one article, moreover, reacts upon the demand for another, as the investment of the earnings of the masses a few years ago in bicycles was said to have reduced the amount spent upon pianos and to have injured the business of the livery stables. Thus, in order to determine exactly the equations of demand and supply, a producer would need to possess complete knowledge in regard to all existing industries and the gift of prophecy in respect to future changes in popular demand for their products.

The tendency to over-production resulting from unrestricted competition has been corrected to some extent during the past decade by the consolidation of industry and the restriction of production. The volume of production and the process of distribution have thus been brought under a higher degree of organization than before. Production has been curtailed in many lines to conform to ascertained or probable demand, but "the machinery of management," in the language of Professor Jones, "has not developed pari passu with the technique of production."

It is declared by Col. Carroll D. Wright, that "Any one great industry, under complete organization, can be regulated by all the forces acting understandingly and together, and it is only through such organization that production can be wisely regulated on the basis of necessity to supply the market." In the United States great combinations of capital have been formed in order to limit competition, and the skill and capacity of the captains of industry have been developed to an exceptional degree. This organization, in spite of many evils, undoubtedly has great advantages. It is subject to dangers of its own, however, growing out of the magnitude of the powers and interests entrusted to individuals as the custodians of large capital and many thousands of workers. While established manufacturing industries may be better regulated by combination than by free competition, there is grave danger of mistakes and undue speculation in the creation and promotion of new enterprises, especially in undeveloped countries.

A remedy for existing evils in production cannot be found in state socialism or coöperation, unless the representatives of the 1Economic Crises, p. 47.

* First Annual Report of the Commissioner of Labor, March, 1886, "Industrial Depressions," p. 287.

state or the coöperative body can be endowed with absolute knowledge of all elements affecting demand and supply, including not only the present but the changes in demand and in methods of production in the future. The state may aid in diminishing the errors resulting from miscalculation by placing at the disposal of the community its great resources for gathering and distributing information, but the past history of state regulation, even in simple matters, does not justify the belief that it can arrogate to itself or to its representatives wider knowledge and more accurate judgment of future contingencies than belong to those who stake their fortunes under the competitive system upon the accuracy of their anticipations and whose errors of individual judgment are submitted to the test of the average judgment of all other producers and investors by the sensitive mechanism of the stock and produce exchanges.

The money market and the organization of credit are closely related to the circumstances of a crisis. They reflect with such delicacy the changes in conditions of credit, in demand for capital, and in prices, that the banking systems was often treated in the early history of economics as the primary cause of crises. That this was a superficial view of the situation is clearly recognized by most modern students. The existence of credit and the great accumulation of loanable capital in modern society contribute to the capacity for over-production and speculative enterprises. Indeed, the economic crisis in its modern form is essentially a phenomenon of the organization of industry and credit; but this is a necessary incident of the employment of so delicate and efficient an instrument. The ancient crises, growing out of crop failures, were much more severe in their effects than the modern derangements of industry, and the progress of economic education is tending to reduce the severity of crises in the wealthy societies of the present day.

One of the most serious of the disturbing causes which prevents the working of the mechanism of industry under the secure conditions of a static state is the growth of the loan fund. This fund is pouring into the money market every year a great amount of saved capital seeking investment. There was a time when every dollar of available saving was required for productive

enterprises in Europe and the United States. This was conspicuously the case in the beginning of railway construction, when it was necessary for the Bank of France to go to the aid of the French railways in order to raise in the course of three years a sum of about $200,000,000. But the increase of railway equipment and the employment of labor-saving machinery in farming and manufacturing has promoted saving almost in a geometrical ratio from year to year. The saving of one year has been capitalized into increased producing plant, which has greatly increased the saving of another year, until the amount of capital offered annually for investment in new enterprises has reached several thousands of millions of dollars each year.

This great development in modern society of saving for investment has contributed to increase the tendency to a misdirection of productive power. Over-production of consumable goods takes place because so large a part of the purchasing power of the community is saved for investment. A better equilibrium would be established between the production of finished goods and the demand for them if the community devoted a larger portion of its purchasing power to obtaining such goods. Saving is required not merely to maintain the old equipment of society,— the precious fruit of many centuries of development, but to continue this development by the creation of new and improved machinery and providing for an increased population upon the established scale of comfort, or a higher scale. But so large a part of the earnings of society has been set aside in recent years for investment that the equilibrium between the production of finished goods and the effective demand for them has been broken. Too much of the product of labor has been devoted to the creation of new equipment of doubtful or at least postponed utility, and too little to the purchase of the products of the existing equipment.1

"The mere introduction of trade by money destroys, as it were, the use of the whole abstract theory. So long as original barter prevailed, supply and demand met face to face. But by the intervention of money, the seller is placed in a condition to purchase only after a time, that is, to postpone the other half of the exchange transaction as he wishes. Hence it follows that supply does not necessarily produce a corresponding demand in the real market."—Roscher, II, p. 208.

It is a sound maxim that there cannot be such a thing as universal over-production, because the increased product of one man's labor will be exchanged against the increased product of the labor of others. But even Mr. Mill, who insisted most strongly upon this axiom, admitted that it was subject to several conditions. The most vital of these are that production shall always take the right channels, producing only that for which there is a demand at prices at least equal to the cost of production, and that there shall be perfect mobility of capital and labor to meet changes in this demand. These conditions are difficult of realization under the modern system of production in anticipation of demand. It thus comes about, as suggested by Professor Clark, that "it is in the relations of present to future—in speculative and inaccurate estimates of incomes that are about to be,that there lie influences that cause goods to be created for which, in time, there is no effectual demand."

In a practical sense, if not in theory, over-production in respect to effective demand is not only possible, but has been the actual history of many leading commodities during the last three decades, since the civilized countries of Europe and the United States came to be almost completely supplied with the equipment for producing machine-made goods and the means of transportation. Why does the rule of the exchange of products for each other, no matter how large the production, cease to operate in such a way as to produce a healthy equilibrium? The answer is found largely in the investment of savings in enterprises which do not immediately become productive. These enterprises make large demands for food supplies and clothing for the laborers employed in them, and for iron and steel and other raw materials of production, but they often duplicate unduly the existing machinery of production. This increase in the equipment of civilized societies, beyond the point adequate to supplying consumptive demands is to a large extent a destruction of saving 1 Introduction to Rodbertus, Over-production and Crises, p. 17.

"The use of the term over-production does not mean that more goods are produced than the community can consume, but more than the community can pay for at the prices which cover the expense to the producers. The larger the fixed capital in an industry, the greater is the danger of such over-production." -Hadley, Economics, p. 294.

instead of a productive use of it. The capital which might have been employed for varied new uses, in ministering to new and finer needs, has been practically devoted to the needless duplication of what was already sufficient and has not contributed to the useful wealth of the community. The excessive creation of mills and railways illustrates in this sense, though not to the same degree, the paradox of value shown by water and air, that an increase of the supply does not add to the sum of exchange values nor even to the benefits of the community. This consecration of capital to the production of useless machinery is worse than its use upon articles of luxury or consumption, because the latter would at least afford an economic satisfaction, if not a moral one, to the consumer. Capital sunk in enterprises which are not productive and do not promise productiveness in the future is practically capital destroyed.

It is the natural tendency of capital, under the law of marginal utility, to gravitate to the point where it will earn the highest returns. Artificial barriers of law and custom will sometimes check this movement and force the owner to accept a low return in comparison with what might be earned elsewhere. One of these barriers which was potent until recent times was the barrier of national boundaries. After this barrier was crossed, capital still remained shut to a large extent within the limits of the advanced civilized countries of Europe and North America. Experiments beyond these boundaries, such as those of British capitalists in Latin America in the third decade of the nineteenth century and in the Argentine Republic in the ninth decade, were often followed by disastrous results, because of the lack of European commercial standards, respect for the sanctity of contracts in the countries where the capital was invested, and extravagant expectations for the future. When the crash came, it affected not only the country where the investments had been made and those who had made them, but the whole trade of the lending countries. Within the last few years, however, has begun a new movement of this character more important than any which has gone before. The less developed countries of Europe, Germany and Russia, were first supplied with the machinery of production and exchange from the reservoir of