of idle money swelled the reserves nearly 40 per cent. above the amount in the summer of 1893, and accumulated a specie fund which was not again equaled until 1898. The course of events was somewhat irregular from 1894 to 1897, because of the political panics which swept the stock exchanges and hampered business, as the result of the pressure upon the gold reserve, the threat of war with Great Britain over the Venezuelan boundary, and the political campaign of 1896 regarding the metallic standard. It was not until the summer of 1898 that loans and discounts returned to the maximum of 1893. The volume of loans at this time did not represent the degree of inflation of 1893, because of the intervening growth in the population and consuming power of the country. The increase in the volume of money swelled the specie reserves 50 per cent. above the amount in 1893, and deposits $550,000,000 above the minimum of the panic year. It remained for the year 1899 to witness a further expansion in loans and deposits, which, although balanced by a large increase in specie reserves, already pointed the way to another period of expanded credit and of the absorption of the loan fund of the community.

A severe strain is imposed upon commercial banks at the acute stage of a crisis. Unusual demands are made for new loans and the extension of previous loans, which arise in part from the ordinary functions of the banker, but are intensified by the sudden distrust of other sources of credit. Those who have been content with small quantities of cash, and have been both giving and receiving commercial credits in the conduct of their business, suddenly realize that unusual calls will be made upon them for cash and begin to distrust the ability to pay of those who owe it to them. Appeals for cash or its equivalents are then made to the banks, which are usually in inverse ratio to the general belief in the ability to obtain it. Any form of banking credit will be accepted on such occasions which has the virtue of unquestioned exchangeability. Such credits may be issued by banks to solvent traders without risk to any required limit, with great benefits in arresting panic and preventing its worst consequences, on the conditions that the banking system is known to be sound and that its issues are not fettered by law. If currency

is hoarded under a solvent banking system, it is because the amount is believed to be limited and those who hoard it fear that they may not be able to obtain the share which they need at the moment when it may be demanded. An elastic limit of note issue is a powerful weapon for restoring financial confidence on such occasions.

The expansive theory, as it is called by Professor MacLeod, has been too often tested during the past half century against the restrictive theory to leave any doubt as to the wisdom of the former. The expansive theory involves loans in times of panic up to the utmost limit, upon good security, which the resources of the bank permit, in order to meet the emergency of the moment. A solvent bank need have no fear in a crisis, if it has the power to issue notes and extend credit freely, that its specie reserves will not be fully restored after the acute stage of the crisis is over. The restrictive theory assumes the necessity of bringing everything at once to a metallic basis. It is supposed to have the effect upon the congested financial body of a healthy purging. This theory is directed against the continuance of loans to sustain the inflated credit which has brought on the panic. It would be a sound theory if it were applied at the right time; but the demands for accommodation after a panic has broken out are very different in character from those before the panic. The new demands are not usually made for the purpose of continuing inflation, but for the purpose of supplying the sudden drying up of the usual sources of credit,-the temporary paralysis of the entire machinery of exchange through terror. The moment the terror is mitigated, the old machinery will resume its normal functions, with a movement modulated to the new conditions of things. It is one of the highest functions of modern banking to put an end to the period of unreasoning fear and complete paralysis which marks the acute stage of a panic by employing all the resources due to inherited strength and legal powers in restoring the orderly functions of the machinery of exchange.

Many of the disturbances in the equilibrium between supply and demand which brings about crises result in the long run in important benefits to society. The crisis weeds out the less competent producers and leaves in the field only those who have

shown their capacity to obtain the largest sum of results with the greatest economy of capital and labor. It is the rapidity of this evolution which has contributed to the frequency and severity of crises in modern society. As Professor Giddings well says of the increase of crime and vagabondage along with the increase of social wealth:1

"These things are a part of the cost of progress, forms that the cost of progress takes when the rate of social activity exceeds the rate of constructive reorganization. Quicken the pace of a moving army, and the number of the unfortunates who will fall exhausted by the way will be disproportionately increased. Increase the strain of any kind of competitive work and derange the conditions under which it is done, and the percentage of failures will rise."

This element in the problem would seem to establish the principle that the more rapid the progress of society, the more frequent and acute would be industrial crises. This tendency is fortunately restrained by the increased power of resistance given to the mechanism of production and exchange by the greater wealth of the community, the diversity of its industries and resources, and the wider area over which the shock of disturbance is spread. In this respect the complexity of machine production and financial organization in modern society operates with the equalizing effect of the market for securities upon changes in the value and supply of money and capital. The increased sensitiveness of the mechanism makes a slight derangement keenly felt and results in precautions at an early date against more radical derangements.

The effect of new inventions is felt most severely by fixed capital. Capital invested in permanent forms is almost defenseless against the progress of improvements. As the situation is defined by Mr. Wells, "Society proffers its highest honors and rewards to its inventors and discoverers; but, as a matter of fact, what each inventor or discoverer is unconsciously trying to do is to destroy property, and his measure of success and reward is always proportioned to the degree to which he effects such destruction."2 The adoption of labor-saving devices or more

1 Democracy and Empire, p. 90,

Recent Economic Changes, p. 369.

efficient machinery in any industry relegate the old equipment to the lumber room, if the improvement is of an important character. It is the adjustments of capital and labor to these new conditions which are among the important factors in causing a crisis. Only under a static condition of the mechanism of production could crises be averted, even if knowledge were complete regarding all existing conditions of demand and supply. The element of new discoveries, causing changes in cost of production and the supply of old articles and creating new demands, would break the equilibrium. As Professor Smart describes the situation:1

"As things are, each new invention throws labour out of employment for the time, superannuates fixed capital, and interrupts the flow of wages and profits. Again, through miscalculation, new capital does not always seek out those channels which are awaiting on improvement and reduced cost, but flows on in the old grooves, till it dams up the channel of progress with capital in the wrong place, and prices are again pressed down tɔ the level that pays the last comer only. Thus progress marks its course as a series of jerks."

In the market for money and capital also, the final result of the changes which bring on a crisis is likely to be beneficial to society. The reduction in the rates of discount and interest, which is the result of the large supply of capital seeking investment, permits many enterprises to be undertaken which would not be productive under a higher rate of interest. The lower the rate of interest falls and the greater the accumulation of capital in the world, the greater becomes the equipment of efficient producing machinery and the greater is the surplus which society can afford to devote to permanent works of education and decoration which are not directly productive. But the process of transition by which capital is deprived of its value and investments cease to earn their old return is a period of losses and suffering for the owners of this fixed capital and these investments. A fall in the rate of interest means a reduction of expenditure and a readjustment of social relations by those living upon the interest on securities, by insurance companies, banks, and all others

1 Studies in Economics, p. 207.

depending upon the rate of return upon investments for their income. It impairs the value of all saving and is in this sense equivalent to a reduction of wages for the workingman who wishes to provide for old age or for his family after his death. But circulating capital, like other articles, is subject to the law of diminishing returns, which affords to the entire mass only the rate earned by the last increments. The owner of such capital, much more than the laborer, has felt during the present century the operation of an "iron law," depressing his earnings more uniformly and powerfully as new capital came into the field to compete with the old. The sifting process of a crisis separates worthless enterprises from sound ones, wipes off the account the capital which has been destroyed by unwise investments, and sets forces in motion which drive capital to new fields where its earning power ceases for a time to go downward.

CHARLES A. Conant.

1 This phrase is applied to the earnings of capital by M. Sayous, La Bourse Moderne et sa Loi d'Airain, in Revue d'Economie Politique (April, 1900), xiv, p. 373.