COMMERCIAL crises are primarily the consequence of the imprudence of bankers, merchants, financiers and other members of the business classes, and also of the credulity of the general public. Crises vary very much in the details of the phenomena composing them, but they all possess certain well-marked characteristics which it is necessary to describe with some minuteness, as otherwise it would not be possible to indicate the important part which the action of governments in regard to finance and commerce have had on the crises of recent years.

A commercial crisis is a state of things resulting from a period of inflation and over-speculation; its characteristics are usually a breakdown, for a short time, of the ordinary machinery of credit, followed by a period of inactivity. The violence and extent of the collapse is proportionate to the strain that has been put upon credit by the previous inflation. For inflation of prices is the concrete expression of overproduction and over-speculation, and over-speculation is only possible when a great many people have trusted others too much and have been trusted too much themselves. Sooner or later the more cautious lenders begin to get anxious about the money they have lent and restrict the accommodation they afford to borrowers, who are then obliged to try and obtain what they need from less careful, or worse informed people. The latter, in their turn, eventually become uneasy, and as they are a large class, the bulk, indeed, of the business

L

community, their newly acquired fear of continuing loans soon produces a considerable effect on the money market, necessitates sales of stock and commodities, and causes failures. When once the process we have briefly described has commenced its effects are felt even by manufacturers and traders who have not operated beyond the extent which in ordinary times their means justify. The paralysis of credit eventually becomes acute, and even the most careful and wealthiest people have to be content to abstain from all but the most necessary transactions in which no risk is involved, until by sales of securities and commodities the embarrassed portion of the business world has either paid what it owes or made a composition with its creditors. After a certain lapse of time an approximately 'clean slate' is shown, creditors having taken what they can get and written off the balance of what is due to them from their books as a 'bad debt.'

Of course the condition of affairs is never in practice so simple as this. There are no men who are creditors, or debtors, pure and simple; but there are always men who are, on balance, creditors, that is, have more owing to them than they owe. That is, or ought to be, the position of the bulk of the community, with one important exception, the bankers. A banker is a person who is at all times a debtor, on balance. He owes a great deal more than he could pay if all the people whose money is left with him asked for it at once. But he is in no danger whatever on that account provided he has observed what are known as the rules of sound banking. The normal condition of a careful trader is to be a creditor, on balance, but he can only be in this position if some one else is always a debtor, on balance; and this latter function is fulfilled by the banker.

The safety of a banker depends partly on the character of the liabilities he has assumed, but even more on due proportion being kept between the various classes of those liabilities, and above all on his preserving a proper amount of actual cash constantly in hand, or, under the London system, in the Bank of England. What the 'proper' amount may be each banker must judge for himself, but it is necessary to

observe that even a proportion of cash which would rightly be considered large in ordinary times may be insufficient in times of general discredit, when the banker, the universal debtor, is called upon to pay an unusual amount on demand. What he can keep in cash is a small portion, at the best, of what he owes, for cash kept as a reserve, ex hypothesi, earns no interest, and as bankers have to pay interest on most of the money left with them, they have to use the bulk of it profitably or become bankrupt. The universal debtor, therefore, must be very careful to whom he lends and even more careful how he lends it. If a banker lends more than a small portion of his resources to even the most wealthy of his customers for a long period, he is courting danger. In technical language he has allowed his money to be 'locked up.' It avails him nought to be able to say, 'So and So is a good man, the interest is fair, and the loan is secure of repayment when it is due.' The banker can be made to pay large sums on demand under pain of commercial death, and his demand creditors will not be put off by being informed of the promise of Messrs. So and So to repay him, for they want cash at once, and must have it, under pain, perhaps, of commercial death themselves. Bankers, therefore, cannot hold a large proportion of long dated securities, no matter how good they may be, unless these securities are what is called marketable, that is, are freely dealt in at all times on the Stock Exchange. Now, the number of such securities is not great, for though under normal conditions readily marketable securities of good quality are fairly numerous, they become few during periods of commercial distrust. In the extreme case of a panic they are, to all intents and purposes, reduced to one, namely, Consols. The rest of the 'readily marketable' class can, indeed, sometimes be sold at such times, but only at a ruinous fall in their price. Consols on the other hand can be sold at a moderate decline, or borrowed on, even in a panic, and this is why bankers always keep a considerable quantity of Consols in spite of the low rate of interest they yield.

If all merchants were careful to remain, on balance, creditors and took care to give credit only to people who could eventually

pay, and if all bankers invariably kept the money lent them in proper proportions of cash, short loans, bills and marketable securities, there would never be a commercial crisis, though owing to failures of crops, wars and revolutions, and unavoidable accidents which can only be partly covered by policies of insurance, there would still be occasional times of comparatively dear money. But merchants, bankers, and the general public, are human beings, and are consequently liable to be led from the path of safety, from time to time, by the delusive hope of abnormally large gains. The desires of even the humblest man or woman may be said to be infinite relatively to his or her resources for gratifying them, and though most people learn at an early age that their desires can only be fulfilled to a strictly limited extent, and only by constant hard work, and though, as a rule, they also learn to act on the knowledge they have acquired, the desires never wholly become extinct, and occasionally play strange pranks with the mental equilibrium of usually staid and grave persons. This is the secret of the never-failing attraction of lotteries, and of the periodic outbursts of insane speculation in Stock Exchange securities. The class of people who live by promoting and dealing in loans and public companies have an enormous mass of latent cupidity to work upon, and from time to time this cupidity becomes ungovernable and leads large masses of people to do things which they would not, in their normal state, have dreamed of doing, and which they bitterly regret having done for the rest of their lives.

It must not be assumed that the people who promote and deal in loans and other securities of a speculative character are intentional cheats. If they were they would not be as dangerous as they are. In nineteen cases out of twenty they too are misled by their desires into greatly exaggerating the profits which can be derived from their undertakings. It is true they are usually better informed as to the risks run than they allow the public to be, but they underrate the risks, even to themselves, when under the influence of Desire the mother of Hope. That this is so is plain from history, for there have been occasions when the public even