THE CHARACTER OF THE PRESENT INDUSTRIAL CRISIS.
FROM THE REVUE GENERALE.
Every one agrees that “business is bad”; but how many give themselves the trouble to look for the causes of this persistent stagnation? Some are distressed, others astonished, by it. The calmer observers—those who are not dismayed beyond measure by a deceptive view from the bank of the river of fortune—seek for comparisons in the crises of 1837, 1848, and 1866.
A gifted writer, who conducts with deserved success a technical magazine of our country, the “Monitor of Material Interests” (Le Moniteur des Intérêts Matériels), has examined this interesting subject in a series of remarkable articles. M. George de Laveleye—who must not be confounded with his relative, the professor at Liege—maintains that the present crisis is not transient. He attributes to it a permanent character. If the reader will follow attentively the summary that we are about to give of the argument of M. De Laveleye, he will not be too alarmed at his conclusion.
Generally, these crises have had the effect of rarefying the capital by which the great industrial enterprises were fed; these, then, deprived of the food which enabled them to live, seemed to hesitate; then they shook and fell. But to-day what do we see? Entirely the reverse. Money, floating capital, unused funds, are more abundant than ever; the cash-boxes overflow; the large banks literally sweat with gold; and this excess, this plethora of unemployed capital causes the public funds to advance and the price of money to decrease. It is business that is wanting; it is the employment of capital that is in default.
Whence comes this accumulation of savings and this inertia of capital, and how does it happen that new and tempting enterprises do not attract it, notwithstanding its apparently low price? M. De Laveleye thus instructs us:
“All these tempests,” says he, speaking of the crises of 1837, 1848, 1857, and 1866, “which reproduced themselves at almost equal intervals, were periods of settlement which marked the impatience of the industrial speculation over-excited during a period of forty years; each time that it had abused credit, each time that there was a disproportion between the engagements entered upon and the available resources, industrial, commercial, and financial Europe received a warning; credit vanished suddenly; there was a series of commercial or industrial failures; there was a violent contraction in the stock exchanges and in business; there was a slackening of new enterprises or of those already in hand; there were more losses than one could reckon. But at each of these momentary and transitory crises a remedy was very quickly found. Thus we had free trade and the upward movement of commercial relations; we had the play of free joint-stock companies; we had the war of secession, which, from a European point of view, was a powerful derivative; finally, during this long period we had the discovery of gold and silver mines, coming annually to swell the stock of metal at the disposal of business and of speculation. Thus these crises were not of long duration. It sufficed to let the overworked market have time to assimilate the stocks of paper or of merchandise from which it suffered, to re-establish the equilibrium between the current debts, circulating capital and credit, and immediately industrial and commercial Europe resumed her progressive march; the new enterprises which presented themselves obtained public favor; the warning was forgotten; the play of credit renewed itself; and after a period of enforced quiet, which never exceeded three years, we felt vibrating anew that febrile activity which, in forty years, has caused a veritable transformation of the world.”
This was always the course of these crises in the past. To-day there is nothing like this; on the contrary, “if there be a disproportion between undertakings and resources, it is absolutely the reverse of that which marked the preceding crises: the undertakings are almost null, and the resources are exaggerated.”
Why? Because the present crisis is not merely a transitional crisis: it is a permanent, final one; the origin of the evil from which the industry and the commerce of Europe suffer is to be traced to other causes than those commonly attributed to it. The true origin of the crisis, says M. De Laveleye, is the withdrawal of capital from the operations in which it had been employed, and the inactivity and unproductiveness to which it has been since doomed. At the beginning of the crisis of 1873 a general panic was produced among the lenders, whose confidence was profoundly shaken, and they exerted themselves all at once to realize their money. The bankers and the money-lenders of Europe were seized, by a unanimous accord, with a desire to have their capital, or that which remained of it, in their hands—“to see their money again,” as M. De Laveleye says. They realized their foreign securities; they retired en masse from the industrial enterprises in which they were engaged abroad; and, above all, they cut off credit. The countries and the establishments which lived on credit and on outside capital saw their resources cut off and suspended their activity, believing, however, that the crisis would be only temporary. The three principal lending countries—England, France, and Holland—realized their money, at the price of heavy losses on more than one occasion; and, under the influence of the panic, they contented themselves with keeping it under lock and key in their cash-boxes. From this resulted a great and rapid decline in the rate of interest. Bank paper fell to one per cent., and the lenders upon short bills, with incontestable securities, got but a half per cent. This was the result of the return of the capital drawn back from the foreign countries to which it had been lent; the capitalists had but one ambition: they wished to be certain that their money was running no risk whatever.
The result of all this was that, in every instance where they lived on borrowed capital, industrial works were stopped and all sorts of enterprises were cut short. On the other hand, a plethora of capital was produced among those who had realized, and who could no longer find means to employ their funds with profit. This is the explanation and the first characteristic of the present crisis—the accumulation of capital and the low price for the use of money.
The accumulation is general; but it is principally in the rich countries, like England and France, that this excess was produced. The same phenomenon, however, also showed itself in Austria, Italy, Sweden, etc.—countries which live in part upon foreign capital. On the other hand, the countries which depended entirely upon this capital—Turkey, Egypt, Peru, etc.—were crippled, as they were deprived of the resources which credit had previously placed at their disposal.
Thus, then, nothing happened as in the preceding crises, and from 1873 to 1877 all has been new, the phenomena themselves and their causes. There would be reason for surprise and bewilderment at this if one did not admit, with M. De Laveleye, that only now has ceased the industrial and speculative movement which has led Europe for forty years to send her money abroad. New employments for capital are very nearly exhausted; new sources of riches have been exploited as much as they can be. The movement of the last forty years, especially active since 1851, is not merely arrested for a moment to resume its march once more, as in the previous crises; it is definitely terminated.
The design of the past movement was the economical furnishing of Europe and of the world: and this equipment is completed, or nearly so. But in giving proof of this assertion and seeking for its justification, M. De Laveleye supplies a very clear account of the direct and specific causes of the crisis through which we are passing.
“Western Europe,” he says—“and by this generic expression we mean Europe rich in capital and feeding great foreign enterprises—Western Europe has made a rude return upon herself. She has retaken her money; she has made an inventory of what she possessed abroad, and she shows herself solicitous to preserve, to keep by her, this scattered wealth. The first element of the force of progress, then, is in default; the money is wanting; it is hidden; it is refused. Concurrently, what have the borrowing countries done since 1873? They have abandoned the game and ceased an impossible struggle, which consisted in paying to Western Europe a revenue which was not produced by the soil or by practicable enterprises. They have become bankrupt, and the crisis in their government funds has opened the eyes of the two champions. Each perceived that he was ruined: the borrower by becoming indebted without sufficient motive; the lender not only by lending his capital upon illusory guarantees, but by receiving finally only a part of it, under the form of arrearages.”
This is the second cause. As for the third:
“It is the depreciation of silver, due to the incapacity and the improvidence of the Western states, which imagined they could make a good stroke of political economy by allowing one of the agents of circulation to debase itself.
“Principal possessors of the stock of gold these states have obeyed an egoistic thought in seconding the movement for a single metal as currency—gold; a movement which had for its first effect an increase in the relative value of their metallic circulation. But they took no note of another very grave consequence of this disturbance of equilibrium.
“When a nominal money submits to variations in value as great as those which have been noted in silver, it becomes provisionally inapt for its functions. Commercial enterprises, based upon this metal, become extremely dangerous, and are no longer attempted by those who wish to operate only with the security attached to studied and matured plans. But all the commerce with the East is based upon silver, which, for these countries, is the nominal money. When the value of silver, and, following it, the course of exchange, became subject to oscillations of ten and fifteen per cent., there was no longer any security for international commerce. The cost of despatching and of selling raw material or manufactured goods could no longer be precisely fixed; and the most careful merchant became a speculator in spite of himself. He then stopped, and by that very act he added to the difficulty of the situation. The fall in the value of silver broke the charm exercised by the constant augmentation of the stock of metals put at the disposal of international enterprises.
“This is the third element in the advance of progress which has disappeared in its turn; and we may thus sum up:
“1. The lenders are not willing, provisionally, to enter upon new schemes.
“2. The borrowers, weary or feeble, are incapable of giving birth to new illusions.
“3. The monetary crisis has added its action to these two negative elements.
“So that to-day, after proper deliberation, people decide to do nothing; or, at least, to do nothing under the former conditions of international enterprises.”
But is it admissible that we shall do nothing henceforth, and that the present situation will prolong itself indefinitely? No, assuredly; and, so far as this goes, M. De Laveleye recognizes with every one that the stagnation of business cannot endure, that a reaction is inevitable, and that it will come in its time.
“But,” he hastens to add, “this return to activity will not be produced at all in the form known and hoped for by those who have seen the revivals of speculation after the crises of 1837, 1857, and 1866; and this for the logical reason that the industrial, commercial, financial, and speculative activity of the middle of this century has had for its base and aim the economical furnishing of the world (l’outillage économique du monde), and that this furnishing is very nearly completed.
“The base and the object of the former activity will no longer exist, or scarcely so. We must, then, wait for a profound modification in the form and conditions of this activity.
“This is why we have called the present crisis a permanent, a final crisis”—une crise définitive.
He goes on to give his reasons for this idea, that the economical furnishing of the world is finished, or so far advanced that henceforth we can expect no such development as we have seen in the past:
“In Holland the great works are done: the drains are continued; Amsterdam is connected with the sea; international communications are established.
“In Italy, in Spain, the great arteries are provided with iron roads, and the products of their working are notoriously below what one could reckon as remuneration upon the capital. The seaports, the mines, are sufficiently provided for in these countries; the towns, there as elsewhere, have their markets, their water and gas works, their new quarters, their tramways.
“As for the Pyrenees, they are crossed; the Alps also; and after the tunnel already made by Mont Cenis toward France, the road in construction through Saint-Gothard toward Germany, and the very sufficient pass through the Brenner toward Austria, industrial activity will no longer find any occupation in this quarter.
“In Russia the principal railroad lines are completed.
“The railway system of Prussia is finished, and in that country industry is so well furnished that she is murdered with her own tools; the means of production and of transportation are too vast, and in evident disproportion to the possible business of the country.
“Austria is supplied, and there it would be rash to go further.
“Turkey has railroads. It has been difficult enough to construct them; one does not speak of them willingly.
“The United States have borrowed enough from us to establish their system; it is compact and well provided with lines, even opposition lines. That country has regained its lost time; it is necessary to watch its steps now that it is furnished sufficiently to put itself in competition with the industry of Western Europe.
“The Isthmus of Suez is opened.
“The transatlantic cables are laid.
“The transformation in the merchant marine is three-fourths completed; the sailing ship has disappeared, or at least is relegated to the second place; the steamers have the principal trade.
“On whatever side we turn our eyes we see these accomplished results of the work of the last forty years. These results may not be always excellent from the financial point of view; many errors have been brought out, and by the side of some brilliant exceptions we must count a number of deceptions for the capitalists engaged, and for the governments which have become needy and insolvent. But, whatever may be the financial result, these lands have been stirred up and dug out; the blocks and the rails have been laid; the towns have been transformed; the distances have been shortened; the new apparatus has been given in profusion to the rich countries, in more reasonable limits to countries less open; everywhere what was strictly necessary has been done; often too much has been done.”
Here, very clearly expressed, is the result of the forty years of activity which we have had, and this result is really the end toward which tended the great industrial movement that, for so long a time, has held minds awake, has kept the dockyards, the workshops, the factories, the forges at work. This end is attained; we see it; and among the serious consequences of this fact is one which M. De Laveleye exposes with his usual lucidity:
“Thanks to the facilities of communication, to the new routes opened, to steam and to electricity, the conditions of commerce and industry are changed. There is no longer any place, as there was at the beginning of this century, for the boldness of the manufacturer or the trader, counting upon his skill as well as on his risk to obtain a large remuneration due to his audacity, to his special knowledge, and to his capital.
“Between the new and the old commerce and industry there exists the same difference as between the wars of the empire and the last campaigns of France and of Austria.
“The same causes have produced the same results. In war the cannon and guns of perfection, the railways and the telegraphs, the vast masses of men, have produced rapid campaigns, in which personal valor and the chances of war, going almost for nothing, contributed very little to the final result. In industry the same perfection of apparatus has changed the conditions of trade; and the masses of men are replaced by the abundance of circulating capital and the facility of the means of credit—two other products of this active period of forty years.
“Only, in war the final result places the vanquished at the mercy of his foe, who can, as it appears, dictate his laws; in industry and in commerce the final gain is not left arbitrarily to the swiftest or to the best equipped. He must content himself with little; he is forbidden to abuse the victory which, without this moderation, will not be long in escaping him.”
This is what we have come to; and from a purely economic point of view we can recognize, with the judicious writer who has furnished us with the process of the struggle, that the most certain consequences of all this will be the following:
.pm letter-start “There will be an excess of circulating capital, free from employment.
“Now, as long as this has not been the case the product of capital has been as follows:
“From three to four and a half per cent. on unquestionable securities of the first class.
“From four and a half to six per cent. on real estate security of the second class.
“From six to eight per cent. on loans and limited liabilities.
“From eight to ten per cent. and upwards on industrial, financial, and speculative ventures.
“In the future and during a still indefinite period, which cannot fail to be long, very long, this scale must be modified by the excess of unemployed capital.
“Unquestionable securities will descend to three per cent., or below that; those of the second class will bring four and a half; men will be happy to make six per cent. in manufactures or production; finally, one can obtain eight per cent. only by running wild risks. There will be a general change in the rate of capitalization, in the sense of lessening the interest while increasing the amount of capital. Some exceptions—that is to say, some happy chances, some skilful personal strokes—may occur to confirm this rule. The general movement, however, will, we believe, be that which we have indicated.”
But what remains, then, to be done? Little of anything, if we wish to attribute to the revival of activity, which will come in its own time, only the sense and the direction which the movement has had until now. On the other hand, forced to admit that the human spirit has not at all gone to sleep, and that the inventive genius which the Master of all things in his goodness has bestowed upon his humble creatures has not in the least diminished, it is necessary also to confess that in the future it is the unknown which opens before us; and just as, before this century, people had not even thought of all the beautiful applications of heat, electricity, steam, and light which have made the material glory of our age and of an illustrious galaxy of savants, even so to-day we cannot say toward what end the efforts of humanity might tend to-morrow. One Being only knows it—he who knows all and sees all, he for whom the past, the present, and the future are but one, he who does not depend at all on time—God, in fact, the creator of all that has been, that is, and that shall be, the great dispenser of all good and of all progress; he who disposes of man at his will in one way or the other, often while the latter, in his folly, refuses to abase his blind presumption sufficiently to recognize him.
Let us, then, leave to the future that which belongs to the future, and let us hold ourselves, each one for his own account, ready to obey the impulse which it may please God to give us.