capital, production would be restricted or suspended; that the less favored producers would be crowded out, and, by the relief thus afforded to the market, normal prices would be again restored. But this doctrine is no longer applicable to the modern methods of production. Those engaged in great industrial enterprises, whether they form joint-stock companies, or are simply wealthy individuals, are invested with such economic powers that none of them can be easily pushed to the wall, inasmuch as they can continue to work under conditions that would not permit a small producer to exist. Examples are familiar of joint stock companies that have made no profit and paid no dividends for years, and yet continue active operations. The stockholders are content if the plant is kept up, and the working capital preserved intact; and, even when this is not done, they prefer to submit to assessments, or to issue preferred shares and take them up themselves, rather than go into liquidation, with the chance of losing their whole capital. Another feature of such a condition of things is that the war of competition, in which such industrial enterprises are usually engaged, is usually carried on by a greater and greater extension of the market supply of their products. . . . Under such circumstances, industrial over-production, manifesting itself in excessive competition to effect sales and in a reduction of prices below the cost of production, may becbme chronic." *

1 The following quotations from the author's pamphlet entitled "Over-production and Commercial Distress" (pp. 16-18), published in 1887, are here given, in order to show that Messrs. Carnegie and Wells had been anticipated by this author in their statement of the causes of recent over-production. Indeed, the similarity in the form of the three statements would seem to show that this author furnished to the two later writers the unacknowledged basis for their above quoted statements.

"Modern society has brought in, to complicate the problem which Mill attempted to solve, at least one new and important element, namely, the immense amount of machinery, which now increases a hundred fold the effectiveness of human labor. And the use of machinery has had one curious effect which Mill entirely overlooked ; namely, that its owner finds an inducement to employ it in the production of consumable articles, even when he has no hope or expectation that he can by such production supply himself, directly or indirectly, with any consumable article for his own use. The factory owner, for instance, has upon his hands a piece of propertj' which, if idle, will involve him in continued expense for its care and its protection from the weather, from fire, and from thieves, and which, in spite of all that he can do to prevent it, will rapidly deteriorate through rust and decay. The owner of an idle factory must also suffer a further injury from losing the skilled workmen who have been accustomed to run his machinery, and from forcing the customers, who have been in the habit of buying his products, to patronize rival manufacturers ; for to fill the places of those workmen and to find new customers, when his factory starts up again, must certainly involve him in great trouble and expense. . . . In order to avoid the loss which must necessarily come to him if his machinery is allowed to remain idle, he will employ that machinery in production, even when he knows that the articles produced must be sold for less than the cost of producing them."

"It is evident that during recent years much machinery has in fact been run without profit, or at a loss, to its owners, — run simply because those owners believed that they would suffer a smaller loss if they should continue to run it than if they should allow it to lie idle. It has in recent years been a matter of common observation that most kinds of machinery have been created of a capacity in excess of the demands of the market for the products which the machinery has been adapted to produce. There has hardly been<a branch of manufacture, open to free competition, in which the machinery has not within the last ten years been run for long periods at a loss, simply because its owners have hoped to kill off rival manufacturers, to hold the market in anticipation of better times, or to avoid the deterioration and expense necessarily attendant upon idleness ; and there is hardly any branch of manufacture to-day — unless it is, through a patent right or otherwise, in the enjoyment of a monopoly — which is not endeavoring to limit production by all sorts of mutual agreements, known as pools, trusts, etc., and thereby to prevent the continuance or recurrence of the troubles which it has experienced and of the losses which have resulted from the excessive amount of its machinery and from its general capacity of production in excess of the demands of the market."

Chapter VII

AN EXCESSIVE AMOUNT OF THE MACHINERY OF PRODUCTION ACCOUNTED FOR AS A RESULT OF AN EXCESSIVE DEMAND FOR INCOME- PRODUCING INVESTMENTS.

WE have seen that the chief feature of our recent business depressions has been a general excess of production over the demand for products at remunerative prices, a condition which, under the name of " general over-production," the professional economists have mistakenly thought they had proved to be impossible, and we have seen further how an excessive creation of the machinery of production has, through the competition of the owners of that machinery, made this general over-production not only a possible, but an actually existing phenomenon. We have next to consider how we may account for the existence of this excessive amount of machinery.