with a consequent chronic depression. On the other hand, the earning-capacity of investments was high relatively to their reduced capitalization after the crisis. Actual earning-capacity exceeded the nominal earning-capacity of industrial plants by so appreciable a margin as to encourage a bold competitive advance and a sanguine financiering on the part of the various business men, so soon as the shock of the liquidation had passed and business had again fallen into settled channels. But such a bold competitive advance means the beginning of an extension of credit and a speculative movement in industry, such as has been discussed some pages back in connection with crises. This movement has a cumulative character, after the manner there indicated, and its outcome is an inflation of capitalization and a large extension of credit, which normally ends in a period of liquidation.
Within the period spoken of (1816-1873) this liquidation is apparently always brought on by some extraneous disturbance. But it seems that the theory would require us to say that the extraneous disturbance requisite to bring such a speculative movement to a head will be slighter the farther the movement has gone; so that in the earlier stages of a given period of inflation a liquidation could be brought on only by some relatively violent disturbance, whereas at a higher phase of speculative inflation a relatively slight disturbance would suffice.
Now, it takes some time for such a speculative movement to bring on so large a discrepancy between capitalization and earning-capacity as may not be adjusted by other means than a widespread and severe liquidation. Hence a rough periodicity in the recurrence of these seasons of buoyancy and of collapse in capitalized values. Other factors, and varying ones, have, no doubt, been present in each of the historic crises of the nineteenth century, and these other factors would have to be taken due account of in any history of crises, and even in any theory of crises, which aimed at anything like an exhaustive treatment; but the factors here pointed out seem to be the characteristic and constant ones in the sequence of crises within this period, at the same time that they are the factors which are in a peculiar degree connected with that process of business management in modern industry which is the objective point of the present inquiry.
Since the seventies, as an approximate date and as applying particularly to America and in a less degree to Great Britain, the course of affairs in business has apparently taken a permanent change as regards crises and depression. During this recent period, and with increasing persistency, chronic depression has been the rule rather than the exception in business. Seasons of easy times, "ordinary prosperity," during this period are pretty uniformly traceable to specific causes extraneous to the process of industrial business proper. In one case, the early nineties, it seems to have been a peculiar crop situation, and in the most notable case of a speculative inflation, the one now (1904) apparently drawing to a close, it was the Spanish-American War, coupled with the expenditures for stores, munitions, and services incident to placing the country on a war footing, that lifted the depression and brought prosperity to the business community. If the outside stimulus from which the present prosperity takes its impulse be continued at an adequate pitch, the season of prosperity may be prolonged; otherwise there seems little reason to expect any other outcome than a more or less abrupt and searching liquidation.
What would be an adequate pitch of the stimulus making for prosperity is, of course, not easy to say, but it is probably safe to say that in order to keep up the season of prosperity for a considerable number of years the stimulus would have to be gradually increased. That is to say in other words, the absorption of goods and services by extra-industrial expenditures, expenditures which as seen from the standpoint of industry are pure waste, would have to go on in an increasing volume. If the wasteful expenditure slackens, the logical outcome should be a considerable perturbation of business and industry, followed by depression; if the waste on war, colonization, provincial investment, and the like, comes to an abrupt stop, the logical consequence, in the absence of other counteracting factors, should be a crisis of some severity.
It was said above that since the seventies the ordinary course of affairs in business, when undisturbed by transient circumstances extraneous to the industrial system proper, has been chronic depression. The fact of such prevalent depression will probably not be denied by any student of the situation during this period, so far as regards America and, in a degree, England. For the Continent of Europe this characterization would have to be materially qualified. But the reply is ready to hand that governmental interferences with trade have been so ubiquitous on the Continent, particularly in the German-speaking communities, that their case is fairly to be thrown out of any general theory. It may also be questioned whether the industrial system of Germany, e.g., throughout this period conforms to the requirements of the theory in respect of the degree of development of the machine industry which such a state of affairs supposes.
The explanation of this persistent business depression, in those countries where it has prevailed, is, on the view here spoken for, quite simple. By an uncertain date toward the close of the seventies the advancing efficiency and articulation of the processes of the machine industry reached such a pitch that the cost of production of productive goods has since then persistently outstripped such readjustment of capitalization as has from time to time been made. The persistent decline of profits, due to this relative overproduction of industrial apparatus, has not permitted a consistent speculative expansion, of the kind which abounds in the earlier half of the nineteenth century, to get under way. When a speculative movement has been set up by extraneous stimuli, during this late period, the inherent and relatively rapid decline of earning-capacity on the part of older investments has brought the speculative inflation to book before it has reached such dimensions as would bring on a violent crisis. And when a crisis of some appreciable severity has come and has lowered the capitalization, the persistent efficiency and facile balance of processes in the modern machine industry has overtaken the decline in capitalization without allowing time for recovery and consequent boom. The cheapening of capital goods has overtaken the lowered capitalization of investments before the shock-effect of the liquidation has worn off. Hence depression is normal to the industrial situation under the consummate regime of the machine, so long as competition is unchecked and no deus ex machina interposes.
The persistent defection of reasonable profits calls for a remedy. The remedy may be sought in one or the other of two directions: (1) in an increased unproductive consumption of goods; or (2) in an elimination of that "cutthroat" competition that keeps profits below the "reasonable" level. If enough of the work or of the output is turned to wasteful expenditures, so as to admit of but a relatively slight aggregate saving, as counted by weight and tale, profitable prices can be maintained on the old basis of capitalization. If the waste is sufficiently large, the current investment in additional industrial equipment will not be sufficient to lower prices appreciably through competition.
Wasteful expenditure on a scale adequate to offset the surplus productivity of modern industry is nearly out of the question. Private initiative cannot carry the waste of goods and services to nearly the point required by the business situation. Private waste is no doubt large, but business principles, leading to saving and shrewd investment, are too ingrained in the habits of modern men to admit an effective retardation of the rate of saving. Something more to the point can be done, and indeed is being done, by the civilized governments in the way of effectual waste. Armaments, public edifices, courtly and diplomatic establishments, and the like, are almost altogether wasteful, so far as bears on the present question. They have the additional advantage that the public securities which represent this waste serve as attractive investment securities for private savings, at the same time that, taken in the aggregate, the savings so invested are purely fictitious savings and therefore do not act to lower profits or prices. Expenditures met by taxation are less expedient for this purpose; although indirect taxes have the peculiar advantage of keeping up the prices of the goods on which they are imposed, and thereby act directly toward the desired end. The waste of time and effort that goes into military service, as well as the employment of the courtly, diplomatic, and ecclesiastical personnel, counts effectually in the same direction. But however extraordinary this public waste of substance latterly has been, it is apparently altogether inadequate to offset the surplus productivity of the machine industry, particularly when this productivity is seconded by the great facility which the modern
