concession never overtakes the need of readjustment, - and the discrepancy between capitalization and earning-capacity is therefore chronic so long as no extraneous circumstances come in temporarily to set aside the trend of business affairs in this respect. It may, therefore, be said, on the basis of this view, that chronic depression, more or less pronounced, is normal to business under the fully developed regime of the machine industry.
This deplorable trend given to business by the excessive prevalence and efficiency of the machine industry can, however, be set aside by several factors more or less extraneous to the industrial system proper. Even within the mechanical system of industry there is at least one factor of some consequence that consistently acts to mitigate the trend indicated, and that may even put it in abeyance from time to time. As has been pointed out above, questions of business are fundamentally questions of price. A decline of prices which widely touches business interests brings depression. Conversely, an appreciable advance in prices, from whatever cause, means improvement in business. Such an advance in prices may come of a speculative movement; which in turn may arise from a variety of circumstances, for the most part circumstances extraneous to the industrial process. For the present, however, the question of a speculative movement is best left on one side. Another factor touches the case more intimately. As has more than once been the case, prices may be advanced through a freer supply of the precious metals, or by an inflation of the currency, or a more facile use of credit instruments as a subsidiary currency mechanism. Now, the growing efficiency of industry has an effect in lowering the (material) cost of production of the precious metals and so increasing the ease with which they are supplied, after the same manner as it affects the supply of goods for industrial or consumptive use. But the increased supply of the precious metals has, of course, an effect upon prices contrary to that exerted by the increasing supply of goods. In so far as this effect is had, it acts to correct or mitigate the trend of business toward chronic depression.
But certain circumstances come in to qualify the salutary effect of a lowered cost of the precious metals. Improvements in the industrial processes affect the (industrial) cost of production of the precious metals in a less degree than the cost of other goods; at least, such seems to have been the case recently. But beyond this, and of graver consequence, is a peculiarity affecting the value of the money metals. The annual product of the money metals is not annually consumed, nor nearly. The use of them as money does not consume them except incidentally and very slowly. The mass of these metals in hand at any given time is very considerable and is relatively imperishable, so that the annual accretion is but a small fraction of the aggregate supply. The lowered cost of the annual supply has therefore but a relatively slight effect upon the aggregate value of the available supply.
The case is different as regards the annual output of vendible products, whether for industrial or consumptive use. In this case, and particularly as regards this matter of new Investments and extensions of Industrial equipment, the annual output counts for by far the greater factor in making the current value of the available supply, if indeed it is not to be regarded as substantially the only factor that comes in question here. Accordingly, it is only under very exceptional circumstances, at times when the precious metals are supplied with extraordinary freedom, that the in creased output of these metals can offset the trend of business toward depression. Ordinarily this factor can count for no more than a mitigation of the "tendency of profits to a minimum." And even this mitigating effect, it may be remarked, appears to be of less radical consequence for the general situation of business now than it was during the earlier phases of the machine industry's regime. The most telling effect of an increased supply of the precious metals seems to be the incitement which it gives to speculative inflation.
It will be noted that the explanation here offered of depression makes it a malady of the affections. The discrepancy which discourages business men is a discrepancy between that nominal capitalization which they have set their hearts upon through habituation in the immediate past and that actual capitalizable value of their property which its current earning-capacity will warrant. But where the preconceptions of the business men engaged have, as commonly happens, in great part been fixed and legalized in the form of interest-bearing securities, this malady of the affections becomes extremely difficult to remedy, even though it be true that these legalized affections, preconceptions, or what not, centre upon the metaphysical stability of the money unit.
But while it is true that depression is primarily a business difficulty and rests on emotional grounds, that does not hinder its having grave consequences for industry and for the material welfare of the community outside the range of business interests. Business enterprise, it is true, proceeds on metaphysical grounds and is swayed by considerations of nominal wealth rather than by considerations of material serviceability; but, none the less, business enterprise and business metaphysics control the course of industry.
Dull times in business means dull times in industry, of course. But a caution is necessary on this head. The yearly output does not usually vary extremely between brisk and dull times, except as measured in price. As measured in material terms the discrepancy in the volume of output between brisk and dull times is much less. The gross output as measured by weight and tale is less in dull than in brisk times, other things equal; but the deficiency as measured in these terms is much less than the price returns would indicate. Indeed, the output as measured by weight and tale need not average very appreciably less during a protracted depression than during a preceding period of good times. The volume of business as well as the volume of output (by weight and tale) of industry may increase during a few years of depression at nearly if not quite as high a rate as during a corresponding period of good times. A transition from dull to brisk times, however, commonly if not invariably involves a rapid increase in values, while a converse transition involves a corresponding shrinkage of values, though commonly a slower shrinkage, - except where a crisis intervenes.
The primary hardship of a period of depression is a persistent lesion of the affections of the business men; the greatest secondary hardship is what falls upon the workmen, in the way of partial unemployment and a decline in wages, with consequent precariousness and reduction of their livelihood. For those workmen who continue to find fairly steady employment during the depression, however, even at reduced wages, the loss is more apparent than real; since the cheapening of goods offsets the decline in wages. Indeed, the cheapening of the means of living is apt to offset the fall in wages fully, for such workmen as have steady work. So that in the case of the workmen also, as well as in that of the business men, the distress which dull times brings is in some part a spiritual, emotional matter.
To the rest of the community, those classes that are outside of business enterprise and outside of the industrial occupations proper, that is to say, those (non-industrial) classes who live on a fixed salary or similar fixed income, dull times are a thinly disguised blessing. They suffer in their affections from the reflected emotional detriment of the business community, but they gain in their ease of livelihood and in their savings by all the difference between the price scale of brisk and of dull times. To these classes an era of prosperity brings substantially nothing but detriment.
Depression is primarily a malady of the affections of the business men. That is the seat of the difficulty. The stagnation of industry and the hardships suffered by the workmen and other classes are of the nature of symptoms and secondary effects. Any proposed remedy, therefore, must be of such a nature as to reach this emotional seat of the trouble and restore the balance between the nominal value of the business capital engaged and the earnings of the business; that is to say, a remedy, to be efficacious, must restore profits to a "reasonable" rate; which means, practically, that prices must be brought to the level on which the accepted capitalization has been made. Such a remedy, to offset the disastrous cheapening of products through mechanical improvements, has been found in business coalitions and working arrangements of one kind and another, looking to the "regulation" of prices and output. Latterly this remedy is becoming familiar to the business community as well as to students of the business situation, and its tangible, direct, and unequivocal efficiency in correcting this main infirmity of modern business is well recognized. So much so, indeed, that its urgent advisability has been formulated in the maxim that "Where combination is possible competition
