AN

CRISES AND THEIR MANAGEMENT.

N economic crisis is the result of disturbances of the equilibrium between demand and supply. The causes of such disturbances are partly traceable to direct errors in the production and distribution of goods, but they acquire much of their acute character from pathological tendencies. The economic world is never in a static condition, but always in the dynamic condition of constant change in the relations between production and consumption. The demand for commodities is determined by the law of marginal utility which sends the buyer to the market, not only where he can buy cheapest, but where he can buy the objects on the whole most attractive to him for the purchasing power which he has to expend. Changes are constantly taking place in the character of these objects, in the amounts purchased under the influence of modifications of taste and fashion, and in the cost of production as determined by new processes of manufacture. Hence come the miscalculations of producers, over-production of particular articles, and when these articles form an important part of the whole product of the community, and other conditions are ripe, there sweeps over the community a sudden panic of fear for the future, distrust of credit, and arrest of consumption.

Errors of calculation as to demand and supply are occurring daily, under conditions of the greatest general prosperity. The competition between producers is constantly causing waves of excessive offer or excessive demand for particular articles, which result in the oscillation of prices above or below the cost of production. These movements counteract each other to a large extent under favorable business conditions, and the occasional loss of one producer is offset by the gain of another, or the loss upon one class of articles is offset for the same producer by the gains upon other articles. But if, as Professor Pareto says, "at a given moment a great number of these oscillations take place in the same direction, their effects being cumulative, added one to the other, they give as a result an oscillation which may

attain a wide sweep. It is to this oscillation, when it affects the whole economic system, that the name of crisis is given." This combinaton of conditions is neither accidental nor unusual. It is a natural outgrowth of the character of the human mind, which causes a feeling of exuberant confidence at one period and of doubt and depression at another. "The periodicity of crises," Professor Pareto declares "does not depend upon an objective cause, but rather upon a subjective one." This rhythmic movement is apparently one of the conditions of economic progress,―a manifestation of the vitality of the economic organism. The alternatives of repose and excitement seem to be necessary to all living organisms, and it is only in death that such movements cease.

The modern organization of industry tends to cause crises in several ways. The sub-division of labor is responsible in the first instance for the possibility of errors in production. This subdivision is not only local, as between groups of individuals, but has become territorial and international. It has given birth to industries which could hardly have been carried on without the modern equipment of means of transportation by land and sea. The primitive producer, providing directly for his own wants by his own efforts, occupied a very different position from the modern producer, who produces a large quantity of a single article and produces wholly for exchange. If it turns out that he cannot exchange his product for as much of other products as he expected, his calculations of profit are defeated. If he relies for his income upon the margin of profit above cost of production and finds that he cannot sell his products for more than the cost of production, or cannot sell them for as much, he receives no return for his own labor and ceases to be a purchaser of the products of the labor of others. If he holds his products for what he considers a fair equivalent in money or in other goods, but the producers of other goods will not pay this equivalent, he finds on his hands a useless stock of goods. When this condition

1 Cours d'Économie Politique, ii, p. 278.

"Nations specialize, like individuals, according to their aptitudes, each assuming the task of satisfying a part of the material and moral needs whose number and intensity so constantly grow among civilized men."-Campredon, Rôle Économique et Social des Voies de Communication, p, 101.

reaches large numbers of producers, and affects the mechanism of credit by their inability to fulfil their obligations to the banks, a crisis occurs.

This modern organization of industry makes it difficult even for the most astute producers to guard against errors in production. The assumption of the old political economy, that production follows demand, is no longer true under the present system. Demands for goods of a given kind affords a partial guide for the future production of such goods, but only in particular cases,-goods "made to order,"-does the production actually wait upon the particular demand. In the case of the great wholesale manufactures production in anticipation of demand is the almost universal rule. Preparation for production has to be made months, and in many cases, years in advance of the delivery of the finished product. Thus a manufacturer of cottons has to build his factory, equip it with machinery, and buy his raw materials, and he has to gather his fuel and make his contracts with his employees, before a yard of cotton can be produced. He may contract for machinery when its price is high or buy cotton for future delivery at a price which afterwards falls. If a competitor performs both these transactions on more favorable terms, he may underbid the first producer in the markets and compel him to sell his goods at a loss or see them stacked up idle in the mill.

The intensity of competition in modern industry has so reduced profits that it requires the most careful calculation to guard against loss. A manufacturer who makes errors amounting to 10 per cent. of the market price of his goods cannot solace himself with the reflection that he simply makes a less profit than a more prudent and far-seeing rival, who has avoided errors. Ten per cent. is likely to be the whole of the profit of his rival, and if the profit is greater, the machinery of modern money markets soon brings it down to the level of profits in other industries. If the demand runs a little ahead of the supply, and considerable profits are realized for a brief period, some capitalist, tempted by the profit, puts up another mill and the supply again threatens to become excessive. In the language of Professor Smart:1

1. Studies in Economics, p. 204.

"Mills and machinery in great part are standing ready to start, or go on full time, whenever a profit can be shown, but the moment that a profit emerges every one rushes to snatch it, and it disappears in a wave of over-supply."

Capital once invested in the machinery of production cannot always or easily be withdrawn or converted to other uses. The mobility of capital has greatly increased under the system of banking credits and stock exchange securities, but arguments based upon this mobility refer to the loan fund of floating capital and are not applicable to capital which has become fixed in mills. and machinery. Such capital is subject to all the risks of competitive production during the long process of investment and after the investment has been made. As Prof. Smart observes, "It is only in text-books of political economy that capital at once leaves the old channels as their waters sink below the 'average profits,' and cuts out new ones." In the desperate effort to utilize the old equipment of mills and machinery, and to earn a profit, the manufacturer will often seek to reduce the ratio of his fixed charges to his total product by increasing production. This may be attained by adding to the plant or increasing the output of the old plant. While this permits a reduction of profits to a minimum, these profits are further threatened by this increase of production beyond the effective demand, and the whole process continues until the poorer mills and the weaker producers are finally forced to suspend. A certain period of time is needed for finding new outlets for finished goods and for the adjustments which are required by changed conditions. It is truthfully declared by Professor Leroy-Beaulieu, that when the production of an article is increased suddenly and greatly, the market, with rare exceptions, fails to enlarge in equal proportion except under the stimulus of a fall in price.

These then are among the conditions which make it difficult for the most far-sighted producer to maintain in his own industry the equilibrium between supply and demand. He has a sensitive barometer of the conditions of supply in organized markets, like the cotton and iron markets and the stock exchanges. The warning given by fluctuations of prices in these markets is very useful to him in purchasing materials and governing his future produc

tion, but the warning sometimes comes after the fact as a result of the excess of production arising from his operations and those of his rivals. These organized markets, especially that for transferable capital, afford a constant menace as well as a barometer to the producer. He knows that if his profits rise above the average profits in other industries, the great loan fund of the world is ready to pour into his industry, create new mills and increase to an excessive amount a production which was probably already sufficient to meet effective demand.1 He knows also, that if a new invention appears upon the market, reducing by 5 per cent. or even a smaller fraction the cost of producing his goods, the loan fund is available for equipping new mills with this invention or enabling his rivals to apply it to their old mills. The same resource may be open to him as to the future, but the fact that cost of production has fallen is likely to react upon existing stocks of finished goods and drive their price below their cost of production.

When to these variable elements affecting the cost of production and the margin of profit are added the variable elements which influence demand, the situation of the manufacturing producer becomes still more delicate. The law of marginal utility will not only drive the buyer with almost unerring instinct to the seller who sells the best goods at the lowest price, but it will drive him to buy any substitute which promises to perform the same service at a lower price. Thus, if the price of woolens should be abnormally advanced, upon the calculation that the community must consume a fixed quantity of woolens, it would be found that buyers would turn to the other textile fabrics,— cottons, silks, and linens,and their compounds,-in order to provide for their wants. An advance in copper was met in 1889 by a remarkable shrinkage in the demand and the employment of other metals, like zinc and iron. In respect to these great staple articles the problem is much simpler than in respect to finished articles which are the subject of varying tastes. A demand for

"The knowledge that enough capital is already invested in an industry to fully supply all current demands at profitable prices has no power to deter the investment of fresh capital, provided the new investors have reason to believe their capital can be made to displace some existing capital."-Hobson, The Evolution of Modern Capitalism, p. 202.