CRISES AND INDUSTRIAL DEPRESSIONS § 1. Mischance, special and general, in business. Definitions. A feature of a money economy. European crises. § 5. American crises. ˘ 6. A business cycle. § 7. General features of a crisis. § 8. The use of credit. § 9. Interest rate's in a crisis. I 10. dynamic conditions and price readjustments. § 11. Tariff changes and business uncertainty. § 12. Rhythmic changes in weather and in crops. "Glut" theories of crises. Monetary theories of crises.
§ 1. Mischance, special and general, in business. Every separate business enterprise is subject to chances that sud denly decrease its profits and the prosperity of its owners; such are fire, flood, illness of its owners, unfavorable changes in prices of materials or of the The interests of many other persons in the neighborhood may be so bound up with an enterprise that its losses may mean unemployment, lower wages to workingmen, and bankruptcy to local mer chants and to banks. Sometimes misfortune and disaster affect whole communities. The lack of cotton while the Civil War was in progress compelled the factories of Manchester to close in 1864, and the earthquake and fire in San Francisco in 1906 left a quarter of a million people homeless.
But a change of business conditions is constantly occurring that is of wider extent, that is of less accidental and of more rhythmic nature, and that appears to be the effect of slowly working and more general causes. The enterprise of a mod ern community, as a whole, "general business," moves along 1 On the way these affect private profits see Vol. I, pp. 340, 341 (and references there given in note), 348 ff. and 361 ff. There are thus good reasons for discussing crises in connection with profits, as well as with money and banking.
138 in a wavelike manner, going through a somewhat regular series of changes that is called a business cycle. We are now to study the nature of these cycles.
A financial crisis is that brief period in which the gen eral rise of prices culminates and a general fall begins which shatters the credit of some banks, brokers, merchants, and manufacturers. Every crisis is marked by much con
fusion and loss and by hasty efforts of individuals and in stitutions to meet their pressing obligations. Sometimes this process of liquidation goes on quietly; when it becomes a wild scramble, each one trying to save himself, it is called a financial panic. An industrial depression is the period of hard times that usually follows a financial crisis. A business cycle is the period from one crisis to another within which occurs the complete series of price and business changes above and below the average.
§ 3. A feature of a money economy. Financial crises, by their very nature, are confined to communities in which the money economy prevails and where there is a developed state of industry. The periods of industrial hardship in the Middle Ages were connected usually not with the collapse of prices but with political oppression, famine, wars, pesti lence, and scourges of nature. Throughout the lands money was little used and there was no development of credit and of credit prices. The money economy began, as has been noted, in the cities. As the use of money spread, as larger commercial enterprises were undertaken, as borrowing and the payment of interest became common, there began to ap pear in city trading circles, on a small scale, the phenomena of the modern § 4. European crises. In Europe financial crises date from 1763 and have occurred at more or less regular intervals since. The common statement that the cycle of a crisis is run in a period of ten years finds only partial support in his tory. The chief crises of the eighteenth century occurred in 1763, 1783, 1793, these dates marking the close of wars of some magnitude. The crises were not widespread or general, but were more marked in England, which was at that time farther developed industrially and in its money economy than other countries. Likewise, thereafter, the crises were of unequal force in various European countries, usually be ing more severe in England, where they occurred in 1803, 1825, 1838, 1847, 1857, 1864-66, 1875, 1890, 1900, 1907, and 1914. These have been attributed to various causes: that of 1825 to over-trading abroad; that of 1847 to railroad-build ing; while that of 1864-66 was attributed to the severe disturbance of the cotton trade and of commerce by the Civil War in America. While in many parts of England the crisis of 1864 was unusually severe, in other countries it was of little moment. Germany, after several years of great speculative prosperity, had a most severe crisis in 1875; while France, although prostrated by the war of 1870-71, losing a large amount of wealth and paying a thou sand millions of dollars to Germany as a war indemnity, es caped a commercial crisis almost entirely at that time.