ii See Vol. I, ch. 38, on abstinence and production. Believers in the glut theory usually condemn efforts to encourage frugality among the masses, calling it the "fallacy of saving." grows faster than wages, wages being fixed, as he believes, by the minimum of subsistence—a theory akin to the iron law of wages. The Marxian socialist's theory of crises is a more complex variety of this type, being connected with the "theory of surplus value," in which the capitalist class is conceived of as gradually appropriating the surplus value produced by the workers until there is no longer enough purchasing power left in the workers' hands to purchase the products of the capitalists' factories.
These views have wide vogue, but they have the same taint of illogicalness as the "fallacy of waste" and the "fallacy of luxury." 12 Both in over-production and in under-con sumption theories, the inequality of demand and supply is looked upon as a general one. There is supposed to be not merely an unequal and mistaken distribution of production, but a general excess of productive power. Such theories overlook the fact that an income, either of money or of other goods, coming even to the wealthiest, will be used in some way. It may be used either for direct consumption or for further indirect use in durable form. Through miscal culation there may be, at a given moment, too many con sumption goods of a particular kind, but the durable applica tions could find no limit until the material world became incapable of improvement; but that day is inconceivable. At the time of a crisis, there is unquestionably a bad appor tionment of productive agents, and a still worse adjustment of their valuations, but these facts should not be taken as proving that there is an excess of all kinds of economic goods.
§ 14. Monetary theories of crises. Another group of theories of crises connects them with the supply of money, either too great or too small. The unregulated issue of bank notes has been assigned as the cause of crises, especially such as those of 1837 and 1857 in America, when bank-note issues 12 See Vol. I, ch. 37, 6 and 9.
greatly contributed to the unsound expansion of credit. The issue of government paper money years before, leading to inflation and speculation, was by many believed to be the cause of the crisis of 1873. The reverse view is taken by the advocates of a cheap and plentiful money. They say that these crises were caused, not by the expansion but by the con traction of the money stock; for example, not by the inflation of prices through the issue of greenbacks in 1862 to 1865, but by the contraction of the currency from 1866 to 1873.
There is only a fragment of truth in these various views. If it may be said to be "lack of money" at the moment of a crisis that is the immediate cause of particular failures and losses, it is "money" only in the figurative sense of credit and immediately available purchasing power. The question is, whether in any reasonable sense it can be said that it was lack of a circulating medium before the crisis that brought it on. There is no support for this view, except
in the rare case when the money standard is undergoing a rapid change, as in the United States from 1866 to 1873, and the statement then needs much modification and explana tion. The monetary theories of crises are a bit nearer to the truth than are those of the over-production type, for a crisis is always connected with prices and credit. But it is clear that these rhythmic price changes occurring in the business cycle are not due to the same causes as are the general movements of the price level, due to an increasing or decreasing output of gold or again to a paper-money in flation. Statistics show that, while a general price level is slowly changing like a tidal movement, the effect of the rhythmic business cycle appears now in hastening, now in retarding, the changes in the price level.
§ 15. Capitalisation theory of crises. Here, as repeat edly above, we verge upon a different type of explanation of the crisis—one of a psychological nature. The quantity of money, we have seen, affects prices more or less, according as credit is more or less used in connection with it. Money plus confidence has a larger power of sustaining prices than money without, or with less, confidence. And throughout the busi ness cycle the amount of confidence, expressed in such ways as the readiness to grant credits and in the easy extension of the time of collection, is constantly changing. Over-con fidence at one time is suddenly followed by widespread lack of confidence. This has led some to say that lack of con fidence is the cause of crises. This is true, but does not ex plain what is the real cause of this lack of confidence, which, when the crisis comes, is not mere unreasoning fear that needs only to ignore the danger to banish it. Might it not just as truly, if not more truly, be said that the cause is over-confidence in the period preceding the crisis? The essential characteristic of a crisis is the forcible and sudden movement of readjustment in the mistaken capitaliza tion of productive agents. Capitalization runs through all industry. The value of everything that lasts for more than a moment is built in part upon incomes that are not actual, but expectative, whose amount, therefore, is a matter of guess work, or "speculation." 13 Many unknown factors enter into the estimate of future incomes. The universal tendency to rhythm in motion (material or psychic) manifests itself in an overestimate or underestimate of incomes and of every other factor in value. This is emphasized by a psychological factor called sometimes the "hypnotism of the crowd" and sometimes the "mob mind." Most men follow a leader in investment, as in other things. The spirit of speculation grows until often it becomes almost a frenzy, and people rush toward this or that investment, throwing capitalization in some industries far out of equilibrium with that in others.