People who are counting their future gains are sure to have larger wants, and their seeming prosperity in [pg 169] accumulation of value gives them a larger credit among dealers. The next step is an enlargement of sales of current supplies of all sorts and an increasing manufacture of such supplies to meet the increasing wants and naturally enhancing price. Soon the staple products of farms and factories and mines become themselves objects of speculative purchase. Men buy simply to hold for the increase in price. This speculation itself is a temporary cause of success, and goes on until some accident somewhere reveals the exaggerated proportions of expectation. Sometimes this speculative spirit continues for a series of years, in which case it pervades every circle of producers and consumers. Sometimes it is temporary and local, being produced by some special undertaking and destroyed by a special failure. Sometimes the death of an enterprising man destroys the "boom" he has created. When speculation is rife over a large territory, everybody is employed to his utmost ability, and the times are said to be good. All property of every kind is counted at its highest price in the mind of the owner, and all credits are easily extended from month to month, or from year to year, because of the universal faith. There seems to the casual observer no reason for doubt, and the most conservative judges overestimate the ability of the people.
Financial crisis.—At such a time as that described, when credits of every kind are interlocked and expectations are high, the so-called floating capital of the country, under indefinite promises to pay, is gradually being actually locked up in huge plants of machinery in great [pg 170] railroad routes, in vacant city lots, and uncultivated farms held for future sale, or in warehouses and elevators full of the products of industry,—especially such products as do not immediately deteriorate in quality, such as grains, cloths, raw materials of every kind and machinery of general use. This is apparently the property of the holders, but against it are the claims of all those who have contributed by loans on time, by credit for sales, by labor unpaid for and by provisions on account. One can easily see that with all these people bound together by credit a single failure may be far-reaching in its effects. The inability of a single man to meet his promises, if those promises are widely enough distributed, may bring a panic among his creditors, their creditors, and so on down to even the solid men, supposed to hold the accumulation of years untouched by speculation. For every channel of trade is full of credit, which now everybody loses.
In 1873 the promoter of the Northern Pacific railroad had borrowed everywhere, even the small savings of widows and workmen, through his intimate connection with banking. All this accumulation of savings had been expended for labor upon what was only a huge embankment, making no possible returns to any owner. The only possible means of continuing the work was continued borrowing, or the sale of additional stock. The revenue promised upon the means already used could be given only by larger borrowing. On a certain day the amount to be borrowed was less than the amount to be paid, and the failure of Jay Cooke to meet his expectations and promises was known. Within [pg 171] six hours every village in the land felt the disaster. The financial crisis was seen and realized. Bargains partially completed were stopped in the midst. Materials about to be shipped were held at the station. Deposits at the bank were needed immediately, notes due at the bank could not be extended, collectors of accounts appeared at every corner, thousands of workmen directly and indirectly employed on the great railroad building were out of employment and out of wages due, the banks were unable to furnish even paper currency to their depositors, and the whole world felt absolute loss of confidence in any undertaking or any expectation.
I select this particular panic because its beginning was so comparatively simple, its progress so evident and its results so well defined. Any other failure of speculative purpose might have been equally disastrous. It could hardly have been so rapid, because it could not have been so directly distributed among the masses of the people. Yet the machinery of credit is such that any considerable failure in enterprise or speculation is felt everywhere. The banks are at once called upon for larger loans and for deposits together, an impossibility in the nature of the case. All exchangeable forms of credit are immediately offered in market at constantly decreasing prices. Current credit of every kind is checked, and exchange is limited to the barest necessities. All productive energies are practically stopped, except such as are out of the line of daily exchanges. Very soon all domestic expenses are reduced to the lowest notch, domestic help is discharged, the well-to-do undertake to help themselves, and the poor are left [pg 172] without resources. It seems as if all the wheels of progress had stopped.
Hard times.—Succeeding such a crisis must follow hard times. Wage earners generally are without employment; manufactories have put out their fires; the warehouses full of goods are under attachment; farm produce is moved very slowly to market; fancy stock of horses, cattle and sheep are unsalable; farm mortgages are foreclosed as rapidly as the laws allow; skilled workmen meet absolute necessities by half time, and common laborers move from place to place in useless search for employment, their families being barely kept alive by charity. The fact that warehouses and granaries are full leads to the assumption that over-production has destroyed the market and the demand for labor. This is quite probably true of all articles of such a nature as to be held for speculative purposes. The staple grains and fancy live stock are illustrations of these. An universal over-production, so long as the articles produced are adapted to current wants, is impossible, since every man's product, if needed, is his means of securing another man's product to meet his own wants.
On the other hand, the suffering of multitudes and the abstinence of everybody lead to the supposition that under-consumption, or failure to use what we might, is a principal cause. It is undoubtedly true that fear of absolute want checks consumption of articles within our reach. This is shown by the immediate increase of consumption as soon as the fear subsides. This, however, is a symptom of the times, rather than a cause.
Some theorists account for the suffering by the ratio of the currency to the population, claiming that a larger circulation of money will fill the empty pockets of the needy, forgetting that money circulates only through the very channels of trade which something else has stopped. It is quite true that any financial legislation involving uncertain results contributes materially to the doubt which stops the machinery. All efforts to make money worth less by legislation have invariably extended the period of hard times. Almost every conceivable cause has been assigned, or given as a partial explanation, for the stagnation of trade. A careful analysis of these recurring periods in the history of our country in 1837, 1848, 1857, 1873, 1887 and 1893, shows many partial causes of disaster in exchange, affecting the peculiar nature of each panic, yet one especial cause is evident in them all. That cause is large investment in fixed capital from which no immediate returns can be expected.
The chief causes of hard times.—Prior to 1837 there was a rapid development of new country, as shown from the greatly increased receipts for public lands. Every new home involves a permanent investment of somebody's savings to the extent of at least $1,000. With the settlement of every new region a considerable waste in real estate speculation is found. A similar expansion of territory occupied by settlement immediately followed the Mexican war, and was a chief cause of reduced capital and consequent lack of employment.
The crisis of 1857 was preceded by enormous waste in the Crimean war. To that was added the loss of a season's labor in a bad harvest and increase of cost of [pg 174] living, reducing profits. The latter cause was incidental to this particular season, but added materially to the suffering. In this country there had also been an extensive enlargement in iron works and woolen factories without corresponding products.
The panic of 1867, felt widely outside of America, was preceded by immense waste of property in the civil war of the United States, a considerable portion of which expense, on both sides, had been borne in Europe, either during the war or immediately following, through the sale of bonds.