Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
(?-1899)
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First Pub. Date
1881
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New York: Maynard, Merrill, and Co.
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1899
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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COMMERCIAL CRISES

I.249.1

COMMERCIAL CRISES, disturbances of the course of trade at given times, arising from the necessity of re-adjusting its conditions to the common standard and measure of value. The common standard of value is money, and the conditions of trade which require to be adjusted to it are the prices of commodities, and contracts and obligations of all kinds. Contracts and obligations are almost always expressed in money. They call for the payment of dollars, pounds sterling, francs, etc., which signify a certain weight of gold or silver. Contracts and obligations are entered into on the basis of the scale of prices prevailing at the time, which may be too high or too low. Prices are susceptible of great elasticity. If they are too high at a given time as compared with the cost of money (i.e., the cost of producing gold and silver), it follows that the person who has obligated himself to pay money at such a time has not actually received an equivalent in return, and that he is in danger of loss or failure. This he may avoid by selling the commodities he has purchased for money sufficient, or more than sufficient to meet his obligation, or by taking the obligation of another person for an equal or greater sum. In the latter case it is evident that the situation of the community is not changed by substituting A in the place of B as the obligor who undertakes to deliver a certain number of grains of gold in exchange for a certain amount of cloth or iron, or a certain piece of land, or a certain amount of labor. If the element of equivalency is wanting between the money agreed to be paid and the thing received in exchange, there must be eventual loss, and possibly such loss as to cause bankruptcy. It does not alter the state of the case that the obligation to pay money may be lawfully discharged with paper, even irredeemable paper, since such paper must be resolvable into gold at some ratio.

I.249.2

—Contracts and obligations, agreements to pay money at a future time for something presently received, are the "credit system" of modern commerce. Innumerable phases and complications arise under the credit system, but analysis will show that they all resolve themselves into the agreement of A to sell goods, houses, lands, labor, etc, to B for money to be paid at a future time. If B, instead of borrowing goods, houses, etc., from A, borrows money from C, it is only to buy the goods, houses, etc., from A. The only difference is that C instead. of A, is the payee when the obligation matures. Inability to meet the obligation constitutes bankruptcy, and a great multiplicity of bankruptcies occurring simultaneously constitutes a commercial crisis. A commercial crisis may be confined to one country, or it may extend to the whole commercial world, but it can not extend to places where there is no credit system. If all persons were in the habit of paying immediately for everything received, there could be no debts, consequently no failures, no money panics, no crises. In proportion as debts are few and small and of short duration, so will bankruptcies be infrequent and commercial crises brief and inconsiderable. Those nations among whom the credit system has received its widest development, and where consequently the spirit of commercial adventure and speculation is most rife, are most exposed to the ravages of recurring periods of bankruptcy. It is an observed fact that nations of Teutonic origin (including the English, American, German, Dutch and Scandinavian) are those most frequently and severely afflicted with commercial crises. These nations are also noted as the most enterprising of all, in the commercial sense. They habitually assume greater risks for the sake of expected profit than their neighbors, and consequently are more exposed to periodical disaster.

I.249.3

—Since the introduction of the credit element into trade, which began to assume a systematic character early in the seventeenth century, commercial crises have been of frequent occurrence among civilized nations. The symptoms by which they are preceded, and which always give fair warning of their approach, are a rapid advance of prices and wages, great activity of trade, a multiplication of new enterprises of every sort, such as factories, buildings, banks, railways, mines, shipping, colonies—what is termed, in short, a period of general prosperity. Fortunes are made, or appear to be made, in a day. A spirit of speculation pervades all the trading classes. Everybody is buying, in order to sell at a higher price. All who have capital are seeking to place it where it will gain the highest possible return. These periods of alluring prosperity generally run a course of ten years in England, e.g., 1816, 1825, 1837, 1847, 1857, 1866, 1875, in each of which years there was a commercial crisis in that country. In the United States the periodical return has been less regular and less frequent, the most noted crises having been those of 1819, 1837, 1857 and 1873. Each period of abnormal and exciting prosperity is followed by a violent collapse, whose phases are a money panic, a sudden rise in the rate of interest, a run on the banks, and most frequently a suspension of cash payments; then a fall of prices of commodities, securities and real property; failures of mercantile and manufacturing houses and corporations, a partial suspension of industry, a fall of wages and the enforced idleness of great numbers of laborers, often culminating in riots and social anarchy. The money panic is generally of short duration, but the crisis is frequently protracted through a series of years, being marked by a continued and inexorable "shrinkage of values," general stagnation and lack of confidence, dearth of employment for labor and capital, and an abnormally low rate of interest. It has become a maxim among business men, that in such a period more profit can be made by locking money up in a close vault than by investing it in anything whatsoever; which signifies merely, that, when prices of all things are declining, it is best not to buy till they reach their minimum. The pendulum will swing back in time.

I.249.4

—These undulations of trade, of alternately high and low prices, of alternate activity and depression in business, have their root in the mental and moral constitution of mankind. The price of a thing is the amount of gold it sells for in a free market. The prices of commodities generally—i.e., the scale of prices prevailing at a given time—are the ratio existing between commodities in general and gold bullion, in a free market. We know, as a matter of fact, that general prices are subject to great variations within comparatively short periods of time, as, for instance, between the years 1873 and 1877, the conditions of gold production and the annual output remaining substantially the same. The cause of these rapid variations must be sought for in something else than the gold supply. Some writers seek an explanation in bank issues and bank credits. Excessive issues and excessive credits are invariable concomitants of the swelling gale of prosperity which precedes and ushers in a crisis. They are part and parcel of the speculative fever which pervades the community, but are no more to be accounted the cause of it than the excessive multiplication of spindles and of railways going on at the same time. The true cause of advancing prices is the competition of buyers in the market: the true cause of declining prices is the competition of sellers. When there are more buyers than sellers, prices will fall. The love of gain causes the competition of buyers; the fear of loss, the competition of sellers. The former is a state of speculation; the latter of panic. Now, it is demonstrable from history, and, indeed, obvious to all persons of adult age, that there are times when the whole community are buying this, that and the other sort of property, with the purpose and expectation of selling it at a higher price. There are other times when they are selling with like unanimity, in order to avoid an apprehended loss. Such a period of general speculation prevailed in the United States during several years prior to 1873. A corresponding period of panic and depression prevailed from 1873 to 1879. The pendulum has now (1881) begun to swing back, and there are many signs that the country has started on a new career of prosperity, to be succeeded by another crisis, another period of commercial depression, revulsion, stagnation. Prices and wages are advancing, employment for labor and capital is abundant, fortunes are made rapidly, new railway enterprises are multiplying on every hand. But the ordinary channels of trade are not yet choked with debt to any considerable extent. The debts of 1873 have been pretty generally wiped out, but the credit system has not wholly recovered from the shock of that year. Both borrowers and lenders are still cautious. So long as this spirit of caution prevails, the community will be in no danger of a commercial crisis, although there may be stock panics and "Black Fridays" now and then, affecting particular classes of traders and speculators. When this spirit yields, as it probably will, to the enticing prospect of large profits and rapid gains, and when rising prices and increasing liabilities are observed to be moving hand in hand, the ingredients of a new crisis will be gathering explosive force. Those who are able to discern the real conditions of trade hidden under the guise of general prosperity, and able to resist its fascinations, will get out of debt while they can, and content themselves with such profits as are to be made without borrowed capital. Then, when the storm comes, they will escape. They may meet with losses—people who owe them may be unable to pay—but the gale will pass by and leave them standing. The "shrinkage of values" will signify nothing to them but a marking down of prices, while to those who are much in debt it will mean bankruptcy, sheriff's sales, and a sudden descent from affluence to poverty. Unfortunately, neither prudence nor foresight can avail to any great extent to protect the wage-working classes from the effects of these fearful visitations. They are powerless to resist the advance of prices, they are impelled by necessity and by the competition of employers to demand higher wages for their labor, and higher wages again necessitate higher prices for commodities. When the tension of prices against the standard of value can no longer be borne, and a crisis supervenes, the worst horrors of the calamity fall upon them in the loss of employment. What savings they have accumulated during the period of prosperity, to shelter themselves in sickness and age, are generally consumed during the succeeding period of depression, and they begin again the battle of life with no other resources than their hands, and not seldom with bitterness in their hearts against the social order which allows such sore distress to fall upon them.

I.249.5

—It has been remarked that commercial crises have their root in the mental and moral constitution of mankind. The love of gain is the foundation stone upon which political economy builds itself as a science. This motive is more nearly universal than any other in the whole category of human impulses. The greatest amount of gain with the least amount of effort is what all but an imperceptible fraction of mankind are striving for. It is this omnipresent desire which incites people to buy whatever they think they can sell at an advanced price, and to buy on credit, or with borrowed capital, when they can not command sufficient means of their own. Buying with one's own means, however imprudently, would never bring on a commercial crisis, because nobody could fail. The competition of buyers would cause prices to advance exactly as under the credit system, and the reaction would come as surely. The elasticity of prices would enable speculation to run its course for the usual period, until the strain could be borne no longer, i.e., until the difference between the prices of commodities generally, and the cost of dollars and pounds sterling at the gold mines, became too great to admit of further speculation. Then there would be a decline of prices resulting from a common desire to sell and avoid loss, but the marked and distinguishing feature of the modern commercial crisis, bankruptcy and total ruin, would be wanting. The credit system supplies this ingredient. It furnishes the explosive material of which the great crises of the past two centuries have been mainly composed, viz, contracts, obligations debts, piled upon each other mountain high, contracted upon a fictitious scale of prices, a scale which the whole community has for the time being conspired to make fictions, but payable in matter of fact dollars and pounds sterling, or their true equivalent, and not otherwise.

I.249.6

—One of the earliest crises mentioned by Dr. Max Wirth, in his Geschichte der Handelskrisen, is the tulip mania of Holland, in the years 1634-8. This celebrated speculation in the products of horticulture bore all the marks of a genuine commercial crisis. A delusion difficult now to understand, though not more absurd than many others which have at times infected an entire people, gradually led the inhabitants of the Netherlands to consider the tulip plant to be worth its weight in gold, while certain varieties were esteemed much more valuable. The whole population, merchants, farmers, nobles, politicians, sailors, day-laborers, serving men and serving women, joined in an eager and exciting trade in tulips. There was a tulip exchange in Amsterdam, with a board of brokers, presenting all the features of a modern stock exchange. The price of tulips rose from a mere trifle, or about the price of onions, to 5,500 florins each, the latter being the quoted value of the variety called "Semper Augustus." The rage lasted four years. Contracts for the purchase and sale of tulip plants at these extravagant figures, plastered the whole country, and were so numerous when the collapse came that the courts of justice were unable to adjudicate a tithe of them. A tulip bulb was intrinsically worth no more then than it is now; that is, a few pennies for common varieties, and a few shillings for the rarer. It was inevitable that a time would come when they must sell for their intrinsic value in coin. That time did come, and the nation was plunged at once into a whirlpool of bankruptcy. Panic terror swept all the market places. Misery, madness and ruin entered thousands of Dutch homesteads. The country was strewn with every species of commercial wreckage. The consequences of the disaster afflicted a whole generation, and the memory of it revives with every recurrence of a commercial crisis in any part of the world.

I.249.7

—The tulip crisis of Holland was of the same breed as the modern commercial crisis, differing in size, but not in ferocity. The crises of different periods and different countries have distinguishing features in this, that there is generally some form of speculation more rampant than any other at a given period, although it frequently happens that the leading rage begets other varieties equally pernicious. In the French crisis of 1720, it was John Law's Mississippi scheme around which the speculation gathered. In the contemporary English crisis it was the South sea bubble, which also produced a progeny of lesser bubbles so numerous and ludicrous that the period has ever since been known as the "epoch of the bubble companies." In the American crisis of 1837, land speculation was the principal craze. In the English crisis of 1847, it was railway building. But in these and all the others, the features of the tulip mania are discernible—a whole community betting that certain kinds of property are worth more gold and silver than they are really worth, and entering into contracts and obligations based upon erroneous estimates of value. It generally happens during the speculative period, that the prices of some commodities are pushed up to a higher point, relatively, than others, speculation being particularly directed into those channels, thus attracting an undue investment of capital and labor in particular trades, as in the cultivation of tulips in Holland at the period mentioned. This was the case in the iron and coal trades and in many branches of manufacture in the United States prior to the panic of 1873. The equilibrium of labor is disturbed; and, when the crisis comes, the greatest distress falls upon those branches of industry which had formerly been the most prosperous. An immediate glut of the market is felt because an abnormal production had been stimulated. Neither the laborers nor the capital employed in particular lines of trade can change their vocation suddenly. But change they must sooner or later. The equilibrium of industry must be restored; prices must fall back to the level of equivalency between money and goods; superfluous mills and mines and factories must close, or work on half time, till a re-adjustment takes place. If the prevailing rage has been for foreign trade, as it was in England in 1825, there will be a mushroom growth of manufactures and shipping, and when the collapse comes, weavers and sailors will be out of employment. If it is for new railways, as in the United States in the years prior to 1873, iron furnaces will go out of blast, coal companies will fail, puddlers and miners will be brought to dire distress, and it will be wonderful if riots and public disorder do not follow in the train of idleness and misery. It results from the view here taken, that the displacement or misplacement of labor, so often noticed as a feature of commercial crises, is a consequence and not a cause of the temporary delusion or entraínement of the public mind, which is the real origin of the trouble.

I.249.8

—What causes this entraínement has been partly answered already. Anything which acts strongly upon the imaginations of traders, always keenly alive to the prospect of gain, is sufficient to set a general speculation on foot. There can be no doubt that the gigantic war indemnity collected by Germany from France stimulated the imaginative powers of the former in the highest degree, and led to the extravagant speculations which ushered in the crisis of 1873 in that country. The English crisis of 1816 was due to a misconception founded upon the overthrow of Napoleon and the reopening of the continent of Europe to British trade. It was assumed that the continent was bare of goods, and that an unlimited demand would spring up as soon as trade restrictions were removed. The imagination of the British merchant was fired. Great quantities of manufactures and colonial produce were accumulated to meet the expected demand, and prices rose rapidly in consequence. No account was made of the fact that those countries, impoverished by long wars, were unable to pay for the commodities they would gladly purchase. When the ports were opened, English goods were crowded upon the continental markets in such quantities that presently "they were selling for less in Holland and Germany than in London and Manchester, while in most places they were lying a dead weight on the market, without any sale at all." (Lord Brougham, quoted in Tooke's History of Prices.) In consequence of this miscalculation, 6,616 failures took place in the agricultural, commercial, manufacturing, mining and shipping interests of Great Britain, and so many laborers were thrown out of employment, that the country seemed for awhile to be on the eve of revolution. The commercial history of both Europe and America is sprinkled with commercial crises from 1799 to 1816, having their origin in the distempered imaginations of traders unduly excited by military events and the commercial regulations of governments. The Hamburg crisis of 1799 was caused by the French occupation of Holland in 1795, which threw into the lap of the former the continental trade which had previously belonged to the latter, causing such a tremendous speculation and rise of prices and extension of credit in Hamburg during the succeeding four years that presently a crash came, in which 82 houses failed, with liabilities amounting to 29,000,000 marks. Thus the very event which seemed likely to contribute to the prosperity of Hamburg, serving to inflame the greed of her capitalists and obscure their vision, ended in her impoverishment. It is needless to multiply instances showing that every great speculative movement has an ascertainable starting point. Referring to the last one which afflicted our own country, there can be little doubt that the most potent contributing cause was the unwise liberality of congress in offering immense grants of land to corporations as a free gift on condition that they would build railways through them. No less than 170,000,000 acres were flung out to the cupidity of capitalists after the close of the war. Such an alluring bait had never been danced before the eyes of a whole nation, not of one nation merely, but as many as chose to participate, for capital knows no boundary lines. England, Germany and Holland are believed to have invested $250,000,000 in our railway bonds between 1865 and 1873, which afterward defaulted, not to mention those which managed to pay their interest and keep out of bankruptcy.

I.249.9

—We will now consider some of the theories which have been advanced on the subject of commercial crises, more or less in conflict with the one here outlined. The one most commonly accepted ascribes all the mischief to paper money, to bank agencies of various sorts; to irredeemable paper, where such paper is current; to the medium of exchange, rather than to the things exchanged. Interminable statistics have been compiled to sustain this view, all going to confuse the reader and darken counsel. The bank is so necessary a part of modern trade, it is so great an object of interest in a financial panic, its system of loans, issues and deposits is so great a mystery to the general public, that it answers all the purposes of a witch when a commercial distemper sets in. As the issue of circulating notes is no necessary function of a bank, we will first consider it without that function. Banks were first established to keep people's money in places of safety. Their sphere of duty was afterward enlarged, in order to assimilate the various sorts of money brought to them, so that their customers could deposit dollars, pounds sterling, livres, florins and ducats, some of full weight, others of short weight, and draw out one particular kind of money, as for instance, dollars always of full value, thus furnishing a sure basis for trade, and enabling buyer and seller to make their bargains understandingly. In point of principle the modern bank differs but little from the ancient one. It receives people's money in order to keep it safely and pay it back on demand. It also undertakes to melt down and hold in a state of "solvency" all the instruments of exchange that experience has found useful in facilitating the transfer of property, such as bills of exchange, checks, drafts, etc., so that its customers depositing such instruments, secured by commodities or otherwise, can draw out their equivalent in money as occasion requires. Bank deposits consist for the most part of these written instruments, which are merely the title deeds of property circulating between buyers and sellers, producers and consumers. The amount of cash kept on hand by a bank is usually a very small part of its deposits, since in practice the deposits offset and counterbalance each other through the instrumentality of checks and clearing houses. Experience has shown that a certain average amount of the deposits will always be on hand, and that it will be safe and profitable to lend these at the current rate of interest, a capital being provided by the bank itself as a safeguard and guarantee against sudden and unexpected demands from depositors. It is obvious that a bank has no power to create property; therefore, it can not cause drafts, bills of exchange, etc., to be drawn; therefore it can not cause deposits to be made. Nor can it lend more deposits than the average amount which it has on hand. It may unduly trench upon its own capital. It may put beyond its immediate reach more of its means than prudence would dictate. Bankers frequently make this mistake, but not oftener than other men. They are subject to the same influences and motives as other members of the trading community, they breathe the same atmosphere, they are as ready to make hay while the sun shines. If others are making unusual profits, they are not slow to participate, and when their customers are habitually taking large risks, they are apt to take large risks also. If we expect them alone to be prudent and conservative, while everybody else is enterprising and dashing, we shall expect too much. The community will always find bankers to their liking. In times of prosperity all croakers are unpopular, and banking croakers most of all. The popular banker at such a time is the one who accommodates most liberally and is not too particular about his securities. He will draw the largest train of customers and make the greatest profits, while his croaking neighbor will have only a constituency of curmudgeons and old fogies. A banker's risks are somewhat greater than a merchant's, because his liabilities are payable on demand; therefore bankers ought to be more prudent than merchants, and, as a general rule, they are so. But they are liable to become infected by their surroundings, and to lend more of their capital in good times than they ought, in exactly the same way and for the same reason that a merchant extends too much credit to his customers, and borrows too much money from his banker. In short, bankers are not sinners above others in paving the way for a commercial crisis. They have no occult power to swell their own deposits or to force loans upon the community. Their contribution to the general mischief is precisely similar to that of other people, attempting to do too much business on a given capital.

I.249.10

—When a bank, in addition to the function we have been considering, is vested with the power to issue notes, it merely displaces an equivalent amount of gold from the circulation. No more notes will circulate than are needed to pass from hand to hand among buyers and sellers. Any excess will come back to the bank's counter for redemption: any deficiency will be supplied by gold from the mines or from foreign countries. Banks are powerless either to add to or subtract from the circulation of the country. Nor is the case different when their notes are redeemable in government notes, which are themselves irredeemable. So far as the banks are concerned, all the principles which govern when gold is the standard, govern when greenbacks are the standard. If more bank notes are out than are really wanted, and therefore serviceable to the public, the surplus will come back to them in spite of all their efforts to the contrary. It is an observed fact, that, at times immediately preceding a panic—that is, during a favoring gale of high prices, large profits and active speculation—there is an abnormal increase of bank note issues; whence it has been concluded that the bank issues have caused all the trouble. Post hoc, ergo propter hoc. Bank issues are large at such times, because business is active, because prices are high, because the conditions of trade demand and require and will have an augmented circulating medium. If they can not have paper they will have gold; and their having gold instead of paper would not stave off the crisis. A commercial crisis has no better appetite for one kind of money than for another; nor does one kind of money favor the oncoming of a crisis more than another, with a single exception to be noted hereafter. This is abundantly proved by the history of these disasters, which have fallen with perfect impartiality upon countries having an exclusively metallic currency, upon those having a mixed currency, and upon those having an exclusively paper currency. The tulip crisis in Holland came at a time and place where paper money was unknown. There was a genuine crisis in England in 1692, two years before the bank of England was established. (Bagehot's Lombard Street, c. 6.) The crisis of 1873 in the United States came during a protracted suspension of specie payments, as did also the English crises of 1811 and 1816. These facts prove that the kind of currency prevailing is not necessarily the producing cause of a crisis. It may have its influence one way or another, but there are no facts to show that the adoption or rejection of any particular medium of exchange would banish the phenomenon from the commercial world.

I.249.11

—The single case where a crisis may be produced by a vicious currency is that of irredeemable legal tender paper. When government commences issuing such paper the experience of mankind suggests that the first issue will probably be followed by a second, and the second by a third, and so on. It is a necessary consequence that prices of commodities and real property should rise, there being no foreign outlet for the excess of notes forced upon the community by the government's disbursements. This is sufficient in itself to incite speculation. Most commonly there is a further incentive furnished by the government's heavy purchases of the goods it stands in need of, and general speculation takes its start in the branches of trade which supply these articles. A commercial crisis may or may not ensue. The legal tender notes may become utterly valueless, as our continental currency, the French assignats and the notes of the southern confederacy did, or they may be restored to gold value, as bank of England notes were in 1821, and as our own greenbacks were in December, 1878. Whatever may be the disasters consequent upon such pernicious meddling with the standard of value, it is obvious that they do not belong to the category of the true commercial crisis, which is a disturbance due to commercial causes alone without extraneous influence of any kind. It is hardly necessary to add that all the ingredients of a commercial crisis can be gathered under a régime of irredeemable paper, as readily as under a metallic or mixed currency. The quantity of such paper afloat always has some limit; and, as long as it possesses the character and requisites of a currency at all, it must have some value quotable in gold. Prices of commodities will be reckoned in paper, contracts and obligations will be payable in it, and the undulations of trade as previously described will move on for all the purposes of crisis-breeding, in the same way as under the régime of metallic money.

I.249.12

—Another theory, which has the support of respectable authority, assumes that the improvident investment of capital during a period of general speculation is the cause of commercial crises. Improvident investment is, for the time being, the same thing as total loss, and it is contended that the aggregate of losses becomes so great eventually that the fabric of industry can not support the burden, and is crushed beneath it. This doctrine seems to be open to a short reductio ad absurdum. Let us suppose that mankind have accumulated a year's stock of goods, and that everybody starts, as most people do start after one commercial crisis has spent its force, measurably free from debt. Then, if all the surplus products of a country or of the world—that is, all the wealth produced beyond annual consumption and seed—were collected together and burned on the last day of every year, would any commercial crisis be produced thereby? The world would merely remain in statu quo Wealth would be neither increased nor diminished, since only the surplus of production had been lost; but, as nobody would owe more than he could pay, there would be no crisis. This is another instance of the argument, post hoc, ergo propter hoc. The conversion of circulating capital into fixed capital goes on rapidly in "good times." As the production of wealth is rapid, means must be found for investing the surplus—the portion not consumed in the process of production—and such seasons of prosperity are always marked by the multitude of new enterprises, such as railways, mines, factories, buildings, ships, and the bringing of new land under cultivation. A great part of these enterprises turn out to be premature and improvident, perhaps wholly wasteful, and for all present purposes the capital invested in them might as well have been burned at the outset. But if it had been burned at the outset, no commercial crisis would have resulted. It is contended, however, that the conversion of circulating capital, (wheat, cloth, iron, etc.) into fixed capital has gone on at such a reckless and headlong pace that there was not a sufficiency left for the requirements of trade. Hence the distress. The answer is, that nature has provided abundant checks against the too rapid conversion of circulating into fixed capital, for, if too much food and clothing are thus withdrawn from the market, a portion of the community must starve and go naked; if too much iron and timber are withdrawn, the requirements of everyday life will impose such obstacles, in the shape of enhanced prices, to the further conversion that it will be sharply arrested. Finally, it is an observed fact, that a rapid increase of fixed capital is always accompanied by a great increase of circulating capital. J. S. Mill doubts if a single instance can be found to the contrary. (Political Economy, book i., c. 6.)

I.249.13

—A third doctrine, which has found more or less support, assumes that commercial crises proceed from a sudden and spasmodic want of confidence, and that if confidence could be restored as suddenly as it was destroyed, all the evil consequences would disappear. The want of confidence which upsets commercial calculations and brings on a crisis is the disturbance or rupture of a commonly received opinion that fifty cents' worth of goods are equal to a dollar in gold. This opinion, which finds its expression in high prices of commodities, labor and real property, is gradually undermined by the departure of gold to countries where it is rated at a higher value. The exportation of the precious metals is signalized by a rise of the exchanges and of the rate of discount; and general uneasiness ensues. The outflow of gold continues, money becomes scarce, and the rate of interest rises, till the weaker and more venturesome traders fail. Then the public discover all at once that their "confidence" in the value of property was misplaced. Everybody will rush to his banker to draw out money, lest others should get the start of him and break the bank. It is not necessary to recount the usual features of a panic. Like other stampedes they are cruel and destructive, and not amenable to argument, but they are likewise of short duration. Banks and other depositories of money are either broken at once by the onset of depositors, or they are relieved from the pressure in a few days or weeks. But "confidence" is gone. People no longer believe that fifty cents' worth of goods are equal to a dollar in gold. Nor is it possible that they should so believe when once their eyes have been opened to the real facts. "Want of confidence" at such a time is mere inability to believe an exposed falsehood. People have been confident at certain times and places that clipped shillings were equal to whole ones, and that brass money was equal to silver. When they discovered the contrary, they were perhaps upbraided for their want of confidence, but history does not mention that any efforts to restore confidence in this particular ever met with much success. When want of confidence is well founded, as it always is in a commercial crisis, there is no cure but a re establishment of the true par of exchange between money and goods.

I.249.14

—Money is the pivot around which the vast mechanism of exchange revolves. As already shown, money is either gold coin and bullion or something referable thereto and deriving its potency therefrom. Every commercial act, whether for present or future execution, every business transaction, from a government loan to the purchase of a jackknife, is expressed in money, is enforceable in money, is computable in money, and not otherwise. It is not our purpose to consider whether any better system can be devised and agreed upon by mankind for ganging and estimating their dealings with each other. No other has yet been suggested that would not entail more evils and inconvenience than it would care, and it is extremely doubtful whether any other (Mr Poulet Scrope's Tabular Standard of Value, for instance) could command the assent of a sufficient number of people at one time to serve the purposes of experiment. What we have to consider here is the fact that goods and money must be equivalent to each other in a healthy state of trade, and that any wide divergence from equivalency is a state of disease, which, when sufficiently prolonged and aggravated, ends in convulsions.

I.249.15

—Much has been written about the remedies for commercial crises. There is no remedy except in the concurrence of mankind to keep out of debt and to avoid all temptation to make gain without equivalent labor. Civilization is so interlaced with the credit system that it is idle to talk of abolishing it. The interests of mankind require that it should continue, even at the cost of its abuses and of the miseries of an occasional crisis. The desire for gain without labor, or of much gain with little labor, is so universally diffused and firmly planted in the human breast that it is equally idle to think of uprooting it. Nor is it, upon the whole, a thing which ought to be uprooted. Nine-tenths of all the inventions and discoveries that have advanced mankind from the stone age to the age of steam and electricity have had their origin in this desire. But while we may not hope, and should not wish, to eliminate from the mental and moral constitution of mankind those motives which drive the commercial world now and then into a state of crisis, much may be done to lessen and mitigate the evil by diffusing correct knowledge of the principles underlying these painful phenomena. When the public shall be well instructed as to the genesis, growth and external indications of an approaching crisis, each captain of an industrial craft will be moved to take in sail before the storm strikes him; and, if all captains take heed in time, little mischief will be done. Speculation will be checked, prices will recede, losses may be felt; but the cataclysm may be avoided. At present, it must be admitted that economists themselves are not sufficiently agreed upon the fundamental principles of commercial crises to command strict attention from the unprofessional classes.

I.249.16

—The literature of our subject is not extensive. Among the works most worthy of examination may be mentioned Max Wirth's Geschichte der Handelskrisen, 2nd ed., Frankfort, 1874; Le Marché monétaire et ses Crises, by Emile de Laveleye, Paris, 1865; The Commercial Crisis of 1847-8, by D. Morier Evans, London, 1849; History of the Commercial Crisis of 1857-8, by the same author, London, 1859; Les Crises Commerciales, by Clément Juglar; and the article by the same author in Block's Dictionnaire de la Politique, Paris, 1880; the History of British Commerce, by Leone Levi, London, 1872. Tooke's History of Prices is a mine of information, and the contributions of his co-laborer and literary executor, Wm. Newmarch, in the London Economist's Annual Review, are extremely valuable. James Wilson's Capital, Currency and Banking (London, 1847), contains important suggestions; indeed, nowhere else can be found a more rigid analysis or sounder conclusions upon the relation between prices and the circulating medium. Mr. R. H. Patterson's Science of Finance (Edinburgh, 1868,) gives a good account of the London crisis of 1866, but the views advanced by the writer are misleading. Since the crisis of 1873 there has been an active discussion of the subject in magazine articles. The most important contribution of this kind is that of Maurice Block (La Crise Economique) in the Revue des Doux Mondes, March 15, 1879. Mr. Robert Giffen's article in the Fortnightly Review, entitled "The Liquidations of 1873-6," (republished in his volume of Essays in Finance), and a recent article on "Over-Production," by Mr. George Chesney, in the same periodical, are also noteworthy. The house of commons' report on the commercial distress (1848), and other parliamentary inquiries, contain a great mass of undigested material, as does also the evidence taken by the house committee on depression of labor and business in the United States (1878-9).

HORACE WHITE.

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