CHAPTER XXIX
CRISES
The Nature of an Economic Crisis
[231]A definition of an economic "crisis" is, like most other definitions, very difficult to construct. By way of introduction we shall quote a few chosen somewhat at random. Adolph Wagner, the German economist, expresses his idea by saying: "Crises imply ... the overwhelming and simultaneous occurrence of inability on the part of independent entrepreneurs to pay their debts." This is similar to the statement of John Stuart Mill: "There is said to be a commercial crisis when a great number of merchants and traders at once either have, or apprehend that they shall have, a difficulty in meeting their engagements." Professor E. D. Jones says: "A crisis is the sudden application of a critical conservatism to business transactions, leading to such a demand for liquidation as to cause a widespread inability among business men to meet their obligations." Senator Theodore E. Burton states: "The word crisis, if employed with entire accuracy, describes a period of acute disturbance in the business world, the prevailing features of which are the breakdown of credit and prices and the destruction of confidence. It has especially to do with the relations of debtor and creditor."
None of these definitions gives so clear an idea as does a brief description. Probably no one has ever pictured the crisis and the associated events more effectively than did Frederick Engels in his little volume, Socialism: Utopian and Scientific:
As a matter of fact, since 1825, when the first general crisis broke out, the whole industrial and commercial world, production and exchange among all civilized peoples and their more or less barbaric hangers-on, are thrown out of joint about once every ten years. Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence; bankruptcy follows upon bankruptcy, execution upon execution. The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again. Little by little the pace quickens. It becomes a trot. The industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit, and speculation, which finally, after breakneck leaps, ends where it began—in the ditch of a crisis. And so over and over again.
Perhaps even this vivid word picture will be less impressive to some than a few facts as to the serious effects of the crisis and the depression that follows it. Professor Wesley C. Mitchell in his recent volume entitled Business Cycles has recorded the significant features of the crisis of 1907 in England and the United States and the following points have been taken from his account. By the middle of the summer evidences of difficulty had begun to appear in England. British railway stocks had fallen off in price; the shipbuilding yards had few new contracts; costs of production had become so great that many manufacturers were refusing to take new business at the ruling quotations; the building trades were dull; the ratio of net to gross railway receipts declined; commodity prices began to drop; bank clearings fell off; imports gained less rapidly; and the percentage of trade union members unemployed rose from 2.8 per cent. at the end of April to 3.6 per cent. by the close of August. These difficulties came to a climax in the latter half of the year, being intensified by the crash in the United States. The bank rate of the Bank of England rose from 4-1/2 to 7 per cent., where it remained for nearly two months. During this period the market rate averaged from 5-1/2 to 6-1/2 per cent. Imports and exports showed smaller and smaller increases over the preceding year and in the early months of 1908 began to decline; clearings fell off sharply and trade union unemployment increased to nearly 10 per cent. during the latter months of 1908.
In the United States, where the crisis degenerated into a panic, conditions were much worse. In advance of the actual outbreak of the panic there was for months evidence of a tension in the investment market. Copper especially fell in price and was followed by copper stocks. This precipitated difficulty among a group of banks that were more or less closely identified with the copper interests. Runs were started and a number of banks were forced to suspend payments. A scramble for cash followed, spreading from New York throughout the United States and accompanied by very serious consequences. Among the worst of the effects were a premium on currency which rose at one time as high as 4 per cent.; the necessity of introducing numerous substitutes for cash; a demoralization of the domestic and foreign exchange markets that caused heavy losses both to bankers and to business men, while the amount and the prices of securities dealt in on the stock exchanges seriously declined. During November and December currency was at a premium of from 1/8 to 4 per cent. Call loan rates were erratic, going as high as 125 per cent. in the latter part of October and fluctuating between 5 and 25 per cent. as late as during the latter half of December. During November there was a decline in the amount of time loans and the quoted rates ranged from 6 to 7 per cent. in October, 12 to 16 per cent. in November, and 8 to 12 per cent. in December. Worse still was the stoppage of business by those enterprises that could not pay the high rates and could make no special arrangements to secure lower ones. Business failures in the United States which had been as low as 161 in the last week of 1906, were 300 for the week ending December 19, 1907, and 435 for the week ending January 9, 1908. In the second quarter of 1907 there were 2,471 and for the first quarter of 1908 there were 4,909.
These derangements of business would seem to be of interest primarily to the bankers and brokers or to the large borrowers—to the capitalist class. The counterpart of the picture is to be found in the effect of the crisis upon the man of small means and upon the poor. Inability to borrow may mean considerable inconvenience or even financial ruin for the man of large affairs but it does not usually mean actual suffering. Nevertheless his failure to secure funds and the necessity of selling his securities or commodities at a low price may force him to close his factory, to delay extensions, or at least to curtail operations. He receives fewer orders for goods and as a result buys smaller amounts of raw materials and lessens his own output.
This means reductions of wages and discharge of workmen. Some writers have urged that the workingman receives a fixed wage and does not assume industrial risks, which are borne by the capitalist or entrepreneur. Such a statement is fallacious. The employee participates in the risks of modern industry and suffers from a business derangement far more severely than his employer. The capitalist secures less profits but with his accumulated savings ordinarily endures no real privation, while large numbers of the workers with little or no savings face actual hunger or starvation. Demands upon charitable organizations increase, bread lines grow longer, and suffering becomes widespread and intense until the crisis and the ensuing depression are over....