The panic of 1873 followed immense investments of wealth in fixed capital, as illustrated in the Northern Pacific railroad, previously mentioned. Between 1865 and 1873 30,000 miles of railroad were built in the United States alone. This permanent investment involved immense debts at home and abroad, with all the profits yet in the future. The fact that imports increased at the rate of nearly $100,000,000 a year in 1871 and 1872 indicates the extent of expenditures. The Franco-Prussian war had also wasted great energies.
The hard times in America, shown especially in the price of farms, about 1888 were immediately preceded by enormous investments in unsatisfactory farming lands and unneeded town sites, as well as in railroad building. Forty-nine million acres of land were sold by the government, and more than 12,000 miles of railway were built. Enormous expenditures were also made for school-houses, court-houses, and other public buildings by sale of bonds. The actual crisis was perhaps delayed and a new speculation fostered by large payments [pg 175] on the public debt. Again, there was expansion of credit and large investment in railroad and city building in anticipation of future growth, during which the small savings of multitudes had been gathered up through the guaranty loan companies of the West. Upon the top of this came the expenditures of 1892 and 1893 on the great World's Exposition. The expenditure of savings in attendance upon the exposition curtailed the abilities of hundreds of thousands of families. So the panic of 1893 was in no respect an exception to the rule. No sufficient data are at hand for showing exactly how great has been the expenditure in unproductive enterprises, but a reference to Chart No. IV, p. 83, giving the development of railroad building in this country, will show how this form of enterprise in every case outran the increase in population immediately preceding the hard times.
It is evident to any student of the question that extra large consumption of floating capital has immediately preceded every period of supposed over-production. The chief over-production has always been in the machinery of production and trade, including the costly settlement of new land. The immediate dismissal of labor employed in such enterprises brings greatest suffering, because such laborers are always least forehanded and are in large numbers homeless. Such laborers also most readily become competitors for any kind of a job, and so affect current wages of those still retaining their places. This emphasizes the unequal distribution of wealth, and leads multitudes to call for a redistribution, by fair means or foul. This increases the distrust of community [pg 176] and the disposition to hoard wealth in the form of money, while checking every desire to build for the future.
Remedies for hard times.—The means of recovery from such a disaster are less easy to see than the causes. We know, in fact, that the world does recover confidence among enterprising men and confidence in the future, sometimes surprisingly soon. We can see some of the steps by which the burden of debt is diminished and hopes are revived. In the first place, some method of settlement out of the usual course is adopted. Most obvious is an agreement among banks to carry on the usual machinery of exchanges through checks, drafts and a clearing house without the use of currency. This is called suspension of payment. It holds the deposits steady while the transfer of ownership is easy. It saves the sacrifice of large credit to meet the panicky condition of small trade, and it checks the disposition to hoard money in out-of-the-way places. The actual failures are thus confined to those actually engaged in the wasted production or directly involved as creditors of such persons. The failures in 1873 were said to have been nine in each thousand business houses; those of 1893 were thirteen in a thousand. The actual failures among farmers are confined almost entirely to those who have been caught in the speculative spirit of investment in more land for the sake of increasing prices or have borrowed capital to be used in other speculation. A few only have wasted their substance in expensive homes and luxuries.
If all forms of indebtedness could circulate freely, [pg 177] the final result in balancing debts with debts would be quite readily reached, and the actual losses would be found less than is generally supposed. An equal loss without distrust, if that were possible, would be met with new enterprise and extra energy instead of despondency.
The various remedies offered in proposed legislation frequently add to the delays in the recovery of confidence. The issue of paper currency, while universally welcomed by the most wasteful of investors, makes those who still have property more doubtful as to the future. The proposition to increase demand for labor by great public improvements comes at a time when revenues are diminished and almost surely is coupled with a proposal of government scrip. To increase the burden of taxation at once, when the mass of the people are already burdened and distressed, is impossible. The issue of scrip, though actually a costly method of taxation, seems to the unthinking a way of making something out of nothing. The certain effect is to extend the period of doubt. Laws affecting the coinage and character of legal tender, since they disturb the relation of borrower and lender indefinitely, postpone readjustment of confidence. Changes in the tariff laws are liable to have the same effect because of uncertainty as to where the influence will be most felt. Special legislation with reference to contracts for labor, however well intended, are sure to hinder adjustment, and all agitation in favor of new experiments in government enterprises or in legislation as to property makes less available the capital and ingenuity of the people.
Cure for hard times.—The only genuine cure involves a restoration of faith in enterprise. It is almost as hard to establish after a commercial panic as after a panic in an army. The remedies best worth study are really preventives, in the form of checks upon undue expansion of credits and distinct limits as to extension of time. Some have gone so far as to wish there were no laws for collection of debts, since this would actually prevent the great bulk of indebtedness; but it would also destroy the essential foundation of daily credit, one of the most productive machines of exchange. The best that can be done is to make more explicit the laws against frauds, and to limit easily transferred forms of credit to those whose foundation can be carefully inspected. It is very desirable that all corporations dealing in credit should be subject to the strictest examination by a public officer.
Short credits vs. hard times.—More important than legal enactments are the business habits of a community, and these can be cultivated by business men. Farmers, of all classes of people, can foster such customs of careful inspection of business standing and frequent settlement of accounts and careful loaning as will make a panic less possible. They need, however, a wider acquaintance with the machinery of business and a firmer faith in the advantage to all concerned of cash payments and absolute promptness in all settlements. The moral power of such a body, amounting to one-half the population, most of whom are solid owners of property, would, if well informed and united in principle, check most of the extravagances in expenditure [pg 179] and investment which waste the capital of the country.
Bankruptcy.—In closing the discussion of hard times, it is proper to mention a device for removing in part the discouragement of debts where ability to pay is entirely wanting. Of course, a settlement between debtor and creditors, in which the property of the debtor is divided among his creditors, is always available, leaving both at liberty to begin business anew with a knowledge of the worst that can happen. It seems possible to contrive bankruptcy laws in such shape as to secure a fair settlement of insolvent business whenever the business is evidently failing. If discovery of fraud or misrepresentation could cause immediate intervention in a bankruptcy court, the surest possible check would be brought to bear upon improper credits. It is certainly to the interest of all honest creditors and debtors that a fair settlement should be reached as early after insolvency as possible. Such bankrupt laws should be as wide reaching in their uniformity as government permits. If a national bankrupt law is not sufficient, the states should combine to establish in each the same general system.