"We are now in a position to perceive the magnitude of the blunder of which the American people were guilty in constructing this most mischievous quantity of fixed capital in the form of railways. They acted precisely like a landowner who had an estate of £10,000 a year, and spent £20,000 on drainage. It could not be made out of savings, for they did not exist, and at the end of the very first year he must sell a portion of the estate to pay for the cost of his draining. In other words, his capital, his estate, his means of making income whereon to live was reduced. The drainage was an excellent operation, but for him it was ruinous. So it was with America. Few things in the long run enrich a nation like railways; but so gigantic an over-consumption, not out of savings, but out of capital, brought her poverty, commercial depression, and much misery. The new railways have been reckoned at some 30,000 miles, at an estimated cost of £10,000 a mile; they destroyed three hundred million of pounds worth, not of money, but of corn, clothing, coal, iron, and other substances. The connection between such over-production and commercial depression is here only too visibly that of parent and child. But the disastrous consequences were far from ending here. The over-consumption did not content itself with the wealth used up in working the railways and the materials of which they were composed. It sent other waves of destruction rolling over the land. The demand for coal, iron, engines, and materials kindled prodigious excitement in the factories and the shops; labourers were called for from every side; wages rose rapidly; profits shared the upward movement; luxurious spending overflowed; prices advanced all round; the recklessness of a prosperous time bubbled over; and this subsidiary over-consumption immensely enlarged the waste of the national capital set in motion by the expenditure on the railways themselves. Onward still pressed the gale; foreign nations were carried away by its force. They poured their goods into America, so over-powering was the attraction of high prices. They supplied materials for the railways, and luxuries for their constructors. Their own prices rose in turn; their business burst into unwonted activity; profits and wages were enlarged; and the vicious cycle repeated itself in many countries of Europe. Over-consumption advanced with greater strides; the tide of prosperity rose ever higher; and the destruction of wealth marched at greater speed."[172]
Now, in the first place, our analysis of saving and the confinement of the term consumption to direct embodiments of utility and convenience forbid us to acknowledge that the action of the United States or the analogy of the improving landowner is a case of over-consumption at all. If the landowner borrowed money on his estates in order to live in luxury for a season beyond his income, or similarly, if a State raised loans in order to consume powder and shot, the term over-consumption rightly applies. But where the landowner borrows so much money to improve his land that he is unable to hold out till the improvements bear fruit, and must sell his land to pay the interest, he is not rightly accused of over-consumption. His reduced consumption later on while practising retrenchment is simply a process of "saving" which, when complete, is to take the place of an amount of "saving" previously made by some one else and borrowed by him. What happened was simply this. A, wishing to drain his land, had not "saved" enough to do it; B has saved, and A, borrowing his "saving," holds it for a time in his shape of drainage. If he can continue to pay interest and gradually "save" to pay off the capital, he will do so; if not, as in the case supposed, B, the mortgagee, will foreclose and legally enter upon his savings in the shape of "drainage" which he really owned all along. But even if A in this case were rightly accused of over-consumption, this over-consumption must be considered as balanced by the under-consumption of B, so that as regards the community of which A and B are both members there is no over-consumption.
Now, precisely the same line of reasoning applies if for the individual A we take the country of the United States. If it tries to increase its factories, machinery, etc., in excess of its ability to pay, it can only do so by borrowing from other countries; and if it cannot pay the interest on such loans, the "savings," in the shape of fixed capital which it has endeavoured to secure for itself, remain the property of the other countries which have effected the real saving which they embody, assuming them to have a value. If the action of the United States be called over-consumption, it is balanced by an under-consumption of England, France, or other countries of the commercial community. Mr. Price sought to avoid this conclusion by saying nothing about the individual from whom the landowner or the country from which the United States borrowed in order to increase the fixed capital. But as the landowner and the United States, ex hypothesi, did not make their improvements out of their own savings, they made them out of somebody else's savings, and that conduct which is styled over-consumption in them is balanced by an equal quantity of under-consumption in some other party. If thus we look at the individual landowner or the single country of the United States, we might say, accepting Price's view of consumption, that he and it were guilty of over-consumption, and that this was the cause of the commercial crisis. But since this over-consumption is absolutely conditioned by a correspondent under-consumption of some other member of the industrial community, it is not possible to conclude with Professor Price that over-consumption can even for a time exist in the community as a whole, or that such a condition can be the explanation of a crisis commonly felt by all or most of the members of that community.
What actually happened in the case of United States railways was that a number of people, either in America or in Europe, under-consumed or over-saved: their excessive saving could find no better form to take than American railways, which, ex hypothesi, were not wanted for use. A number of persons who might have made and consumed three hundred million pounds' worth more of corn, clothing, coals, etc., than they actually did consume, refused to do so, and instead of doing so made a number of railway lines, locomotives, etc., which no one could consume and which were not wanted to assist production. What occurred was a waste of saving power through an attempt to make an excessive number of forms of capital.
Even if, some years later, many of these forms obtained a use and a value, none the less they represent an excess or waste of "saving" to an extent measured by the normal rate of interest over that period of time which elapsed before they fructified into use. In a word, what had happened was not over-consumption, but under-consumption.
M. Guyot appears to think that in the community as a whole too much saving can be put into the form of "fixed" capital and too little into circulating capital, and that such a condition of affairs will bring depression. "Fixed capital," he says, "cannot be utilised if there is no available circulating capital. Ships and railways are useless if there are no commodities for them to convey; a factory cannot be worked unless there are consumers ready to buy its products. If, then, circulating capital has been so far exhausted as to take a long time replacing, fixed capital must meanwhile remain unproductive, and the crisis is so much the longer and more severe."[173]
To this there are two sufficient answers. The prevalence of low prices for goods of various kinds as well as for plant in a time of depression, the general glut of goods which forms one phase of the depression proves that the crisis does not arise from storing too much saving in plant and too little in goods. Where there exists simultaneously a larger quantity of plant, raw material, finished goods, and labour than the industrial society can find use for, no assertion of maladjustment, either as between trade and trade, country and country, fixed and circulating capital, will afford any explanation. Secondly, M. Guyot gives away his entire position by admitting "a factory cannot be worked unless there are consumers ready to buy its products." A "consumer" here can logically only mean one who buys finished goods for personal use, and if this be generally applied it amounts to a clear admission that under-consumption is the reason why there appears to be a glut of capital, fixed or other.
FOOTNOTES:
[146] Contemporary Review, March 1888.