is impossible." What is required is a business coalition on such a scale as to regulate the output and eliminate competitive sales and competitive investment within a field large enough to make up a self-balanced, passably independent industrial system, - such a coalition of business enterprises as is loosely called a "trust."
Such a business coalition, if it is comprehensive and closely controlled, can adjust the output of goods and services to the market with some nicety, and can maintaIn the balance of the ruling prices, or the price scale agreed upon, with such effect that the received capitalization need not become obsolete even in the face of very radical improvements in the processes of industry. Its effect, in the case of ideal success, is to neutralize the cheapening of goods and services effected by current industrial progress. It offsets industrial improvements in so far as these improvements affect the cost of goods more than they affect the value of the money metals. It might seem at first sight that by thIs inhibitory effect of the trust the entire advantage derivable from industrial improvements within the scope of the trust should inure to the gaIn of the business men in the combination, but such does not appear to be the practical outcome. The practical outcome appears more nearly to be that material advantage inures to no one from industrial improvements under the control of the trust, in so far as the trust successfully carries its point. This feature of trust management will be taken up again in a different connection.
In addition to its prime purpose of checking the decline of earnings on past investments, such a business coalition is also enabled to distribute any unavoidable effect of the progressively reduced cost of production of the productive goods employed, somewhat equably over the entire field of industry comprised in the coalition, and so obviate the pressure of this untoward industrial progress falling with exceptional severity at any given point. Economies effected are at the same time made to accrue to the collective business organization, showing themselves in the way of increased dividends and increased effective (market) capitalization of the coalition's property, instead of being dissipated in competitive selling, and so going to the body of consumers or to the industrial system at large.
To return to a point temporarily set aside above. By supposition, in what has just been said, anything like a speculative inflation has been excluded from the discussion of business depression; and necessarily so, since the two do not come at the same time. But at one point the two show a feature in common. Under both of these two widely different conditions of the business situation there is a discrepancy between the accepted capitalization and the actual earning-capacity. But the two differ even at this point in that, in the case of inflation, the discrepancy is not felt until the climax, when a widespread realization of the discrepancy brings on an abrupt readjustment, in the crisis which follows inflation; whereas in a period of depression the sense of this discrepancy and the protest against it is the most striking circumstance of the case. The discrepancy between capitalization and earning-capacity in a period of speculative movement comes of an inflation of capitalization; whereas in time of depression the discrepancy is due to a shrinkage of earning-capacity, - both capitalization and earning-capacity being, of course, counted in terms of money values. A speculative movement offsets or checks the trend to depression whenever it occurs; and for some appreciable time past, such speculative movements appear to have been the only force which has from time to time broken the otherwise uninterrupted course of business depression. Under the regime of a perfected machine industry and a perfect business organization, with active competition throughout, it is at least probable that depression would not be seriously interrupted by any other cause.
But it has been a point of economic dogma in modern times - not to call it a point of theory, since it is not held on reasoned grounds - that depression and inflation, followed by crisis, succeed one another with a rough periodicity, interminably and in the nature of the case. The periodicity (with an interval of some ten to twelve years from phase to phase) has not been established with any cogent show of evidence, except for the period from 1816 to 1873; and even within that period the evidence has not been convincing to all students of these phenomena. A tentative explanation of the periodicity, such as there may have been within that period, as well as of its absence before and after the period in question, may be offered on the basis of the views here set forth. keeping in mind the point that the disturbance, both in the case of inflation and in that of depression, is a discrepancy between capitalization and earning-capacity, and also the manner in which this discrepancy arises, it may be said that prior to the earlier date mentioned the modern industrial system was not such a comprehensive and articulate process that a disturbance in one part or one member of the system need be transmitted forthwith through the channels of business to all the rest. A speculative movement need not spread forthwith throughout the industrial system. The great episodes of speculation and collapse that occurred during earlier modern times were not of the nature of speculative inflation affecting the entire business community occupied with industry. They are rather of the nature of commercial speculation verging on gambling. So also, the crises of that earlier time, when they were not collapses of gambling ventures, were commonly produced by some great disaster which brought an absolute material loss upon the community, such as crop failures, invasions, or heavy war expenditures. On the other hand, as regards periods of depression prior to the early years of the nineteenth century, they were also rare if not unknown, except when due to failure of resources or the burdens of government. The conditions out of which depression could come, as a persistent disturbance of business through a divergence between the capitalization and the earning-capacity of investments, were not had. The developed machine system was absent, and without this the cost of production of productive goods could not be progressively lowered at a rate large enough to set up and maintain a persistent divergence between capitalization and earning-capacity in industrial enterprises.
At some uncertain point in the first half of the nineteenth century the system of machine industry, and the business system based upon it, attained such a breadth and consistency that business disturbances of appreciable magnitude in any part would affect values throughout the system. It had then grown so large and was so closely articulated a structure that the relations of its members to one another and to the system as a whole were of greater moment for the fortunes of these members and for the orderly process of the whole than were the relations of the members to industrial factors lying outside the system of the machine industry and the business community. Hence industrial crises in the proper sense of the word seem well at home in this period. They spread with great force and facility whenever they came; and they had the true character of business crises, in that they ran with great severity without involving an appreciable aggregate loss of material wealth, except in terms of price. They commonly meant a cancelment of values, without appreciable aggregate loss of goods. They seem also to have been true to the staple definition of crises in that they followed upon a period of speculative inflation in industrial investments.
Chronic depression, however, does not seem to belong, as a consistent feature of the course of things, in this nineteenth-century period, prior to the eighties or the middle of the seventies. The usual course, it is commonly held, was rather: inflation, crisis, transient depression, gradual advance to inflation, and so on over again.
On the view of these phenomena here spoken for, an attempt at explaining this circuit may be made as follows: A crisis, under this early nineteenth-century situation, was an abrupt collapse of capitalized values, in which the capitalization was not only brought to the level of the earning-capacity which the investments would have shown in quiet times, but appreciably below that level. The efficiency and the reach of the machine industry in the production of productive goods was not then so great as to lower the cost of their production rapidly enough to overtake the shrinkage in capitalization and so prevent the latter from rising again in response to the stimulus of a relatively high earning-capacity. The shock-effect of the liquidation passed off before the cheapening of the means of production had time to catch up with the shrinkage of capitalization due to the crisis, so that after the shock-effect had passed there still remained an appreciable under-capitalization as a sequel of the period of liquidation. Therefore there did not result a persistent unfavorable discrepancy between capitalization and earning-capacity, with a consequent chronic depression. On the other hand, the earning-capacity of investments was high relatively to their reduced capitalization after
