pressed, it has no recourse hut liquidation through forced sales or bankruptcy. Either expedient, if the case is one of considerable magnitude, is disastrous to the balanced sequence of credit relations in which the business community is involved. The system of credit relations prevailing at such a time has grown up on the basis of an earning-capacity transiently enhanced by a wave of differential price advantage; and when this wave has passed, even if it leaves prices higher all around, the differential advantage of at least most concerns is past. The differential price advantage has come to the several branches or firms in succession, and has, in the typical case, successively left each with an excessive capitalization, and has left many with a body of liabilities out of proportion to their subsequent earning-capacity. This situation may, evidently, come about in this manner, even without lowering the aggregate (pecuniary) earning-capacity of the business community to the level at which it stood before the wave of prosperity set in.119
But when such a situation has come, all that is required to bring on the general catastrophe is that some considerable creditor find out that the present earning-capacity of his debtor will probably not warrant the capitalization on which his collateral is appraised, In self-defence he must decline the extension of a loan, and forced liquidation must follow. Such a liquidation involves cutting under the ruling prices of products, which lessens the profits of competing firms and throws them into the class of insolvents, and so extends the readjustment of capitalization.
The point of departure for the ensuing sequence of liquidation is not infrequently the failure of some banking house, but when this is the case it is pretty sure to be a bank whose funds have been "tied up" in "unwise" loans to industrial enterprises of the class spoken of above.120
The abruptness of the recapitalization and of the redistribution of ownership involved in a period of liquidation may be greatly mitigated, and the incidence of the shrinkage of values may be more equably distributed, by a judicious leniency on the part of the creditors or by a well-advised and discreetly weighted extension of credit by the government to certain sections of the business community. Such measures of alleviation were had, with happy effect, in the case of a recent stringency which is sometimes spoken of as an averted crisis. But where the situation answers the specifications recited above, in respect of a large and widely prevalent discrepancy between earning-capacity and capitalization, a drastic readjustment of values is apparently unavoidable.
The point has already been adverted to once or twice that the most substantial immediate outcome of such a liquidation as is involved in a crisis is a redistribution of the ownership of the property concerned in the liquidation, whereby creditors and similar claimants gain at the expense of the solvent debtors. Such being the case, it would logically follow that the large creditors should see and follow up their advantage by concertedly pushing the body of debtors to an abrupt liquidation, and so realizing as large a gain as possible with the least practicable delay, whenever the situation offers.
Such may be the logic of the circumstances, but such is not the course practically taken by the large creditors under the circumstances. For this there is more than one reason. It is not, apparently, that human kindness overrules the creditors' impulse to gain at the expense of the debtors. The ever recurring object-lessons afforded by operations in the stock and money market enforce the belief that when one business man gets the advantage of another he will commonly use the advantage without humanitarian reserve, if only the advantage is offered hIm in terms which he can comprehend. But short-sightedness and lack of insight beyond the conventional routine seem to be fairly universal traits of the class of men who engage in the larger business activities. So that, while it would be to the unequivocal advantage of the large creditor, in point of material gain, to draw in his debtor's property at such a reduced valuation as comes in a period of abrupt liquidation, yet he does not ordinarily see the matter in that light; because the liquidation involves a shrinkage of the money value of the property concerned, and the business man, creditor or debtor, is not in the habit of looking beyond the money rating of the property in question or beyond the most immediate future. The conventional base line of business traffic, of course, is the money value, and a recognition of the patent fact that this base line wavers incontinently, and that it may on occasion shift very abruptly, apparently exceeds the business man's practical powers of comprehension. Money value is his habitual bench-mark, and he holds to the conviction that this bench-mark is stable, in spite of the facts.121
It is true, cases occur, from time to time, of transactions of some appreciable magnitude in which some degree of recognition of this fact is met with. Some large business man may yet rise to the requisite level of intelligence, and may comprehend and unreservedly act upon the fact that the money base line of business traffic at large is thoroughly unstable and may readily be manipulated, and it will be worth going out of one's way to see the phenomenal gains and the picturesque accompaniments of such a man's work. Parenthetically it may be remarked that if such a degree of insight should become the common property of the business community, business traffic as now carried on might conceivably collapse through loss of its base line. What is yet lacking in order to such a consummation is perhaps nothing more serious than that business capital be reduced to a somewhat more thorough state of intangibility than it has yet attained, and that does not seem a remote contingency.122
There is, however, another and more constraining circumstance which hinders the large creditors from wilfully pushing the debtors to a reckoning when things are ripe for liquidation. As was indicated above, the sequence of credit relations in an era of prosperity is endlessly ramified through the business community; whereby it happens that very few creditors are not also debtors, or stand in such relation to debtors as would involve them in some loss, even if this loss should not be commensurate with their eventual gain at the cost of other debtors. This circumstance by itself has a strong deterrent effect, and when taken in connection with what was said above of the habitual inability of the men in business to appreciate the instability of money values, it is probably sufficient to explain the apparently shortsighted conduct of those large creditors to seek to mitigate the severity of liquidation when the liquidation has come due.
The account here offered of the "method" of crises and eras of prosperity does not differ greatly from accounts usually met with, except in explaining these phenomena as primarily phenomena of business rather than of industry. The disturbances of the mechanical processes of industry, which are a conspicuous feature of any period of crisis, follow from the disturbance set up in the pecuniary traffic instead of leading up to the latter. While industry and business stand in a relation of mutual cause and effect, in this as in other cases, the initiative in such a movement belongs with the business traffic rather than with the industrial processes.
Industry is controlled by business exigencies and is carried on for business ends. The effects of a wide disturbance in business, therefore, reach the industrial processes pretty directly, and the consequences, in the way of an expansion or curtailment of industrial activity and an enlarged or shortened output of product, are, of course, both immediate and important. As a primary effect, on the industrial side, of an era of prosperity, the community gains greatly in aggregate material wealth. The gain in material wealth, of course, is not equably distributed; most of it goes to the larger business men, eventually in great part to those who come out of the subsequent liquidation on the credit side. To some extent this aggregate material gain is offset by the unavoidable waste incident to the stagnation that attends upon an era of prosperity. It is further offset by the fact that good times carry with them an exceptionally wasteful expenditure in current consumption. Also, the usual and more effectual impetus to an era of prosperity, when it is not an inflation of the currency, is some form of wasteful expenditure, as, e.g., a sustained war demand or the demand due to the increase of armaments, naval and military, or again, such an interference with the course of business as is wrought by a differentially protective tariff. The later history of America and Germany illustrates both these methods of
