UC-NRLF
SB flfl uq ?
LIBRARY
OF THE
UNIVERSITY OF CALIFORNIA.
Class
A NEGLECTED
POINT
IN CONNECTION WITH CRISES
By
N. JOHANNSEN
NEW YORK
THE BANKERS PUBLISHING CO.
1908
Copyright, 1908
By N. JOHANNSEN
Of
OF
INTRODUCTORY
The black central field and the
red ring, together, represent the
country's money supply; consist-
ing partly of coin, or certifi-
cates backed by coin; partly of
bank notes; and partly of bank
money (deposits in commercial
banks, "money in bank").
The black central field repre-
sents such of the country's cash
funds as are available for in-
vestment, or for lending pur-
poses; the red ring, all cash
funds not sq available and all
other money in the country. The
lines between the centre and the
ring show the movements of
money in connection with the
processes of saving and invest-
ing; the wider the lines, the
greater the values they repre-
sent
The f Money Market (central
field) is fed principally by the
red lines, savings, which carry
funds from the ring to the
centre; it is drained by the
black lines, which carry the
money back from the centre to
the ring. Most of the black
lines, but not all of them, rep-
resent investments.
The red ring shows, by means
of the large arrows, the circu-
lation of money in the regular
course of business. It is divided
into two sections, pink and
carmine. The latter represents
the money that happens to be,
at a given moment, in the
people's possession in the shape
of income: money available for
expenditures and for buying
commodities (Purchase Money).
The pink section represents
money neither available for
-*
Showing the Giro
G> as affe
G S AND
<fl o
Ui
15 A- Mercantile Investments
(Extensions)
For Explan;
1
ation of Money
ted by
ra^-
INTRODUCTORY
CONTINUED
spending nor for investment,
being needed by business men for
carrying on their regular busi-
ness.
Whenever "Purchase Money"
(Income) is expended in the
purchase of commodities, say of
a hat costing $2.50, it leaves the
carmine field and crosses the
"Purchase Line" (which see),
becoming Business Money in
the hands of the hatter. When
he replenishes his stock and new
goods are being made, that
amount will be split up as fol-
lows: the retailer retains $1.00
as his profit; the wholesaler
25c. ; the hatmaker, 6sc. ; the
manufacturers of the raw
material soc. ; the transporters
loc. Thus the Purchase Money,
after passing the Purchase Line,
will, in its course around the
pink circle, reach in turn the
retail dealer (lower left), the
wholesale dealer (upper left),
the manufacturer (upper right),
the manufacturer of material
(lower right) each of these
parties retaining a portion as
income (wages or profits)
until the whole of the money in
its course around the circle has
passed the Income Line (which
see) and becomes income again.
The central field is small,
compared with the pink field;
so are the funds of the Money
Market, compared with those
employed by business men. It
should be well understood that
the former are available for in-
vestment, but the latter are not ;
they have already found invest-
ment in the shape % of liquid
capital needed in business.
n see Page 34
DIAGRAMS
SHOWING HOW CERTAIN LINES OF THE CHART
ARE AFFECTED BY A CHANGE OF CONDITIONS.
FIGURES CONJECTURAL.
Diagram I.
Diagram 2.
Diagram 3.
DIAGRAM 1 shows Line 11, with its branches, the same as in
the Chart; also Line 17. It is intended to represent the conditions
in the United States at a time of great prosperity ; for example, such
as prevailed in 1900. Practically all of the Net Savings (No. 11),
put down at three billions per annum, became useful Capitalistic
Savings (No. ii B), finding employment in Capitalistic Investments
(not shown in the diagram). Only a nominal share of the Net
Savings became Impair Savings (No. n C) ; these effected tfieir
return flow from the Money Market (the black field) in the shape
of Impair Investments, represented by Line 17.
DIAGRAM 2 is intended to represent the same lines as diagram
I, as they would appear when affected by a year of depression, such
as prevailed in 1894. The Net Savings (No, ir) have fallen from three
billions to two billions. And of this amount only one billion (No.
II B) finds useful employment in Capitalistic Investments, while the
other billion represents Impair Savings (No. n C), leading to Impair
Investments as represented by Line 17.
DIAGRAM 3 is intended to represent these lines in an unpro-
gressive country, like China. The aggregate of Net Savings (No. n)
is but small, and consists almost entirely of Impair Savings (No.
ii C) ; so the line of Impair Investments, No. 17, is practically equiv-
alent to the line of Net Savings, No. ii. The useful savings, No.
ii C, put down ^as "nominal," are insignificant, our premise being
that the country is unprogressive, and no increase of wealth taking
place.
SYNOPSIS.
"Lack of demand" is the characteristic feature of
crises and depressions, especially of the latter; lack of
demand for working forces 6 as well as for commodities.
The cause of this lack of demand, at times of depres-
sion, is practically unknown. Some economists have
tried to connect it with the saving process 1 . If a man
earns $1,000 and spends only $900, he will create a short-
age of demand to the extent of $100, and unless this
shortage were counteracted, we would here have a clear
case showing how the "lack of demand" is introduced
into our economic system as a positive and definite
element.
Our economists hold that such counteraction takes
place whenever the savings funds 1 come to be invested.
In the course of the investment they are finally expended
for goods or commodities. Thus, if the said amount of
$100 be applied towards building a house and be paid out
in the shape of wages to the builders, the latter will ex-
pend the money in buying the commodities they need.
This constitutes a demand to the extent of $100 ; not only
for goods, but also for such working forces 6 as produce
the goods, or, as it were, reproduce them. This demand
fully compensates for the original shortage of demand
caused by the saving activity a process which can easily
be traced.
But will such compensation also take place where
the savings funds find no opportunities to be invested in
enterprise and new constructions? 3 At times of depres-
sion such opportunities become scarce and the funds have
to follow a different mode of investment which is hard to
trace. Our economists maintain, that even then a com-
207679
ii Synopsis.
pensation is effected. They point to a very peculiar
phenomenon which can always be observed at such times,
namely : the savings funds which constantly flow into the
money market do not accumulate there (except to a small
extent) but find their way back into the channels of pro-
duction and trade. They cannot get back into these chan-
nels without buying goods or commodities in some shape
or other. If they do, they create a demand, not only for
goods, but also for working forces. The demand v thus
created by the expenditure of the said $100 will be fully
as large as the original shortage of demand ($100) caused
by the saving activity.
From these facts, undeniable as they are, our econ-
omists have drawn the conclusion that the saving activity
cannot result in a real shortage of the demand, provided
the savings funds be promptly invested. This conclusion
has been universally accepted as correct and has prac-
tically become an axiom in modern economics. Still, it is
not reliable.
The conclusion loses sight of a certain eventuality. In
ordinary business each participant (working-man, trader,
capitalist, &c.) furnishes both supply and demand. If A
supplies goods or services to the C9mmunity worth $100
(or draws income from the community in any shape), he
subsequently will buy a hundred dollars' worth of goods
from the community ; either he or his family. Just so
with B. Ordinarily, therefore, two sets of working forces,
A and B, will furnish two supplies and two demands. At
times of depression, however, we often find only one
supply and one demand between the two sets of working
forces, some of the individuals producing without con-
suming others consuming without producing, their ser-
vices being left uncalled for. This leaves part of the
working forces without employment and will disturb the
Synopsis. iii
equilibrium between the demand for working forces and
the supply thereof.
Such unemployment always occurs whenever savings
funds are invested in that peculiar manner which char-
acterizes times of depression ; the saving process then as-
suming its " Impairing Form." Exactly how the invest-
ment takes place at such times has never been explained
by our economists, the subject having escaped their at-
tention. It will be revealed in this present treatise. And
it will be shown that, though the savings will finally be
turned into goods and commodities, and though this will
give employment to working forces, yet unemployment is
bound to intervene before this result is reached; unem-
ployment as well as "lack of demand," both due to the
saving process.
Once we comprehend the dual nature of the saving
process stimulating business at one time and depressing
it at another we shall not only get a clearer view of the
causes underlying depressions but will also know in which
direction to look for the remedy.
CONTENTS.
CHAPTER I.
THE APPARENT CAUSE OF CRISES AND
DEPRESSIONS 1
CHAPTER II.
HOW ARE SAVINGS INVESTED AT TIMES OF
DEPRESSION? 11
Do they accumulate in the Money Market ? . . . 14
Do they go into Temporary Investments ? . . . . 16
Do they become Liquid Capital? 18
Are they absorbed when used for paying
debts? 20
Are they used to relieve over-strained
credits ? . . 22
Do they serve to increase the expenditures for
commodities ? 26
Are they used for the creation of "unpro-
ductive capital"? 27
Do they find investment in the purchase of
mortgages, securities, etc. ? 28
Do they go abroad ? 28
Do they fall off in the same proportion as the
opportunities for new constructions fall off? 30
Recapitulation 32
CHAPTER III.
THE INVESTMENT OF SAVINGS AT TIMES OF
DEPRESSION 34
Explanation of the chart 34
Impair Investments 38
vi Contents.
Basic Calculation 40
Impoverishment of the masses 42
How is the impoverishment brought about ? . . 43
Multiplying Principle 43
The impoverishment of "others" the basis for
the investment of Excess Savings 47
Recapitulation 52
CHAPTER IF.
VARIOUS DEPRESSION THEORIES 55
Lack-of-funds theory 55
Excessive profits 66
Disproportions between economic factors. ... 69
Summary 76
v
CHAPTER V.
THE "NEGLECTED POINT" AS THE TRUE
CAUSE OF DEPRESSIONS 77
CHAPTER VI.
PROS AND CONS 89
Investment demand not necessarily a demand
for working forces . . . 89
The three phases of the saving process 92
Tables showing Debit and Credit of Supply
and Demand 96
Are the nations of greatest saving propensity
the wealthiest? ' 100
Interest as indicative of a demand for cash
capital 106
Interest as indicative of a need of money 107
Why the demand for working forces should be
measured in terms of money 108
The purchase of commodities as rewarding
past labor 109
Contents. vii
Squandering 110
Other forms of investment, besides the Cap-
italistic and the Impairing 113
The extent of the country's saving power. . '. . 114
A positive proof of the existence of Impair
Savings 118
Recapitulation ' 123
CHAPTER VII.
VARIOUS FACTORS AFFECTING PROSPERITY 126
The money supply 126
Industry 130
Enterprise 131
Foreign trade 133
Minor factors 137
CHAPTER VIII.
RECENT UPS AND DOWNS OF PROSPERITY
IN THE UNITED STATES 139
Causes of the Panic of 1893 140
Leading features of the Panic of 1893 and of
the subsequent depression 141
The Return of Prosperity 145
Complications due to Foreign Trade 147
Relative Scarcity of Currency 150
Unhealthy Basis of the Bank Money 154
Excessive Volume of Bank Money, yet a
Dearth of Cash Capital 156
Causes of the Dearth of Cash Capital 158
Inflation and Depreciation 160
Inflation the moving factor 161
The Panic of 1907 163
The Subsequent Depression 165
What of the Future? 168
In Conclusion. . . 171
viii Contents.
CHAPTER IX.
SUMMARY OF THE FOREGOING 175
A brief review 175
The three degrees of business activity 180
Economic fallacies 184
Once more, the "Neglected Point" 190
EXPLANATORY NOTES.. 192
A NEGLECTED POINT
IN CONNECTION WITH CRISES.
CHAPTER I.
THE APPARENT CAUSE OF CRISES
AND DEPRESSIONS.
(The small figures throughout the book refer to Explanatory Notes
at the end of the volume.)
MODERN economists make a sharp distinction be-
tween crises and depressions, the one designating
the shock which marks the end of a reign of
prosperity, the other the period of stagnation in trade
which follows. In common usage, however, when we
speak of a crisis, such a distinction is not made, and a
theory purporting to throw new light on the subject is
expected not to confine itself to the initial stage, the
crisis proper, but to deal largely with the subsequent
depression of business a usage which has been adhered
to in selecting the title of this book. In fact, the "ne-
glected point" which I am going to reveal is primarily a
factor connected with depressions. At times, however, it
has also been the governing factor in developing a crisis.
Despite the common usage of treating crises and
depressions as practically one and the same thing, we
are justified in distinguishing between the two, for there
is a radical difference not only in their outward manifes-
tations but often in their origin. Our economists have
hardly gone far enough in this respect. They have
The Apparent Cause
dwelt much more upon the difference" in the manifesta-
tions than upon the difference in the underlying causes.
Indeed, the more important crisis theories now Qxtant
assume practically one and the same fundamental cause
as governing both crises and depressions. Let us see
if this assumption can stand scrutiny, and let us inquire
into some of these theories in order to ascertain how far
the apparent cause of the one will answer to explain the
phenomena connected with the other.
The theory most widely accepted holds that a crisis
must be attributed to overtrading, too much specula-
tion, extravagance, etc., these various causes absorbing
too much of the country's cash capital; and that a^ period
of restriction in enterprise and of retrenchment in ex-
penditures must follow to allow of building up fresh
funds of liquid capital. This theory, no doubt, is capti-
vating on account of its simplicity and apparent common
sense. It seems plausible that inasmuch as the crisis is
marked by a decided money famine, and inasmuch as
before the setting in of the crisis there must have been
an exhaustion of the country's cash capital, a period of
repose and of commercial depression becomes necessary,
to permit of recuperation. So it is the dearth of cash
funds, occasioned by overtrading, etc., which really would
stand as the cause of both of the crisis as well as of the
depression. But do we not here encounter an absurdity?
Can the dearth of cash funds be the cause of the depres-
sion where as a matter of fact there is no such dearth
while the depression exists and where, on the contrary,
we witness an excess of idle cash funds? To get around
this difficulty the theory had to be enlarged by taking in
a new element the loss of confidence incident to the
panic and continuing during the subsequent depression,
in consequence of which merchants and manufacturers
do not carry on trade and enterprise to the same extent
of Crises and Depressions.
as formerly. This new element, however, does not cover
the point either, for confidence is really not lacking and
would manifest itself at once wherever an opportunity
for a profitable undertaking would offer itself. The fact
is, such opportunities are scarce, owing to the prostrate
state of trade and the lack of demand; and this lack of
demand, which forms the gist of the depression, is neither
explained by the loss of confidence nor by the scarcity of
cash funds which originally engendered the crisis. The
" lack-of-f unds " theory, therefore, though fully explain-
ing the setting in of a crisis, and thus accounting for the
initial stage of a depression, will not explain why the
depression should continue for years in succession. A
depression may be started by a lack of funds and a loss
of confidence; but if it were dependent only upon these
two factors, it ought to disappear as soon as these two
factors disappear. When the scarcity of cash funds
gives place to a plethora, and when the general distrust
ceases, the cash funds coming forth from their hiding-
places, ready to engage in any promising undertaking,
then those two factors which started the depression exist
no longer, and the depression itself should cease. And
as it does not do so, there must be some other factor
at work not covered by said theory.
The latter, therefore, though accounting for the \
phenomena of a crisis, does not account for the phenom-
ena of the depression.
Another theory, more in accord with the facts, has of
late years found many adherents. It hinges on the
investment process, and is based on the observation that
wherever that process leads to new constructions and to
the creation of new productive capital and wealth, the
degree of business activity, and therewith of prosperity,
bears an almost exact proportion to the extent of such
new constructions. Thus, the continuous avalanche of
The Apparent Cause
new undertakings and extensions as witnessed in the
United States in the years 1905, 1906 and 1907 was
coupled with an unprecedented degree of prosperity;
ten or twelve years ago, when new enterprises were
launched only to a limited extent, business languished;
and if we extend our inquiry to unprogressive countries,
like China and India, where there are practically no new
constructions beyond the replacements necessary to keep
up the status quo, we shall find a chronic stagnation of
trade accompanied with great poverty of the masses.
Wherever we look, we find almost invariably a close
proportion between the degree of business activity and
the extent of new constructions and enterprises. The
funds required for the latter are furnished principally
by the saving process the savings and surplus earnings
of individuals all over the country. So long as these
savings 1 are invested in new constructions and enter-
prises, they will give employment and income to the
working men and business men engaged in these new
constructions, and by means of the well-known process
of action and reaction the activity created in these
special lines of business will spread to other lines and
stimulate demand and activity also among all the nu-
merous trades which are engaged in the broad field of
production of commodities resulting in general business
prosperity. But if the savings are not so invested they
can not give employment to the working men and busi-
ness men ordinarily engaged in new constructions, and
the lull thus originating in the building lines will react
upon general production and trade, and engender a
depression.
The foregoing theory, so long as it goes no further
than developed above, is undoubtedly correct, and has
been accepted by most of our economists, to that extent.
But the disagreement begins when considering the ques-
of Crises and Depressions,
tion, What hinders the savings 1 from continuing to be
invested in that beneficent way, i. e., in new construc-
tions 3 and enterprises? Many explanations, differing
more or less from each other, have been put forth to
answer that question.
Judging this question from my own point of view, I
can state two specific causes for the stoppage of new j
constructions, the one the very opposite of the other: (
first, The extension of new constructions, like railroads,
factories, houses, etc., may have been carried on to such f
an extent as to satisfy the demand for this kind of
capital goods for the time being, thus causing a scarcity
of opportunities for investment in this direction; sec-
ond, the demand for new constructions may become so
insatiable as to exhaust the funds of the money market
and over-strain the credit facilities of our financial in-
stitutions.
The first-mentioned cause became operative with us
in 1903 and 1904. In the years immediately preceding,
lavish expenditures had been incurred in all sorts of
new constructions, or in the extension of old ones,
bringing the country's productive power up to a standard
much beyond anything previously known, so much so
that the demand for productive capital seemed to be
satisfied for the time being. In consequence, the pace
of new constructions slackened. The trades engaged in
new constructions began to suffer, notably the iron and
steel trade, and, by means of the well-known process of
action and reaction, the dullness in the one line of trade
created dullness in most other lines also all due to the
primary cause that the undertaking of new constructions
was checked through the abundance of productive capital
(railroads, factories, etc.) already in existence.
The second of the two causes above mentioned may
seem paradoxical, namely, that an excessive, insatiable
The Apparent Cause
demand for new constructions should engender a lull of
that demand. But the process is not difficult to under-
stand. An excessive amount of new constructions will
absorb an excessive amount of cash capital and will cause
a stringency in the money market, so much so that the
latter is constantly kept on the verge of a general col-
lapse. If on top of this stringency anything should
occur that shakes confidence, all entrepreneurs will take
flight at once, and the rush for new constructions will
suddenly change to the contrary. If it does, the final
result will be the same as in the former case, namely,
a lull in new constructions. As soon as this lull sets in,
the working forces 6 ordinarily engaged in creating new
productive capital and wealth are thrown out of employ-
ment, and the loss of income and of buying power on the
part of these forces will react upon the forces engaged
in the broad lines of production and trade, and engender
the depression. Then a new factor sets in. While before
the crash the country's productive capital was not large
enough to fully meet the great demand for commodities,
it is now too large for the reduced demand, so the stim-
ulus for new constructions ceases. Thus we arrive at two
factors causing the depression, first, the loss of confi-
dence; second, the shrinkage of the general demand, due
to the lull in new constructions. The ' one factor initiates
the depression, the other gives it continuity. The one
ceases to operate after the panic is over; the other oper-
ates as long as the depression lasts, generally for years
in succession. This being so, it is evidently the second
1 factor, the lull in new constructions, which must be con-
sidered as the real basis of the depression. And it should
<be noted that this factor is entirely different from the
one which originally gave rise to the crisis.
The foregoing will explain how a stagnation in busi-
ness may be brought about by either one of two factors.
of Crises and Depressions.
the one the very opposite of the other a lull in the
demand for new constructions on the one hand, and an
excessive, insatiable demand for such on the other. In
either case we arrive at the same final result, namely, a
check to enterprise and to new constructions the very
thing which, according to the view of most economists,
forms the governing factor of all depressions.
This view, however, that the degree of business
activity largely depends upon the extent of new con-
structions that happen to be under way for the time
being, is not exactly shared in by all of our economists,
some of them holding that it looks like putting the cart
before the horse. According to their view the demand
for new productive capital and for new constructions,
such as we witness in seasons of booming business, must
be attributed to the great demand for commodities, this
being the governing factor; not that the heavy demand
for commodities should be brought about by the great
extent of new constructions under way. The fact is, we
have here a case of reciprocal action. An augmentation
in the rate of new constructions brings with it an aug-
mentation of the country's business activity; and an
increase in this activity, in turn, will increase the demand
for new constructions; the one factor constantly invig-
orating the other. The governing factor, however, and
the one that starts this reciprocal action, must be found
in enterprise and new constructions. Suppose a railroad
be built in an unprogressive country like China; this
will give employment and income to many persons who
would otherwise remain idle; these persons, when ex-
pending their income for commodities, give employment
to other people, those who produce these commodities,
and these people in turn, when expending their earnings,
will furnish employment to still others, and these again
to others, thus giving rise to a chain of action and re-
The Apparent Cause
action resulting in an enlargement of the community's
total business activity all of this being due to the
building of the railroad.
It seems hardly necessary to adduce further argument
to prove how largely prosperity depends upon this im-
portant factor: enterprise and new constructions. All
experience confirms the fact that wherever the country's
savings and surplus earnings are promptly invested in
this direction, there business will be active and labor
well employed. And experience equally confirms the fact
that wherever that all-important factor is dormant, there
depression prevails. Such being the case, we are evident-
ly justified in concluding that the theory is correct which
L/(/ holds that the subsidence of enterprise and new con-
structions, and the causes (whatever they may be) to
which the subsidence is due, must constitute the true
source of the depression.
This theory seems quite plausible, being sustained
by logic as well as by the facts. Nevertheless, it does
not cover the ground. It gives only the apparent cause
of depressions, not the real one. While we can take it
for granted that the presence of the above-named factor,
enterprise and new constructions, will stimulate business
activity and prosperity, it does not necessarily follow
that its absence must entail depression and stagnation
in trade.
There is a flaw in the theory. It does not sufficiently
consider the question as to what becomes of the country 's
savings and surplus earnings if they are not invested in
enterprises and in the creation of new productive capital
and wealth. Why do they, in that case, fail to stimulate
trade and prosperity? If they were not invested at all,
they would accumulate in the money market, to an im-
mense aggregate, which as we know is not the case.
They are evidently invested nearly as fast as they accrue.
of Crises and Depressions.
And in the course of such investment they return into
the channels of general trade, finally becoming scattered
in the purchase of commodities. Why does not this sort
of investment stimulate prosperity as well?
Let us clearly define the point at issue. If the coun-
try's savings and surplus earnings become invested in
new constructions, they give employment to a certain
class of working forces 6 , and business prospers; if in--
vested in a different way, why do they not give employ-
ment to some other class of working forces, and why do
we see, on the contrary, a general lack of employment?
If we could point out the reason why, in the latter case.
their investment does not give employment to working
forces, might we not fairly hope to obtain new light on
the subject of depressions?
Let us follow up this question. "We may arrive at
conclusions which shall show the existence of a factor,
heretofore unknown, that is responsible for the unem-
ployment and the lack of demand prevalent at times .of
slack business.
The factor considered by many present-day econo-
mists as all-important in bringing about a stagnation
in trade the subsidence of enterprise and of new con-
structions is only the apparent cause of depressions. A
'factor more potent than this has escaped their attention.
Once we understand the nature of this hidden factor and
find means for checking its activity, enterprise and new
constructions may practically come to a standstill, and
yet business would prosper.
In the foregoing, as well as in what follows, attention
has been given primarily to the subject of Depressions,
rather than to Crises. The latter are not so difficult to
10 The Apparent Cause of Crises and Depressions.
understand, in fact their cause is generally well known,
so it would be unprofitable to enlarge upon their dis-
cussion. Not so with depressions. Their origin is still
so much enveloped in mystery as to justify the conclusion
reached above, that there must be factors at work whose
existence has heretofore remained unsuspected.
CHAPTER II.
HOW ARE SAVINGS INVESTED AT
TIMES OF DEPRESSION?
MOST economists hold that in times of depression
the savings and surplus earnings of individuals,
then accruing, will largely remain in the money market 4 ,
staying there, for years in succession, in the shape of
"liquid capital."
Is this view consistent with the facts? When consid-
ering the stupendous annual aggregate of savings made
in a country like the United States, the retention of any
large portion thereof in the money market would repre-
sent a huge sum, entirely out of proportion to the amount
of liquid capital actually found there at any one time.
When further taking into account that every year of
depression ought to increase that huge sum and ought
to add to the stock of idle cash funds, while no such in-
creases are revealed by the actual trend of the money
market, the above view seems to be quite untenable.
The behavior of the money market, far from showing
a growing accumulation of liquid capital at such times,
will rather impart the impression that the savings funds
flow out about as fast as they flow in, and that a steady
absorption of these funds goes on, nearly as fast as at
times of prosperous business. True, they are not invested
in the field legitimate for savings funds, i. e.. in the for-
mation of additional wealth or capital goods, such as
railroads, houses, factories, etc., for there is but little of
this kind of capital 2 built up in times of depression. But
they are surely absorbed in some way.
How this absorption is taking place ; how those funds
12 How Are Savings Invested
can be invested and transformed into capital 2 without
the concurrent creation of new capital this subject,
though of vast practical importance, has not received the
attention which it deserves.
Let us, first of all, form an idea of the approximate
extent of the country's saving power.
Between the years 1890 and 1900 the wealth of the
United States increased about 23 billion dollars, or 2,300
millions per annum. Considering that during the four
years of depression from 1893 to 1897 the accumulation
went on at a slower rate, the increase must have aver-
aged, for the remaining six years of the decade, as much
as three billions. In the recent highly prosperous years,
since 1900, it may have averaged not less than four bil-
lions.*
Of the latter amount we may safely assume as much
as three-fourths to represent savings, i. e., surplus earn-
ings;! and we thus arrive at a total of, say, three billions
per annum as approximately representing the country's
saving power.
~ '*'*'*'
Having thus approximated the saving power, let us
see to what extent these savings can find investment in
* A recent Government publication states the increase of the
country's wealth for the four years 1900 to 1904 to be about 19 bil-
lions almost 5 billions per annum.
t Not all of the country's annual increase of wealth represents
surplus income. Part of that increase is the result of appreciation of
property, due to a rise in market value; another part may be the re-
sult of personal efforts, for instance, where a farmer improves his
property by his own toil. If we figure the increase of wealth re-
sulting from these and other sources to be one-fourth of the tdtal
increase of four billions, this would leave three billions to represent
the wealth derived from surplus income.
All of these figures are guesswork and on that account may not
be considered a reliable basis on which to build up an important
economic principle. Still, if they are only roughly correct, they an-
swer the purpose of this discussion. Exact figures are neither avail-
able nor necessary.
A further discussion of this subject will be found in the footnote
on page 115.
at Times of Depression? 13
the creation of new wealth (i. e., in new constructions)
at a time of prosperity and again at a time of depression.
It is well known that under prosperous conditions prac-
tically all of the savings are so invested. Taking this for
granted we would arrive at the following equation:
Saving power of the people, per annum $3,000,000,000
Savings invested in building up new capital, or in cre-
ating additional wealths, per annum 3,000,000,000
Now, suppose a period of depression sets in, equally
severe as the one witnessed in the years 1893 to 1897.
Our capitalists will not go then into new enterprises to
such an extent as they did of late, and will not continue
to build up new capital at the rate of three billions a
year ; perhaps not even at the rate of one billion. Assum-
ing the latter amount to be sufficiently near the correct
figure, and assuming further that the people's saving
power will be reduced by as much as one billion dollars,
owing to the depression, our equation would be changed
as follows:
Saving power of the people UNDER FAVORABLE
CIRCUMSTANCES, per annum, same as above $3,000,000,000
Saving power, at a time of depression, reduced to, say 2,000,000,000
Savings actually invested in building up new capital,
per annum 1,000,000,000
At times of depression only a part of the people 's sur-
plus earnings can still be employed in the creation of
wealth ; according to the above equation only one billion
out of two billions of savings. What becomes of the bal-
ance?
That balance, whatever it amounts to, is by no means
barred from finding profitable investment, and is surely
turned into capital 2 . Evidently, if one field of invest-
ment becomes closed, another one opens. But how this
is done; how savings can be turned into capital without
at the same time forming new capital, this question has
not so far been treated in a conclusive manner.
A number of theories have been advanced to explain
14 How Are Savings Invested
what becomes of savings funds in times of depression.
Let us review these explanations, including the one al-
ready referred to, and let us see whether they can stand
scrutiny.
EXPLANATION NO. 1 If savings do not find im-
mediate employment, they will find it later on, after the
depression is over; the final investment, such as leads to
the formation of new capital, being simply deferred, and
the savings meanwhile remaining in the state of " liquid
capital. ' ' Thus they provide part of the cash funds needed
at the time of subsequent recovery in trade. For instance,
the savings made during the years of depression from
1893 to 1897, so far as not absorbed at the time, consti-
tuted part of the cash capital which was utilized later on
for the numerous enterprises launched at the time of the
ensuing "boom".
REPLY. If the savings made between 1893 and 1897,
or a large part of them, were really left unabsorbed for
the time being, where were they to be found? Did they
stay in the money market? 4 As is well known, savings
gravitate toward the latter, appearing there as employ-
ment-seeking funds. But even if only one billion dol-
lars per annum, i. e., only one-third of what the savings
at the present prosperous time (1907) amount to, had
stayed in the money market in the shape of "liquid capi-
tal seeking investment," a four years' accumulation
would have amounted to four billion dollars of idle cash
f funds, a sum larger than the whole supply of money in
the United States. As a matter of fact, the money mar-
ket took an entirely different turn. If we take the sur-
plus funds of the commercial banks as a gauge by which
to judge the amount of unemployed cash capital extant,
we find indeed that a moderate accumulation took place
soon after the panic of 1893 had set in, amounting to a
at Times of Depression? 15
few hundred millions; but this accumulation gradually
disappeared, so that around 1897 hardly any of it was
left showing that all surplus earnings had been absorbed
in the meantime. Do these facts confirm the above " Ex-
planation"?
It may be held that the course which the money mar-
ket took during those years of depression in the United
States was exceptional, and that in other periods of de-
pression the superabundance of liquid capital has been
more pronounced. But the principal sign which naturally
ought to accompany the steady accumulation of savings
funds, viz., the constant growth of unemployed cash
funds in the money market, augmenting from year to
year while the depression lasts, has never been observed.
As a matter of fact the general drift of the money market
has not varied much in other depressions, whether in
Europe or America, from the course above described. And
in none of them has there been an accumulation of funds
at all commensurate with the vast amount of savings
which flowed into the money market and were not ab-
sorbed in new enterprises, and which according to Theory
No. 1 should have accumulated there.
Much has been made of the fact that the rate of in-
terest shows a tendency to decline in periods of depres-
sion, thus betraying a greater pressure of cash capital to
find employment. This pressure no doubt exists; but to
deduce therefrom, or from the declining rate of interest,
(the cause of which will be explained in a subsequent
chapter) that there must be exceptional accumulations of
cash funds, although statistics fail to reveal them, is an
unwarrantable conclusion. If such idle cash funds, run-
ning into billions, really existed, they would first of all
appear in the commercial banks. But inasmuch as the
weekly bank statistics disprove the existence of these
huge idle funds. Theory No. 1 cannot be true.
16 How Are Savings Invested
EXPLANATION NO. 2. The surplus earnings find
temporary employment, say in the shape of loans, and
in many other ways, until the return of activity in trade
ushers in a new demand for liquid capital, and opens up
opportunities for permanent investment.
REPLY. It would not be an easy matter to point out
many instances where surplus earnings, or, as it were, the
cash funds representing them, find investment of a merely
temporary nature. In most instances the supposed tem-
porary investment will either prove to be a permanent
one, or will prove to be no investment at all, so far as the
funds as such are concerned. A real, genuine investment
of cash funds will lead them to be split up into hundreds
of fragments; they will go in payment for goods or ser-
vices, will lose the character of cash capital, and will
leave the money market. If they do that, they generally
have found permanent investment. If they do not come
to be scattered, they most likely have found no invest-
ment at all, but have only changed owners a subject
which will be treated more fully further on. (See ''Ex-
planation No. 8.")
Let us analyze a case of what may seem to be a tem-
porary investment. Suppose A saves $1000 and lends the
money, for the term of one year, to B, who uses it to
extend his factory. When so employed the money is
turned into "fixed capital" and, though loaned out tem-
porarily only, is permanently invested. By the end of
the year B will not be able to return the money, except
with the help of new savings, or with the help of fresh
funds procured elsewhere. He may have saved up that
amount of $1000 himself in the meantime; but then the
money returned to A represents B's savings, not A's any
more ; or he may make a new loan elsewhere, and procure
the money from C, to pay off A; then the amount repre-
sents C's or somebody else's savings. In either case the
at Times of Depression? 17
original funds saved up by A remain permanently in-
vested in the factory.
Just so with the great majority of all other invest-
ments, such as may seem to be of a temporary character.
Take, for instance, the investment of such funds as are
loaned out by the commercial banks of New York to the
business community of that city, aggregating more than
a billion dollars. Each of those bank loans is of a tem-
porary character, and one should think that the invest-
ments for which the funds are used by the borrowers
must likewise be of a temporary character. But as a
matter of fact, those bank loans represent, in their en-
tirety, a permanent investment. The repayment of the
individual loans is rendered possible only by the constant
issuing of new loans; though not to the same party,
still to the community. As soon as the banks try to re-
strict the aggregate of their loans, they meet with great
difficulty, for the money needed to repay the maturing
loans is not in existence.* That billion dollars, therefore,
though seemingly consisting of "liquid capital," turns
out to be permanently invested by the business com-
munity, and, broadly speaking, no part of it can be re-
* The money is not in existence! This is true, despite the fact
that the funds loaned out by the commercial banks are generally re-
deposited with the banks, and therefore not only in existence but
seemingly within their reach. We have to bear in mind that the
"money in bank," i. e. the fictitious money represented by bank
credits, is the outcome of loans; so, if there is a bank-credit on the
one hand there is generally a corresponding loan on the other and
the individuals in whose names the bank credits stand are mostly
not those who obtained the loans. Now, if the banks wish to with-
draw part of the credit money extant in order to reduce its volume
they can not withdraw it from the individuals in whose names the
credits stand but must have recourse to those to whom they made
the original loans and since these individuals borrowed the money
to invest it in their business, buying either fixed or circulating capi-
tal with it, they are no longer in possession of same. These indi-
viduals can maintain their solvency only by constant renewals of
their loans, eventually shifting them from one bank to the other.
But if the banks would try to largely restrict their loans, say by
one-half, and would accordingly refuse to make renewals, many of
those individuals would simply be unable to pay their maturing obli-
gations, and would have to suspend payments. And the banks would
at once find out that the money needed for canceling a large part of
their loans, say a quarter or a half of the total, is not in existence.
See also footnote on page 23.
18 ' How Are Savings Invested
turned for good except by the tedious process of saving
on the part of members of the community.
Outside of the cases here discussed there exist, no
doubt, investments of a really temporary character; for
instance where a man loans out money to help buying or
making season goods, and where the money is returned
after the season is over, and after the goods have been
sold and paid for. Such transactions would be the only
ones that properly come within the scope of "Explana-
tion No. 2 ' '. They are quite limited in extent ; and, what
is more important, they occur oftener at times of great
business activity than at times of depression a fact
which economists will hardly dispute. Explanation No.
2 could stand only if such occurrences were much more
frequent in hard times, so much so as to employ and ab-
sorb a much larger part of the people's savings than is
done in times of prosperity. The reverse being true, Ex-
planation No. 2 proves to be utterly inadequate to show
what becomes of surplus earnings at times of depression.
EXPLANATION NO. 3. Periods of great business
activity drawn heavily upon the "liquid capital" of the
community, so much so as to finally bring about an
almost complete exhaustion thereof. The savings made
in the subsequent period of depression are needed to re-
plenish the fund of liquid capital available for new en-
terprises.
REPLY. The fund of liquid capital can be replen-
ished only by the accumulation of cash funds. As nobody
has so far been able to detect the whereabouts of such
accumulations, which in the course of a few years of de-
pression ought to run into billions if they were to absorb
a large part of the savings, the "replenishing theory"
cannot be substantiated. My replies to Explanations
Nos. 1 and 2 will also apply here.
The very basis underlying Explanation No. 3 is
at Times of Depression? 19
wrong, namely, the assumption that for smooth working
there should always be a large fund of liquid capital ex-
tant, available for new enterprises. Actual facts show
this accumulation to be rather small, at active times as
well as at dull times. As a rule, savings, the source of
that fund, flow into the money market and flow out
again, but they do not stay long enough to accumulate to
a great extent. That accumulation fund will at no time
amount to more than a few hundred millions, so it can-
not take billions and billions to replenish it. If, prac-
tically, there is no fund to be replenished, the "replen-
ishing theory " cannot stand.
EXPLANATIONS NOS. 4 AND 5. Before considering
these two Explanations individually I will say that both
of them refer to the over-straining of credit facilities dur-
ing the period preceding a depression and to the alleged
necessity of a subsequent relaxation. Our discussion of
the subject will be helped if we first reach a clear under-
standing as to the source of credit. There are two dis-
tinct sources. The one (to be treated in Explanation No.
4) comprises such loans as one individual will make to
the other, or as are made by savings banks, life insurance
companies, etc., i. e., by such credit institutions as loan
out no more money than they receive; the funds orig-
inally having accrued from the saving process. The other
source (to be treated in Explanation No. 5) comprises
loans made by the commercial banks, who create new
cash funds of their own, of an artificial nature; bank
notes on the one hand and bank credits on the other ; the
latter being founded on the principle that $1,000 loaned
by a commercial bank to an individual is left by this in-
dividual on deposit with the bank, or, if transferred by
him to other parties, will still remain in the shape of a
deposit with some other bank or banks, and will then be
20 How Are Savings Invested
used by the business community the same as cash funds
("money in bank") though not really consisting of cash.*
Only these artificial cash funds, which have nothing to
do with the saving process, come in under Explanation
No. 5.
EXPLANATION NO. 4. At busy times too many en-
terprises are undertaken "on credit", by incurring debts.
The subsequent time of depression and of "forced
economy" is needed to pay off at least a part of those
debts. During this time the savings of the people are
not employed so much towards creating new productive
capital as towards cancelling the debit obligations previ-
ously contracted.
REPLY. It may seem quite evident that if people want
to pay off their debts, they must save, and that their
savings will be absorbed when paying off the debts. But
the question arises, What will the receivers of the funds,
so paid over, do with them ? Are the funds, as such, really
.absorbed when used for the payment of a debt? Is it not
.true that they merely change owners and remain "funds
available for investment ' ', only in somebody else 's hands ?
If A saves $1,000* and pays this amount to B in cancel-
lation of a debt, B may invest the money in some enter-
prise, just the same as if it had riot previously been used
* This redepositing of the loans constitutes the reason why the
deposits in commercial banks represent part of the country's money
supply, while those put into savings banks do not. Savings banks,
when issuing a loan, part with the money loaned out; the commer-
cial banks do not, broadly speaking. Inasmuch as the funds loaned
out by the commercial banks are redeposited with the banks, they
practically remain cash funds, and are considered as such and used
as such by the business community. Not so with the deposits in
savings banks; these represent, not "funds on hand," but "funds in-
vested"; not liquid, but productive capital.
Just so with the Trust Banks. When confining themselves to
their legitimate sphere, they part with the money deposited with
them, and invest it in securities, the same as the savings banks do.
The deposits so invested should not be considered as part of the
country's money supply.
Of late, however, the Trust Banks have largely gone into the
business of commercial banks, not investing their deposits so much
In the purchase of securities, but loaning them out, subject to check,
the same as commercial banks do. Such deposits, subject to check,
should indeed be counted as liquid capital, increasing the country's
money supply, and are so counted on pages 154, 156 and 164.
at Times of Depression? 21
to cancel a debt. Evidently, if B does so invest the
funds, the latter did not previously find investment by
the act of A paying them over to B; i. e., not by their
being used to pay off a debt. Cash funds, as such, cannot
be considered as having been invested until they are
scattered in the general circulation and cease to be " cash
funds available for investment", and until they leave
the money market. As such is not the case if they are
merely used to pay a debt, the theory set forth in Ex-
planation No. 4 to account for the disappearance of sav-
ings funds from the money market is not substantiated.*
It is true that at busy times (and in fact at all times)
many enterprises are undertaken on credit, one individ-
ual borrowing the funds accumulated by another. It is
equally true that some of the debts thus incurred by in-
dividuals may be cancelled out of savings made by these
individuals during the subsequent period of depression.
But it is not true that such savings funds should be ab-
sorbed and cease to be cash capital when so applied, or
should thereby be withdrawn from the money market.
If nevertheless they disappear from there, they evidently
find an outlet different from the one assigned in Explana-
tion No. 4.
If the assumption were correct that at times of de-
pression the people's savings are more largely applied
* It may seem that we should not only consider the act of pay-
ing the debt but also the question as to what the payee does with
the money afterwards. Let us take some examples. Suppose he uses
it for building a house. If so, the funds would find investment in
creating new wealth: while in this chapter we are discussing the
question how they can find investment without the creation of new
wealth, the fact being that at times of depression (such as we are
now considering) the opportunities for the creation of new wealth
are quite limited. Suppose he squanders the money. Then an in-
vestment does not take place at all, and again we gain no clue as
to how surplus earnings are invested in times of depression. This
latter point is the only one we are considering in this chapter, and
in the text above we are specially considering the question whether
the act of repaying a loan constitutes an investment of the money
so paid over. We are not discussing the broad question as to what
may possibly be done with the money after it has been used for re-
paying a loan.
22 How Are Savings Invested
toward paying off debts and canceling loans, this ten-
dency should manifest itself in the case of savings banks
and insurance companies. The loans they had issued be-
fore should be largely paid back to them and they should
be at a loss as to what to do with their funds. As a
matter of fact, no such tendency manifests itself at times
of depression.
EXPLANATION NO. 5. In periods of great business
activity there is more productive capital built up than
can be procured from the people's savings accruing at
the time ; the excess being built up on the strength of
funds supplied by credit institutions, with the result of
exhausting and unduly straining all credit facilities of
the community. The savings made in the subsequent pe-
riod of depression are needed, therefore, for putting the
credit institutions on a sound basis again.
REPLY. There is some truth in this statement, but
very little. As a matter of fact, the credits issued by
our financial institutions are not relieved or reduced ma-
terially in a period of depression. During our late de-
pression of 1893 to 1897 the credits issued by our com-
mercial banks were reduced by only 135 million dollars.
Suppose that this loan reduction was entirely due to the
savings made on the part of the borrowers (though it
may as well have been due to other causes), could this
small amount explain what became of the 4,000 million
dollars of savings, which flowed into the money market 4
in the course of those four years, and whose outlet is left
unaccounted for?
Let it be well understood that we are dealing here
only with such credit institutions as really create credit
funds, i. e., the commercial banks; not with institutions
(like savings banks) who merely lend out funds that
were already in existence, and who practically act only
as mediators between the owner of such funds on the one
at Times of Depression? 23
hand and the borrower on the other. It is hardly the
latter class of institutions which come in consideration
when speaking of over-strained credit conditions, for the
extent of the credits they grant is bound to keep a close
proportion to the extent of the funds entrusted to them
by the public. Not so with the commercial banks. With
them the amount of credits issued depends largely upon
the requirements of the market and a strain may readily
take place if they create artificial funds to an extent near
the safety limit, either by the issue of bank notes or by
the extension of bank credits.
These artificial funds can be used for the creation of
new wealth precisely the same as funds accruing from
savings. They can be used for that purpose only once,*
the same as savings can be used only once. Thus, if their
total volume increases from 3 billions to 4 billions, the
increase of 1 billion represents cash funds available for
building up one billion dollars' worth of new productive
capital, or of new commercial capital. At busy times
* It may seem as though such "credit money" can be employed
over and over again towards building up new productive capital,
inasmuch as it is constantly reverting to the issuers, and constantly
being reloaned. But that supposition would be wrong. Most of those
reloaning transactions represent a mere shifting of borrowings; a
contracting of new debts to pay old ones. Suppose a merchant, A, is
short of $50,000 to conduct his business on a cash basis, and that he
constantly has notes afloat, aggregating that amount, to make up
for the deficiency. These notes, successively issued in payment for
the goods he buys, and discounted in various banks, will cause a
frequent shifting of cash funds; but the aggregate of these trans-
actions will amount to the same thing as a permanent loan of $50,000
to that merchant, on the part of the banks, as though it were a
permanent investment of the banks' credit money in A's business,
that bank money having been used by him to build up part of his
"circulating capital." Now suppose A saves up $50,000, and pays all
his notes, issuing no more of them. Then the banks' funds become
free to that amount, to be lent out to some other borrower, B; this
time for real investment purposes, i. e. for creating new capital goods.
But the reader will readily perceive that the funds thus becoming"
available for investing purposes really consist of A's savings. Seem-
ingly the capital goods created by both A and B, aggregating $100,000,
have all been built up with credit money advanced by the banks; but
as a matter of fact only $50,000 came from that source, the other
$50,000 from the saving process. So the issue of $50,000 credit money
will only once build up new productive capital to that amount. Every
additional million dollars of bank notes or bank loans issued can be
made available for creating new wealth to the like amount, and to
that extent only.
24 How Are Savings Invested
a tendency prevails towards a rapid increase of such
"credit money"; at dull times, towards diminishing its
volume. To find out how much its volume diminished
during our depression of 1893 to 1897, we have to sub-
tract the total volume existing at the end of that period
from the total existing before the depression set in; as
follows :
Total credit money extant in 1892: Bank notes $174;
loans of National Banks $2171; of State Banks
$757 millions; in all $3,102,000,000
Total credit money extant in 1897: $230; $2067; $670
millions; in all.... 2,967,000,000
Showing a decrease of 135,000,000
This small reduction of 135 millions* can, at best, ac-
count for the absorption of only an equal amount of the
savings made during that period; but does not explain
what became of the balance of the savings. If, as as-
sumed in the early part of this chapter, the total of the
savings, left unaccounted for, amounted to 1000 millions
per annum, or 4000 millions for the four years from 1893
to 1897, the small share of this total which is represented
by the above-stated amount of 135 millions cuts no figure.
The importance of credit money, in so far as it con-
tributes cash funds towards building up new productive
capital, seems to have been much exaggerated by our
economists. That amount is quite small, when compared
with the amount supplied by the saving process. Savings
funds are always flowing into the money market quite
freely; but they soon find investment and disappear,
never to be seen asrain, while credit money will constantly
reappear in the money market and be lent out over and
* The deposits in Trust Banks are not considered in the above
statement. At that period the Trust Banks did very little business
of such character as the commercial banks do (see footnote, page
20 ), so their deposits could not, at that time, be classed the same
as deposits in commercial banks and did not really constitute part of
the country's money supply.
at Times of Depression? 25
over again-, a fact which may impart the impression that
there is more productive capital built up with credit
money than with savings funds. We should bear in mind,
however, that credit money can be used for that purpose
only once, and only in proportion as its total volume in-
creases. The following figures will serve to show the
extent of this increase, for the years 1890 to 1900 :
1890: Total of credit money then extant: Bank notes
$186; loans of National Banks $1986; of State Banks
$581 millions; in all $2,753,000,000
1900: $310; $2710; $3030 millions; in all 4,050,000,000
Showing an increase of 1,297,000,000
Was the whole of this latter amount available for
new constructions, or the creation of new wealth? Hardly.
Part of it was tied up owing to the fact that the banks
needed so much more legal reserve; another part was
absorbed by losing enterprises, by squandering, by re-
pairs, replacements, etc. For the sake of argument let us
assume that out of the $1,297,000,000 increase of credit
money just stated, as much as one billion was available
for new constructions, though in reality it was less. Dur-
ing the same period of 1890 to 1900 the country's wealth
increased by about 23 billions. Of this amount perhaps
one-quarter was made up by "appreciation of value" (see
footnote, page 12), the balance, say 15 billions, by the
creation of new wealth. Of the cash funds necessary to
create this wealth there was one billion supplied by the
issue of credit money, the balance, say 14 billlions, by
the saving process.
Reviewing explanation No. 5 in the light of these fig-
ures, we find that only a small share of the productive
capital (in this case one-fifteenth) is being built up with
credit money; and of this small share only a small part
is cancelled in a period of depression only 135 millions
during the said four years. Were the reverse true ; were
the cash Fin. ids required for new enterprises supplied prin-
26 How Are Savings Invested
cipally by the issue of credit money, and were a large
proportion of this credit money cancelled by the savings
made during a subsequent depression, then we could
argue that there is an inherent necessity for a period of
depression to follow a period of strained credits and of
great business activity. Then, Explanation No. 5 would
stand substantiated. But not where all facts point to the
contrary.*
EXPLANATION NO. 6. The surplus funds are to a
larger extent absorbed in "unproductive consumption,"
which results in an increase of the demand.
REPLY. This argument is met quite often in modern
economics. On general principles it may seem obvious
that if on the one hand the surplus earnings are not ap-
plied toward new constructions or the creation of new
wealth, and on the other they do not accumulate in the
money market, they must be used, to a greater extent
than usually, for the purpose of consumption. In fact,
many economists share in the belief that if towards the
end of a boom period it appears that more productive
capital has been built up than the demand for the time
being will warrant, and if in consequence a tendency
arises to abstain from new constructions, then the sur-
plus earnings, finding only partial employment in new
constructions, are more largely applied towards the sat-
isfaction of personal wants for the purchase of luxuries
and consumptibles. And the theory has it that as a result
of this increased purchasing power, which means an in-
* In the foregoing the fact that, from 1893 to 1897, an amount of
$135,000,000 of loans was repaid to the financial institutions, has been
attributed to the assumption that this amount represented so much
savings, but, as already stated, this reduction of the loan account*
may be due to other causes; for instance, to the shifting of loans
from the commercial banks to the trust companies, or to the reduced
demand for accommodation on the part of business men, conse-
quent upon the lessened activity of trade. If so, there would not re-
main even a nominal basis for Explanation No. 5.
at Times of Depression? 27
creased demand for consumptibles, and naturally an in-
creased production of the latter, the general demand pre-
vailing in the country will expand and gradually become
large enough to fully employ the productive capital then
in existence, whereupon a demand for additional pro-
ductive capital will spring up and usher in a new boom
period.
According to this theory the demand for consump-
tibles is greater in a depression period than in a boom
period a conclusion which runs counter to all experi-
ence.
Again, if people, instead of accumulating and invest-
ing part of their income, will spend it in luxuries (which
is the gist of the above theory) we cannot talk of "sur-
plus earnings" any more; the latter representing such
income as is left after providing not only for the neces-
saries of life but also for luxuries.
If there is more * ' unproductive consumption ' ' at times
of depression, and if such unproductive consumption will
afford opportunities for real investment of surplus earn-
ings, the modus operandi should be explained. That has
not been done so far. Explanation No. 6, therefore,
neither explains what becomes of surplus earnings at
such times, nor does it agree with the facts when assum-
ing that they are employed towards increasing the de-
mand for consumptibles. Times of depression do not
show an increase of consumption.
EXPLANATION NO. 7. The surplus funds are ap-
plied in a larger measure for unproductive public ex-
penditures, for the building up of what we may call "un-
productive capital"; such as schools, works of art, em-
bellishment of cities, sanitary improvements, hospitals,
etc.
REPLY. This assumption likewise runs counter to ac-
tual facts. In years of depression the expenditures made
28 How Are Savings Invested
for such purposes do not increase; on the contrary, they
decline.
This is still more true of. private expenditures for
unproductive purposes, such as the buying of carriages,
automobiles, yachts, palaces, pictures, etc. Nobody will
dispute that less money is spent on such investments in
hard times, even by the rich. Point No. 7 would hold
good only if the reverse were true, i. e., if an increased
amount were spent at such times.
EXPLANATION NO. 8. The surplus funds are more
largely absorbed by investments in mortgages and pub-
lic securities
REPLY. Many people think that the mere purchase
of bonds and mortgages, already issued and already in
the market, constitutes an investment. It does so from
the standpoint of the individual capitalist, but not from
that of the cash funds as such. If A buys a bond from
B for $1000, the purchase will no doubt constitute an in-
vestment so far as A personally is concerned; but the
money as such does not find investment by the purchase ;
it continues to be idle, investment-seeking cash capital,
only in B's hands instead of A's. And it remains in the
money market, now as before. What B does with the
money later on has nothing to do with our subject, and
in this connection I refer to the foot-note on page 21;
what has been said there will also apply here. So we are
justified in saying that the mere purchase of bonds or
mortgages, where the purchase money remains in the
shape of cash capital, does not constitute a real and final
investment for cash funds, and cannot possibly form an
outlet for the savings funds which keep on flowing into
the money market and which nevertheless do not accumu-
late there.
EXPLANATION NO. 9. The surplus earnings find
investment abroad.
OF THE
UNIVERSITY
OF
at Times of Depression? 29
REPLY. In what shape do they go abroad? In the
shape of money? Or of merchandise? Or through the
instrumentality of foreign exchange ?
Most people believe that funds can be sent abroad
without the necessity of gold shipments; say, by bankers'
drafts ; i. e., by a mere shifting of credits. But this is not
so. Very few people have a clear conception of the func-
tion of foreign exchange, and the less they know about
it the more are they inclined to attribute all sorts of
mysterious powers to its agency. A discussion of this
subject will be found in the footnote on page 116.
As to the migration of surplus earnings in the shape
of cash, statistics do not bear out the idea that during
hard times billions of money are sent abroad. This would
necessitate large remittances of gold, while as a matter
of fact a country's net movement of gold (the "net"
being the difference between a year's exports and a year's
imports) is not seriously affected by a period of depres-
sion, and the balance may as well appear on the credit
side as on the debit side. As a rule such shipments
of gold merely represent the residual balances of foreign
trade transactions, very seldom foreign investments. And
invariably they are of a rather limited extent.
Nor do statistics bear out the idea that in hard times
the surplus earnings go abroad in the shape of merchan-
dise. This would necessitate a sudden enormous increase
of exports without a corresponding increase of imports.
True, there* is a reason why exports should expand at
such times, inasmuch as wages and prices shrink, and the
home market thus becomes better fitted to meet foreign
prices and to enter into foreign competition. But such
an expansion of the exports is a plant of slow growth
and really depends upon commercial causes and market
conditions, not upon the intention of capitalists to invest
their funds abroad. Under favorable market conditions
30 How Are Savings Invested
such increase of exports takes place anyway. If it does,
and if in consequence a country's foreign trade leaves a
balance in its favor, showing a surplus of, say, $100,-
000,000, then the capitalists of that country may invest
this amount in foreign securities, instead of having that
balance paid over in the shape of cash; and there we
would have a clear case of investing capital "abroad".
The rule is, however, that there must first be a favorable
trade balance and then there is room for investing do-
mestic funds in foreign securities a subject which will
be more fully discussed on page 134. To assume that at
times of depression capitalists will buy up large lots of
domestic goods, and send them to foreign countries, in
addition to the usual movement of export goods this
idea is not worth serious consideration and is in no way
borne out by statistics.
We have to conclude, therefore, that at such times
our idle surplus earnings cannot find employment by
migrating abroad.
EXPLANATION NO. 10. In times of depression the
saving power of the community relaxes, resulting in a
shrinkage of the volume of savings and surplus earnings,
and therewith of the funds which constantly flow into the
money market to seek investment there. Thus, if on the
one hand there are admittedly less opportunities for in-
vestment, there are, on the other hand, less funds looking
for investment.
REPLY. This view is undoubtedly correct'. Inasmuch
as the earnings of the people fall off, their saving power
as well as their aggregate savings will decrease. But
that does not do away with the fact that of the savings
still remaining only a part is being absorbed by new con-
structions a fact which economists will hardly dispute.
To bring this point out more clearly, let us illustrate it.
by the use of figures.
at Times of Depression? 31
Let us assume that :
The aggregate surplus earnings per annum in prosper-
ous times (practically all of them being invested in
the creation of new capital o r wealth) come to $3,000,000,000
At a time of depression the aggregate annual surplus
earnings shrink to 2,000,000,000
Of which amount there is invested in the creation of
new wealths, say 1,000,000,000
Leaving a balance of surplus earnings, the mode of in-
vestment of which is not known, amounting to 1,000,000,000
Whether the last-mentioned figure should be one bil-
lion, or only half a billion, does not matter much for the
sake of our argument. Tt certainly is a large amount.
And the disappearance of this large share of the savings
is left unexplained by Explanation No. 10. The latter
only states that the total of the savings will fall off; but
it does not show what becomes of the savings that are
still being made. To show that, is just the point in
question.
Explanation No. 10 would cover the point only if the
aggregate savings could be assumed to diminish always
at the same rate as the opportunities for building up new
capital 2 diminish; as it were, that a million dollars of
savings could be made only if there were opportunities
for investing that amount in the creation of new wealth,
and that if there were no opportunities for investing more
than half a million in that manner, no more than the
latter amount could be saved. Such an assumption, how-
ever, could neither be proved by theory nor substantiated
by facts.
In the foregoing pages I have reviewed the various
explanations now extant purporting to show how sur-
plus earnings are invested in times of depression, and
I have proved every one of these explanations to be un-
tenable. While it is generally conceded that at such
times the surplus earnings do not find investment in new
constructions (except to a limited extent) the true man-
32 How Are Savings Invested
ner of their investment has never been revealed. I have
demonstrated that:
First. They do not accumulate in the money market.
Second. They do not, to a larger extent, go into in-
vestments of a temporary character.
Third. They do not assume the shape of "liquid
capital. ' '
Fourth. They do not become absorbed when used for
paying debts.
Fifth. They are absorbed only to a very limited ex-
tent, if at all, in augmenting the reserves of the credit
institutions.
Sixth. They are not dissipated in luxuries, or in a
greater satisfaction of personal wants.
Seventh. They are not, in a larger measure, applied
to the creation of what we might call "unproductive
capital."
Eighth. They do not become absorbed if invested in
the mere purchase of mortgages, securities, etc.
Ninth. They do not go abroad to find investment
there.
Tenth. The theory that the aggregate of savings
diminishes in the same proportion as the opportunities
diminish for investing them in new constructions or in
the creation of additional wealth, cannot be substantia-
ted.
No doubt a shrinkage in the aggregate of savings or
surplus earnings takes place, when times of depression
set in. Nevertheless it is generally conceded that at such
times large volumes of savings funds would still be avail-
able for new enterprises if there were opportunities for
profitable investment in that direction. These savings
funds keep on right along flowing into the money market;
at Times of Depression? 33
only part of them is absorbed in the creation of new
wealth; the balance disappears; but the nature of the
outlet still remains to be discovered. Where does that
balance go?
That question, though seemingly of a purely academic
character, is of vast practical importance. If we can
answer it, we may find ourselves in possession of the key
to the solution of the greatest problem of the age: the
cause of depressions.
CHAPTER III.
THE INVESTMENT OF SAVINGS AT
TIMES OF DEPRESSION.
EXPLANATION OF THE CHART.
BEFORE inquiring into the nature of the peculiar
class of investments mentioned in the title of this
chapter, let us broadly define what constitutes an invest-
ment as such, and what changes cash funds have to
undergo before they become invested.
To this end let us conceive the country's money sup-
ply to be divided into two classes: " Active Money" on
the one hand, as represented by the Red Ring of the
Chart, and ' ' Surplus Funds ' ' on the other, the latter con-
stituting the "Money Market," the central field of the
Chart.
The first class, Active Money, comprises by far the
greatest part of the money wealth, viz., all that is em-
ployed in industry and trade, wage funds, people's earn-
ings so far as intended to be expended for consumpt-
ibles, and all funds held by business men for purposes of
regular current business.*
The second class, Surplus Funds, comprises such
funds as are not engaged in carrying on regular current
business, but are idle, and available for investment.
These funds originate principally from the surplus earn-
ings of the savers (represented in the Chart by the red
savings lines 10 and 11, which build up the central field) ;
* Such funds may be temporarily idle; but inasmuch as the owner
cannot afford to invest them elsewhere, and will sooner or later need
them again for his regular business, they belong in the class of
Active Money, i. e., in the red ring of the Chart.
The Investment of Savings at Times of Depression. 35
to a small extent also from the increase of artificial
money issued by the commercial banks, such as bank
notes and bank credits; which increase is represented in
the Chart by the red-and-black line No. 18.
We should keep this distinction between Surplus
Funds (black central field) and Active Money (red ring)
well before us in order to answer the above-stated ques- ^
tion as to what constitutes an investment. The latter i ~ I
necessitates the transformation of Surplus Funds into
Active Money.
While the act of saving generally withdraws Active
Money from the channels of industry and trade and
turns it into the Money Market, the act of investment
will turn it back from the Money Market into the chan-
nels of industry and trade. In terms of the Chart: while
the red savings lines emanating from the " Income Field "
transmit cash from the ring to the centre, transforming
it from "Active Money" into "Surplus Funds," the
black investment lines emanating from the central field
carry it back from there to the ring from the unpro-
ductive circulation of the Money Market into the pro-
ductive circulation of industry and trade. They trans-
form "Surplus Funds" into "Active Money."
This transformation constitutes a vital condition of
an investment. Surplus Funds, in order to be invested,
must cease to be "funds available for investment."
Merely changing the ownership of such funds does not
invest them; for instance, in buying a house. But the
building of a house does. A thousand dollars, if spent in
building or creating any kind of property, will be scat-
tered into many hands, will generally be turned into in-
come for the direct or indirect receivers, and will cease
to be cash capital. This scattering of the compact money
mass the return of the money into the channels of in-
dustry and trade for purposes of production or consump-
36 The Investment of Savings
tion that is what constitutes the essential feature of an
investment. Without this scattering of the cash funds no
investment takes place.
***.***
Of such investment lines our Chart shows quite a
number, each one denoting a separate and distinct class
of investment. Of the red savings lines, which emanate
from the "Income Field," the Chart shows only two.
" Replacement Savings " and "Net Savings/' the dis-
tinction between these two classes being based on the
manner of investment whether the savings are avail-
able for increasing the country's wealth and for creating
new productive capital, or whether they are absorbed in
merely keeping up the standard of the capital already in
existence and in making up for deterioration and losses.
In other words, the distinction as to whether they must
be classed as Replacement Savings or as Net Savings de-
pends upon the outlet from the Money Market, whether
they find it by means of Lines 12, 13 and 14, or by means
of Lines 15, 16 and 17.
LINE No. 10 represents "Replacement Savings," i. e., such
savings as are absorbed in maintaining the standard
and efficiency of existing capital, property, or wealth.
The manner of their absorption is shown by the in-
vestment lines 12, 13 and 14. Line No. 12 stands for
"Losing Enterprises," where cash capital is sunk in
injudicious or fruitless undertakings; the accumula-
tion of such cash capital (or eventually the subse-
quent replacement of it) evidently absorbing savings.
Line No. 13 stands for "squandering"; a spendthrift
may sell his house and squander the proceeds, while
the man who supplies the money and takes the house
for it, finds investment for his savings. Inasmuch as
the spendthrift expends his money for consumptibles,
he transforms "Surplus Funds," the savings of
others, into "Purchase Money." a process which can
be followed on the Chart. Line No. 14 stands for
"Repairs and Renewals," such as are necessitated in
at Times of Depression. 37
consequence of wear and tear, the ravages of time,
accidents, conflagrations, floods, storms, etc.
It is plain that out of the total of savings accruing, a
certain part is required to make good the losses result-
ing from the causes enumerated above; and this part of
the savings is represented separately in the Chart, by the
red line No. 10 Replacement Savings.
LINE No. 11 represents "Net Savings'*; i. e., such sav- j ^
ings as are not absorbed by any of the factors just
alluded to, and which are therefore available for new
constructions and for the augmentation of wealth.
The manner of their absorption is shown by the in-
vestment lines 15A, 15B, 15C, 16 and 17.
As will be noticed, Line No. 11 divides into two
branches, one of them being designated as "No. 11 B.
Capitalistic Savings," the other as "No. 11 C, Excess
Savings," this distinction indicating the difference in the
final results whch the savings lead to. The fact is that
while all "Net Savings," as represented by Line No. 11.
are available for the augmentation of the country's
wealth, only a part of them really comes to be employed
for that purpose, which part is represented by the branch
of Line No. 11 designated as "Capitalistic Savings;"
while the other part, designated as "Excess Savings," is
not so employed. The mode of investment of these two
sub-divisions of "Net Savings/' therefore, is quite dif-
ferent, which difference can be traced in the Chart, as
follows :
"CAPITALISTIC" SAVINGS (No. 11 B) are, as stated,
those which lead to the creation of new capital 2 or
wealth, finding their avenues of investment through
the lines 15 A, 15 B, 15 C and 16. Line "15 A stands
for cash funds moving into mercantile enterprises,
increasing the "circulating capital" by opening new
commercial establishments and extending old ones.
Line 15 B stands for cash funds which are being em-
38 The Investment of Savings
ployed in the extension of transportation facilities,
such as railroads, ships, roads, canals, etc. Line 15 C
stands for cash funds in course of conversion into new
productive enterprises, especially manufacturing,
mining, and agriculture; also tenement houses, etc.
Line 16 stands for cash funds being invested in what
may be termed "non-productive capital," such as
hospitals, public schools, municipal buildings, parks,
houses occupied by the owners, pictures, libraries, etc.
"EXCESS" SAYINGS (Line 11 C) constitute that part
of the "Net Savings" which, though available for
new enterprises, or for the creation of new wealth, do
not find an outlet in that direction. Their avenue of
investment is represented in the Chart by Line No.
17, "Impair Investments." Their peculiar manner of
investment has never been explained so far, and will
be the subject of the present chapter.
On the last page of the Chart will be found Diagrams
1, 2 and 3, the purport of which is fully covered by the
accompanying text. These diagrams will be referred to
in this treatise as occasion demands.
IMPAIR INVESTMENTS.
Savings 1 generally flow to the money market, where
they seek investment a process which has been illus-
trated by the red lines of our Chart. These savings, so
far as they are not absorbed for "Replacement" pur-
poses, are available for the creation of new capital or
wealth. In times of depression, however, this, their nat-
ural field of investment, becomes quite limited, and will
no longer absorb all the funds available for that pur-
pose. Then a part of these funds is left over. The part
thus remaining has been designated in the foregoing
pages as "Excess Savings."
These Excess Savings should be expected to accumu-
late in the money market; as a matter of fact, however,
they do not. They evidently find some outlet from there,
at Times of Depression. 39
/
almost as readily as if absorbed in new enterprises. How
this is done, nobody knows. They are, no doubt, turned
into capital 2 , but a corresponding creation of new capi-
tal does not take place.
The explanations so far given by our economists to
account for this strange phenomenon have proved to be
untenable a conclusion which has been fully demon-
strated in the previous chapter.
To present the subject at issue in a form more readily
understood, let us resort to figures, and to this end re-
produce the equations given on page 13, which show
how savings are affected and investments changed in
their character by the recurring seasons of prosperity
and depression. The changes thus brought about can
also be followed up in Diagrams 1 and 2, which see.
MANNER OF INVESTING SAVINGS AT A TIME OF PROSPERITY.
(See Diagram 1)
Dollars
Annual savings available for the creation of new capital
(the "Net Savings" of the Chart) 3 billions
Savings actually invested in new constructions (the
"Capitalistic Savings" of the Chart) nearly 3 billions
Savings left over (the "Excess Savings" of the Chart).. Nominal
MANNER OF INVESTING AT A TIME OF DEPRESSION.
(See Diagram 2)
Dollars
Annual savings available for the creation of new capital
(Net Savings), as assumed on page 13, the saving
power of the people having been cut down by one
billion, owing to a diminution of income 2 billions
Of which amount only a part is actually invested in new
constructions (said part representing the Capitalistic
Savings), say 1 billion
Leaving an amount of "Excess Savings," the mode of in-
vestment of which is not known, of 1 billion
Whether this last figure, representing the "Excess
Savings," should be exactly one billion, or a different
amount, does not matter. In any event the amount of
savings not invested in the creation of new wealth is
quite large at times of depression a fact which econo-
mists will hardly dispute.
40 The Investment of Savings
From the above figures, rough as they are/ a conclu-
sion can be drawn which will throw a peculiar light on
the mjode of investment of the funds in question. Inas-
much as the saving process enriches the savers, increas-
ing their aggregate wealth by two billion dollars, and
inasmuch as the aggregate wealth of the country as a
whole increases only by one billion, the acquisition of
wealth on the part of the savers must be accompanied by
impoverishment 9 on the part of other members of the
community. In other words: If Net Savings are not in-
vested so as to augment the country's wealth or capital,
and if they find their final investment in some other way,
they will, though benefiting the saver, do so only at the
expense of "others." The savers will become richer;
"others" poorer.
To render this point still more clear, let us again re-
sort to figures. Let us assume the wealth of the country
to amount to 100 billion dollars, of which one half is
owned by the savers, the other half by non-savers; and
let us ascertain how the holdings of the latter class
(which class, by the way, represents the great mass of
the people) are affected by the saving process in a year
of prosperity and how they are affected in a year of de-
pression.
CHANGES OF WEALTH IN A TEAR OF PROSPERITY.
Dollars
Jan. 1st. Property held by the savers 50 billions
Property held by the non-savers 50 billions
Total holdings 100 billions
Dec. 31st. Total holdings, the saving process having
added 3 billions of new capital 103 billions
Of which amount the savers own 53 billions
Leaving for the non-savers, the same as at the
beginning of the year 50 billions
CHANGES OF WEALTH IN A YEAR OF DEPRESSION.
Dollars
Jan. 1st. Total holdings, same starting figures as above,
aggregating 100 billions
at Times of Depression. 41
Dec. 31st. Total holdings only one billion of savings, out
of a total of two billions, having been used
for building up new constructions 101 billions
Of which amount the savers own, having aug-
mented their holdings by two billions 52 billions
Leaving for the non-savers, instead of 50 bil-
lions as at the beginning of the year, only. . 49 billions
Here the non-savers, representing the bulk of the
community, have become poorer by one billion as a se-
quel to the fact that savings to that amount, made by
others, failed to be invested in the creation of new
wealth,* but were invested in some other way. Granting
the fact that at times of depression there are more sav-
ings made than can, for the time being, find investment
towards increasing the community's wealth, it follows
with certainty, from the above calculation, that the body
of non-savei's must become poorer to the full extent of
the savings not so employed; i. e., to the full amount of
the "Excess Savings."
A great deal, therefore, depends upon the manner of
investment, as to whether it leads to the creation of new
wealth, or not. In the one case the community is bene-
fited; in the other, a part of it suffers a certain impov-
erishment. 9 To distinguish these two kinds of invest-
* The above calculation, which forms the basis of my saving-
theory, will, in the subsequent parts of this treatise, be referred to
as the "Basic Calculation."
To economists this calculation may, at first sight, seem to be
erroneous, and the impression may prevail that if the savers become
richer by 2 billions, the community must also become richer by that
much. That this does not necessarily follow, is proved, however, by
the well known squandering process. The spendthrift who sells his
house and spends the proceeds, becomes poorer; the saver who sup-
plies him with the money and takes the house for it, becomes richer.
So the enrichment of the latter is offset by the impoverishment9 of
somebody else, and is not accompanied by an increase in the aggre-
gate wealth of the community. The savings are invested, but with-
out the creation of new capitals.
Just so in the case covered by our calculation: the investment of
the one billion of "Excess Savings" does not augment the wealth of
the community, but hinges on the acquisition, by the savers or their
representatives, of property already existing, in connection with the
impoverishment of its previous owner.
The causes of the impoverishment 9 are radically different, how-
ever, in the two cases here cited. It is brought about by the volun-
tary doings of the individual in the one instance, and in the other
by general market conditions entirely beyond the individual's con-
trol.
42 The Investment of Savings
ment, let us designate the one as " Capitalistic (i. e.
capital-producing) Investments/' linking with the
"Capitalistic Savings" spoken of on page 37, the other
as "Impair Investments" 8 the latter term having been
used on page 38, as well as in the Chart. Of these two
forms of investment the first one is well known to the
reader and needs no discussion; so we may confine our-
selves to the investigation of the second, the "Impairing
Form of Investment" (i. e., the investment of Excess
Savings), and above all enquire into the nature of the
impoverishment caused by it. To this end I shall take
up three questions which naturally present themselves in
connection with the subject, viz. :
1st Is the impoverishment, 9 as evinced by the aforesaid
"Basic Calculation," merely a matter of calculation
based on assumed figures, or is it proved by actual
facts?
2d. If a matter of fact, how is it brought about? What
is the modus operandi?
3rd. What has the impoverishment 9 of the community to
do with the investment of "Excess Savings"?
Let us take up each of these questions separately.
QUESTION NO. 1. Is there much impoverishment 9
going on among the people at a time of depression?
There certainly is. In fact, that is one of the princi-
pal features of a depression. Anywhere and everywhere
we meet people who complain of reduced earnings, of
poor business, of their inability to make both ends meet.
All over we find men out of employment, or working
only part of the time, and struggling hard to procure
even the most urgent necessaries of life business men
running behind, and property-owners being compelled to
encumber their holdings. Wherever people do not enjoy
a fixed income ; wherever their earnings depend upon the
at Times of Depression. 43
course of business; and wherever they do not belong to
the favored few who are well to do and who still can
save and accumulate, there we find wealth waning and
poverty spreading.
The ''Basic Calculation," therefore, agrees with the
facts. And in turn, the facts prove the correctness of
our calculation s-at least so far as the underlying prin-
ciple is concerned.
QUESTION NO. 2. How is this impoverishment 9
brought about 9
We can readily trace the cause when considering the
fact that at times of depression but little new capital 2
is being built up and that most of the " working forces" 6
ordinarily engaged in new constructions are thrown out
of employment. These "Constructive" Forces comprise
not only the workmen immediately concerned, but also
manufacturers, contractors, dealers, the men engaged in
transportation and in the production of raw material,
etc., all of whom find their income either stopped or re-
duced and accordingly become poorer. Let us designate
these people in their entirety as "Class C"*.
As soon as Class C commences to suffer from the im-
poverishment process caused by the lull in new construc-
tions, a new element of disturbance, which we will call
the "Multiplying Principle," comes into play, aggravat-
ing the harmful effect. The impoverishment is not con-
fined to Class C, i. e. to the Constructive Forces, 7 but
will spread further. The individuals constituting that
class, finding their income stopped or reduced, have to
reduce their expenses accordingly. They will buy less of
* The individual members of class C, or any other class, are af-
fected to a very uneven extent; the one member, a workingman, may
lose all of his income; another member, a merchant, only a small
part of it. A merchant may be a member of each of a good many
classes.
44 The Investment of Savings
commodities than before. In consequence of that, the
producers and distributers of such commodities as class
C *had been buying, will likewise be affected, the demand
for these goods falling off. "Withal the production of
these commodities will be reduced; and, as a further se-
quence, the earnings of the producers will decline. So
the harmful effect is not limited to the members of class
C, the Constructive Forces, but will extend further, mul-
tiply as it were, and reach those engaged in the produc-
tion of commodities, i.e. the " Commodity Working
Forces." 7
To illustrate this matter by an example, let us single
out ten working men, forming part of class C, and as-
sume that, when employed, their aggregate earnings
amount to $5,000 per annum. They spend that money in
the purchase of commodities. When these commodities
are produced anew, that money will become income for
those who are engaged in reproducing them. Let us
designate these producers (including the distributers).
so far as they are directly affected by the purchases of
those ten men, as "Class D " When the members of class
D, in turn, expend their earnings, that same money be-
comes income for class E, and so on for classes F, G, etc..
the succession of income and expenditure forming prac-
tically an endless chain. Now cut off the income of those
ten men in class C, and the whole chain will be affected.
The expenditures of class C may be reduced from $5,000
to $1,000,* thus diminishing the income of class D by
* The members of class C surely do not reduce their expenditures
to nothing, for they do not exactly starve with their families and are
not left without food and clothing and shelter, but will manage, by
hook or crook, to obtain the most urgent necessaries of life. If they
have an account at the sevings bank, they will draw against it. If
they have furniture which t~hey can spare, or other kind of property
they can dispose of, they will sell it. They will leave the rent unpaid,
and thus pirate on the landlord; or they may pirate on their friends,
by borrowing from them. Eventually they will appeal to the charity
of others. On the whole, our assumption that if they lose their reg-
ular income of $5,000, they still will expend $1,000, may not be far
from the truth.
at Times of Depression. 45
$4,000; which means a total loss of income of $9,000 to
the two classes combined. The income of class E may
decline to the extent of $2,000 or $3,000, which brings
the total loss up to $11,000 or $12,000. This total will
keep on swelling as the harmful effect spreads further.
True, for each successive link of the chain the loss be-
comes smaller, being divided up, at the same time, among
a greater number of individuals.* Still, the losses are
there, and, whether light or heavy, they are felt by all
classes affected, and in their aggregate represent a much
larger amount than the original loss of $5,000 which be-
fell class C. Here we have^an illustration of the modus
operandi of the "Multiplying Principle."
To form an estimate of the extent to which the in-
come of the community at large can be affected by the
factors here discussed, we must recall the figures given
in the early part of this chapter. Let us retain the as-
sumption that while during the prosperous period of 1907
the total surplus earnings of the people amounted to 3
billion dollars per annum and were fully absorbed in the
creation of new wealth, the amount shrank to 2 billions
after the depression set in, out of which sum only 1 bil-
lion is being absorbed in the creation of new wealth,
instead of 3 billions as before. Then two-thirds of the
"Constructive Working Forces," 7 i.e. two-thirds of the
individuals constituting class C, will be put to idleness,
and will lose income to the amount of 2 billion dollars
per annum. This loss of income on the part of class C
will entail a loss of income on the part of class D, of
probably not less than one and a half billion. The loss
to class E will be less than that, and still less will be the
respective losses to classes F, G, etc. If we put down
* If class C counts 10 members, class D (i. e. those who are di-
rectly affected by the purchases of class C and derive income there-
from) may count 1,000 members; class E (those who derive income
from the purchases of class D) 5,000 members, class F 10,000, and
so on.
46 The Investment of Savings
another billion and a half as the aggregate loss of all the
other groups, a figure which may not be too high, the
grand total of the annihilation of earnings would be
brought up to 5 billion dollars per annum If we com-
pare this sum with the amount of the aggregate actual
earnings, which has been computed at over 20 billions
per annum, we find that one-fourth of the former income
of the people may thus be annihilated. This would be
the outcome if earnings to the amount of one billion dol-
lars were invested in the "Impairing Form" 8 ; i.e., if
they did not lead to the creation of new wealth.
The above-stated proportion of one-fourth may seem
excessive. Whether the annihilation of income be put
down as a fourth, or only as a fifth, or a sixth of the
total, does not matter much. My object is not to estab
lish exact proportions, but to bring out the general prin-
ciple and to show that an interruption in the process of
building up new capital 2 , even a partial one, forms in
itself a factor of disturbance potent enough to bring
about, to the full extent, those harmful effects which are
being witnessed in a period of depression.
How widely the two forms of investment will differ
in their bearing upon the welfare of the commonwealth,
may become apparent from the following comparison:
One billion dollars of savings 1 , if invested
in building up new capital 2 , will aug-
ment the country's wealth by $1,000,000,000
One billion dollars of savings, if invested
in the * ' Impairing Form. ' ' will not aug-
ment the country's wealth, but will,
according to the figuring above, an-
nihilate the income of the community
to the extent of $5,000,000,000
These two modes of investment, the Capitalistic and
the Impairing the one enriching the community, the
at Times of Depression. 47
other impoverishing it may seem to counteract and ex-
clude each other; yet they are both in action at one and
the same time, especially in periods of depression, and
go very well together. There may be a billion dollars in-
vested in the Capitalistic Form and create new capital 2
to that amount, at the same time when another billion
dollars is being invested in the Impairing Form, annihi-
lating income on the part of the people to perhaps five
times that amount.
QUESTION NO. 3. Does the impoverishment of
the community help the savers to find investment for
their " Excess Savings"?
It does. Excess Savings are invested, not in the cre-
ation of new capital, but in the acquisition of capital 2
already existing, such as the owners have to let go, ow-
ing to impoverishment; to a large extent, also, by mak-
ing loans on such property, or loans to such business
men as find themselves running behind.
As already stated, this process of impoverishment 9 ,
which forms such a conspicuous feature in a depression,
does not confine itself to reducing workingmen and the
poorer classes to a state of privation; it will also en-
croach upon the wealthy, such as own property which
they may realize on 10 when they can no longer defray
their expenses out of their diminishing income. This
process of impoverishment, therefore, will manifest itself
in two distinct forms: on the one hand in the shape of
privation on the part of those affected, resulting in a
lowering of their standard of life; on the other hand in
the shape of alienation of property. 10 These two forms
of impoverishment should be kept well apart. Making a
guess as to the relative proportion of these two kinds of
hardship, I would say that out of a total loss of income
of 5 billions due to the depression and to the lack of de-
48 The Investment of Savings
m'and, there may be 4 billions represented by privation,
and 1 billion by alienation of property.* It is the latter
form of impoverishment, the loss of capital goods, which
the " Basic Calculation" refers to in the early part of
this chapter, when pointing out that a billion dollars of
savings, if invested in a different way than in the creation
of new wealth, would impoverish the non-savers of the
community to the like amount of one billion. But this loss
of capital goods to the amount of one billion is generally
coupled with a good deal of privation, which, if ex-
pressed in money value, would represent a much larger
amount. For instance, a man may lose income to the
amount of $3,000 and may, in consequence, alienate prop-
erty worth $1,000, 10 the loss of the remaining $2,000 be-
ing met by privation.
Strictly speaking, he would thus become poorer not
by $3,000 but by $1,000. It is only the latter figure, viz. ;
the amount represented by the alienation of property 10 ,
which counts towards absorbing " Excess Savings." In
proportion as such property is thrown upon the market.
Excess Savings come to be invested, generally through
the medium of some financial institution. In the pur-
chase of such property practically all savings funds, so
far as available for, but not used in, the creation of new
wealth, find their outlet from the money market at times
of depression. When they do, they are being spent by
the receivers of the money in defraying their living ex-
penses, and in consequence they re-enter the channels of
trade and industry and are transformed into goods again.
As soon as Excess Savings, say to the amount of $1,000,
re-enter these channels, the harmful action caused by the
* The above proportion of 1 to 5 between "alienation of prop-
erty"io on the one hand and "loss of income" on the other, is identi-
cal with the proportion I arrived at on page 46 as obtaining between
"Excess Savings" and "loss of income." Excess Savings are equiva-
lent in amount with the alienationio of property caused by the in-
vestment of such Excess Savings, so both of these factors stand in
the same proportion to the third factor, "loss of income."
at Times of Depression. 49
fact that that individual block of a thousand dollars of
Excess Savings failed to be invested in the creation of
new wealth, will come to an end and will not spread any
further.
Excess Savings will not return into the channels of
trade qnd industry until an equivalent alienation 10 of
property on the part of non-savers has taken place,
$1,000 of property against $1,000 of savings; and the im-
poverishment, the loss of income, forms the whip which
enforces that alienation. The sooner this alienation is
attained, the less need is there for the application of the
whip, and the smaller is the harm brought upon the com-
munity; on the other hand, the harder people fight
against the alienation of their property, and the more
they meet the loss of income by privation, the fiercer will
he the lash of the whip, and the greater the distress.*
The more privation, the greater will be the curtailment
of the demand, of consumption, and of production, and
* Let us illustrate the above by an example. Suppose a merchant
has "run behind" to the amount of $1,000 in a year of depression, but
withal has not reduced his business or household expenses any, mak-
ing up for the deficiency by means of a loan. Such a loan, as ex-
plained before, counts the same towards absorbing Excess Savings
as would an equivalent alienation of property. Here we have a case
where the loss of income is not met by privation. Therefore the
merchant's loss of $1,000 entails no diminution of the general demand
and, consequently, no loss of income to others. The two factors in
question, "loss of income" on the one hand and "alienation of prop-
erty"]^ on the other, are coupled right in the same link of the chain
and, in consequence, a multiplication of that loss of income does not
take place. Now suppose the merchant acts differently, and, having
anticipated a poor year, reduces his household expenses from the be-
ginning, so as to economize $1,000 in that year. Then he meets that
loss of income of $1,000 by privation to the like amount, not by
alienation of property as assumed before. His economizing will re-
duce the general demand for commodities by $1,000; therewith pro-
duction; and therewith the income of others. Then the loss of in-
come sustained by these "others" will be at least $1,000 in addition
to his own loss; but most likely those "others" will economize, too,
and if so, the damage will spread from one link of the chain to the
other, and may easily aggregate $5,000,or more, before the individuals
constitiiting the various links of the chain have, in their entirety,
sacrificed property enough to clear that amount of $1,000, or until
they have become indebted that much.
The proportion between the two factors, "alienation of property"
(equivalent to Excess Savings) on the one hand and "loss of income"
on the other, stands as 1 to 1 in the first instance, and as 1 to 5 in
the second bearing out the statement made in the text that, the
more the shrinkage of income on the part of individuals is met by
privation, the more will that shrinkage of income multiply by spread-
ing among other members of the community.
50 The Investment of Savings
therewith of income. That whip of impoverishment will
lead to both, privation as well as alienation of property;
but it is only the latter which offers a bridge for Excess
Savings to be invested and which thereby makes the lat-
ter return into the channels of industry and trade. Until
they do return into these channels, the whip will remain
in action, impoverishment will spread, and incomes will
shrink.
********
The conclusion arrived at in the foregoing discussion,
that Excess Savings meet their investment by the mere
purchase of capital goods already existing, may seem to
come in conflict with an assertion made in the preceding
chapter. In the reply to Explanation No. 8, page 28, I
stated that the mere purchase of capital already exist-
ing, or the mere loaning out of funds on mortgage, etc..
would simply shift the funds from the possession of one
man to that of another, say from A to B, but would not
constitute an investment of the funds as such the latter
remaining idle, investment-seeking cash capital, now as
"before. While this is true where the sale is consummated
as a matter of regular business, and where B intends to
use the money subsequently for business purposes, i. e.
for some enterprise, the situation is entirely changed if,
as a new factor, the impoverishment 9 process comes into
play. If B sells a bond, not for business purposes but
because he needs the proceeds to defray his living ex-
penses, then the purchase money ceases to be cash capi-
tal and leaves the money market without going through
the process of a further investment, so that practically
the real and final investment of that cash capital
is formed by the purchase of the bond. To emphasize
this point, I repeat:
Whenever capital goods are sold, and the seller uses the
funds (i. e., the proceeds) for business purposes, these
funds find their real and final investment when ap-
at Times of Depression. 51
plied to such business purposes. The mere sale or
purchase of property does not then constitute an in-
vestment of the funds as such.
Whenever capital goods are sold, and the seller expends
the proceeds for living expenses, then the purchase
of the property constitutes the real and final invest-
ment of the funds thus changing hands.
What is said here of cash funds in general, refers
specifically to cash funds accruing from savings or sur-
plus earnings. The latter may be invested without a
creation of new wealth, simply by the purchase of capi-
tal 2 already existing, provided a concurrent impoverish-
ment 9 of the owners of that capital takes place. Other-
wise the transaction does not constitute an investment.
Let us illustrate this point still further by an exam-
ple. Suppose a wage earner, H, loses his position and
therewith his income. He owns a house, worth say $5,000.
From his friend A, a saver, he borrows some money
which he uses for his living expenses; and when through
with it he borrows again, paying interest accordingly.
After running his debt up to $1,000, he gives A a mort-
gage on the house; which mortgage is subsequently in-
creased to $2,000 and to $3,000, in proportion as his in-
debtedness grows. H may find employment again after
that. But the debt remains, and constitutes a profitable,
interest-bearing investment for A's savings. Here we
have a plain case showing how savings can be employed
without the creation of new capital goods; also, how the
impoverishment of the non-savers actually forms the
basis of the investment, opening up, as it were, a new
field for investments, just at a time when depression pre-
vails and when poverty is spreading, and when the
regular field of investment narrows down. The example
also explains the mysterious disappearance of the sav-
ings funds from the money market at times of depres-
sion : Had the mortgage been given for business pur-
52 The Investment of Savings
poses, there would be a cash capital of $3,000 in H's
hands to show for it; or, eventually, there would be a
new construction of some kind to show for the cash cap-
ital,in case II invested it. In the case covered by our
example, however, there will be no available cash capital
of $3,000 when H issues the mortgage, most of the money
having already been spent by him, and no new property
having been created with the aid of it. The funds grad-
ually disappeared from the money market without lead-
ing to any visible result just as we see it in real life.
It is in the acquisition of property which the owners
cannot hold, that Excess Savings find their final invest-
ment; either directly, by outright purchase, or indirect-
ly, by acquiring a title to or a Hen on such property, say in
the shape of a mortgage or of a common loan. The char-
acteristic feature of the investment of Excess Savings is
the Change of Possession of property (capital goods) al-
ready existing, in conjunction with the involuntary im-
poverishment of the previous owner. This kind of in-
vestment is going on, to a small extent, even at prosper-
ous times; but it grows in extent as business relaxes, and
at times of serious depression will actually be the pre-
dominating form of investment.
Let us recapitulate the three queries raised in the
early part of this chapter in connection with the "Basic
Calculation" and in connection with the process of im-
poverishment 9 which that calculation reveals. Our first
query was, whether such impoverishment really exists,
at times of depression. No economist will seriously at-
tempt to deny that it does. Second query: How is that
impoverishment brought about? By lack of employment
and lack of earnings. At times of depression but little
in the line of new constructions is being built up, in con-
sequence of which fact the Constructive Working
at Times of Depression. 53
Forces, 7 which I designated as class C, are largely put to
idleness and are thus deprived of their earnings. This
enforced idleness will spread further, reacting on the
"Commodity Working Forces" D, E, F, etc., engaged in
production and trade, and will reduce their income also,
thus bringing about a multiplication of the annihilation
of income, aggregating perhaps five times the original
loss sustained by the forces C. This annihilation of in-
come will, on the one hand, lead to more or less privation
on the part of the classes C, D, E, F, etc. ; on the other
hand to alienation of property 10 on the part of the
wealthy members of these classes. Third query: Does
this annihilation of income, and the consequent impov-
erishment of a large part of the community, help the
savers to find investment for their surplus earnings,
such as are not absorbed in the creation of new wealth?
It does. This class of surplus earnings finds its invest-
ment in the purchase of property or capital goods which
the owners are compelled to alienate 10 as a sequence of
that impoverishment. Without the impoverishment there
would be no such forced alienation of property, and
without the latter there would not be the opportunities
for investing "Excess Savings."
Economists will not dispute that now and then the
impoverishment of the one individual will enable the
other to invest his savings by merely purchasing prop-
erty already existing. They may also admit that such
cases occur more frequently in seasons of depression,
where incomes shrink and where the impoverishment
process becomes more pronounced. But to admit that
this impoverishment process should go far enough to ab-
sorb practically all surplus income that is not absorbed
in the creation of new wealth; and that, moreover, the
impoverishment should be a matter of inherent necessity
54 The Investment of Savings at Times of Depression.
in order to provide investment for that class of surplus
income to admit that, would be almost impossible for
our economists, unless they thoroughly remodel the ac-
cepted theories on the subject of saving. Still, it is hard
to avoid those conclusions, which coincide with the con-
clusion arrived at in the "Basic Calculation" given on
page 40, viz. : if the savers become richer and the total
wealth of the community does not increase to an equal
extent, the non-savers must become poorer, and either
must give up property or become indebted, to the full
amount of the "Excess Savings. "
In the foregoing pages it has been shown how a de-
ficiency of the demand is created in the interval between
the act of saving and the act of investment, provided the
latter takes place in the Impairing Form 8 a deficiency
which is never compensated for by the act of investment.
The conclusions arrived at may seem to run counter to a
well-established axiom of modern economics, That the
shortage of the demand originally caused by the act of
saving is always compensated for by the act of invest-
ment, provided the savings funds finally come to be ex-
pended for goods or services in the course of such in-
vestment. Whether this axiom can stand scrutiny or not,
will be discussed in a subsequent chapter. For the pres-
ent let us bear in mind that much depends upon the
manner in which the savings funds come into the posses-
sion of the individuals who expend them for commodities
and thus turn them into goods again whether in the
shape of income, in payment for services rendered, or
whether over the bridge of their own impoverishment, in
the shape of loans, or as the proceeds of property which
they were compelled to alienate or realize on.
CHAPTER IV.
VARIOUS DEPRESSION THEORIES.
IN the preceding chapters the cause of depressions has
been connected with a relaxation in the process of
building up new capital. 2 That such a relaxation actually
sets in concurrently with the beginning of a depression
is generally admitted by economists ; and it is also under-
stood that as a consequence the working forces ordi-
narily engaged in said process are largely reduced to
idleness also that this forced idleness reacts upon those
engaged in the broad lines of production and upon busi-
ness in general, thus aggravating the ill effects originally
caused by the subsidence of new undertakings. But
while this slackening of new constructions is well known
to be the immediate cause of depressions, it is also well
understood not to be the primary cause, being itself a
sequence of causes still more remote. The nature of the
real, the primary cause, has been a subject of much dis-
cussion among economists, many theories being extant to
explain the origin of that lull in new constructions. Let
us review some of these theories.
DEPRESSION THEORY NO. 1.
(LACK OF FUNDS.)
The fact that a dearth of cash capital, when becoming
acute, is likely to engender a crisis, and will always form
a conspicuous feature of the crisis proper after it once
sets in, has led many economists to believe that the de-
pression following a crisis must likewise be attributed to
that cause, i. e., to the lack of funds. This view has been
discussed at some length in Chapter I, where I have
56 Various Depression Theories.
pointed out that though a dearth of cash capital will
often engender a crisis and serve to usher in the subse-
quent depression, it can not be the cause of the con-
tinuance of the latter, inasmuch as we generally do not
find a scarcity of cash capital after the depression has
properly developed and passed the primary stage. The
obvious fact that some other and more powerful element
must intervene to give continuity to the depression, since
the primary factor the dearth of cash capital is no
longer active, this fact should conclusively disprove the
"lack-of -funds" theory, provided we are looking for the
inherent cause of the depression, and not merely for the
origin of the crisis. On the other hand, such an array of
brilliant arguments has been brought forward in support
of the lack-of-funds theory, arguments which may seem
largely to controvert my own conclusions, that I deem it
best to take up some of them and expose their fallacy.
Almost all of these arguments lose sight of an import-
ant point, namely, that productive capital 2 can not for-
ever go on increasing. The most natural explanation of
the cause of depressions, such as would readily occur to
a business man, would probably be this: "Productive
capital can not keep on growing forever; it can expand
only in proportion as the demand for the products of cap-
ital expands, and this demand is almost always lagging
behind. The growth of productive capital, therefore, is
checked because the demand cannot follow/'
This explanation, however, has not found much favor
among economists, their views trending rather in the op-
posite direction. Most of them prefer to attribute the
check in the formation of productive capital, not to the
superabundance of capital 2 already in existence, but to
the shortage of liquid capital such as is necessary to build
up still more of it. Their chief arguments may be summed
up in the following four points:
Various Depression Theories. 57
ARGUMENT NO. 1. The alleged superabundance of
productive capital has existed in the past pretty much
the same as it does today. As this superabundance
heretofore did not hinder the growth of productive
capital, there is no reason why it should do so at pres-
ent, or in the future. Going by the experience of the
past we must conclude that in spite of that super-
abundance of productive capital there is always room
for more.
ARGUMENT NO. 2. The expansion of productive capi-
tal is to a certain extent self-sustaining. The more
capital there is, the greater the general demand; and
in turn, the more the demand grows, the greater the
need of productive capital.
ARGUMENT NO. 3. Whenever the investment process
relaxes, the cause thereof must be due to either one of
two alternatives, either to a lack of opportunities for
profitable investment, or to a lack of savings funds
to be invested. Which of these two causes is the pre-
dominating one? If it were the former, i. e., if the
opportunities for investment were wanting, the sav-
ings funds would accumulate in the money market in
the shape of huge idle cash funds, which as we know
is not the case. The cause of the relaxation, there-
fore, must be due to the other alternative, i. e., to the
lack of savings funds available for investment a
conclusion fully corroborated by the fact that savings
almost always can find investment of a reasonably
profitable character.
ARGUMENT NO. 4. A period of very active business
and of rapid increase of productive capital uses up
the savings funds faster than they accrue and will
even draw heavily upon the resources of all credit
institutions, so much so that towards the end of such
a period we find a considerable dearth of liquid capi-
tal. A period of relaxation, therefore, is bound to
follow in order to replenish the stock of liquid capi-
tal necessary for a subsequent period of expansion and
of new enterprises.
Let us examine the four arguments above given, to
58 Various Depression Theories.
see if they can stand scrutiny; and let us take them up in
reversed rotation, the last point first.
REPLY TO ARGUMENT NO. 4. The scarcity of
cash funds, often noticed towards the end of a "boom"
period, is due largely to the fact that during that period
prices and wages undergo a gradual rise, in consequence
of which more money is needed for industry and trade.
If towards the end of a "boom" period, a general rise
of, say, 15 per cent, has been effected, the transaction of
the country's business may call for 10 to 15 per cent,
more of the circulating medium. To procure the addi-
tional cash thus needed, business men look to the money
market, and in consequence a larger part of the savings
which constantly flow in and which otherwise would be
available for new enterprises, is absorbed for purposes
of regular business. Even without this rise in prices or
wages there is more of the circulating medium required
in a time of active business than in a dull time. These
two factors, in addition to the steady absorption of cash
funds for the sake of launching new enterprises, account
for the scarcity of liquid capital so often noticed pre-
vious to the setting in of a crisis.*
As to the theory that a period of relaxation and of
forced economy is necessary to replenish the stock of
liquid capital which would be required for another
"boom" period, I refer to the discussions following Ex-
planations Nos. 1, 2, 3, 4 and 5 in Chapter II. In those
Explanations I have considered every imaginable form
in which this replenishing process possibly may assume
practical shape, and have shown that all of those Ex-
planations lose sight of the enormous amounts, running
into billions, which we have to deal with when trying to
explain what becomes of the surplus earnings, available
* A further factor which, at times, contributes towards creating
a scarcity of cash funds, will be discussed on page 161.
Various Depression Theories. 59
for investment, which accrue in the course of several
years of depression. The view most current is, that such
funds lie over in the shape of ''loanable funds." Let us
fully understand the meaning: of this word "loanable";
it does not mean funds "loaned out" (for that would
imply funds which have found employment), but funds
ready to be employed, and in the meantime lying idle.
The adherents of this view altogether fail to consider that
such loanable funds would, first of all, show up in the
commercial banks; that, inasmuch as they remain unem-
ployed, they would rapidly accumulate there to a stu-
pendous amount; that each year of sharp depression,
such as prevailed in the United States from 1893 to 1897,
would add hardly less than one billion dollars to the idle
funds of the country, making an aggregate of four bil-
lions for the four years while as a matter of fact the
banks showed only an insignificant increase of their loan-
able funds at the end of that period, in 1897, as com-
pared with 1892. .All of these facts, which have been
fully discussed in Chapter II, disprove the above stated
view as to the usefulness of a period of depression in
increasing the country's liquid capital or replenishing
the funds depleted in the preceding "boom" period.
REPLY TO ARGUMENT NO. 3. The latter has so
far been considered unanswerable. It seems plausible to
infer that if savings funds available for capitalistic in-
vestment, that is, for the creation of new wealth, did not
find their employment to that end, they would accumulate
in the money market; and inasmuch as no such accu-
mulation takes place, it has been assumed that sooner or
later they really do find investment in the capital-produc-
ing form. It must be conceded that if this latter form
were the only one in existence for investing such funds,
this argument would be conclusive. But it is not the
only form. In Chapter III it has been shown that the
60 Various Depression Theories.
savings funds are dot confined to investment in the Cap-
italistic Form, but often find it in the Impairing Form
a fact which completely upsets Argument 3.
REPLY TO ARGUMENT NO. 2. There is some truth
in the assertion that the growth of productive capital is
in a certain way self-sustaining, inasmuch as this growth
is followed by an enlarged demand for commodities. But
that demand will not grow in the same proportion m If it
did, there would not be that universal excess of produc-
tive capital above the demand for it. This excess exists
in spite of the fact that there are times when it seems to
disappear and when the demand for commodities grows
large enough to keep the productive capital fairly well
employed. Such keen demand is not normal, but is fos-
tered by special circumstances. It occurs, strange to say,
just at seasons w T hen a rapid increase of productive cap-
ital takes place; and, what is still more strange, it is
caused by the very act of building up such productive
capital. By that act, so long as it lasts, the general de-
mand is temporarily stimulated. Capitalists who are
building new railroads, factories, houses, machinery, &c.,
become consumers for the time being, inasmuch as they
engage working forces to a lar^e extent and thus in-
crease the general demand ; when through building, how-
ever, and when about to set their works agoing, they
become producers where they were consumers and are
thus beginning to increase the supply and to decrease
the demand A multitude of such cases will result in a
growing disparity between demand and supply and will
therewith re-establish that relative superabundance of
productive capital which forms the normal state of
affairs.
Boom periods, where the demand almost equals the
supply, are always accompanied by a rapid increase of
productive capital, and are, in fact caused by this rapid
Various Depression Theories. 61
increase. Were this increase self -sustaining, as assumed
in Argument No. 2; in other words, were the growth of
productive capital followed by a corresponding growth
of the demand, then there would be no reason why the
demand, after a while, should lag behind. The fact that
it does lag shows conclusively its inability to keep pace
with the growing powers of production.
REPLY TO ARGUMENT NO. 1.- There are many
economists who reject the idea that the alleged super-
abundance of productive capital should form a barrier
against the still further growth of such capital. They
hold that all arguments in that direction are met by the
simple fact that capital 2 , in spite of that barrier, is con-
stantly increasing and that there is room for the increase
a point which indeed sounds plausible and unanswer-
able. In reality, however, this point is no more conclusive
than would be the assertion that our civil laws form no
barrier against crime, on the plea that these laws are con-
stantly being trespassed against. The barrier is not an
absolute one in either case; still it exists, and is eminently
effective. The superabundance of capital 2 forms no
absolute barrier against its increase, but it keeps that in-
crease within narrow limits, such as are drawn by the
extent of the demand for the products of capital. If more
capital exists in any special line than necessary to meet
the demand, and if the excess should surpass a certain
proportion, say 15 or 20 per cent., that excess will cer-
tainly put a stop to the further increase of capital in
that line, except in sporadic cases where an enterprising
capitalist has, or thinks he has, special advantages for
competing.
Were that barrier not in existence, and were the
growth of productive capital merely dependent upon the
supply of savings funds applicable to that purpose, cap-
ital would, long before this, have grown to an extent be-
62 Various Depression Theories.
yond all conception. An idea of the rapidity with which
capital would expand under such circumstances may be
gained from the following examples:
EXAMPLE NO. 1. As is well known, a penny loaned
out at the time of Christ at a moderate rate of compound
interest, and accumulating undisturbed, would now have
grown to an amount impossible to pay. If we" consider
that at present there are funds amounting to many billions
of dollars loaned out or invested, and growing on the com-
pound interest principle, the question arises, can these
funds keep on growing at that ratio for am 1 - great length
of time? If we consider furthermore that the elements
of insecurity which in past ages hampered the continued
accumulation and conservation of capital are being more
and more eliminated, and if we consider that on this ac-
count the accumulation process goes on all the more
rapidly is it not evident that the accumulation must
reach the limit of the possible much sooner than in the
case of the penny and must indeed reach it within a
comparatively short time?
EXAMPLE NO. 2. In prosperous years the people of
the United States save up and turn into capital 2 about
one-seventh of their income. For the ten 3^ears from 1880
to 1890 the income has been estimated at an average of
14 billions per annum, and if we figure the savings at
one-seventh of this amount that is, 2 billions annually
for ten years we arrive at an aggregate of 20 billions.
This amount approximates the actual gain in wealth
which, according- to Census reports, took place in that
period, viz., from 43 billions in 1880 to 65 billions in
1890. For the ten years from 1890 to 1900, which in-
cluded only six years of prosperity, the increase has been
variously estimated at from 23 to 29 billions, which again
would represent a saving power of about one-seventh of
the people's aggregate income, figuring the. latter at 20
Various Depression Theories. 63
billions, on the average. Could such a rate of accumula-
tion, growing larger from year to year, be kept up for a
long time, say, for centuries in succession?
EXAMPLE NO. 3. If the people of the United States
can, under favorable circumstances, accumulate one-
?eventh of their income, though they are not regarded as
possessing much of a propensity for saving, how much
larger ought to be the savings and the accumulated
wealth of such thrifty peoples as the Dutch and the
French ! If we figure only a ratio of 10 per cent, of their
income which, under favorable circumstances, they could
put by, and carry the calculation back for three or four
centuries, starting with any sum half way within the
limits of the probable as representing the people's annual
income at that time, the total accumulated wealth should
be many times greater than it really is especially so if
we consider that the annual increase in wealth will in-
crease the people's income, and, in turn, the increased
income will augment the people's saving power, and
therewith the annual accumulation. In view of this
reciprocal action, all tending toward an enlargement of
the country's wealth, we would be fully justified in
figuring the growth of the latter on the compound inter-
est principle, and if so, we would find a stupendous dis-
crepancy between the wealth there is and the wealth
there ought to be.
These three examples should be sufficient to demon-
strate the enormous cumulative power of the saving pro-
cess provided this cumulative principle had free scope.
It is well understood, however, that it has not. But why
not? In the case of the penny referred to in Example 1,
we all know the reason social and political disturbances
of the most radical character, which made it impossible
for any aggregation of capital to survive. In the case
of France and Holland it may also be held that the dis-
64 Various Depression Theories.
crepancy above mentioned can be fully accounted for by
wars and other disturbing influences. But the damage
from wars devastation of property, and war expenses,
sustained by Holland and France in the course of sev-
eral centuries would represent only an insignificant
proportion of that discrepancy; and a still smaller pro-
portion would be represented by disturbing factors other
than war Excepting these temporary adversities, the
extraneous conditions should have been favorable and
should have allowed a rapid accumulation of wealth, in
proportion to the people's saving power. If neverthe-
less that rapid accumulation did not materialize there
must have been a hidden cause at work to prevent it a
cause which despite the favorable extraneous conditions
created unfavorable inherent conditions sufficient to
check the cumulative power and therewith the growth of
wealth and of productive capital. Just so with the
United States. Its rapid rate of increase in wealth can
not continue forever. It will be restrained by the same
factor which has limited the accumulation process in the
older countries.
We need not look far to find this factor it consists
of the fact that ordinarily the extent of the productive
capital already in existence exceeds the demand therefor,
thus curtailing the incentive for building up still more of
it. This almost continuous superabundance of capital,
which has been a characteristic feature of past ages as
v/ell as of recent times, reduces the opportunities for
profitable investment, and thereby forms a most effective
barrier against the unlimited creation of new productive
capital.
Economists are not generally inclined to consider this
natural barrier in the proper light, and prefer to believe
that such a barrier either must be an absolute one, or that
it dees not exist at all. Many of them seem to hold that
rations Depression Theories. 65
so long as there is a house left to be built, or any sort of
enterprise still to be carried out, so long can there be no
lack of opportunities for profitable investment of billions
of savings funds and, therefore, no barrier. That the
latter is only relative and not absolute seems to have
escaped their attention. They are unaware of the fact
that whenever, on account of this barrier, the oppor-
tunities for profitable investment in new constructions
become scarce, only a part of the savings funds will find
investment in that form the balance simply being
diverted to the Impairing Form, as explained in Chap-
ter III.
Of the four arguments considered above, which form
the chief support of what we properly may call the
"Lack -of -Funds" theory, not one can stand scrutiny.
The "boundless opportunities" for, the expansion of pro-
ductive capital do not exist. On the contrary, wherever
opportunities turn up for safe and half-way profitable
investment, there is, ordinarily, no lack of savings funds
to make use of them. And though there may be periods
\vhere this truth does not seem to hold good, and where
the great demand for new constructions creates a demand
for cash funds far in excess of the possible supply as has
recently been the case in the United States and in Ger-
many it is well understood that such exceptional periods
will not last and that sooner or later the ordinary state
of affairs, the excess of productive capital over and above
the demand for it, will reassert itself. As soon as it does,
there is no longer a scarcity of funds such as are avail-
able for new enterprises.
While the lack-of- funds theory will undoubtedly ac-
count for the origin of most of our crises, as. set forth in
Chapter I, it will not account for the period of continued
depression which so often follows the crisis.
66 Various Depression Theories.
DEPRESSION THEORY NO. 2.
(EXCESSIVE PROFITS.)
This theory makes a sharp distinction between the
wealthy classes and the working classes, ascribing to the
latter the greater consumptive power and to the former
the greater accumulating power. Thus, for illustration,
out of an income of $20,000 going into the hands of the
working classes, more than $19,000 are likely to be ex-
pended for consumptibles and less than $1,000 to be ac-
cumulated ; while out of the same income, if going into
the hands of the wealthy, only $10,000 may be spent and
as much as $10,000 accumulated. Evidently, therefore,
the larger the share which out of the people's total in-
come goes to the working classes, the greater the demand
for consuraptibles ; and again, the larger the share which
goes to the wealthy, the greater the accumulation; and
inasmuch as the accumulations generally are turned into
productive capital (i. e., into capital which produces com-
modities), we also might say, the greater the production
of commodities t A plentiful income on the part of the
working classes and of the masses, therefore, favors the
demand, while a plentiful income on the part of the
wealthy favors the supply. The theory ascribes the gen-
erally existing disparity between demand and supply to
the fact that the share of income received by the working
classes is too small, that of the wealthy too large.
This faulty division, as the theory has it, occasions no
disturbance in times of general prosperity, since at such
times the deficiency of the demand on the part of the
working classes (due to the deficiency of their income)
is compensated for by the increased demand emanating
from the wealthy, the latter investing their surplus earn-
ings in the creation of new wealth and productive cap-
ital, and therewith bringing an increased demand for
Various Depression Theories. 67
working forces into the market. At such times, there-
fore, the working forces are well employed. After a
number of years, however, the rapid creation of new pro-
ductive capital will slacken, as the demand can not fol-
low, and then the consequences of the above-mentioned
faulty division manifest themselves in the shape of a
growing preponderance of the supply, culminating in a
depression. ***
There is much truth in the foregoing theory, and in
itself it is not antagonistic to the true cause of depres-
sions, such as will be developed in the next chapter; but
it does not go far enough, and falls short of discerning
the primary cause. We may conceive a state of affairs
where that faulty division of income is carried to ex-
tremes and where the working classes practically receive
no income at all, being kept like slaves, and still busi-
ness would prosper provided the wealthy would expend
the enormous accessions to their income either for lux-
uries, or in the steady expansion of new capital 2 and
wealth. Evidently, therefore, that faulty division of in-
come is not itf itself sufficient to cause a depression, but
some other more potent factor must come into play to
lead to that result.
The theory acknowledges the fact that the faulty
division will do no harm so long as the funds accruing
from the savings and surplus earnings of the wealthy are
invested in the creation of new productive capital, and
thus give employment to the working forces engaged in
that line. But the theory overlooks the natural question.
If the funds, though not applied towards new construc-
tions, are invested in some other way, why do they not
give employment to some other class of working forces?
If in either case the savings funds meet real investment,
such as will cause them finally to be dissolved and to be
paid over to working men and business men in the pur-
68 Various Depression Theories.
chase of commodities, why should there be prosperous
conditions and full employment for the working forces
in the one case and unemployment in the other? If it is
the different mode of investment which entails the unem-
ployment and the stagnation in trade, the matter should
be explained, for then the cause of the trouble evidently
lies right here, not in the faulty division of income.
As a matter of fact the "Excessive-Profits" theory
connects the cause of depressions with the saving process,
holding that the over-abundant profits and income of the
wealthy stimulate that process to an undue extent and
therewith the excessive construction of new productive
capital and in this respect there is much truth in the
theory. But it does not show us in what manner the
deleterious influence of the saving process takes place,
and therefore falls short of discerning the direct and im-
mediate cause of depressions. It loses sight of two im-
portant questions; first: If, at times of depression, the
savings funds do not find investment, where are they,
since they do not show up in the money market; and
again: If they do find investment, why do they not
give employment to working forces, and why should the
latter be so largely condemned to idleness?
********
There is another version of Theory No. 2; as it were,
a modification of same, which limits itself substantially
to the point that the production of such consumptibles as
are used by the working classes absorbs and employs
more working forces than are required in the produc-
tion of such commodities as are consumed by the wealthy ;
in other words, that $1,000 expended for the common
necessaries of life would bring more working forces into
action than $1,000 expended for luxuries; and that for
this reason the faulty division of income above referred
to works injuriously. If we thus limit the scope of the
Various Depression Theories. 69
theory, it is still less apparent why the said factor should
show its ill effects only at times of depression, or why it
should lead to a depression at one time and not at an-
other. Nor is the very starting point of this version of
the theory correct. True, the manufacture of $1,000
worth of luxuries calls for a smaller number of workers
than would the production of $1,000 worth of necessaries;
but we have to bear in mind that the individuals produc-
ing the luxuries will, on their part, when expending
their income, create a demand for common necessaries.
And when adding the latter class of demand to the other
it is not apparent why there should be any deficiency in
the aggregate.
DEPRESSION THEORY NO. 3.
(DISPROPORTIONS.)
The fundamental part of this theory hinges on dis-
proportions existing between economic factors; too much
of the one, too little of the other. There may be a dis-
proportion (1) between the various lines of production;
(2) between the aggregates of city population and country
population; C3) between the volume of capital flowing
into some lines of business and that flowing into other
lines; (4) between the income of the wealthy and that of
the working classes; (5) between the volume of produc-
tive capital and the demand for its products and in
fact between many other economic factors such as ought
to maintain due proportions to one another.
In sum and substance Theory No. 3 ascribes economic
disturbances to a lack of system in productive activity
to the absence of a governing power controlling produc-
tion and distribution which would cause the various eco-
nomic factors to work harmoniously with each other.
****:;:=*#*
When examining the various forms of disproportion
70 Various Depression Theories.
enumerated above, we first ought to eliminate those given
under Nos. 4 and 5 the one having been already treated
of under "Theory No. 2," page 66, and the other being so
closely related to the main theme of this treatise as not
to require especial consideration in this place. As a mat-
ter of fact. Theory No. 3 is generally understood to con-
fine itself chiefly to such factors as relate to the broad
fields of production. Limiting our discussion accord-
ingly, and weighing the pros and cons as to whether de-
pressions and disturbances can really be traced to dis-
proportions of this nature, the following objections would
present themselves:
OBJECTION NO. 1. That there is, in many lines of
business, an excess of the means of production cannot
be doubted; but is there an excess of actual production?
Is not the so-called over-production becoming more and
more a matter of the past, and does not production under
modern conditions adjust itself very closely to the de-
mand? Take, for instance, iron and steel, the output
of which a few years ago attained -enormous proportions
in the United States did not the production promptly
decline with the diminution of the demand in 1903 and
1904? ^Was there, at any time, a real overproduction in
this line, or in any other line of manufacture, that did
not speedily correct itself?* If we find a close adjust-
ment of the supply to the demand to obtain everywhere,
* A seeming exception to this rule may be found in the produc-
tion of copper in the United States, enormous over-supplies having
come to light in 1903 and again in 1907. In both instances, however.
the overproduction was intentional, forming part of a scheme for
manipulating the stock market. While the overproduction went on,
an artificial scarcity of the metal was created by means of hiding a
part of the output out of sight, the public being made to believe that
all of the enormous production was quickly selling at excessive
prices. On the strength of this belief the shares of the copper min-
ing companies advanced to high figures and were then unloaded by
the "insiders" on this inflated basis. When the truth became known.
and the over-supplies came to light, an enormous drop of prices
ensued, not only in the metal but more so in the shares, which en-
abled the insiders to buy their shares back at half the price they
had sold them at. Such manipulative overproduction does not dis-
prove the rule stated in the text above.
Various Depression Theories. 71
we evidently have no right to assert that there is too
much production going on in the one line of business
and too little in the other. Or take as another kind of
disproportion the flocking of the country people into the
cities is not the main reason for this migration to be
found in the fact that city work pays better than farm
work? And if so, does not this migration rather tend
to correct a disproportion than to create one? Finally,
referring to the third kind of disproportions mentioned
above, is there much truth in the oft-repeated assertion
that too much cash capital is flowing into some lines of
business, and too little into others? Do not investors nat-
ural Jy select such lines of business as are least overrun,
and which therefore give best promise of adequate re-
turns? True, such a promise may subsequently fail of
fulfillment, owing to a falling off of the demand. For ex-
ample, prior to 1903 much cash capital went into the con-
struction of iron and steel plants in the United States,
and when later on the demand for the product of these
plants fell off, much was heard about the expansion hav-
ing been out of proportion to the real requirements. But
did such disproportion exist at the time the investments
were made?
The gist of Theory No. 3 is represented by the assump-
tion that a partial overproductive engenders a general
overproduction. But if the former does not exist, how
can the general overproduction be ascribed to it?
OBJECTION NO. 2. If we were to believe that the
maintenance of proper proportions between the various
lines of production insures prosperous times and a dis-
proportion leads to the opposite result, we might ask the
question, Did the business men of the United States ex-
ercise good judgment in this direction all through the
thirteen years of prosperity from 1880 to 1893, while in
the subsequent four years of depression they failed to do
72 Various Depression Theories.
likewise? The supposition which this question implies
is simply preposterous, and Theory No. 3 certainly can-
not stand where it leads to such conclusions. As a mat-
ter of fact, the business men acted just as intelligently at
the one period as the other, and at either time did their
best to adjust their production to the requirements of the
market.
True, there is one line of production that is in a great
measure beyond control by human foresight, and where
the annual output therefore may vary considerably; that
is. agriculture. The products of agriculture represent
such a large share of the total production that their
scarcity or abundance should certainly affect the aggre-
gate in the manner assumed in Theory No. 3, were that
theory correct. As a matter of fact, however, we find a
poor crop to occur now and then in a period of pros-
perity, and a good crop while times are bad, but as a rule
the general drift of business is not reversed by such oc-
currences. If overproduction in such an important line
as agriculture fails to turn the tide, how can we expect
such a result from other lines, which are on the one hand
less important and on the other far more within human
control ?
OBJECTION NO. 3. Obviously the principle of dis-
proportion, as enunciated in Theory No. 3, could be held
responsible for depressions only if it could be proved to
lead to a diminution of the general demand.
Theory No. 3 attempts such a proof on the following
line of reasoning: In one or some lines of business there
occurs an overproduction, or at least excessive competi-
tion. In consequence, prices in those lines will fall;
therewith the income of the respective producers; and
therewith their purchasing power. Owing to this lessen-
ing of the purchasing power on the part of these individ-
uals the producers in all other lines of business cannot
Various Depression Theories. 73
sell them so much as before; therefore these other lines
will also suffer, and the partial overproduction becomes a
general one.
Let us see how far this line of reasoning can stand
scrutiny. To this end let us select some special trade,
say, the shoe business, and let us assume, for the sake
of argument, that this industry embraces 10 per cent, of
all the working forces 6 of the community. Let us desig-
nate the people so engaged as Group D ; the remaining 90
per cent., embracing all other lines of business, as Group
S. Suppose the first-named group be compelled, by sharp
competition, to reduce the selling price of shoes by 20
per cent.; will the members of the other group (S) really
suffer thereby and find their purchasing power lessened?
To investigate this question, let us further assume the
purchasing power of the whole community to be $1,000
per annum, of which $900 comes from Group S and $100
from Group D. Now, suppose that the break in prices
above referred to, sets in, and that Group D will subse-
quently realize only $80 for their goods (shoes) instead
of $100 as before; which means that the purchasing
power of Group D is lessened by $20. Evidently the
members of Group S will now spend less money for shoes.
If their expenditures on this account had formerly been
$90 per annum, they can now buy the same goods for $72,
and have $18 over, which amount becomes available for
buying other kinds of commodities, additional to those
theretofore purchased by that group. This increased
purchasing power on the part of Group S will give em-
ployment to a third group, T, to the amount of $18, and
the latter group will at once become a purchaser to that
extent and will fully make up for the reduced purchasing-
power of Group D. Even the seeming discrepancy be-
tween the surplus of $18 coming to Group S as against
the loss of $20 sustained by Group D, disappears when
74 Various Depression Theories.
considering that the members of the latter g'roup, who so
far have been spending $10 per annum to buy what they
themselves needed in the line of shoes, can now buy what
thpy need for $8, so that their real loss of purchasing
power conies to only $18, not $20.
Now let us figure the totals. Owing to excessive com-
petition among those employed in the shoe business, their
purchasing power becomes reduced from $100 to $82;
that of all other classes rises from $900 to $918; making
an aggregate of $1000. Before the sharp competition set
in, the aggregate purchasing power amounted also to
$1000. Where, then, does the falling off of the demand
come in?
Thus when going into details and resorting to figures,
we find no substantial basis for the assertion that the
cheapening of some lines of goods, caused by a partial
overproduction or by excessive competition, in any line
of industry,, should lessen the purchasing power of the
community as a whole, or reduce the aggregate of the de-
mand. Just the reverse takes place the cheapening of
any line of goods will benefit the community ond increase
its purchasing power perhaps not in terms of money,
but certainly in the volume of goods which the money
will command. A &
V V V V ~;.' ^ w ^F
When speaking of overproduction, economists often
do not mean excessive production of the commodities as
such (which, as stated before, is more and more becoming
a matter of the past) but an excess of the means for
production. By overproduction in any special line they
mostly mean an excess of productive capital in that line.
And it is the alleged disproportion in building up pro-
ductive capital, too much in the one branch of industry
and too little in the other, to which they principally
ascribe the derangement of business and the resultant
depression.
Various Depression Theories. 75
But a depression cannot take place without a falling
eft' of the demand ; and why the demand should suffer
owing to the said disproportion, that has never been
proved. Any attempt to establish such a proof would
at once come to naught when trying to substantiate it
by means of figures.
Suppose there be an excess of cash funds invested in
the creation of bicycle plants and too little in shoe fac-
tories; true, this disproportion will result in a lessened
demand for working forces so far as the building of
shoe factories is concerned, but will not this be fully
compensated for by the increased demand arising from
the building up of the bicycle plants? And if the said dis-
proportion will not reduce the demand while building
the factories, have we more reason to believe that it will
do so later on, when operating them? It might be
held that while part of the bicycle plants would stand
idle for lack of work, there would not be shoe factories
enough to meet the demand for shoes, and to give em-
ployment to the hands required to supply this demand.
But if such were the case, we should expect to see on the
one hand a sharp rise in the price of shoes and on the
other hand a lack of cash funds available for building up
new factories in this line while as a matter of fact we
find neither the one nor the other, in any line of business,
except under unusual circumstances. Where are those
lines of industry which offer opportunities for safe and
paying investment at times of depression, and for which
the fundc to make use of such opportunities cannot be
obtained?
Here we encounter the vulnerable point of the theory
that too much cash capital goes into the one line of busi-
ness and too little in the other. Were this assumption
true, the neglected line should be noted for high prices
and scarcity of supply, as the only possible result of that
76 Various Depression Theories.
disproportion. The adherents of said theory, however,
argue the other way, and contend that the lack of invest-
ment funds going into the neglected line, and the conse-
quent restriction of the means of production, would re-
sult, not in high prices and scarcity of the supply but in
overproduction and low prices a paradoxical conclu-
sion, to say the least.
Out of the great number of theories which econo-
mists have brought forth to explain the cause of depres-
sions, I have, in the foregoing pages, been discussing the
three which count the greatest number of adherents. All
these theories ascribe the depression to the relaxation
of new constructions, differing, however, as to the causes
of this relaxation; the one theory assigning it to a lack
of the funds necessary to keep up the rapid expansion of
productive capital, such as took place in the preceding
"boom" period: the other assigning the relaxation to the
excessive income of the wealthy classes, which is thought
to lead to an excessive construction of new productive
capital and to an undue stimulation of the supply, so
much so that in course of time the demand can no
longer keep pace with the supply; the third theory as-
signing the relaxation to a disproportion between the
economic factors that should maintain an equilibrium in
order to avoid overproduction. But while each one of
these theories regards the lull in new constructions as
being an indispensable prerequisite for the setting in of
the depression, this lull, as will be shown later on, is
neither the direct and immediate cause of it, nor indeed
an indispensable prerequisite. I repeat that if we recog-
nize the true cause of depressions and find the means
of removing it, the process of new constructions might
practically come to a standstill, and yet business would
prosper.
CHAPTER V.
THE "NEGLECTED POINT" AS THE
TRUE CAUSE OF DEPRESSIONS.
IN Chapter 3 it has been shown that savings, such as are
available for investment, will, in times of depression,
find investment in the Capitalistic (capital-producing)
Form only to a limited extent, the balance finding it in
the Impairing Form. It has also been shown that, if they
are so invested, a diminution of the demand, with all its
ill effects, is the inevitable result.
Now I wish to emphasize that when speaking of the
*' Impairing Form of Investment" this term should not
be understood as attributing these ill effects to the in-
vestment as such, the act of investing being invariably
beneficent, from an economic standpoint, inasmuch as it
restores the savings funds to the channels of industry and
trade, thereby preventing the hoarding of funds and the
strain resulting therefrom which would otherwise be en-
tailed by the saving process.
Seemingly there is a contradiction in the two fore-
going paragraphs, one of them stating that the invest-
ment, if made in the Impairing Form, means a diminu-
tion of the demand; the other, that the investment as
such will not lead to a diminution of the demand. Some
lifirht may be thrown on this seeming contradiction, how-
ever, if we bear in mind that the act of investing is a se-
quence of the act of saving, these two acts being often
considered as mere phases of the accumulation process.
Can the disturbing element, if not due to the invest-
ment process, be charged to the saving process?
Is it possible that the saving activity as such can
78 The "Neglected Point" as the
exercise any injurious influence in the direction of cur-
tailing the demand that is, the demand for working
forces J ?
All economists agree that it can. In its primary stage
the saving process is always accompanied by an injuri-
c-us tendency, inasmuch as the saver is constantly trying
to buy less from the community in the line of goods or
services than he sells to it, and thus is disturbing the
equilibrium of supply and demand. This equilibrium is
restored only by the investment. It is understood that by
means of the investment the demand for goods or services
i. e., for working forces 6 will reappear in the market.
Thus, if somebody saves $1,000 he will first create what
we might call a "minus of demand" to the extent of
$1,000. But whenever he invests his savings, say, in
building a house, the money is spent for labor, for pro-
duction of the necessary material, supervision, etc. ; so
he transforms the $1,000 into wages and profits, i. e.,
into income for others, and in doing so he employs work-
ing forces and creates a demand for them fully sufficient
to couterbalance the minus of demand referred to above.
But while this restoration of the equilibrium between
supply and demand will undoubtedly take place under
the Capitalistic Form of investment, that is, where new
constructions of some kind are being created, will it also
take place under the Impairing Form, where, as we have
seen in Chapter 3, the act of investment will not call for
working forces? Will the minus of demand, and the
consequent unemployment, as originally caused by the
act of saving, be wiped out by the act of investment,
where the latter brings no demand for working forces
with it? Certainly not. Under such circumstances the
injurious tendency connected with the primary stage of
the saving process is no longer counterbalanced, and if
not counterbalanced it will go into effect. This being the
True Cause of Depressions. 79
case, it must be the saving activity, not the investment,
to which are due the harmful results that follow. The
mode of investment merely determines whether those
harmful tendencies inherent in the saving process become
operative or not. They certainly will become operative
whenever they are no longer counteracted by the invest-
ment, i. e., whenever the latter assumes the Impairing
Form.
To recall to our mind the modus operandi of that
peculiar form of investment, let us repeat its salient
points, as developed in Chapter 3.
Whenever the Impairing Form of Investment prevails,
as is the case in times of depression, the savers do not
apply their funds in such a way as to turn them into in-
come for those whom the funds go to. They do not buy
personal services with the money, nor goods for consump-
tion, because that would be spending the money, whereas
they mean to save it; nor do they (or others for them)
invest it in building up new productive capital, because
new enterprises rarely pay in times of depression. They
need not do either, and still they can invest their funds;
the opportunities for doing so turning up in a rather
roundabout way. Inasmuch as they abstain from going
into new constructions, the group of working forces 6 or-
dinarily employed in such constructions is reduced to
idleness. The income of these working forces diminishes
accordingly. The loss of income means a lessening of
their purchasing power; this, a slackening of the demand
for commodities; this again, a curtailment of thepro-
ductionv? such commodities and a lack of employment
for the producers and distributors of same. Thus the en-
forced idleness of the first-mentioned group of working
forces, the 1 1 Constructive Forces, ' ' will react upon another
group, in the line of the "Commodity Working Forces 7 , "
reducing them to idleness also (at least to some extent),
80 The <: Neglected Point" as the
and this process of action and reaction will spread from
the second group to the third, from there to the fourth, to
the fifth, and so on, bringing with it in every instance a
diminution of the demand and a corresponding annihila-
tion of income, and thus causing a considerable multipli-
cation of the ill effects and of the unemployment sus-
tained by the first group. The loss of income of, say,
$1.000 on the part of the first group may, by reason of
this "Multiplying Principle", be augmented to a total
loss of income of perhaps $3,000, or $4,000 or $5,000
(varying according to circumstances), distributed among
many groups of individuals.
These groups are composed not only of working men
but also include business men, many of whom find their
trade and their income more or less curtailed, and in
consequence are "running behind" where they used to
make a profit. To meet their expenses, they find them-
selves compelled to borrow, or to realize on their prop-
erty. When they do, the funds of the savers come into
action, either by supplying the money needed to make the
loans, or purchasing property such as the impoverishing*
owners can not hold.
It is in this manner that "Excess" Savings, (see page
38) the kind of savings characteristic of times of depres-
sion, are invested. The savers, or those acting for them,
will not employ their funds so as to create new wealth
or productive capital, but will simply confine themselves
to buying capital goods (fixed property, securities, etc.)
already in existence. The savings funds re-enter the gen-
eral circulation of industry and trade not by the act of
investment, but by the expenditures of the impoverishing 9
borrowers and sellers, who expend the money to meet their
living expenses or their losses in business. No working
forces, therefore, will be called into action, by the act of
investment, under such circumstances. And if so, the
True Cause of Depressions. 81
original minus of demand, caused by the act of sav-
ing, is not compensated for by the act of investment.*
All economists agree that the saving activity will cause
a minus of demand unless this minus be counterbalanced
by the act of investment. And inasmuch as practically
all savings funds are invested (otherwise they would ac-
cumulate in the money market) the economists concluded
that such counteraction always does take place, no mat-
ter what the particular form of investment. We have
shown, however, that this is the case only if the savings
are invested in the Capitalistic Form, not if in the Im-
pairing Form. The latter form will, quite automatically,
become operative as soon as the opportunities for Capital-
istic Investment grow scarce. Whenever they do, the
saving process changes its 'character. Its inherent per-
nicious tendency will no longer be checked, and the sav-
ers' everlasting endeavors to increase the supply and re-
duce the demand will no longer be restrained from
becoming effective resulting in that disparity between
demand and supply which we call depression.
Here we encounter the factor which introduces the
minus of demand into our business organization as a posi-
tive, definite and unmistakable element the long-sought-
for cause of the chronic disparity between demand and
supply, and the true cause of depressions.
##*=#*:####
I have so far, in this treatise, spoken of the "Impair-
ing Form of Investment"; more properly it should be
called the "Impairing Form of Saving." Though the
manner of investment decides whether any harmful con-
sequences take place or not, we should not lose sight of
* Further argument on this point will be found in Chapter 6,
especially on pages 92, 96 and 118.
82 The "Neglected Point" as the
the fact that the source of the harmful tendency is to be
found not in the investment but in the saving process.
If the latter process could be brought under control, and,
at times of depression, could be so circumscribed that
Excess Savings more properly called "Impair Savings"
would become impossible, i. e., that no savings could
be made except such as can find investment either for
Replacement purposes, (see page 36) or in the Capitalistic
Form in other words, if people could be compelled to
expend for luxuries such part of their surplus income as
could not find investment in the two ways just men-
tioned, the depression would at once be brought to an
end. There would not then be an excess of working
forces, since they would be absorbed in the production
of luxuries (see page 108), so far as not employed in new
constructions or for purposes of Replacement. Given the
possibility of checking or controlling the people's saving
activity so as to prevent the formation of "Impair Sav-
ings," a relaxation in new constructions, in fact their
complete suspension^ might take place, and still business
would prosper, for there would be no disparity between
the aggregate demand (for working forces) and the ag-
gregate supply.
If, then, the suspension of new constructions does not
necessarily lead to a depression, while the saving pro-
cess, in its Impairing Form, most positively does so, it
follows that the latter factor is the more powerful, the
deciding one. As a matter of fact, this factor constitutes
the ruling feature of all depressions.
*********
A billion dollars of savings, applicable to the creation
of new capital or wealth, but not so applied, can not find
investment unless the non-savers of the community either
become indebted or alienate property to the amount of a
billion dollars. In Chapter III I have shown what factors
True Cause of Depressions. 83
come into play to compel the non-savers to part with
their property or to run into debts namely, falling off
of the demand, unemployment, lack of income, and con-
sequent impoverishment all of these factors being
brought into existence by the same primary factor: Im-
pair Savings.
Thus a strange duplex action of the saving process
can be observed whenever it assumes this "Impairing"
form: on the one hand that process creates cash funds
which, once accrued, will seek investment; on the other
hand it creates market conditions which enable those
funds to find investment the bridge between Impair
Savings on the one hand, and their investment on the
other, being the impoverishment of the community. This
specific duplex action, which constitutes the ruling fea-
ture of the "Impairing" form of the saving process, and
which comes into play especially at seasons of depression,
opens up a new field for investments strictly in propor-
tion as the regular fi&d- *' investment, the formation of
new productive capital, narrows down.
******
The Impairing Form of Investment is not solely con-
fined to periods of depression. It pervades all times,
varying in intensity, however. It may be considered as
the complement of the Capitalistic Form, inasmuch as the
two forms, co-existing as they are, absorb between them-
selves all savings funds that are not needed for Replace-
ments (see pajxe 36). But the share of absorption be-
tween the two forms varies. At very prosperous seasons
most of the savings will be invested in the Capitalistic
Form, and only an insignificant share in the Impairing;
at hard times, however, the proportion may be half and
half. An intermediate proportion will prevail at seasons
which are neither prosperous nor poor. In new and
progressive countries, like the United States, the Cap-
84 The "Neglected Point" as the
italistic Form will predominate; in unprogressive coun-
tries, like China, the Impairing Form. The latter is also
more pronounced in highly developed countries, where
most of the available resources have already been cap-
italized and where, in consequence, we find the masses
not so well employed as in the United States, occupying
a lower standard of life in consequence. That the two
forms of saving co-exist in our communities, is clearly
shown by the results; we see on the one hand a constant
increase of capital, due to the Capitalistic class of saving ;
on the other hand a chronic lack of demand, due to sav-
ing of the Impairing class.
The individual saver seldom has any means of know-
ing whether his funds belong in the one class or in the
other; nor does he care to know, as in either case he can
invest them. He may put them in a savings bank, or loan
them out on mortgage, or buy a house, or securities, or
other kind of property with them; but what finally be-
comes of the funds, after he has thus transferred them to
others whether they serve to increase the country's
wealth or whether they do not, that is none of his busi-
ness, and is, in most cases, beyond his control.
As a rule we may take it that such funds as the saver
does not make use of himself, will always be invested in
the Impairing Form, this being their natural and primary
tendency, unless they be deflected from that course by
being drawn into some capitalistic enterprise. Looking
at the matter from this standpoint it becomes clear why
savings, if not finding investment in the Capitalistic
Form, will, quite automatically, find it in the Impairing
Form. **.*****
It should be well understood that the harm brought
about by Impair Savings is of a temporary nature only;
it ceases as soon as the savings funds re-enter the channels
of industry and trade, which is the case whenever they are
True Cause of Depressions. 85
spent for purposes of consumption, and are thus turned
into goods or services.
As it were, each individual case of saving, of the Im-
pairing Form, brings with it its own sphere of ill effects,
the latter terminating as soon as the funds are finally
expended for consumptibies. As a general rule the pro-
cess, from beginning to end, is short-lived, so far as each
individual case is concerned. But the multitude of cases
and their constant recurrence, in connection with the
aggravation caused by the Multiplying Principle, pro-
duce those conditions which in their entirety manifest
themselves in the shape of stagnation in trade, and in the
consequent unemployment of a large part of the working
forces.
How long it takes before the harmful action is termi-
nated in each individual case, and how much scope the
Multiplying Principle has had in the meantime, depends
upon circumstances, which have been explained in the
footnote on page 49.*
* In connection with the varying results traceable to the opera-
tion of the saving process in the different countries, a peculiar point
of great practical importance should not be lost sight of. One would
naturally conclude that if Impair Savings are the underlying cause
of the disproportion between demand and supply, then, the greater
the aggregate of Impair Savings, the greater the injury they bring
about; as it were, Impair Savings aggregating three billions should
be three times more harmful than an aggregate of one billion. This
conclusion, however, is subject to important modifications.
For the sake of illustration let us imagine two provinces whose
resources are being drained by the enemy, one of them having been
subjected to forced contributions for a year or two, the other only
for a short time. Naturally the contributions come in more freely
from the latter province than from the former, whose resources are
fairly exhausted. Suppose the proportion of the contributions be as
3 to 1. Now, if we were to take this proportion of 3 to 1 as a meas-
ure of the damage relatively sustained by the two provinces, we
would be wrong, inasmuch as the exhausted province may suffer far
more from the extortion of one million than the other from the loss
of three millions. Just so with regard to the injury sustained by
different countries from Impair Savings. In the United States the
latter may aggregate one billion during a year of depression; in
China, the country of permanent depression, they may not aggregate
one-quarter of that sum, and still work far more mischief than the
larger sum in the United States. To account for this, we have to
bear in mind that Impair Savings necessitate a change of posses-
sion, the non-savers losing property in the same proportion as the
savers acquire it, and evidently this change of possession can more
readily he effected in a rich country, where there are many wealthy
non-savers who have property to lose, than in a country like Chi-
86 The "Neglected Point" as the
Though the harmful action, brought about by the Im-
pair Savings, ceases as soon as the savings are expended
for commodities, it is important to remember that such
expenditure can not take place before the damage is
done - ********
According to the views now prevailing on the sub-
ject, savings, as a rule, will benefit the community if in-
vested, and will prove harmful only if hoarded. Look-
ing at the matter in the light of our investigation, how-
ever, we find that savings are invested to a large extent
in a manner which will not benefit the community, but
impoverish it and will largely impede trade and business
activity. Let us summarize the leading features of these
various forms of the saving process, including the hoard-
ing form (always keeping in mind that the difference be-
tween the several forms depends entirely upon the man-
ner of applying the savings) as follows:
THE HOARDING FORM, where savings are not invested
at all, but remain in the shape of idle cash funds, at
least for a long time. This form is known to be
highly injurious to business.
na, where poverty is the rule. And we further have to bear in mind,
that until this change of possession is effected, the saved-up-funds
will not re-enter their legitimate course in the channels of industry,
trade and consumption (the Red Ring of the Chart), and in the
meantime the "lack of demand" will multiply, unemployment will
spread, and incomes will shrink amongst the producing classes.
The injury, therefore, which is brought about by Impair Savings
cannot be gauged by the totals which they represent, but is de-
pendent very much upon circumstances. As a general thing, the
poorer a country, the more harm will they bring about, and the
more will the harm be likely to assume a permanent character; the
richer a country, the less harm. Within one and the same country,
however, the damage done will more closely correspond to the ag-
gregate of Impair Savings, though even here an exact ratio does not
obtain; doubling the amount of Impair Savings will more than
double, perhaps quadruple, the annihilation of income.
In a certain way we may liken the harm done by Impair Sav-
ings to that done by hoarding. An amount of $1,000, withdrawn
from circulation and hoarded, is sure to bring with it more or less
disturbance by engendering a diminution of the demand; but evi-
dently to a far greater extent in a country like China where cash
funds are quite scarce (and where their disappearance is more felt)
than in the United States, where they are incomparably more
abundant. What holds true of hoarding also holds true of Impair
Savings, though in a lesser degree.
True Cause of Depressions. 87
THE CAPITALISTIC FORM, where savings are invested
in the creation of new wealth, principally such as con-
sists of productive capital. Here the act of invest-
ment will turn the savings into income for those to
whom the money goes, in the shape of payment for
services rendered ; which services may be rendered
either in the construction of said capital, or in the
production of the material for it. This form entails
no lack of demand for working forces (though there
is more or ]ess shifting of the latter), but will rather
stimulate the demand, and tend to increase produc-
tion and to help business. It enriches the savers as
well as the community, and is the basis of all accu-
mulated wealth.
THE IMPAIRING FORM, where savings are invested
not in the creation of new wealth but in the acquisi-
tion of property already existing; this in connection
with the impoverishment 9 of the previous owners, and
the impoverishment being brought about by the very
saving activity on the part of the savers. * This form
of saving differs from the Hoarding Form inasmuch
as the savings funds are not left idle for any length
of time, but are seeking a^d finding investment. It
differs from the Capitalistic Form inasmuch as it does
not lead to the formation of new capital. It en-
riches the savers at the expense of the non-savers,
making the latter lose as much property as the savers
gain, but in addition making the community lose in-
come to a much larger amount (see page 43). It
tends to lessen the demand and thereby to impair
business activity, though not to such an extent as the
Hoarding Form does.
The three forms of saving enumerated above com-
prise only such savings funds as are available for the
creation of additional wealth the "Net Savings " of the
Chart. Other savings are required for Replacements
* The above does not mean that if B, owing to impoverishment,
has to sell his house to A, it must be specifically A's saving activity
which made B poorer. His impoverishment is due to general market
conditions, to the lack of demand brought about by the concurrent
saving activity of a great number of individuals.
88 The "Neglected Point" as True Cause of Depressions.
(see page 36), and for various minor purposes. The lat-
ter, however, do not cut much of a figure so their dis-
cussion need not come within the scope of our present
inquiry.
********
Apparently ', depressions are due to the relaxation in
new constructions, this being the cause most generally
assumed in modern economics. The real cause, however,
must be found in the fact that the saving activity changes
its character the Impairing Form of Saving, as just
defined, prevailing to a much larger extent at times of
depression.
There is only one remedy for depressions, and that
is, The prevention of Impair Savings. To attain this end,
two methods are imaginable first, by creating unlimited
opportunities for profitable investment in building up
new productive capital, so that all savings, no matter to
what extent they accrue, can find investment in the Cap-
italistic Form which method, as explained on pages 62
to 64, would be impossible to follow out; second, by
checking the saving activity, so as to limit the aggregate
of savings to such a volume as can find investment either
in the Capitalistic Form or in Replacements (see page
36), and thus prevent the very formation of an excess of
savings. If we could bring the saving activity under con-
trol so as to allow it free scope only so long as savings
funds can find ready investment in the creation of new
wealth, but check it or impede it whenever the oppor-
tunities for such kind of investment become scarce
then we would have the means in our hands for prevent-
ing depressions. Whether a simple and practicable
means can be found to attain this end that ic a question
which it is not the purpose of this treatise to discuss.
CHAPTER VI.
PROS AND CONS.
THE primary cause of depressions has, in the previous
chapter, been traced to the saving process. Many
authors have, before this, arrived at the same conclusion
and have insisted upon the existence of such a connec-
tion, without, however, succeeding in proving it. Their
arguments were met by such forceful objections and
counter-arguments that all efforts heretofore made to
establish that connection, must be considered as failures.
As matters now stand, the great majority of economists
are inclined to look only at the bright side of the saving
process, not at its dark side. The latter, viz., its Impair-
ing Form, has so far remained unknown, and therefore
beyond the reach of consideration. Just so with the
Multiplying Principle, which is a sequence of that Im-
pairing Form. These two factors known, and their ex-
istence fully established, the situation is changed, and
the weak points of the above-mentioned counter-argu-
ments and objections can readily be discerned. 1 shall,
in the following pages, enumerate and discuss a number
of the "objections" above referred to, and shall further-
more consider some additional ones which, though not
taken from current literature, will readily present them-
selves, from the standpoint of the views now ruling, as
bearing agamst the Impair-Savings Theory, and I will
show where they are wrong.
OBJECTION I\IO. 1. --According to a well-established
axiom every producer who is willing to sell brings a de-
mand into the market equalling the value of the goods he
offers; for instance, if he offers to sell a hundred dollars'
worth of wheat, he does so with the intention of buying
90 Pros and Cons.
a hundred dollars' worth of other goods with the pro-
ceeds, which would mean a demand to that extent. This
demand asserts itself not only where he expends the
money in the usual manner, i. e., buying commodities, but
also if he saves it and invests it. The investment, no
matter in what shape it takes place, means buying some-
thing or other, and therefore means demand. Hence, the
view that there should be a shortage of the demand when-
ever the investment assumes a certain form (the Impair-
ing Form), contravenes the above-mentioned well-estab-
lished axiom.
REPLY. A. demand of some kind may spring up, due
to the investment; but this need not necessarily be a de-
mand for working forces and it is this point which de-
cides whether there will be unemployment, and event-
ually depression in trade or not.
Most economists do not admit this distinction and
they hold that the demand, irrespective of the shape it
assumes, will in some way or other lead to the employ-
ment of working forces 6 . Let us take some examples to
see whether this view will always agree with the facts.
Suppose that the man who realized the $100 from the
sale of wheat expends the money in the purchase of com-
modities. Then the latter will be reproduced, either in
the same shape or in some other shape, and this reproduc-
tion will call one hundred dollars' worth of working
forces into activity. Such kind of demand, therefore,
which calls for commodities, is practically identical with
a demand for working forces.
Suppose that instead of buying commodities the man
saves and invests the $100. applying it towards the build-
ing of a house. This would likewise give employment to
working forces, no matter whether the money be paid out
for wages or in the production of building material. So
the demand ensuing would also be of the desirable kind.
But if the investment does not take the shape of
new constructions or extensions or improvements, and
Pros and Cons. 91
does not lead to some enterprise that will set working
forces in motion, and is not absorbed in renewals or re-
pairs^ in other words, if the investment takes place in
that particular shape which is peculiar to periods of de-
pression can we still assert that the investment of the
$100 will create a demand for one hundred dollars' worth
of working forces? If it does, the manner in which this
is effected should be explained; but that has never been
done by our economists.
That a demand finally springs up, such as will convert
the savings funds into goods, remains undisputed. But
let us consider the conditions under which it arises.
In the regular course of business each individual's
demand (i. e., the final demand, either on his part or on
the part of his family, for purposes of consumption), de-
pends upon his income from wages, profits or whatever
source. And the extent of his income practically repre-
sents the potentiality of his purchasing power or demand.
Thus, the wheat-grower referred to above brings a hun-
dred dollars' worth of demand upon the market only be-
cause he has earned that much from the sale of the wheat.
And such earning power must be regarded, from an eco-
nomic standpoint, as the legitimate source of all demand.
But is it also the source of the demand where Impair
Savings intervene? No. Here the individual, as has
been shown in Chapter III, does not earn the $100 which
he expends for commodities. The demand which he
brings upon the market does not originate from his in-
come but from dire necessity, from the fact that he needs
food, and clothing, and shelter, in order to live. The de-
mand arising from this necessity exists quite irrespective
of his income, and irrespective of the amount of Impair
Savings accruing in somebody's hands. It would there-
fore be wrong to assume that the investment of these
savings funds originates the demand.
92 Pros and Cons.
Where the savings funds, when being invested, come
to the receivers in the shape of income, they create a de-
mand for working forces, the extent of this demand be-
ing dependent strictly upon the amount of the savings
funds. When invested in the Impairing Form, however,
the act of investment does not create such a demand.
There is a demand for commodities, but it is not caused
by the investment. Though the funds finally come to be
expended for commodities, the money comes to the re-
ceivers not in the shape of income, but through alienation
of property or by borrowing -over the bridge of their
own impoverishment.
OBJECTION NO. 2. The argument given in the
pages just preceding does not prove a minus of demand
to result from the saving activity, in its so-called "Im-
pairing Form." It is a well known fact that savings
funds, say $100, will, in the course of their investment,
be finally expended for commodities; then they will call
not only for goods but also for working forces (to re-
produce these goods), and this represents a demand for
$100 which offsets the original shortage of demand en-
gendered by the saving activity, no matter how the $100
comes to those who buy the commodities, whether in the
shape of income or in some other way. If the original
shortage is compensated for by a final plus, no minus
can remain.
REPLY. Much has been made of the fact that sav-
ings funds, no matter how they are invested, are finally
transformed into goods. To test the merit of this con-
tention, let us resolve the saving process into the three
phases of which, as a matter of fact, it is composed, and
note how these several phases vary in their influence
upon the demand for working forces, according- to
whether the saving process assumes the Capitalistic Form
or the Impairing always bearing in mind that (as as-
sumed above) a demand for commodities is equivalent to
a demand for working forces 6 .
Pros and Cuns. 93
THE THREE PHASES UNDER THE CAPITALISTIC
FORM OF SAVING.
PHASE A This comprises the saving activity as such.
As is well understood, the act of saving will, primar-
ily, tend to create a curtailment of the demand for
working forces.
PHASE B consists of the investment; either in some
enterprise or in some new construction, say, in build-
ing a house. Here, the act of investing brings em-
ployment to working forces, and therewith income,
thus counteracting the injurious tendency of Phase A.
PHA SE C consists of the transformation of the savings
funds into goods. This takes place whenever the
working forces to whom the money goes by the act
of investment, expend that money for consumptibles
and commodities.
THE THREE PHASES UNDER THE IMPAIRING
FORM OF SAVING.
PHASE AA The saving activity as such; which tends
to throw working forces out of employment, the same
as Phase A.
PHASE BB The investment; this is effected by the pur-
chase of capital 2 already existing, say, of a house,
sold by the owner to meet his living expenses; or,
eventually, by making a loan on the house. Here, the
act of investment provides neither employment nor
income for working forces; hence, the injurious tend-
ency emanating from Phase AA is not counteracted.
PHA SE CC The transformation of savings funds into
goods; this takes place whenever the loan, or the pro-
ceeds of the sale of the house (which, as premised, the
owner had to dispose of under the stress of necessity)
are being expended for commodities.
Comparing Phase B of the one form of saving with
Phase BB of the other, we arrive at a striking contrast.
94 Pro* and Cons.
In the one case the act of investment will create a de-
mand for working forces ; in the other it will not.
While the savings funds are in both cases finally
transformed into goods, a vital difference can be observed
before this transformation takes place. A sum of $100,
if invested under the one form of saving- will, as it were,
create two demands and will call for $200 worth of work-
ing forces, namely, $100 when the house in question is
being built and again $100 when the receivers of this
money (the builders of the house) expend it for com-
modities while under the other form only one demand
arises, viz., whenever the $100 is being spent for com-
modities.
Another point of difference, of highest importance,
comes to light when we consider the following: While
the investment, under the Capitalistic Form, gives rise to
two demands for working forces, and while the combined
process of saving and investing necessitates three de-
mands (one for the work of the saver, one for the work
of the builders, and one for the producers of the com-
modities called for under Phase C) we find, under the
Impairing Form, only two demands (one for the work of
the saver and one for the producers of the commodities
called for under Phase CC) ; but these two demands re-
quire the participation of three distinct parties (working
forces) before they can become effective: first, the saver;
second, the borrower 10 ; third, the producers of the com-
modities called for under Phase CC. Let us repeat, un-
der the Capitalistic Form of the saving process (saving
and investing combined) we find three sets of working
forces and a demand for each of them ; under the Impair-
ing Form it likewise takes three sets of working forces
(the saver, the borrower 10 , and the producers of the com-
modities) before the savings funds can find their way
back into the channels of production and trade but of
Pros and Cons. 95
these three sets only two will find a demand for their ser-
vices, the one set (the borrower) being condemned to
idleness.
Where we have three sets of working forces and three
demands, one for each, there is no occasion for a disturb-
ance of the equilibrium betwen supply and demand. But
a disturbance in the labor market is bound to follow
where, as is the case under the Impairing Form of Sav-
ing, we have three sets of working forces and only two
demands between them.
A disproportion in the labor market, with an undue
preponderance of the supply, means unemployment for
part of the working classes, lack of income^ lack of pur-
chasing power, lack of demand for commodities, and
stagnation m business.
This disproportion can not be remedied by a different
distribution of the working forces, or by removing part of
them to a different country. The presence of these unem-
ployed working forces, who consume (even though to a
much reduced extent) without producing, is essential to
furnish a contingent of borrowers 10 (as per Phase BB),
this in order to bring the savings funds back into the chan-
nels of production and trade otherwise the saving pro-
cess would assume the Hoarding Form instead of the Im-
pairing, and matters would be still worse. Though, as
just stated, the consumptive power of the unemployed is
much reduced, say, from 100 down to 20, the stepping in
of the Multiplying Principle (page 43) increases their
number so as to bring their combined borrowing power 10
up sufficiently to absorb all Impair Savings. Thus, while
it may take one set of builders to absorb $100 of savings
under the Capitalistic Form, in the shape of wages, it
may take five sets of builders to absorb the $100 under
the Impairing Form, in the shape of borrowings.
Pros and Cons.
It should be well understood that the saving process
will surely cause a dislocation between supply and de-
mand unless employment be given to working forces
BY THE ACT OF INVESTING. The mere fact that
a demand for working forces will spring up later on,
subsequent to the investment, is not sufficient.
The basic fact stated in "Objection No. 2" remains
undisputed, namely: While the saving of $100 will pri-
marily create a shortage of demand, there will be an
equivalent plus of demand, even under the Impairing
Form of Investment, when in the course of the invest-
ment the $100 is expended for commodities and trans-
formed into goods. But our economists are wrong when
concluding from this fact that the final plus will always
compensate for the original minus. They overlook the
possibility that, to obtain the final plus, it may take the
participation of two sets of working forces, with a de-
mand for the services of only one of these two sets, leav-
ing the other set unemployed as is so often the case at
times of depression.
OBJECTION NO. 3. While it is true that invest-
ments in new constructions will increase the demand for
working forces above the normal, a hundred dollars thus
invested giving rise to two demands of a hundred dollars
each, as explained in the foregoing pages; and while it
is true that if the investment takes place in a different
way, it may call for only one hundred dollars' worth of
working forces the latter form of investment should not
be construed as involving a minus of demand.
It' we turn to ordinary business transactions in the
line of production and trade, we find there, too, only one
demand for an equivalent supply, a dollar's worth of
the one for a dollar's worth of the other, and no-
body will construe this one demand to constitute a
minus of demand. Whj', then, should we have a minus of
Pros and Cons. 97
demand in the case of the so-called Impairing Form of
Investment, if admittedly every dollar so invested will be
turned into goods and will call for a dollar's worth of
working forces?
REPLY. The above contention is to some extent
identical with "Objection No. 2": but the principle in-
volved is so important, and my deductions differ so much
from accepted views, that it may not be amiss to analyze
the subject from various standpoints.
Above all we have to bear in mind that where the
supply represents work done, or services rendered by
working forces, the demand must involve a demand for
working forces, and not merely for capital goods, other-
wise it can not constitute an offset for the supply afore-
mentioned. In order to ascertain how far a demand for
working forces takes place under the Impairing Form of
Investment, in contrast with the demand arising in ordi-
nary business transactions, let us adopt a method similar
to that used in bookkeeping, where they put the Debit
on the one side and the corresponding Credit on the
other; but instead of following up Debit and Credit let
us ascertain demand and supply, putting the Demand
for working forces in one column and the Supply thereof
:n another. By this method we are enabled to compare
Demand and Supply under the two conditions above re-
ferred to, i. e., under the Impairing Form of saving and
investing, as well as where no saving takes place at all.
In making these comparisons a distinction should be
drawn between what might be called "active" supply of
working forces, i. e., where the latter are actually utilized
as against an "inactive" supply of working forces,
where the latter, though standing ready to do the work,
find no employment and are compelled to remain in-
operative.
98
Pros and Cons.
ACTIVE DEMAND FOR WORKING FORCES
COMPARED WITH THE ACTIVE SUPPLY THEREOF.
FIRST. UNDER ORDINARY BUSINESS CONDITIONS COMPRIS-
ING ONLY PRODUCTION AND CONSUMPTION: ALL SAVING
BEING EXCLUDED.
A, a non-saver, who produces goods worth $100,
and consumes goods worth $100, will supply
active working forces to the amount of
and a demand for working forces to the
amount of
B, the individual (or group of individuals) who
by his work earns the $100 expended by A,
and in turn expends money for consumpt-
ibles to the like amount, will supply active
working forces worth
and a demand for working forces to the
amount of
Supply.
$100
$100
Demand.
$100
$100
From the above comparisons, which may be continued
ad infinitum, it will readily be seen that so long as the
saving process does not come into play there need be no
minus or shortage of demand, and no dislocation between
demand and supply, a dollar's worth of the one quite au-
tomatically giving rise to a dollar's worth of the other.
SECOND. WORKING FORCES AS AFFECTED BY THE IMPAIR-
ING FORM OF SAVING.
A, a saver who produces and sells goods worth
$100 (which amount, let us assume, he saves)
will supply active working forces to the
amount of
Whon investing the $100 saved as above
he buys property already existing, but of
working forces he buys
B, the seller of that property and receiver of the
$100, does not get the money for services
rendered, his services not being called for
and remaining "inactive.." so the "active"
working forces he supplies amount to
When expending the money for con-
sumptibles he brings into the market a de-
mand for working forces amounting to
Supply.
$100
nothing
Demand.
$100
Contrasting the two tables given above, we find that
while under the conditions set forth in Table No. 1, the
supply always creates an equivalent demand, and con-
sumption goes hand in hand with production, represent-
ing what is termed "productive consumption," Table No.
2 represents a certain class of ''unproductive consump-
tion"; B, the consumer, being forced to idleness, and his
services remaining uncalled for, owing to the lack of de-
Pros and Cons.
99
mand in the market. This lack of demand is caused by
the saving activity of A, in conjunction with that of many
other individuals, as explained in Chapter III. While the
saving activity of A may not directly lead to the forced
idleness of B, it certainly causes a lack of demand some-
where and helps to create general market conditions
which reflect upon B and under which he suffers.
On further comparing the two tables we find that the
Impairing Form of Investment, as per Table No. 2, neces-
sarily calls for two men (or groups of men), the one, A,
supplying: working forces (his own) to the community,
but buying none from it; the other, B, buying working
forces without supplying any. So, between these two
parties (working forces) there is only one demand and
one active supply. Quite different are the conditions set
forth in Table No. 1. There we see that A not only sup-
plies but also buys, and that B not only buys but also
supplies. So we perceive two demands and two supplies
on the part of these two men; whereas, under the con-
ditions as per Table No, 2, only one supply and one de-
mand can be found to appertain to the two men which
means unemployment on the part of B.
If, to make the comparison complete, we should ex-
tend this method of investigation to the Capitalistic Form
of saving, our table would be changed as follows :
THIRD. WORKING FORCES AS AFFECTED BY THE CAPITAL-
ISTIC FORM OF SAVING.
A, a saver, who produces and sells goods worth
$100 (which amount he saves) will supply
active working forces to the amount of
When investing the money saved as
above, say in building a house, he creates a
demand for working forces to the amount of.
B, the individual, or group of individuals, who
are employed in building the house, bring
an active supply of working forces into the
market amounting to
When expending this money for con-
sumptibles, they bring into the market a de-
mand for working forces amounting to
Supply
$100
$100
Demand.
$100
$100
100 Pros and Cons.
Contrasting the outcome of the three tables we find
that under the conditions represented by Tables No. 1
and 3 the supply always engenders an equivalent demand
for working forces; while under the conditions covered
by Table No. 2 it does not. In the latter case the savers
sell their goods or their services to "others," but do not
give "others" an opportunity to earn their money back.
This class of saving brings upon the market a "lack of
demand" as a tangible, definite and positive element a
fact which fully confutes the position taken in "Objec-
tion No. 3." ********
To maintain an equilibrium between the supply of
working forces and the demand therefor, each man
(workingman, trader, capitalist &c.) who earns a dollar,
i. e., who renders a dollar's worth of services to others,
should buy a dollar's worth of services from others. It
does not matter whether he buys direct, or through his
family, or through third parties; nor does it matter
whether he earns the dollar through handiwork, or brain
work, in the shape of profits, or of interest, or in any
other way, all of which should count the same as services
rendered; the point being that where he earns a dollar
from the community he should give "others" an oppor-
tunity to earn the dollar back. He does so if he buys
commodities, or if he invests the dollar in some enterprise
or construction, or if he saves it and puts it in the money
market and subsequently somebody else invests it in some
construction or enterprise. If not so invested, however,
and if coming to those "others" in the manner described
in Table No. 2, the dollar does not buy the services of
these others by the act of investment. Then a disturb-
ance of the equilibrium between the supply of working
forces and the demand for them is bound to ensue.
OBJECTION NO. 4. If depressions were due to the
saving process, the countries most noted for the saving
Pros and Cons. 101
habits of their people, like France, should be the ones
suffering most from depressions and unemployment. The
reverse is true. As a matter of fact, we find France to
be the country least subject to depressions and their at-
tendant disturbances, and possessed of such a high degree
of wealth as to confirm the commonly-accepted view that
the most saving nations are the wealthiest.
REPLY (a). The foregoing Objection is wrong in
two respects: first, in losing sight of the difference be-
tween savings and Impair Savings a larg volume of
the one being by no means identical with a large volume
of the other; second, in assuming that the peoples of
greatest saving propensities are the wealthiest.
It is not the extent of the saving activity and not
the volume of surplus earnings which does the harm; all
depends upon the manner of investment. In a country
like the United States the surplus earnings accruing in
the course of a year may be ten times greater than in a
country like China, still there may be "too much saving"
in the latter country, and in the former not enough to
meet the requirements, i. e., not enough to supply the
funds needed for new enterprises. Even in one and the
same country the savings 1 may at one time be quite large
and still not too large for the country's well-being; at an-
other time they may be much smaller and nevertheless
too large to be absorbed to good advantage. In the
United States the present (1906) rate of Net Savings ac-
cruing, available for new enterprises, exceeds three bil-
lions annually; yet there would be room for additional
savings funds if they could be had. Twelve years ago
(1894) they may not have aggregated much more than
half of that sum, yet they were too large to be absorbed
in the Capitalistic Form, i. e., in the creation of new pro-
ductive capital or wealth, so they were partly invested
in the Impairing Form, and at once became harmful. I
102 Pros and Cons.
repeat, all depends upon the manner of investment as to
whether the saving activity is beneficial or otherwise, not
upon the volume of savings.
REPLY(b). As to the alleged fact that the most
saving nations are the wealthiest, we first have to define
what is meant by a "saving nation," and in this connec-
tion have to make a sharp distinction between mere saving
propensity on the one hand and actual saving, i. e., ac-
cumulating, on the other. Paradoxical as it may seem,
nations of great accumulating power, like the United
States, are not those of greatest saving propensity; and
in turn, nations of great saving propensity, like China,
are not the wealthiest. To demonstrate this let us take
up various countries and examine the saving propensity
as well as the accumulating power of the inhabitants.
Above all others, the French people are reputed for
their saving habits, these being generally taken as the
source of their great wealth. But are the French really
as saving as is commonly assumed? Is not France the
very birthplace of luxury? And is luxury consistent
with saving? As a matter of fact we find that the
wealthy classes in France are, by their very environments,
required to live up to their means, much more so than in
other countries, and in consequence there are but few of
those huge individual accumulations of wealth, such as
we see in England and in the United States, and these
few are mostly in the hands of foreigners. Inasmuch as
a nation's growth in capital and wealth depends largely
upon the rich people's savings, and as these do not
amount to a great deal in France, we find the aggregate
of the country's internal wealth to be far from what
should be expected when considering the people's alleged
great saving power; and the annual increase of that ag-
gregate is actually slower than in other leading nations.
Pros and Cons. 103
This tendency to live up to their means is not nearly so
conspicuous among the wealthy middle classes of France;
but even here (and to some extent even among the lower
classes) we find a greater disposition than in other Euro-
pean countries to keep up appearances, to dress well, to
dine well, and to live in well-furnished homes. True,
they nevertheless show a keen disposition to save; and
though this disposition largely manifests itself in the
shape of haggling to get the most value for the money
(a trait not really identical with "accumulating"), still,
the accumulation that does take place is principally due
to the middle classes. On the whole, however, we have
to conclude that the saving "propensity" is not such, a
marked characteristic of the French people as is gen-
erally assumed. Though they possess a fair share of this
propensity, the latter is largely modified by their ten-
dency towards luxury the one disposition being the very
opposite of the other.
While France's wealth is commonly attributed to the
great saving power of the people, facts show that the
country does not excel in either of the two forms of sav-
ing stated above neither in saving propensity nor in
actual accumulation of internal wealth.*
A much more pronounced saving propensity than ex-
ists in France is found in China; and if such a disposi-
tion of itself were conducive to wealth, China ought to
be rich. A.S a matter of fact it is very poor. The saving
* As is well known, the recent expansion of France's wealth is
represented largely by the acquisition of foreign values, not so much
by domestic development; in other words, the surplus earnings of
the people are to a great extent being invested in foreign securities,
perhaps more so than in creating new productive property at home.
It was a fortunate circumstance for the Frencfl people to find an
outlet for their surplus earnings in such foreign investments an
outlet which would not have been possible without the intervention
of a factor which will be explained on page 13^ . Had there been
no other avenue for the investment of their surplus earnings except
that afforded by home enterprise, France neither could have attained
her enviable position in international finance, nor would her domestic
prosperity be equal to what it is now.
104 Pros and Cons.
going on in that country is not of a healthy kind. Such
individual accumulations as are being made there, hard-
ly ever find investment in new enterprises or in the in-
crease of wealth, the opportunities for such kind of in-
vestment either not existing or not being made use of,
and practically no new capital being built up except
where European funds flow in. As a consequence the
saving process has, long before this, assumed almost ex-
clusively the Impairing Form* aggravated, as it always
is, by the cumulative effect of the Multiplying 1'rinciple ;
and as a result we find in China great poverty of the
masses, unemployment, stagnation in trade, and a state
of permanent depression.
The poverty of that country is generally attributed
to the lack of labor-saving machinery and to the prim-
itive state of production. The introduction of labor-
saving machinery, however, is not encouraged where
manual labor is abundant and exceedingly cheap. The
abundance of labor is caused by unemployment and by
the general lack of demand; this again, as heretofore ex-
plained, by the saving activity, if it assumes the Impair-
ing (or eventually the Hoarding) Form and either of
these two forms is bound to come into play whenever the
* Economists generally hold that the saving process in that
country is of the "hoarding" type. I dare say, however, that old
hoards are being released and scattered in pretty much the same
proportion as new hoards are forming, otherwise the money still left
in circulation would be quickly absorbed and withdrawn. Now, if
the aggregate of hoards does not increase, the scope of the hoarding
process going on at present can be but limited.
On the other hand we have evidence proving the Impairing Form
of saving to be quite general over there. If Li Hung Chang amassed
a fortune of fifty million dollars; if this accumulation was not ac-
companied by an increase of the country's wealth; and if it did not
consist of money hoards but of useful capital, it follows that his
style of saving belonged to the Impairing, not to the hoarding type.
He became rich at 'the expense of others by means of a "Change
of Possession" of property already existing.
Considering that the Capitalistic type of saving hardly exists
there at all, and that the hoarding type is quite limited (for the
reason just stated), and considering further that more or less saving
is always going on there, it follows that the latter must be princi-
pally of the Impairing type a fact which has been graphically dem-
onstrated in Diagr. 3, Which see.
Pros and Cons. 10i>
savings do not meet an outlet in the CapitaP-Producing
Form. China's poverty, therefore, must be primarily at-
tributed to the strong- saving disposition of its people
thus bearing out the point we started with, that nations
of great saving propensity are not the wealthiest. Were
the people of China less inclined to save, or were the
savings invested in new productive enterprises, there
would be more business and less poverty.
In contrast with the example of China we find much
less of a saving propensity in England and the United
States, but on the other hand a far more rapid accumula-
tion and a much higher standard of life. Here, the de-
sire for a higher standard of life tends to create a greater
demand on the part of the people ; this demand stimulates
production and therewith the formation of new produc-
tive capital; this, again, affords opportunities for the
capitalistic investment of savings which means real ac-
cumulation and increase of wealth. So the greater ac-
cumulating power practically depends upon a concurrent
growth of the buying proclivity of the people. It would
not exist, were this buying proclivity curtailed by a
stronger saving propensity.
Were the degree of saving propensity really the decid-
ing factor in the accumulation of wealth, then the Dutch
should be richer than the French, but they are not; and
they should accumulate wealth much faster than the
Americans, but such is not the case.
From these comparisons it follows that the greatest
degree of wealth is not found in conjunction with the
highest degree of saving propensity, but that best results
as to actual accumulation are attained by a judicious
mixture of a saving disposition on the one hand and a
desire for a better style of living on the other.
This desire for a more luxurious style of living, this
toning down, as it were, of the saving activity, is the in-
106 Pros and Cons,
dispensable, and in reality the decisive factor required to
ensure prosperous business conditions.*
OBJECTION NO. 5. The Impair Savings Theory, in
so far as it implies that not all of the savings can find
useful investment, is contradicted by the fact that at all
times cash funds will command interest in the open mar-
ket. Business men would not oii'er interest if they had no
need of the funds. The principal use, and practically the
only use, which they make of such funds is to apply them,
directly or indirectly, to purposes of production; and
inasmuch as they can always apply them to that purpose,
it follows that the opportunities for profitable investment
in production, or in the capital-producing line, are prac-
tically unlimited. What is said here of cash funds in
general will equally apply to such funds as accrue from
savings. In other words, the fact that savings funds will
always command interest goes to prove that there is no
lack of opportunities for the investment of savings in
the lines of production or in the creation of productive
capital.
REPLY. The above argument is based on the as-
sumption that whenever interest is offered for the use of
cash funds the borrower does this for the purpose of some
profitable investment, and that such funds as accrue from
savings are usually applied in that direction. As a mat-
ter of fact, however, loans are often negotiated under
the pressure of straitened circumstances, the proceeds
going to make good the impairments resulting from a
shrinkage of income, especially at times of depression.
If a business man "runs behind," he often has to resort
* It should be understood, however, that the "judicious mixture,"
referred to in the text, is not the only requirement necessary to en-
sure prosperous conditions. It may be jeopardized by an unhealthy
condition of the foreign trade (seepage 135). On the other hand, a
favorable trade balance (see definition on page 135), such as obtains
with the French (see page 134) and with the Dutch, will do much
to alleviate the ill effects of an excessive saving propensity. The
latter would have tended to make these peoples poorer, had they
been confined to the home markets for the investment of their sav-
ings. The favorable trade balance, however, allowed them to partly
invest their savings abroad, and thus made them all the more
wealthy.
Pros and Com. 107
to borrowing to cover the deficiency. To class this kind
of borrowing the same as borrowing for purposes of regu-
lar business or for purposes of enterprise and extension,
would be improper.
In periods of depression a considerable proportion of
the demand for cash funds comes from the source here
indicated. As at such times the saving process largely
assumes the Impairing Form, so that every $100 saved
by the one entails a loss of income to " others r ' of per-
haps $500, it is clear that among those "others" there
will always be some quite eager to borrow the $100 ac-
cumulated by the saver, and willing to pay interest for
the use of that money. And what is true of the individ-
ual amount of $100 is equally true of the grand total of
all Impair Savings, even if they aggregate a billion dol-
lars per annum. So, while the demand for cash funds
may be there, this does not prove the funds to be wanted
for purposes of enterprise or of new constructions, or
of profitable investment.
If the mere fact that interest is being paid on loans
were really indicative of business enterprise and prog-
w<? should expect to find a very low rate of interest
in an unpro^ressive country like China, where but little
money is absorbed in enterprise and new constructions
Actually, however, the rate of interest is very high there
as much as three per cent, per month not being un
usual.
OBJECTION NO. 6. In contradistinction to the view
set forth in "Objection Xo. 5'' many economists hold
that at times of depression savings funds, and cash funds
in general, do not find ready employment in new enter-
prises or in the lines of regular business. Their argu-
ment would run as follows: The palpable decline in the
rate of interest clearly indicates an accumulation of idle
cash funds, although the statistics of the banks and of
other financial institutions mav not reveal the full extent
108 Pros and Cons.
of the accumulations. If, as assumed in this treatise,
cash funds (savings funds) can always find investment in
the Impairing Form where they do not find it in the
Capitalistic, there should be no accumulation in the
money market and therefore no decline in the rate of
interest.
REPLY. It is true that savings funds if not finding
investment in the Capitalistic Form will find it in the
Impairing Form ; but not so readily. The opportunities
for investment are not so inviting. Nobody likes to lend
money where it is to be used for covering up deficiencies.
Even where property is for sale, like houses, factories,
etc., and where it is offered at prices much below the nor-
mal, buyers hesitate to invest in the face of a stagnant
or declining market. This hesitancy impresses itself
upon the money market we find a predilection for
sound and safe investments, and a disposition to be satis-
fied with a low rate of interest rather than to run any
risk.
At prosperous times a man may find investment for
his funds in two ways, first, in new enterprises; second,
in the purchase of property already existing. At times
of depression the mode of investment first mentioned is
greatly restricted and moneyed men will have to look
chiefly to the other form: high-grade securities which
yield a fixed return being especially in demand. This
will tend to enhance the prices of such securities mean-
ing a fall in the rate of interest which the funds so in-
vested will bring.
A falling rate of interest, therefore, does not confirm
the conclusion arrived at by many economists as to its
indicating the existence of huge idle cash funds in the
money market in excess of the comparatively small
amounts revealed by statistics.
OBJECTION NO. 7. The demand for working
forces should not be measured altogether by dollars and
Pros and Cons. 109
cents, as has been done on page 98, and all through this
treatise. A thousand dollars expended for luxuries will
not give rise to an equally large demand for working
forces as $1,000 expended for common necessaries, the
production of the latter generally requiring much more
manual labor. So the gauge used for measuring the re-
lations between demand and supply does not seem
reliable.
REPLY. Inasmuch as the demand for luxuries will
of itself include, or at least lead to, a demand for com-
mon necessaries (as fully explained on page 69), the
deductions drawn in the foregoing objection are not well
founded.
On the whole it is not so important that the savings
funds should, by the act of their investment, put the
greatest possible number of men in activity, as that the
funds be transformed from idle Surplus Funds into
Active Money: in terms of the Chart: That they be
transferred rom the unproductive circulation of the
black central field into the channels of industry and trade
represented by the red ring. So long as they circulate in
these channels, the purchases of the one mean income
and business for the other, no matter whether the ex-
penditures be made for luxuries or for necessaries.
OBJECTION NO. 8. No attention has been paid, in
this treatise, to in important economic principle inti-
mately connected with the subject of demand and supply,
namely, the fact that a demand for commodities primarily
concerns and rewards past labor, such as was previously
required in producing the commodities whereas the
author treats the subject of demand entirely in its bear-
ing upon future production. As the future is wholly an
outgrowth of the past, reliable conclusions can hardly be
reached where the part played by the past is not con-
sidered.
REPLY. Hundreds of volumes have been written to
define the relations of present demand to past labor or
110 Pros and Cons.
enterprise. Such discussions may have their theoretical
value but are of no practical avail and would throw no
additional light on the ''neglected point" considered in
this treatise.
OBJECTION NO. 9. The impoverishment of indi-
viduals and the consequent alienation of property has, in
this treatise, been ascribed principally to the saving ac-
tivity of ''others." In most cases, however, the impover-
ishment, especially on the part of the wealthy, can be
traced to personal causes. A man may run behind in his
affairs, because he is hampered by ill-health, or by acci-
dents, or because he lacks judgment in the management
of his estate, or goes into losing enterprises, or lives too
high, sacrificing his future well-being for the sake of
temporary passions and enjoyments. Whenever the
wealthy spend more than their income amounts to, their
subsequent impoverishment is not due to the saving
activity of others, but to what may properly be classed
as squandering.
REPLY. No doubt the impoverishment of wealthy
individuals is often caused by their own doings. Were
we to ascribe to this cause, however, the widespread im-
poverishment observable at times of depression, we
might, with as much reason, also ascribe the high degree
of unemployment, observable at such times, to individual
causes. The fact that unemployment often can be traced
to special circumstances of an individual character re-
mains undisputed. A workingman may be disabled by
sickness or accident, or he may not attend to his duties,
or be quarrelsome, or negligent, or lazy, or intemperate,
and owing to any of such reasons he may lose his em-
ployment. Nevertheless nobody will deny that if at times
of dull business large numbers of men are thrown out of
work, there are general and not individual causes at play.
Just so with the impoverishment of the wealthy. While
sporadic cases of "running behind" may often be due to
squandering, the far-reaching impoverishment observable
Pro* and Cons. Ill
at times of depression is evidently due to general, not to
personal causes, and it would be improper to maintain
that the losers come to grief entirely by their own fault.
A sharp distinction, therefore, should be made con-
cerning the two factors to which the impoverishment of
individuals may be due, whether to Squandering, or to
Impair Savings on the part of others. These two factors
are very different in their nature and very different in
their manner of action, and especially so in their bearing
upon business and upon supply and demand; the one
factor stimulating the demand without increasing the
supply; the other stimulating the supply without in-
creasing the demand. A spendthrift who wastes his es-
tate in the purchase of commodities or personal services
evidently brings more demand than supply into the mar-
ket, and thus enlivens business. A saver brings in more
supply than demand, primarily at least, as is well under-
stood; and if subsequently his savings lead to Impair
Investments, the act of investment brings no demand
whatever upon the market, thus leaving an excess of the
supply. Considering that this shortage of the demand,
as well as the unemployment resulting therefrom, pos-
sesses an inherent tendency to multiply, as explained on
page 43, and considering further that these two elements
form the very essence of dull business and of depression,
it is evident that the factor which ushers in these
maleficent elements will hurt business and the welfare of
the community far more than the squandering process
will.
Much has been made of the point that a squanderer
destroys wealth, inasmuch as he annihilates some of the
country's capital and wastes the fruits of other people's
labor this being considered equally injurious to the
country's welfare as the destruction of property by con-
112 Pros and Cons.
flagration, floods, etc. We should bear in mind, however,
that, while the loss of a house by fire will actually des-
troy the house, and reduce the country's wealth accord-
ingly, the loss of the house by the act of squandering will
do nothing of the kind ; it will merely lead to a change of
ownership, leaving the property itself intact. There may
be some truth in the further assertion that the spendthrift
wastes the fruits of other people's labor, inasmuch as he
lavishly buys and consumes all sorts of commodities,
especially luxuries. But the fact is, commodities are
there to be consumed ; i. e., to be destroyed or absorbed
by use or consumption. A rich man, although living
within his means, may use and consume commodities to
a much larger extent than the spendthrift does, without
being accused of wasting the fruits of other people's
labor and if his purchases do not constitute a waste of
the country's wealth, why should those of the squan-
derer? Were there a dearth of commodities, and not
enough in the market to meet the demand, then the
wasteful consumption of the spendthrift (and in fact
also of the rich) would leave others short of an adequate
supply of such commodities as they really need ; but
where (under normal conditions) our markets are over-
flowing, and legions of workingmen stand ready to sup-
ply still more, if the demand existed, and where, on the
other hand, the prodigality of the spendthrift helps to
augment the demand for commodities and for working-
men, it seems entirely out of place to construe his lavish-
ness as leading to an impairment of the country's wealth.
Of course, all this is true only within reasonable lim-
its. If the squandering tendency should spread to a con-
siderable extent, the money market may be unfavorably
affected, such cash funds as are needed for enterprises
and new constructions then being absorbed by dissipa-
tions, with a resultant dearth of cash capital. It may be
Pros and Cons. 113
difficult, however, to cite a single instance where a gen-
eral dearth of cash funds was traceable to excessive
squandering, and not to the great demand for purposes
of enterprise and new constructions. So long as we find
an ample supply of available cash funds (as is the case
under normal conditions), the doings of the spendthrift
will exercise no perceptible influence on the money mar-
ket; and especially not at times of depression, when a
lack of cash funds is hardly ever witnessed.
On general principles squandering is not commenda-
ble, for it hurts the individual concerned, and obviously
it would be better that all citizens should live in comfort-
able circumstances rather than to have any of them re-
duced to poverty. But the contention that it destroyes
wealth and wastes the fruits of other people's labor and
that it depletes the money market to an undue extent
all this is based more upon fiction than upon facts.
OBJECTION NO. 10. The author considers only
two forms of investment, the Capitalistic and the Impair-
ing; and maintains that savings, in order to find invest-
ment, are confined to one of these two forms. There are
other ways, however, for employing savings or cash
funds; for instance, by loaning them out to merchants,
manufacturers, and others, who make use of them in the
regular course of their business.
REPLY. Let us follow up the various purposes for
which a merchant may secure a loan, say of $1,000. First,
he may intend to increase his business; then the loan
would constitute an investment of the Capitalistic class.
Second, he may have run behind, thus needing the money
to make up for his losses ; then the loan would constitute
an investment of the Impairing class. Third, he may
borrow the $1,000 to pay oft* another loan in which case
there has been no investment of cash funds at all, the
$1,000 merely changing ownership when being paid over
to cancel the old loan, thus remaining "investment-
114 Pros and Cons.
seeking" cash capital, though in the hands of a new
owner. Fourth, he may need the money for temporary
purposes, to bridge over the busy season which would
practically mean an increase of his business, the same as
just considered under point No. 1, only of a temporary
character. Whichever way we take it, we would find
that the funds, if they really meet investment (and not
merely shift ownership), will find it either in the Capital-
istic or in the Impairing Form.
Just so with the alleged "other ways" of employing
funds. So long as savings, or cash funds, are actually
available for investment, and are not needed for Replace-
ment purposes (represented by Lines 12, 13 and 14 of the
Chart), they practically have only two avenues of invest-
ment before them, either the Capitalistic, indicated by
Lines 15 and 16 of the Chart, or the Impairing, indicated
by Line 17.
If needed for "Replacement purposes (Lines 12, 13 and
34) they are not available for investment, and therefore
would not fall within the range of if Objection No. 10. "
OBJECTION NO. 11. The amount of three billion
dollars assumed in this treatise as representing our coun-
try's saving power, is much too large. While, as a rule,
economists are cautious about naming a definite figure
as representing, even conjecturally, a country's saving
power, where there is so little material on which to base
statistics, the majority of them will hardly feel inclined
to admit more than one-half or one-quarter of that
amount. The smaller its aggregate, the less its import-
ance as an economic factor.
REPLY. To some extent the data given by the cen-
sus reports, indicating a steady increase of the country's
wealth, should be a guide. Even though these reports
may contain many errors and irregularities, they ought
to be fairly correct on the average, and when comparing
the successive reports with each other they agree well
Pros and Cons. 115
enough to merit confidence. And they undoubtedly point
to the larger figure rather than to the smaller one, not-
withstanding the fact that some of the increase repre-
sents mere appreciation in market value which has noth-
ing to do with the saving process. Take, for instance, the
decade from 1880 to 1890. This period certainly was not
characterized by an inflation of market values. Still our
country's wealth increased from 43 billion dollars in 1880
to 65 billions in 1890, showing an annual augmentation of
over two billions, in the shape of actual, tangible prop-
erty, no paper values included. This increment of wealth
represents saving power to the like amount, excepting a
few items which in their aggregate do not make up a
large share of the total.* In 1890 the saving power was
greater than in 1880, and hardly less than two billions
per annum. For the boom period of 1905, 1906 and 1907
where the country's population, earning power and re-
sources had wonderfully increased, the assumption of an
amount like three billions annually does not seem out of
place.
Another guide may be found in the extent of the an-
nual issue of new securities. According to the compila-
tions of the New York Journal of Commerce the total of
the issues "authorized" for the first nine months of 1907
came to 1733 million dollars, and the total of the secur-
ities really issued during that period to 1025 millions
of which amount about one-third has been estimated to
represent mere refunding or conversion operations, the
remaining two-thirds constituting new capital such as
* These items principally consist of the following: first, the small
appreciation in the market value of the property existing- prior to
1880; second, the property built up with funds procured by the ex-
pansion of credit money, i. e., bank notes and bank credits (bank
loans, "money in bank"), which funds do not represent savings;
third, our borrowings abroad, represented by the growth of foreign
indebtedness, the latter being no more than one billion at the ut-
most, for the whole decade. All of these items may not foot up more
than a quarter of the total increase of tangible wealth reported by
the census; perhaps not more than a sixth.
116 Pros and Cons.
will absorb the funds of the money market and which
must be supplied principally by the saving process. Fig-
uring a full year instead of nine months, the total may
come up to 900 millions.* This figure, large as it is, com-
prises only the issues of railroads and of industrial com-
panies where each issue reaches a million dollars or more.
Considering that the great majority of issues consist of
amounts of less than a million ; considering further that
many other large corporation issues are made in the min-
ing, navigation, banking and commercial lines the said
annual increase of nine hundred millions ought to swell
considerably. The municipalities alone borrowed 200
millions from January to September, 1907. Bearing fur-
ther in mind that all wealth in the United States owned
by corporations has been estimated at 35 billions, or one-
third of tho country's aggregate, and knowing that not
only corporate weaJth is increasing but also that much
larger share which is held by individuals, such as we find
in the lines of agriculture, commerce and industry and in
the possession of all employed persons it seems proper
to put down the present annual increase of capital and
wealth at not less than four billion dollars, the bulk of
this representing saving power.
American economists have not paid much attention to
the great extent of our country's annual increment of
capital. A prominent French economist, however, has
estimated the latter to come to 2,000 or 2,500 million dol-
lars per annum at the present time.j Suppose the saving
* For the full year of 1906 the railroads alone show an increase
of capitalization (bonds, stocks, etc.) of about $800,000,000.
t Strange to say, while computing our country's annual capital
requirement at 2,000 to 2,500 million dollars, that French economist
puts the saving power at only 600 millions holding that the balance
must be procured from abroad. A strange idea, indeed, revealing
a considerable degree of confusion as to the source of capital. If
we had to borrow from 1,400 to 1,900 millions from Europe in a single
year, where would we come to in course of time? Our total indebt-
edness to Europe, accumulating for the whole of the last century,
has never been estimated higher than 2,500 millions!
Again, in what shape could such a huge amount of capital, a
billion or more, be transferred from Europe to America? In the form
Pros and Cons. 117
power were only that much. And suppose that at a time
of depression one-third of that amount of savings were
unable to find investment in the beneficent Capitalistic
Form ; as it were, that savings funds to the extent of 750
millions had to find investment in the Impairing Form;
this would mean a direct impairment of income on the
part of the people to the same extent. But by the step-
ping in of the Multiplying Principle, as explained on
page 43, that amount may be augmented fivefold, or
more, and thus may fully account for the -extensive loss
of income which we witness during depressions. Conse-
quently, it would not prove much against my theory if
instead of three billions, the country's annual saving
of merchandise where statistics show the reverse, a large excess not
of imports but of exports? Or in the form of money? I have shown
on page 29 that either form is out of the question for effecting a
transfer of such magnitude. Can it be done by the mere instru-
mentality of foreign exchange? According to prevailing views, yes.
Suppose a New York banker, A, negotiates a loan of a million dollars
with a bank in Paris; the latter telegraphs Morgan & Co. in New
York to pay that amount to A; all this may be done within a few
hours, and the transfer is apparently consummated.
But is it really consummated? Does not the payment merely
represent part of the transaction? The mere shifting of funds from
one New York banker to another New York banker funds which
were already in New York, either in the possession of Morgan or
of Morgan's bank that does not end the matter. The real transfer,
from Paris to New York, will be made when Morgan and the Paris
bank come to settle with each other. Then it turns out that .unless
foreign trade (understood in its broad sense, see page 135) leaves a
balance to allow of such exchange transactions, the latter must be
made good by means of gold shipments. To presume that over and
above the limit drawn by the trade balance an amount like a billion
dollars, or even the tenth part of it, can be transferred by mere ex-
change transactions would be preposterous.
Nor can new capital be procured by withdrawing it from old In-
vestments, though many believe it can. Suppose a man has in-
vested his capital of $100,000 in building a factory and that he needs
$10,000 additional cash for going into some new enterprise. Can he
withdraw this money from his factory? No. He may mortgage the
latter and thus raise the $10,000; then the new capital comes from
the lender of the money, not from the factory. Or he may obtain the
$10,000 out of the profits accruing from running it; in this case the
money comes from his earnings and from what he saves out of the
latter, but is not withdrawn from the capital originally invested in
the factory.
As a matter of fact the cash capital required for building fac-
tories, railroads and other productive capital must be supplied by
the saving process, excepting only the funds coming from the
expansion of credit money and those derived from abroad (see foot-
note on page 115).
I have dwelt on these subjects at some length because consider-
able misconception seems to prpvail as to the source of capital, not
only on the part of the economist referred to, but of others as well.
118 Pros and Cons.
power were only hall that sum, or still less ; and whether
the Impair Savings come to a billion dollars or only to
half that nmeh. Either sum may be swelled to a very
large total by the intervention of the Multiplying Prin-
ciple, and may thus become an economic factor of suffi-
cient importance to fully account for the phenomena
which we witness in times of depression.
OBJECTION NO. 12. The Impair Savings Theory is
built up on two assumptions, first, that an excess of sav-
ings, over and above what the author styles "Capitalistic
Savings," really exists; second, that these Excess Sav-
ings work injury to the community and thus become
Impair Savings. The existence of such "Excess Sav-
ings" is open to question, so long as not substantiated
by statistical material. Indeed, some economists believe
that savings can almost always find investment in enter-
prise and new constructions and that, if at times of de-
pression a lull in new constructions takes place, this is
due to a lack of savings funds, not to a lack of opportun-
ities for the "Capitalistic" kind of investment. If so,
there could be no Excess Savings, and without these there
can be no Impair Savings. Unless the existence of
"Excess Savings" be fully established, the Impair Sav-
ings Theory has no real foundation.
REPLY. Though it may be difficult to produce statis-
tical material bearing on the subject, still the existence of
Excess Savings can be proved by a chain of definite facts,
as follows:
PROOF POINT 1. At present, during the depression
of 1908, many individuals and business firms are "run-
ning behind," expending more money for their current
expenses than they earn; this "running behind" being
caused, not by extravagance, but by a shrinkage of their
income, and this shrinkage, in turn, being due to lack of
employment resulting from general market conditions.
For example, the Erie Railroad is "running behind" at
the rate of much over a million dollars per annum, where
before the panic it earned a surplus.
Pros and Con*. 119
PROOF POINT 2. Suppose these " Excess Expendi-
tures" amount to a billion dollars (or any other sum) to
which extent the said individuals or concerns let us call
them "The Impaired ' ' are getting poorer. If The Im-
paired consume a billion dollars' worth of commodities
(or services) more than they produce,, there must be
others in the community, savers, who produce a billion
dollars' worth of commodities in excess of what they
consume. Either this, or the stock of commodities, kept
en hand by the dealers, must run down; but as we had no
accumulations of stock before the panic; and as at pres-
ent (summer months of 1908) stocks everywhere have
already run down to a minimum; any further shrinkage
of the stock of commodities is practically impossible, so
the fact remains that any further Excess Expenditures
on the part of The Impaired indicate an equivalent
amount of savings on the part of others. These savings
represent what I have styled "Excess Savings."
PROOF POINT 3. If The Impaired expend more
money than they earn, how do they obtain the money?
It comes from the savers, and reaches them over the
bridge of their own impoverishment, either in the shape
of loans, or in payment for property which they have to
alienate. Suppose some of The Impaired be workingmen,
unemployed, who draw on their deposits in the savings
bank ; the latter, in order to procure the money, will have
to sell some of its securities ; and if the savers mentioned
in Point 2 buy these securities, their savings funds come
into possession of the unemployed workingmen not in
the shape of income but in payment for the securities
alienated by them (or by their bank). If instead of the
unemployed workingmen we consider the case of a busi-
ness concern, say, the Erie Railroad, we find here, too,
that the money the Railroad expends in excess of its
income must come from others; presumably in the shape
120 Pros and Cons.
of loans: or by leaving accounts unpaid, which amounts
to the same thing as contracting loans or debts.
Whether the billion dollars consumed in Excess Ex-
penditures conies, directly or indirectly, from the billion
of Excess Savings referred to in Point 2 ; or whether
some of these savings funds stay in the money market,
and other funds, already in the money market, go to The
Impaired to pay for their Excess Expenditures, that is
immaterial. Practically we are justified in saying that
the billion of Excess Savings, accumulated by the savers,
find their investment by providing for the Excess Expen-
ditures of The Impaired to whom the money goes, not
in the shape of income, but over the bridge of their own
impoverishment.
PROOF POINT 4. The Excess Savings referred to
in Point 2 (represented by Line 11C of the Chart, see
also Diagram 2) are made in addition to the Capitalistic
Savings (Line 11B) and are by no means identical with
these. The latter, when invested, are expended for new
constructions, and go to the working forces in the shape
of income, for services rendered. They neither cause
unemplojanent, nor do they go to the unemployed, or to
The Impaired.
PROOF POINT 5. If no Excess Savings were made ;
if that billion of dollars referred to in Point 2 were not
accumulated in the shape of savings but were spent by
the owners for luxuries, that billion would go to the
working forces in the shape of income, for services ren-
dered. Then the class of The Impaired would disappear.
There would be no Excess Expenditures, due to general
market conditions, for people would earn the money they
expend. There would be an equilibrium between the de-
mand for working forces "and the supply thereof, and the
depression would cease. It may not be apparent how an
enlarged demand for luxuries will benefit all of the work-
Pros and Cons. 121
ing forces, now wholly or partly idle; for instance, what
advantage the Erie Railroad would derive therefrom. But
the manufacturers of luxuries, when expending their
earnings, would set other working forces in motion and
this, owing to the well-known law of action and reaction,
would react favorably upon all working forces in the
community, including the Erie Railroad.
*****
Granting the fundamental point of the foregoing
argument, namely, that Excess Expenditures (as defined
in Proof Point 1) really exist at times of depression a
point which economists cannot reasonably dispute the
conclusion follows, with absolute certainty, that Excess
Savings must be made concurrently, and to an equivalent
extent, and these must be made in addition to the "Capi-
talistic" and the "Replacement" Savings. Excess
Expenditures on the part of some, and Excess Savings
on the part of others, go hand in hand, inseparably. And
of these two elements the latter is the governing one, as
shown in Proof Point 5. "Without Excess Savings there
wouJd not be that "lack of demand" for working forces,
nor would there be that forced "running behind" and
impoverishment on the part of "others." The fact that
Excess Savings lead to such injurious results, gives them
their character as Impair Savings.
***
In addition to the positive proof contained in the fore-
going argument we could adduce a number of points of
circumstantial evidence showing that the standpoint
taken in Objection No. 12 is untenable. Let us cite some
of these points, as follows:
CIRCUMSTANTIAL POINT 1.- Though some of our
economists may share the view evolved in Objection 12,
that thero can never be any superfluity of savings, the
122 Pros and Cons.
great majority of them agree on the fact that more sav-
ings accrue at times of depression, than can find invest-
ment in enterprise and new constructions, for the time
being. They arrived at this conclusion, not through mere
bias, but after duly weighing the facts and circumstances
bearing on the matter. In other words, they believe that
class of savings to exist (temporarily at least) which I
have called Excess Savings.
CIRCUMSTANTIAL POINT 2. Not only at times
of depression but also at normal times many investments
are continually being made abroad, even where the secur-
ity may not be of the best; for instance in the construc-
tion of railroads in China, Turkey, South America,
Africa, etc., and, particularly on the part of the French,
in the constant acquisition of foreign securities. This
clearly reveals the fact that the opportunities for invest-
ment at home do not keep pace with the increment of
cash funds and that the latter accrue faster than they can
be absorbed and employed to advantage in the home
market thus demonstrating the existence of an excess
of savings.
If, then, we find an excess of savings even at normal
times, we should not doubt their presence at times of poor
business, considering that then the opportunities for the
Capitalistic Form of investment are becoming quite
scarce.
CIRCUMSTANTIAL POINT 3.- In countries already
well developed and teeming with all kinds of capital in
the lines of industry, agriculture, transportation, etc.,
there should be more production of commodities, more in-
come on the part of the citizens, and consequently more
saving power than in new countries undergoing rapid
development, where, owing to the less efficient means of
production, the output of the working forces can not be
Pros and Cons. 123
so great. Nevertheless the greater saving power in the
old country does not produce the results which we might
expect in the shape of accumulation of tangible wealth,
this being generally larger (per capita) in the new coun-
try. Thus we find, in the well-developed country, a
higher degree of saving power coupled with a smaller
aggregate of the fruits of saving showing clearly that
a part of the savings must find investment in a way not
leading to the augmentation of wealth; in other words,
that there must be an excess of savings Impair Sav-
ings due to the lack of opportunities for Capitalistic
Investment.
CIRCUMSTANTIAL POINT 4. If we were to be
governed by the time-honored proverb, "By their fruits
you shall know them," we would have to conclude that
Impair Savings exist, because the conditions exist which
they naturally will engender. If we know that Impair
Savings will cause unemployment, lack of demand, and
depression in trade, and if at times we find precisely these
conditions to prevail without being able to trace them to
any other source that will bear investigation, the exist-
ence of Impair Savings seems to be indubitably proven.
Let us recapitulate the conclusions arrived at in dis-
cussing the twelve "Objections" advanced in the fore-
going pages.
FIRST. Though the investment of savings funds will
always engender a demand, this need not necessarily be
a demand for working forces.
SECOND. Though savings funds, in the course of
their investment, will finally be expended in buying com-
modities, and though this will, in turn, create a demand
for working forces, such demand may not compensate for
124 Pros and Cons.
the primary minus originated by the saving activity. A
"lack of demand'' is bound to result if the act of invest-
ment does not call for working forces.
THIRD.- -While in the regular course of business pro-
duction and consumption go hand in hand, the producer
being also a consumer (he or his family), such is not the
case where Impair Savings intervene. There, production
and consumption are no longer united, and we find on the
one hand working forces which produce without con-
suming, on the other hand such as, through enforced
idleness, consume without producing.
FOURTH. The nations of greatest saving propensity
are not the wealthiest. Best results are attained by a
proper mixture of saving propensity on the tme hand and
a disposition for the enjoyment of wealth on the other.
FIFTH. The fact that savings funds (cash funds)
can at all times find interest-bearing investment does not
prove that by such investment the funds are absorbed in
enterprise and new constructions, or in the promotion of
the country's wealth.
SIXTH. The decline of the interest rate, at times of
depression, does not prove the existence of huge accumu-
lations of idle cash funds.
SEVENTH. The point raised by some authors that
the demand for working forces should not only be meas-
ured by the amount of money involved, but also by the
class of demand, whether for luxuries or for necessaries,
does not seem to be well founded. The demand for
luxuries will, indirectly, involve a demand for neces-
saries.
EIGHTH. While the purchase of commodities (for
purposes of consumption) will primarily reward past
labor and enterprise, it will also stimulate future pro-
Pros and Cons. 125
duction. The latter function is by far the more important
one and in fact the only one which determines the trend
of business, whether brisk or dull.
NINTH. The impoverishment of wealthy individuals
frequently has its origin in general conditions beyond the
individual 's control, though usually ascribed to personal
causes, squandering, etc. If really due to squandering,
this does not inflict upon the community those baneful
consequences which most authors speak of, and which are
based upon erroneous suppositions upon conditions
which do not exist. As a rule the squanderer harms only
himself, not the community.
TENTH. It may seem that there are numerous ways
of investing savings or cash funds outside of the Capital-
istic Form (represented by enterprise and new construc-
tions) and outside of the Impairing Form (described in
this treatise) ; but there are practically none excepting
only those indicated in the Chart by Lines 12, 13 and 14,
see page 36.
ELEVENTH. Whether our country's saving power
amounts to something like three billions per annum, as
assumed in this treatise, or to a much smaller amount,
that does not give much of a guide for measuring the
extent of the harm which possibly can be caused by the
saving activity whenever it assumes the Impairing Form.
Most of the harm is brought about by the intervention of
the Multiplying Principle.
TWELFTH. The fact that "Excess Savings" really
exist an assumption which forms the basis of my entire
argument though hardly susceptible of proof by direct
statistical data, can be amply demonstrated by positive
as well as by circumstantial evidence.
CHAPTER VII.
VARIOUS FACTORS AFFECTING
PROSPERITY.
WHILE prosperity is bound to wane whenever the
saving activity assumes the Impairing Form to
any large extent, I do not wish to be understood as main-
taining that this factor is the only one which may under-
mine prosperity. In reality the latter depends upon a
number of factors, all of which must co-operate, and the
absence of any one of them may cause business to lan-
guish. To go over the entire field and thoroughly inves-
tigate all these various factors would lead beyond the
limits of this treatise. On the other hand, a crisis theory
would hardly be regarded as complete, or even accept-
able, if it ignored these factors altogether, and I there-
fore deem it approprate briefly to consider them.
THE MONEY SUPPLY, The relation of this factor
to economic disturbances has been dealt with to same ex-
tent in Chapter 1, but its importance justifies further
consideration.
It does not seem that the kind of money, whether
gold, silver or paper (even inconvertible paper) matters
much in determining whether business conditions shall
be prosperous or the reverse. The United States got
along very well with inconvertible paper money in the
decade preceding the panic year of 1873, better than
England did with its gold standard; the merit of a sound
monetary system apparently consisting chiefly in its com-
mercial convenience. Much more important is a supply
Various Factors Affecting Prosperity. 127
of money adequate to the country's needs, and it seems to
be particularly the case that any drain which will reduce
the supply below this requirement will work mischief.
Such a drain may take place in various ways, and may
be either an actual one, where the coin leaves the coun-
try or the circulation ; or it may be a relative one, brought
about by depreciation. At the time when Rome drained
its dependencies in the shape of annual tributes, those
dependencies withered. In modern times a tendency to
drain the weaker countries of their cash is often brought
about by foreign trade, but is met by the issue of incon-
vertible paper money, which renders the currency unfit
for exportation an expedient which, though not fully
sufficient for maintaining that "adequate money supply "
which constitutes one of the elements necessary to pros-
perous conditions, is certainly the next best thing to it.
There is a peculiar kind of drain, however, which
has been steadily i?oing on for the last ten years and
which can not be met so easily as the one just mentioned.
I mean the depreciation of money a subject that has
hardly received the attention it deserves. Not the depre-
ciation that attaches to paper money, if inconvertible, or
if issued to excess, but the depreciation of the sound
money, of the gold itself, as indicated by the constant
rise of all wages and prices. A certain total of the money
supply may be adequate to carry on a country's business
at a certain level of wages and prices, but not at a higher
level, and if nevertheless the level rises, this would act
practically the same as a drain on the money volume.
An artificial drain of this character goes on especially
at times of prosperous business. At such times the work-
ingmen, always struggling to obtain higher wages, are
helped by the greater demand for labor, and they largely
succeed in their endeavors. This means greater cost of
production and this again higher prices of commodities
128 Various factors Affecting Prosperity.
a result which is still more aggravated by the action
of the trusts in keeping up high prices and suppressing
competition. Gradually the working classes find that
the advantage gained from the higher wages is slipping
away, owing to the increased cost of living, and to rem-
edy this, they will again contend for higher wages. In
consequence of this process more money is needed to
carry on the country's trade and traffic, as has been
strikingly illustrated by recent experience in the United
States, where, in spite of the immense augmentation in
the volume of money, there was so much of the latter
absorbed in the regular channels of trade that a continu-
ous paucity of cash funds was witnessed in the money
market, so much so as to keep the latter constantly on
the verge of a collapse. Under such^ conditions some
circumstance, trivial in itself, may prove sufficient to
shake confidence, and bring about the collapse, thus ush-
ering in crisis and depression which might have been
staved oft* for years but for the disturbing influence of
the enforced rise in wages and prices. A high protective
tariff which prevents the leveling influence of foreign
competition makes matters worse.
Here we arrive at a peculiar interplay of conflicting
tendencies. On the one hand, prosperity tends to create
an artificial drain of the money supply, inasmuch as it
favors the rise of wages and prices and thus depreciates
the money in circulation; on the other hand, this arti-
ficial drain tends to undo prosperity, or at least en-
danger its continuance, by injuriously affecting one of
its essential conditions an adequate money supply.
*
History shows us a strange adaptation of a country's
monetary requirements to its actual supply of money. In
modern times, and especially in recent decades, the sup-
ply has increased enormously, but (except at times of
Various Factors Affecting Prosperity. 129
depression) we do not find any part of it superfluous, all
of it being absorbed in the circulation apparently from
the reason that wages and prices are always being pushed
up to. (or near^ the limit which the money supply will
permit. While this automatic adaptation of wages and
prices to the country's total money volume exercises a
stimulating influence on business activity so long as the
supply keeps on increasing, it has the opposite effect if it
diminishes, as we have seen in the case of Rome's prov-
inces. In such an event wages and prices needs must ad-
just themselves to correspond with the shrinkage of the
supply, and must come down to a lower level ; but the
transition process is a painful one, engendering severe
struggles and bitter controversies before workingmen
accept the lower wages and business men the lower
prices. And as a rule it can not be accomplished without
the intervention of depressions or economic disturbances.
Adjustments of this kind (whether of a depressing
character if for the lower, or of a stimulating character
if for the higher) have always gone on wherever the laws
of supply and demand have "had free scope so as to allow
of proper competition. Within recent years, however,
two new elements have sprung into prominence, tending
to counteract the operation of natural forces the unex-
pected power attained by the labor unions on the one
hand and by industrial combinations (trusts, etc.) on the
other powers which have proved fully capable of en-
forcing a steady rise of wages and prices without the
least concern as to whether the country's money supply
is sufficient to meet the enlarged demands thereby im-
posed upon it. This unceasing and seemingly irresistible
struggle for higher wages and prices which has gone on
for a decade, and which, as stated, has been equivalent
to an artificial drain upon the country's currency vol-
ume, tended to contravene one of the conditions essential
130 Various Factors Affecting Prosperity.
to prosperity, namely, an adequate money supply. Of
late years the latter has been largely augmented by arti-
ficial means, notably in the United States, in the shape
of an expansion of bank money 5 . This expansion has been
large enough to fully meet the increased demands made
i;pon the money volume. But the expansion could not go
on forever, inasmuch as it was breeding troubles of its
own. Then the law asserted itself that the demand upon
the money supply must keep within the limits of the
money volume a collapse ensued which made an end,
for the time being, to the aggressions of labor unions and
trusts and to their endeavors for higher wages and prices
a collapse which probably would not have taken place
but for the doings of these two factors.
I repeat, an adequate money supply is one of the es-
sentials of prosperity. Though business conditions will
gradually adjust themselves to a change in the money
volume, the process of transition means economic dis-
turbance whenever the change takes place in the shape
of a shrinkage of the volume- -no matter whether the
shrinkage is a positive one, in the form of a drain upon
the gold supply, or an artificial one, in the form of de-
preciation, i e. a diminution of the purchasing power of
a gold dollar.
INDUSTRY. Obviously, this is an essential of pros-
perous conditions. In a community of lazy negroes who
shun work, we will not find business activity nor any
wealth to speak of. But while industry is essential to
prosperity, it will not of itself insure it, as is shown by
the example of China, whose people are very industrious,
but nevertheless very poor. It is well understood that
in order to attain best results in the lines of industry
and production it takes more than mere physical exer-
tion, and that the latter must be supplemented by proper
means of production, machines, factories, railroads, etc.
UNIVERSITY
Various Factors Affecting Prosperity. 131
On the other hand, history tells us that even in olden
times periods of prosperity have existed now and then in
spite of the primitive means of production, whereas in
modern times depressions are by no means uncommon,
notwithstanding the multiplication of appliances de-
signed to aid production.
In leading countries we find no lack of industry nor
of the productive capital required to obtain best results
from it; but we generally do find a lack of opportunities
for industry to display its full powers, and to keep all
working forces employed. At times, exceptional condi-
tions may prevail where this rule does not hold true, as
was recently the case in the United States and in Ger-
many; but it is well understood that such exceptional
conditions will not last and .that sooner or later the high
tension will relax. Then we will see normal conditions
return: industry will suffer from the want of an active
market, and part of the working forces, though willing
to work, have to remain idle.
ENTERPRISE. This element, too, constitutes one of
the essentials of prosperity, though it is not quite so far-
reaching in its influence as generally assumed. Many
economists consider it to be the leader, the moving force
in the march of progress and of business activity. As a
matter of fact, however, it is as often the follower as the
leader. All depends upon circumstances and conditions.
Where these are favorable, and offer a reward to enter-
prise and new undertakings, the latter will not be lack-
ing: where they are unfavorable, enterprise can not turn
the tide, and. of itself, bring about prosperity. Let us
cite some illustrations.
The building of a railroad through an unsettled terri-
tory in the United States, with the expectation of a sub-
sequent influx of settlers, who will build cities and vil-
lages, till the ground and establish industries, may seem
132 Various Factors Affecting Prosperity.
to be a clear case showing how enterprise leads and, of
itself, brings business activity and prosperity into a wil-
derness. But does not enterprise, even here, follow cir-
cumstances and conditions, and would the railroad have
.been built unless the circumstances had been favorable
enough to warrant it? In contrast herewith let us con-
sider a case where the favorable conditions are doubtful.
Let us suppose that some twenty or thirty years ago na-
tives of China had contemplated the building of a rail-
road in their own country through a thickly-populated
territory, where, from a European pcftnt of view, the suc-
cess should have been immense was it lack of enterprise
which restrained them from going into such an under-
taking? Hardly. They knew they would not succeed.
They knew they would be sure to fall victims to the ex-
actions of their corrupt officials and to the likin system
which harries all traffic in China. Let us assume, as a
third illustration, that a foreign power would give pro-
tection to the building of a railroad in China; then we
will see enterprise come forward at once and capital flow
in simply because the conditions of success which were
absent in the former case are now at hand.
We could cite many other instances to show that en-
terprise can thrive only where the conditions of success
are pre-existent. In a new country like the United
States, which offers many opportunities for new under-
takings, unhampered by lawlessness or other drawbacks,
there enterprise flourishes. In old countries, whose op-
portunities have largely been seized on already, the field
for enterprise is much more restricted, consequently prof-
itable openings are, to quite an extent, sought for abroad.
Again, opportunities for enterprise become scarce during
periods of depression ; it is well known that at such times
enterprise will not avail and is bound to lag.
Enterprise must be regarded as the antidote, or really
Various Factors Affecting Prosperity. 133
as the preventive, of Impair Savings, and therewith of
depressions. On the other hand, the latter (Impair Sav-
ings) act also as a preventive of the former, the one
tending to exclude the other. Where enterprise is suf-
ficiently active to absorb all the savings of a country,
there is no room for depressions. Where it does not ab-
sorb all of them and where, consequently, a portion will
become Impair Savings, the latter will at once do their
part to subdue enterprise since they curtail consump-
tion (as explained in Chapter 3), therewith production,
therewith the demand for the means of production (fac-
tories, railroads, constructions of any kind), and there-
with enterprise, the latter deriving its support princi-
pally from the demand for new constructions. Enterprise
thus being compelled to slacken its pace, the formation
of Impair Savings (i. e., of funds not used for new con-
structions) will grow in proportion, and this in turn will
tend to check enterprise still more, eventually almost
stifling it, as is so painfully evidenced by unprogressive
countries like China and India.
Enterprise no doubt constitutes one of the factors es-
sential for a country's prosperity, and the peoples most
alert in this direction count among the wealthiest. But
I repeat, it is not nearly so much of a primary factor as
ordinarily supposed, being itself dependent upon the ex-
istence of favorable opportunities and, to a large extent,
upon the absence of Impair Savings.
FOREIGN TRADE. This, when in a healthy state,
certainly constitutes one of the essentials of prosperous
conditions. But on the other hand it harbors the possi-
bility of peculiar complications. Though in the main
beneficial to all parties concerned, it does not benefit all
nations aiike. In its highest conception foreign trade is
considered a refined species of barter, and if it were
nothing but that, no corrmlications would result. But the
134 Various Factors Affecting Prosperity.
foreign transactions do not alwaj^s offset each other in
the shape of goods or services; there are residual bal-
ances, and these may pile up from year to year, thus giv-
ing rise to the development of so-called debtor and cred-
itor nations. The latter are always growing wealthy and
evidently are getting the better end of the bargain.
Debtor nations may likewise be benefited in spite of be-
coming indebted, provided they are thereby enabled to
build up new productive capital at home, as is the case
with newly settled countries. But where, as in the case
of Russia, a country becomes indebted simply because it
is too weak to successfully compete with foreign nations
and because it is unable to hold its own in its trade with
the outside world,, there the complications referred to
may actually set in, and may lead to poverty, to a weak
economic condition, and to chronic financial embarrass-
ment.
Such debtor countries gradually have to increase
their exports as against their imports, the annual excess
representing the tribute they pay to the outside world
owing to their indebtedness- this as a sequence to the
fact that at some period of the past their exports were
not large enough to balance their foreign accounts.
A conspicuous example showing how the annual
residual balances of foreign trade may pile up to an en-
ormous amount in the course of many years, is given us
by France, which is said to own more than 5 billion dol-
lars' worth of foreign securities. To attribute this stu-
pendous accumulation of credits entirely to the course of
her foreign trade, may, at first si'ht, seem absurd, but is
undoubtedly correct. How did France pay for those se-
curities? For the one or the other of the individual loans
she may have paid out the actual gold, but did her stock
of gold, in the long run, become smaller thereby? Did
not she manage to recover, from other nations, the gold
Various Factors Affecting Prosperity. 135
so paid out? And could she recover this gold without
giving goods or services in exchange for it? As a matter
of fact, France paid for those foreign securities,, not in
cash, but in the shape of export goods or services. True,
it also took a corresponding degree of saving activity on
the part of the French people in order to accumulate the
funds invested in those foreign credits, but these credits
could never have been built up, and the saving activity
would have been of no avail to that end, without the
concurrence of the highly favorable trade balance. Sup-
pose the latter were wanting, and French capitalists
would nevertheless undertake to buy a billion dollars'
worth of foreign securities; then they would have to
send that much cash abroad, and the drain of gold would
at once derange their home markets in a manner to make
a continuance of such buying impossible.
The term "foreign trade" should be understood in its
broad sense, covering not only the movement of goods,
but all elements affecting a country's foreign account,
such as ocean freight, expenditures of foreign tourists,
interest accruing on foreign investments, etc. The two
latter items form the chief source of France's favorable
foreign balance- -which, as is well known, does not mani-
fest itself in the shape of a large surplus of exports over
imports, but which nevertheless enables the French to
continually augment their holdings of foreign securities.
While foreign trade represents the principal source
of France's enviable financial condition, it also repre-
sents the source of the wretched condition of Russia's
finances. This country has become heavily indebted to
the outside world, owing to the unfavorable state of her
trade balances, and as a sequence to this indebtedness
she is subjected to a constant drain upon her resources,
which impoverishes her in the same proportion as it en-
riches other countries. Indebtedness is no less objection-
136 Various Factors Affecting Prosperity.
able for a country than for an individual,* especially so
where no values are created to offset the debt. Can Rus-
sia's railroads, owned by the Government, be considered
as partly offsetting her foreign debt, and to that extent
justifying its creation? Hardly. Other European nations
build their railroads out of their own resources, not with
foreign funds.
Not only will foreign trade prove instrumental in
making some countries tributary to others, but it may
also interfere more or less with a country's economic
conditions so far as home trade is concerned. On page
105 I have emphasized that those countries thrive best in
which there obtains a proper mixture of saving propen-
sity on the one hand and of spending propensity on the
other; foreign trade, however, will to some extent dis-
turb the working of this principle.
Let us conceive of an island commercially isolated,
where the inhabitants are moderate savers but neverthe-
less fond of good living. If of industrious habits they
would be wealthy, even though their means of produc-
tion may not rank with ours. Business would prosper
and the demand would be brisk. Should now the island
be opened to foreign trade, followed by the influx of
cheap foreign manufactures, the brisk home demand
would readily absorb the latter, and without a corre-
sponding outgo of domestic goods the island would soon
become indebted to the outside world a result which, as
* Some economists hold that where one country becomes indebted
to another, this is practically a migration of capital, even where the
debt originates from the importation of consumptibles which repre-
sent no capital and whose value is destroyed when they are con-
sumed. For instance, a factory in the United States may be built
with English capital, the latter coming over not in the shape of cash
but of goods; such importation would relieve us from making the
goods ourselves and would set our working forces free to work on
the factory(?).
Such a transaction might be taken for a migration of capital, on
the ground that we built up home capital sufficient to offset the for-
eign debt. In reality the transaction would merely prove that we
were unable to hold our own in foreign trade and unable to pay for
our imports with our exports.
Parlous Factors Affecting Prosperity. 137
stated, is as objectionable for a country as for an indi-
vidual. Here we find that the inclination for good living,
which among an industrious people ought to promote
demand, and therewith production, becomes the means
for impoverishing the community unless it is able to hold
its own against the aggressions of foreign trade. As a
consequence of such impoverishment the buying of for-
eign goods would soon meet a natural check, and the de-
mand for home production would be disturbed from the
very beginning.
A healthy condition of the foreign trade is therefore
highiy essential for ensuring prosperous conditions. Only
where a country manages to hold its own in this respect,
so as not to lose ground or become impoverished by for-
eign trade only there the proper mixture of saving and
expending propensity will produce its beneficent results.
And as a matter of fact we find that among the leading
nations the evolution of foreign intercourse has taken
such a turn that they are not (like Russia, Turkey and
the South American States) left subject to a constant
drain of their wealth, but on the contrary, they have
shaped their foreign relations so that, they derive a sur-
plus income at the expense of other countries, which
makes them all the wealthier.
Not only the economic conditions of a country may
be affected by foreign trade, but also its money supply,
as has already been pointed out in the early part of this
chapter. All of which goes to show that a healthy state
of the foreign trade is by no means an insignificant ele-
ment in supporting business activity.
Outside of the four factors considered in the forego-
ing pages industry, enterprise, an adequate money sup-
ply, a healthy state of the foreign *rade several others
138 Various Factors Affecting Prosperity.
may be enumerated which likewise are important in se-
curing a country's prosperity, such as: good laws; sta-
bility in the government; a wise fiscal system; a bounti-
ful supply of productive capital; promptness in the in-
vestment of savings, etc., etc. But, strange to say, and
here we arrive at the essential point of our discussion,
all of these factors may co-exist in a country, and still
prosperity may be lacking. England affords an example
of this. We find all of the above factors well represented
there, nevertheless periods of depression occur quite
often which goes to show that the presence of all of
these several factors and the freest scope for their co-
operation does not of itself suffice to banish those dis-
tressing spells of stagnant business. To accomplish this
we have to keep that element out of our economic system
which causes the discrepancy between supply and de-
mand and which so far has escaped the attention of our
economists Impair Savings.
CHAPTER Fill.
RECENT UPS AND DOWNS OF PROS-
PERITY IN THE UNITED STATES.
IN the preceding chapter 1 have pointed out that the
maintenance of prosperous conditions depends not
only upon a healthy state of the saving activity but also
upon the co-operation of various other factors an ade-
quate money supply; a favorable condition of foreign
trade; industry; and enterprise. The latter two factors
depend largely upon individual energy; and inasmuch as
we generally find an abundance of this in our modern
communities, we also find an abundance of industry and
enterprise, the only limit being drawn by local condi-
tions; so, if economic disturbances occur, the primary
cause thereof should not be sought in a relaxation of
those two factors. For instance, the panic of 1907 was
not caused by any slowing down of industry or enter-
prise. Quite different is the situation with regard to the
other two elements, foreign trade and the money supply.
These do not depend so much upon individual energy, as
upon a multiplicity of circumstances quite complex in
their nature and hard to control, and though the figures
and totals representing them may not vary much from
year to year, these variations may in course of time ef-
fect considerable changes in a country's economic condi-
tion. To show how these important factors, saving activ-
ity, money supply, and foreign trade, will affect prosper-
ity as changes in their status take place, a concrete ex-
ample may be instructive, such as is supplied by the re-
cent economic history of the United States. Let us re-
view this, commencing as far back as 1893.
140 Recent Ups and Downs of
CAUSES OF THE PANIC OF 1893.
Previous to the panic year o 1893 two elements of
disturbance had been at work for quite some time: first,
our foreign trade (comprising the movement of merchan-
dise and securities, ocean freights, interest, tourists' ex-
penditures, etc.) had resulted in a growing indebtedness
to Europe; second, the money supply had been artificially
inflated by the annual injection of large amounts of sil-
ver currency. Now it is not true, though it has often
been asserted, that business men and capitalists took
fright at the silver inflation and on that account became
chary of engaging in new enterprises, and that this
fright caused the panic ; for as a matter of fact the busi-
ness world paid no attention whatever to the changing
character of our currency previous to the catastrophe of
1893. Nevertheless, the inflation had something to do
with the panic. It worked harm in an unsuspected man-
ner. As explained on page 129, a gradually increasing
supply of currency will not result in an accumulation of
idle cash funds in the money market, but will usually
find absorption in the channels of production and trade
prices and wages rising accordingly. Such rise of
prices reacts upon foreign trade, making the home mar-
ket a good one for foreigners to sell in but a poor one to
buy in : and here we arrive at the cause of the unfavor-
able development of our foreign trade* and of the conse-
* It may seem that a rise of prices, if it took place, should have
manifested itself by a rise of the "index figures" and that an un-
favorable balance should have manifested itself by an excess of im-
ports over exports; while statistics showed neither. Let us examine
the reasons why the statistics did not reveal the facts.
The rise of prices, due to that inflation of the currency, was
comparative rather than absolute. Prices in other countries were
steadily declining (in compliance with the universal retrograde move-
ment of prices which took place between 1873 and 1897). but with us
the decline was largely checked bv the inflation of the currency.
Without this inflation all prices and wages would have been forced
to a lower basis, the same as in Europe, and we then would have
been in a better position to hold our own in foreign trade. But as it
was, we had comparatively higher prices, due to the inflation, with-
out higher index figures.
As to the statistics of foreign trade, they showed quite an ex-
Prosperity in the United States. 141
quent growth of our foreign indebtedness which took
place at that time.
This growth could not go on forever. For many
years Europeans had been content to take American
bonds and stocks and other titles to property, in pay-
ment for the annual dues accruing in their favor, but
finally they showed a decided preference for cash, and
the drain of funds which followed reduced our money
markets to that precarious condition where any un-
toward occurrence may cause a collapse.
LEADING FEATURES OF THE PANIC OF 1893 AND
OF THE SUBSEQUENT DEPRESSION.
An untoward event, of the nature just referred to,
took place in the spring of 1893 when a gang of specu-
lators made an onslaught on the stock market. Taking
advantage of the weak situation, they had been making
11 short sales" of stocks to a large extent, and now raided
the market, managing to depress prices by all sorts of
devices in order to cover their " short sales" at low fig-
ures and thus reap large profits. One of the devices con-
sisted in creating an artificial shortage of money, which
?argely helped to depress prices and to shake confidence.
They even went so far as to negotiate large loans with
the commercial banks, paying interest on these loans but
leaving the funds unused, thus tying them up and keep-
ing them out of the reach of others. In consequence the
tightness of money became quite severe, spreading from
the Stock Exchange to other lines of business, and from
New York to all parts of the country, everywhere de-
cess of exports over imports, for the years preceding the panic year,
and might therefore be construed as favorable. For the four years
1889 to 1893 the export surplus averaged $73,000,000 per annum. When
considering, however, that our annual dues to Europe for interest,
ocean freights, tourists' expenditures, came to not less than double
that amount (according to the compilations of the New York Journal
of Commerce) and possibly to more, it becomes clear that the seem-
ingly faA r orable statistics of foreign trade did not reveal the true
situation.
142 Recent Ups and Downs cf
pressing market values and prices, engendering distrust
as to what might follow, and causing a mad rush to real-
ize on property before things would get worse.
The panic continued for several months before the
general anxiety was allayed. After that the funds which
had disappeared, owing to the prevailing distrust, came
forth from their hiding-places, flowing into the commer-
cial banks and causing a glut in the money market. Con-
fidence evidently returned, but not prosperity. Large
amounts of idle cash funds were on hand, ready for any
profitable investment that might offer, but such oppor-
tunities had become exceedingly scarce. Enterprise
seemed to be stifled. Ordinarily the field for enterprise
and for investments must be found in the creation of
new productive capital ; like factories, etc. : but an ex-
tension of these pre-supposes an increased demand for
their products, and this demand was lacking.
"Why was it lacking? What caused the great falling
off of the demand which took place at that time ? It was
brought about by that mysterious factor which so often
has proved the scourge of mankind the saving activity
in its Impairing Form.
Previous to the panic the saving activity was of a
different character, manifesting itself principally in the
beneficent Captalistic Form, in the creation of new con-
structions and of additional wealth. This, its proper and
desirable sphere of action, was closed to it by the panic,
and at once it was changed from a source of good to a
source of evil. Not finding investment any longer in new
constructions (except to a limited extent), the savings
funds found it in that peculiar manner where the act of
investing does not bring with it a demand for working
forces, and where the services of the latter are left un-
called for. If at that period all saving activity had
ceased, and if the wealthy, instead of continuing to ac-
Prosperity in the United States. 143
cumulate part of their income, had made larger expendi-
tures for luxuries, a corresponding demand for working
forces would have ensued and the depression would have
ceased at once. The wealthy, however, did not pursue
such a course; the saving activity went on therefore
the depression.
True, a cessation of the saving activity, though it
would ha\re done incalculable good, would not have re-
lieved the trouble entirely, for the large foreign indebt-
edness still existed and Europe continued its demands
for payment in cash, therewith causing a steady drain of
our gold supply. This drain became so severe that at
times it was doubtful as to whether the country's cur-
rency could be kept on a gold basis, the reduction to a
silver basis seeming imminent. Only the strenuous ef-
forts of the Government, aided by the support of a syn-
dicate of bankers, saved the country from an exhaustion
of its gold, supply and from jeopardizing its gold
standard.
The situation became still more complicated by the
passage of a measure which, though commendable in it-
self, was of doubtful value under the circumstances,
namely, the enactment of a law for reducing the tariff.
The lowering of the duties certainly tended to facilitate
imports without correspondingly stimulating exports at
least not for the time being and the result of this tend-
ency was fully disclosed by the statistics, inasmuch as
the excess of exports over imports fell off at once, being
<mly 75 million dollars in the first year under the new
tariff, as against 237 millions in the preceding year. With
all due respect for the principle of free trade, it should
be admitted that the time chosen for enacting the new
tariff was inopportune, rendering the country's trade
balance so much the worse and correspondingly increas-
ing the drain on our gold supply.
144 Recent Ups and Downs of
The foregoing will serve to show the far-reaching in-
fluence which foreign trade, and the status of the trade
balance resulting therefrom, may exert on the monetary
and economic conditions of a country. Ordinarily we
find no monetary strain in a country where a depression
prevails, that is, after the panic has subsided. Nor was
such a strain experienced by us; nevertheless a constant
anxiety existed about the money situation and about the
question whether the Government would be able to main-
tain gold payments. This anxiety undoubtedly helped to
intensify the general feeling of despondency and to ac-
centuate the depression. The silver inflation alone would
not have been sufficient to cause that drain of gold and
that distrust in the stability of our monetary standard
unless the adverse trade balance had co-operated with it.
The silver of itself will not expel the gold. It does not
do so in France, despite the great volume of silver circu-
lating there. France's trade balance is favorable, so she
practically has not to make any cash payments abroad,
and there is no drain on her money supply. But with us
the situation was different. We had to make large pay-
ments abroad in addition to what we paid in the shape
of merchandise, and only gold was accepted in settle-
ment, so our gold went out w r hile the silver remained. It
seemed as if the gold was expelled by the silver cur-
rency; in reality it was expelled by the adverse trade
balance.
Tt should be understood that the depression which
follows a panic is not necessarily coupled with an ad-
verse trade balance and with currency troubles. It is not
so in England. There an adverse trade balance (i. e., an
unfavorable balance of the foreign account") is practi-
cally unknown ; nor is the currency a subject of concern
except at times of acute panic: still, periods of depres-
Prosperity in the United States. 145
sion have been quite frequent there. The example af-
forded by tho United States in those memorable years
from 1893 to 1897 has been chosen by me for the special
purpose of illustrating a combination of those three im-
portant factors of disturbance: an adverse trade balance,
an unfavorable monetary situation resulting therefrom,
and last but not 'least, Impair Savings, the latter invari-
ably constituting the governing element of all depres-
sions.
THE RETURN OF PROSPERITY.
While it was the drift of our foreign trade which pro-
duced the various factors of disturbance witnessed dur-
ing the depression of 1893 to 1897, it .was a change in
that drift which put an end to our troubles and opened
the gates for the return of prosperity. This change was
effected bv two memorable events: the enactment of a
new tariff law, and in the same year, 1897, an unusually
bountiful harvest, coupled with poor crops in Europe,
which enabled us to dispose of our large surplus at high
prices. In consequence the excess of exports over im-
ports rose to the phenomenal figure of $615,000,000 in
the year 1897-98, part of which was paid for in cash; so
the efflux of gold witnessed in the preceding years was
changed into an influx, and the drain on our money sup-
ply came to an end. Owing to the new tariff, the imports
of merchandise fell off as much as $150,000,000 in the
year 1897-98, compared with the previous year, a fact
which certainly tended to stimulate domestic production.
The greater activity caused thereby as 'well as by the
largely increased exports, resulted in swelling the peo-
ple's income, this again added to their purchasing power
and to the general demand, this again fostered produc-
tion still more and therewith created an enlarged de-
mand for the means of production, thus awakening a
spirit of enterprise. Then the "Multiplying Principle
146 Recent Ups and Downs of
stepped in enterprise and new constructions calling for
additional working forces 6 , and these in turn, when ex-
pending their income, giving rise to a more extended de-
mand for commodities; in other words, the well-known
principle of action and reaction was brought into play,
which did the rest in boosting up business activity to the
high-water mark. With the revival of enterprise that
malignant factor, "Impair Savings/' which for four
years had clogged the wheels of prosperity, disappeared,
the character of the saving process being transformed
from the harmful to the beneficent type, from the Im-
pairing to the Capitalistic Form.
The remarkably favorable trade balance recorded in
the year 1897-98 fell oft' somewhat in the subsequent
years, but nevertheless continued at a very high average;
this for two reasons: first, the hard times from 1893 to
1897 had resulted in depressing all wages and prices ow-
ing to severe competition among working men and busi-
ness men, thus enabling us to produce our wares at lower
cost, so as to compete with Europe in many lines of man-
ufacture; second, the protection afforded by the high
tariff of 1897 which so largely excluded foreign goods
from our markets stimulated home production and,
strange to say, Europe acquiesced in this policy of ex-
clusion and refrained from adopting retaliatory meas-
ures.
It has often been stated that if we want to sell to
other nations we must buy from them, the one depending
upon the other. There seem to be some flaws in that
theory, however, for our own experience during that
period demonstrates that we could manage to increase
our sales at the same time that we reduced our pur-
chases. True, this one-sided policy may not work in the
long run. but it answered very well for the time being.
It did not result in a shrinkage of exports; on the other
Prosperity in the United States. 147
hand, it broadened the home market for the sale of our
own products, which, in addition to the energetic exploi-
tation of our immense natural resources, afforded em-
ployment for our working forces to an extent never
known before. Where all working forces find employ-
ment and where they are aided by the best possible
means of production, prosperity evidently must be at its
maximum.
COMPLICATIONS DUE TO FOREIGN TRADE.
In course of time, however, the one-sided policy re-
ferred to led to consequences which were not foreseen
when enacting the high tariff of 1897. The latter harbors
an element of mischief which has made itself felt more
and more in recent year?. It helps to raise all prices and
wages, because it excludes the leveling influence of for-
eign competition. The rise of prices means a weakening
of our position in international trade, rendering our
market a better one for foreigners to sell in and a poorer
one to buy in.
True, this tendency has not so far manifested itself in
the shape of reducing our exports, which indeed are con-
stantly growing; but the imports have been growing
much faster (up to the fall of 3907), and in consequence
we see a gradual shrinkage in the excess of exports over
imports, and a waning of our favorable trade balance.
This shrinkage of the trade balance would do no
harm and might be regarded by us with complacency
were we situated as favorably in this regard as England,
Germany or France*, or if only we could come out even
in our international trade, without augmenting our for-
eign indebtedness. But the fact is we have already
* In those countries the trade balance is apparently on the wrong-
side, showing an excess of imports, which, however, they can very
well afford to pay for out of the income derived from their foreign
investments.
148 Recent Ups and Downs of
reached a stance where, despite the large balance of trade
still running in our favor, imbalance of payments turns
out against us a fact clearly evidenced by our appear-
ance as persistent borrowers in the London money
market.
What becomes of the large excess of our exports?
Though not so large as in the years 1897 to 1901, it has
still been averaging over 400 millions annually in recent
years. Only a part of this amount is absorbed by inter-
est on our foreign indebtedness, by ocean freights, ex-
penditures of American tourists, etc. The remainder is
probably absorbed by smuggling (especially of precious
stones), undervaluations at the custom houses, and pos-
sibly by errors in gathering the statistics. Be this as it
may, the fact remains that whenever our excess of ex-
ports falls much below 450 millions per annum, our bor-
rowings in London (in the shape of finance bills and of
contangoes on American securities) seem to increase.
Such being the present situation, and the probability
looming up before us that our trade balances will dimin-
ish more rapidly hereafter, we may well ask the ques-
tion, Where are we drifting?*
We might keep on borrowing from Europe, and
might continue to place large bonded loans abroad (such
as were recently negotiated in the French market by
some of our prominent railroads, and even by the City
of New York) and in this way meet the annual deficit
growing out of our foreign trade. Such a policy, how-
ever, would only serve to bridge us over the present, and
would render the final adjustment all the more distress-
* After the panic of 1907 set in, a remarkable change in the
trade balance took place, exports increasing and imports diminishing
a change which averts any troubles from that source for the time
being, and therefore is proving a considerable help towards the
process of recuperation. It remains to be seen whether this favor-
able trade balance will last at least to an extent that will prevent
a recurrence of such an unfortunate state of our foreign account as
we experienced in the period from 1893 to 1897.
Prosperity in the United States. 149
ing, this aside from the fact that our position would be-
come more precarious as we go along, since Europe
might at any time cease to take our securities an event-
uality which is bound to happen sooner or later. Already
the London bankers have at times' been discriminating
against our securities, charging as much as 8 and 9 per
cent, on American contangoes.
It may be that history will repeat itself. The troubles
we experienced in those hard years 1893 to 1897 resulted
largely from our adverse trade balance and our growing
foreign indebtedness. Precisely the same conditions seem
to be developing at present, and they may lead to the
same end unless the drift of events takes a turn which
changes the position.
Thus we find that though our high protective tariff of
1897 effected an almost magical transformation from de-
pression to prosperity, its after effects will breed trouble.
It restricted imports for a time; on the other hand it
helped to raise all wages and prices, thus gradually fa-
cilitating European competition in our markets despite
the barrier erected by the high tariff. Had the moderate
duties of 1894 remained in force, the change in our for-
tunes would have been less spectacular, but of a healthier
character. Our surplus trade balance, though reduced to
75 millions in the first year under the low tariff of 1894,
rose to 102 millions in the second and to 286 millions in
the third, and most likely it would have kept on growing
had the tariff been left undisturbed, perhaps to figures
as large as those reached under the high tariff of 1897.
At the same time the leveling influence of foreign com-
petition would have prevented domestic prices and wages
from rising to such figures as they did.
The sentiment in favor of lowering the tariff has of
late become more pronounced. Possibly, however, a de-
150 Recent Ups and Downs of
cided move in this direction may prove as inopportune
as it was in 1894; it would, for a time at least, still fur-
ther reduce our already diminishing trade balance.
THE RELATIVE SCARCITY OF CURRENCY.
In the foregoing pages I have dwelt at some length
on the subject of foreign trade, and have pointed out
that the harm arising from our unfavorable trade bal-
ance (or, more properly speaking, our unfavorable bal-
ance of pa3 r ments) consists not so much of the annual
tribute we have to pay to Europe in the shape of an ex-
cess of exports over imports for which excess we get no
returns as of the possible reaction upon our monetary
position. It should be well understood, however, that
the latter does not depend entirely, nor even chiefly,
upon the state of our foreign trade, but is influenced to a
much greater extent by domestic factors labor unions,
trade combinations, and last but not least by the annual
additions to the volume of "bank money 5 ".
As to labor unions and trusts, I have mentioned on
page 129 that they are ever trying to advance wages on
the one hand and prices on the other, without in the
least considering whether the country's money supply is
adequate to stand the added strain imposed upon it by
such advances. Obviously, the higher the average of
wages and prices, the greater ought to be the money sup-
ply needed to transact the country's business. In a way,
therefore, the efforts of those combinations resulted in a
reduction of our country's money supply not in its vol-
ume but in its buying power. In this sense the effect
upon the money volume was almost the same as if part
of it had been blotted out of existence.
To a large extent the lessened purchasing power of
the currency in circulation was compensated for by addi-
tions to its volume. But these additions fell short of the
Prosperity in the United States. 151
increasing requirements of the country. The total circu-
lation (outside the Treasury) rose from 1,640 millions in
1897 to 2,772 millions in 1907. an increase of about 1,100
millions. This additional supply of 1,100 millions had to
meet a number of new demands upon the currency,
caused by various factors, four of them paramount in
importance: first, the growth of population; second, the
extraordinary business activity; third, the rise of all
wages and prices, calling for more currency in each in-
dividual transaction; fourth, the enlarged cash needs of
the banks for reserve purposes. The absorption of money
for the latter purpose has not received much attention
on the part of economists, but its importance will be
readily understood when we consider that out of the
total circulation of about 2,700 millions (in July, 1907)
there was over a billion locked up by the banks, leaving
only 1,700 millions in actual hand-to-hand circulation.
Of the 1,100 millions added to the currency between 1897
and 1907, over one-half was absorbed by the banks for
reserve purposes, during the same period, leaving only
the smaller portion to meet the other three demands
mentioned above, those consequent upon the increase of
population, of business activity, and of wages and prices.
This proved insufficient for the requirements.
Nevertheless, we experienced no actual dearth of cur-
rency, at least not in the channels of production and
trade; this on account of the great expansion in the vol-
ume of "bank money 5 ", which to a certain extent took
the place of currency, and is, in fact, coming more and
more into use for some classes of payments where for-
merly currency was employed. This substitution, how-
ever, progresses but slowly, and on the whole the fact
remains that for the payment of wages and for the pur-
poses of the retail trade, currency is the thing needed.
Another reason which prevented an actual dearth of
152 Recent Ups and Downs of
currency in the channels of production and trade must
be found in the fact that the bank money 5 , of which an
ample supply existed in the hands of business men, could
readily be changed into cash, the banks being under
compulsion to make such exchange whenever demanded,
even where they encountered difficulty in procuring the
necessary cash and often had to encroach upon their
legal reserves in doing so. Business men, therefore, met
no difficulty in procuring the currency they needed, so
long as they commanded a supply of "money in bank."
But a peculiar situation developed in consequence on
the one hand, monetary ease prevailing in the channels
of production and trade, and on the other a constant
dearth of funds on the part of the banks, who found it
difficult to keep their legal reserves intact whenever their
depositors, who needed the money for purposes of their
current business, had to withdraw more of it than the
banks could well afford to spare. In addition to frequent
embarrassments from this source, they were exposed to
a continuous pressure on the part of borrowers clamoring
for loan accommodations far in excess of what the banks
could grant not so much for purposes of production
and trade (demands which the banks generally consid-
ered as having precedence over others) as for purposes
of permanent investment, in the shape of loans on bonds,
stocks, mortgages, etc.
Owing to this double strain, the free funds of the
commercial banks ran down in an alarming degree. The
banks naturally extracted from the general circulation as
much money as they were able to retain, so there was no
more in circulation than actually needed. And whatever
cash they could manage to retain was used by them, al-
most to the last dollar, for reserve purposes, as a basis
for building up additional credits. The extent to which
*his was carried on may be inferred from certain figures
Prosperity in the United States. 153
given in Government reports, according to which the re-
serves held by the National Banks underwent the follow-
ing change: in 1899 they formed about 30 per cent, of
the total of the "deposits"- in 1906, only 20 per cent.
This does not mean that the funds of the banks dimin-
ished in their sum total, which on the contrary rose con-
siderably; but the structure of credits (and therewith of
"deposits") soared to such a gigantic height that the
banks' cash funds, despite their much larger aggregate,
showed a smaller ratio when compared with the deposits.
The commercial banks managed to build up that
structure of credit higher from year to year, notwith-
standing the difficulty they met in gathering cash funds
for reserve purposes, where the depositors withdrew the
money about as fast as the banks tried to accumulate it.
On the whole, however, the banks found themselves much
hampered by this scarcity of cash (which, I repeat, was
experienced by them only, not by the business man),
otherwise the piling up of credits would have gone on
still faster than it did. In this connection I may mention
the fact that the New York banks, which are bound to
keep a cash reserve of 25 per cent., have been unable,
from 190-1 to 1907, to increase their loans and therewith
their deposits, despite the great demand for loan accom-
modation ; such increase of loans as did take place in the
United States being confined chiefly to country banks,
where the reserve of actual cash, as fixed by law, need
not exceed 6 per cent.
Owing to the great demand for cash capital and loans
on the one hand and the dwindling of free loanable cash
funds on the other, the condition of the money market
grew more and more precarious. While the money sup-
ply certainly was ample to meet all reasonable demands,
a growing disproportion developed between the two
classes of the money supply, currency, and "bank
154 Recent Ups and Downs of
money 5 ". The volume of the latter had been swelling
prodigiously, from 3,109 millions in 1897 to 9,602 mil-
lions in 1907. To maintain a proper proportion the cur-
rency should have been expanding in the same ratio,
which, however, it did not do, and such increase of it as
did take place was largely absorbed by the banks for re-
serve purposes, as explained further above. On account
of this growing disproportion the bank money finally
was unable to keep up its par value with the currency, a
development which at once engendered general distrust
and led to the crash.
UNHEALTHY BASIS OF THE BANK MONEY.
The prodigious growth of bank money 5 which took
place during the period mentioned, forms a striking
characteristic of the recent developments in the United
States. That growth was due, as already stated, to the
fact that the commercial banks (the creators of the bank
money) did not confine their loans to the legitimate
sphere, the discounting of commercial paper, but largely
branched out into the field of permanent investment
making loans on bonds, stocks, mortgages,, etc.* Of the
total bank money (about nine billions in 1907) only the
smaller part originates from loans made on commercial
paper, the larger part having been issued on the basis
of the above-mentioned securities. Nominally, it is true,
the latter class of loans are not of a permanent nature,
being generally put out *'oii call," or on short time,
which gives them the appearance of being of a tempo-
rary character, especially so as the funds thus loaned out
* Such loans, as a rule, are not issued direct to the railroads or
the industries needing the funds, yet they are indirectly. Suppose a
railroad makes a bond issue with the help of a banker, the latter
inviting the investing public to subscribe to the bonds; then the
public as well as the banker will largely depend upon the banks to
make advances on the bonds so issued. Thus the funds advanced by
the banks really come to be used for permanent investment in the
railroad.
Prosperity in Hie United States. 155
by the banks constantly revert to them. In reality,
however, the loans constitute permanent investments,
for their aggregate does not diminish, expanding rather
than contracting, and the maturing loans being paid off
by making new ones, shifting them from one bank to the
other and from one holder of the securities to the other.
The money needed to pay them off for good (over five
billions of investment loans and over nine billions of all
classes) is not in existence see footnote on page 17.
A peculiar characteristic of the bank loans, and one
but little understood by economists, consists of the fact
that they become money (bank money) after serving
their primary purpose of furnishing cash capital to the
borrower. The latter generally does not withdraw the
amount of the credit in the shape of currency, but merely
transfers the title to it to other persons, and each of
these, in fact every man in the community, will treat
such transfers of bank credit the same as payments in
money. Thus the mere title, i. e., the mere right to draw
money against the credit, becomes money, owing to the
tacit understanding among business men to consider
these rights as money. And the multiplication of these
rights has, to precisely the same extent, augmented our
money supply. The larger the aggregate of the loans of
the commercial banks outstanding at any one time, the
larger the aggregate of these rights, i. e. of bank money,
and the larger the country's money volume.
I mention (though it is well understood) that a man
who procures a loan from a bank generally borrows the
funds to pay them out to others, while those others, who
thus become the owners of the borrowed bank money,
are not the borrowers.
It may seem unusual to count these bank credits as
a part of the country's money supply. A business man,
however, will count his "bank money" as cash on hand,
156 Recent Ups and Downs of
just the same as the currency in his safe or in hip. till.
This is true of the deposits in National banks, State
banks and Trust banks, bat does not apply to those in
Savings banks (see footnote, page 20).
I repeat, two classes of loans have contributed to
build up the enormous extension of bank money from
3.100 millions in 1897 to 9,600 millions in 1907; first, the
loans issued by the commercial banks on the strength of
commercial paper, backed by merchandise and to be re-
deemed out of the proceeds of the sale of the merchan-
dise; second, loans issued on bonds, stocks, etc., the pro-
ceeds of which loans generally found their way into in-
vestments of a permanent character, i. e. in new con-
structions. These loans cannot be cancelled or reduced
in their aggregate except by the tedious saving process.
Without this latter class of loans that prodigious volume
of bank money would not be half of what it is and would
not have constituted that element of danger which finally
led to the collapse.
EXCESSIVE VOLUME OF BANK MONEY, YET A
DEARTH OF CASH CAPITAL.
It may seem contradictory that at a time where the
volume of bank money 5 had attained such a gigantic
size, representing so much "liquid capital" in the hands
of business men, there should have been that extreme
dearth of cash capital which was really witnessed. This
seeming contradiction is partly explained by another pe-
culiar characteristic of bank loans (likewise overlooked
by most of our economists), namely, that they can be
used for investment purposes only once. If their aggre-
gate increases by one billion dollars, this amount of new
credit money will supply the funds for building up new
constructions of an equal value, but no more. Having
once been used for that purpose, the bank loans become
Prosperity in the United States. 157
"Business Money." Though originally entering the
money market in the shape of cash capital, available for
investment, they cease to be such as soon as they are in-
vested. To make this clear let us suppose that a rail-
road needs funds in order to make some improvements,
and issues bonds which its banker pledges with some
commercial bank, the latter advancing the funds in the
shape of bank credits. Let us further suppose that out
of this credit (bank money) a sum of $1,000 be trans-
ferred to a builder. Does this amount represent loanable
or investable cash capital in the hands of the builder?
Certainly not. He needs that money to make payments
for material and labor, only a fraction remaining for his
profit. The $1,000 has become Business Money by being
transferred to the builder, and when he transfers it to
others it remains Business Money, the same as practi-
cally all bank loans. Every new owner needs it for use
in his current business, and can not apply it to purposes
of permanent investment except to the extent that he
makes savings out of his income. Then, however, the
funds employed in such investment would no longer be
derived from bank credits, but from savings evidenc-
ing the fact that bank credits, when once invested, can
not be used again for investment purposes, and explain-
ing why, in spite of that immense volume of nine billion
dollars of bank money, all of which counts as cash, and
originally appeared as cash capital in the money mar-
ket, the latter was left bare.
In this connection I remind the reader of the sharp
distinction we have to make between cash capital avail-
able for investment (funds which actually constitute
the money market), and the cash funds which constitute
the business men's working capital. These have already
found investment, and though they may seemingly be
idle for a time, they are needed by the owner for the pur-
158 Recent Ups and Downs of
pose of carrying on his regular business, so he neither
could afford to loan them out nor to invest them in some
enterprise. Practically all of the nine billions of bank
money falls within this second classification, very little
of it representing cash capital available for investment.
CAUSES OF THE DEARTH OF CASH CAPITAL.
The abnormal scarcity of cash capital available for
the demands of the money market, going hand in hand
with the tremendous growth of cash funds in the shape
of bank money seemingly a paradoxical combination
presents one of the most conspicuous features of the
recent economic history of the United States. What was
the reason of the constant tightness of the money market
and of that extreme dearth of cash capital in the years
preceding the panic of 1907? We can conceive of two
causes; either the demand for cash capital was excessive,
or the annual supply of new cash capital was too small.
Some economists prefer the latter explanation. They
speak of extravagance on the part of the people, of too
much luxury and good living, arid of the consequent lack
of saving power; too much of the people's income being
spent, too little saved. As a matter of fact, however,
there was never more saving and accumulating going on
than in the years preceding the collapse.
Let us take a glance at the Chart. It represents the
money market in the shape of the Black Central Field,
and it shows the two sources whence the funds come to
build up the money market : first, the red lines 10 and 11,
standing for savings or surplus earnings, of a net aggre-
gate of perhaps 3 or 4 billions per annum (see page 115) ;
second, the red-and-black line 18, standing for the aug-
mentation of bank money, which for the five years 1902
to 1907 averaged about 600 millions per annum. Never
before, in the history of this or any other country, has
Prosperity in the United States. 159
the annual supply of cash capital attained such propor-
tions a nd the fact that cash capital of such magnitude
actually did accrue, is evidenced by the visible conse-
quences by the concurrent increase of the country's
tangible wealth to a like extent, shown by recent statis-
tics. So the assumption referred to above, that the an-
nual supply of new cash capital was too scant, proves
incorrect. In fact it was quite large. But the demands
for new capital were still larger. All of the funds de-
rived from those two sources were readily absorbed for
investment purposes, such as are represented in the Chart
by lines 12, 14, 15A, 15B, 15C, and 16; i. e., in such ways
as lead to the creation of new property and to the exten-
sion of the country's wealth.
If we find that the dearth in the money market pre-
vailing in the years 1905, 1906 and 1907 must be Ascribed,
not to the scantiness of the stream of new cash capital
flowing in every year, but to the abnormally great de-
mand for cash capital, which far exceeded the supply,
the question arises, What caused this abnormal demand?
It was intimately connected with the country's great
prosperity.
And this prosperity hinged largely upon the abun-
dance of opportunities* for enterprise and new construc-
tions. The latter gave employment to working forces
outside of those regularly engaged in production and
trade; not only employment, but also income. This in-
come meant increased purchasing power; this, increased
demand for commodities; this, increased production of
commodities; this, increased demand for the means of
production, factories, railroads, etc., and this, again, ex-
* On page 161 it will be shown that the great prosperity resulted
not only from the existence of abundant opportunities for enterprise,
but also from an inflation of the bank money. The latter, however,
could hardly have grown to the excessive extent stated on page 154
without the co-operation of the factor above-mentioned the ample
opportunities for investment.
160 Recent Ups and Downs of
tended still more the opportunities for profitable enter-
prise. This well-known inter-play of action and reaction
was further stimulated by the rapid growth of popula-
tion, which of itself extended the demand for commod-
ities, therewith again enlarging the demand for the means
of production, i. e., for new constructions. And all these
new constructions, inasmuch as they called for more cash
capital per annum than was accruing from the two
sources mentioned savings on the one hand and in-
crease of credit money on the other did their part in
promoting that insatiable demand for more and more
cash funds, stimulating the issue of bank loans, and
therewith the excessive creation of bank money.
INFLATION AND DEPRECIATION.
In course of time the rapid inflation of the money
volume partly in the shape of coin and bank notes, but
overwhelmingly in the shape of bank money 5 developed
mischief of a peculiar kind. It not only made possible
the constant rise of wages and prices contended for by the
labor unions and trusts, but harbored a distinct tendency
of its own in the same direction, thus still further increas-
ing wages and prices.
To explain the nature of this peculiar tendency let us
assume, for the sake of illustration, that all working
forces 6 in the United States earn 20 billion dollars per
annum. When they expend this income, mostly for con-
sump tibles and partly for the creation of permanent cap-
ital, they will bring a demand for working forces into
the market which likewise amounts to 20 billions. Let
us assume furthermore that this demand suffices to em-
ploy all available working forces of the country; also
that the existing money supply is just sufficient to
transact the country's business. Now suppose that the
money volume were augmented by one billion dollars
Prosperity in the United States. 161
in the course of a year, in the shape of bank-money ;
what will be the consequence! This additional money,
which enters the market as cash capital, can be used for
new constructions and for commercial enterprise just
the same as cash capital accruing: from the saving pro
cess, see page 23, and the business men borrowing such
cash funds from the banks will surely so use them
otherwise there would be no object in borrowing. If so
applied, the money will be turned into income for work-
ing men and business men and will create a demand for
working forces to the extent of one billion dollars, this
in addition to the normal demand. The latter, accord-
ing to our assumption, amounts to 20 billions, and ab-
sorbs all working forces of the country. Where the nor-
mal demand fully employs these, can the additional de-
mand, due to the expenditure of the additional billion
dollars, employ more of them i. e., more working forces
than there are? If not, will not the demand due to that
additional expenditure simply result in raising wages
and prices, without increasing the output?
The answer to this question may readily be found in
the great delay in having orders tilled and in the scarcity
of labor which prevailed in the years preceding the col-
lapse. Such scarcity, of itself, inevitably tends to raise
wages, and therewith prices which means a depreciation
of the money supply. In other words, the great increase
in our money volume was largely swallowed by deprecia-
tion; bearing out the statement made on page 129, that
where the money volume expands, the country's mone-
tary requirements will gradually adjust themselves to
the larger volume.
INFLATION THE MOVING FACTOR.
In the foregoing sub-chapters several factors have
been considered which played their part in shaping the
162 Recent Ups and Downs of
peculiar economic development in the United States from
1897 to 1907 the great prosperity the unusual demand
for commodities as evidenced by the delay in having
orders filled and by the scarcity of labor the dearth of
cash capital the aggressions of labor unions and trusts
the growing depreciation of the money's purchasing
power, resulting from the steady increase of wages and
prices. The moving factor for all of these phenomena
must be found in the unprecedented inflation of the bank
money 5 . This factor should be held responsible for the
excessive, over-strained business activity of that period,
as well as for the subsequent collapse. Inflation was the
cause of both.
Most of our economists are not inclined to admit the
inflationary character of the expansion of the bank
money and prefer to believe the great swelling of its
volume to be harmless, on the plea of its being self-
adjusting expanding and shrinking according to the de-
mands of trade ; and the great expansion during the time
of the boom simply being due to the great demand for
purposes of trade. It escaped their attention that it was
the inflation itself which created this demand.
How this was done has been explained on page 161.
And in the several preceding sub-chapters I have al-
ready pointed out how most of the phenomena enum-
erated above originated from the inflation. Can we like-
wise attribute the dearth of cash capital to that cause?
As it were, could the undue increase of the bank money
cause a scarcity of the bank money?
It certainly can, paradoxical as it may seem. True,
at first the increase will tend to relieve the strain on the
money market. The increase of the total of the bank
money by one billion will satisfy the demand for cash
funds to an equivalent extent. But what will subse-
quently become of that billion of additional bank money?
Prosperity in the United States. 163
Does it assume the shape of idle cash funds, to be a drug
on the money market? No! It is needed by the bor-
rower to make payments and is rapidly absorbed in new
constructions. If so, it will increase the demand for
working forces above the normal (see page 161) ; there-
with the income of these working forces; therewith the
demand for commodities on the part of the latter. This
will over-stimulate the general demand. Then the means
of production (factories, railroads, etc.) will be found
insufficient to meet the unusual demand. In consequence
more factories, more railroad facilities, and more means
of production will be needed, which, in turn, means an
increased demand for cash funds and for bank money
i. e., a demand for still more inflation. Thus the one in-
flation will engender another (at least in a rapidly 'de-
veloping country) and, if so, will tend more to strain
than to relieve the money market until the inevitable
collapse makes an end to further inflation, for the time
being.
I repeat, it may seem paradoxical that an artificial
increase of the money volume should result in a scarcity
of cash funds but the same result has been observed at
other periods of inflation. The creation x)f artificial
money will (except in rare cases) stimulate the demand
for commodities above the normal. This demand may
seem quite healthy; and the increased production result-
ing therefrom may likewise seem quite healthy, inas-
much as it "merely follows the actual demand." Never-
theless it is the inflation which actuates this abnormal
demand, and the latter will cease when inflation ceases
THE PANIC OF 1907.
As the primary cause of the collapse of 1907 we have
to set down the overgrowth of the 'volume of bank
money 5 ; as secondary causes the various factors result-
164 Recent Vps and Downs of
ing from this overgrowth. The steady depreciation of
the money had to work mischief sooner or later; the
abnormal demand for cash capital, coupled with the
constant tightness of the money market, created of itself
a position impossible to maintain in the long run ; and the
growing volume of the bank money (see page 154), was
bound finally to make itself felt in some way or other.
It was especially the latter factorthe excessive vol-
ume of bank money coupled with an inadequate volume
of currency and the growing disproportion between the
two kinds of money, which precipitated the collapse.
As explained on page 151, of the total currency of
2,700 millions extant outside the Treasury in 1907, over
one billion was tied up by the banks for reserve purposes ;
allowing for this, the two kinds of money compared as
follows, in August, 1907:
Currency in hand-to-hand circulation $1,700,000,000
Business men's "money in bank" 9,600,000,000
The fact that all of this bank money of over nine
billions was redeemable in currency on demand em-
phasized the gravity of this disproportion. When a some-
what exceptional demand for redemption sprung up, in
the shape of a run on a few New York banks, the pro-
portionate scarcity of the currency disclosed itself in a
sensational manner the free funds of all of the New
York banks combined, were readily absorbed and were
found inadequate to meet this demand, so the banks were
forced to stop redemption of the bank money 5 , and had
to suspend cash payments. Thereupon the distrust of
bank money became universal, spreading over the whole
country and giving rise to a premium as high as 4 and
5 per cent, on cash money as against bank money. Pres-
ently the whole complicated system of domestic exchange
and of credit became clogged.
Prosperity in the United States. 165
The further development of the panic and its gradual
subsidence into a depression followed the usual course 3
well known to economists, so we need not go into the de-
tails.
THE SUBSEQUENT DEPRESSION.
During the early stages of the panic the opinion
seemed general that the depression to ensue would be
intense but short-lived. At present (July, 1908) nine
months have passed with little or no improvement. What
prevents the recovery?
In the course of this treatise I have repeatedly pointed
out that the degree of prosperity bears a close relation
to the extent of new constructions under way. While
the progress of new constructions went on with great
activity prior to the panic, it experienced a decided check
when the disturbance set in a fact painfully evidenced
by the stagnation in the iron industry, the one pre-
eminently concerned in new constructions. Owing to
this check many of the Constructive Working Forces 7
were thrown out of employment, and this, in turn, re-
acted upon the working forces employed in the lines of
production and trade (Multiplying Principle), causing
considerable curtailment of income, of purchasing power
and of general demand. In consequence of the falling
off of this demand the incentive for undertaking new
constructions disappeared, the productive capital already
in existence (factories, railroads, etc.) proving more
than sufficient to meet the reduced demand. As a result,
that peculiar complication set in, common to all depres-
sions: The entrepreneurs do not build because the people
are backward in buying commodities; and the people
cannot buy because the entrepreneurs do not build.
Instead of the dearth of cash capital so noticeable
before the panic, we now see a plentiful supply of funds
in the money market, with apparently no use for them.
166 Recent Ups and Downs of
Only in one line of enterprise are cash funds still in de-
mand; namely, in the railroad industry; not so much
for immediate requirements, which seem to be fully met
by existing facilities, as to provide for the needs of the
future. According to the opinion of a leading railroad
man these will call for a billion dollars annually for a
number of years to come, the capital invested in rail-
roads having increased but little in the last five or ten
years, although the traffic has grown enormously. If the
money market's idle funds were applied in this direc-
tion, the revival of business would be much assisted.
But a. peculiar difficulty stands in the way, inasmuch as
the railroads find it impossible to borrow at reasonable
rates of interest, while, on the other hand, they are un-
willing to issue long-term bonds at an excessive rate,
such as they had to pay on the numerous temporary
loans which they issued within the last two or three
years. Thus, the money market presents the paradox
of a superfluity of idle cash funds looking for employ-
ment without finding it, and, on the other hand, a great
industry sorely in need of funds without being able to
obtain them. Naturally, this state of affairs will not last
much longer, and will come to an end as soon as investors
realize that the world-wide strain for cash capital is re-
laxing, and that the outlook promises continued ease in
the money markets for years to come.
While a revival of railway construction 'and improve-
ment will do its share towards reviving business activ-
ity, we have to reckon with several other factors that will
operate in the contrary direction. Let us enumerate
some oE them.
FIRST. Wages and prices are expected to go lower,
and while this expectation prevails, buyers are apt to
hold aloof.
Prosperity in the United States. 167
SECOND. The annual expansion of the volume of
bank money which was checked in consequence of the
recent panic, is not likely to be resumed so long as the
present abundant supply of idle cash funds continues.
I have pointed out on page 161, how this expansion of the
bank money has created an abnormal demand for labor
and for working forces, just for the purpose of new con-
structions. This abnormal demand naturally ceases with
the stoppage of the further inflation of bank money. If
the demand, so far as it went beyond the normal, for-
merly absorbed say 3 per cent, of all working forces, this
share of the working forces is now condemned to idle-
ness. And owing to the stepping in of the Multiplying
Principle this share of 3 per cent, may easily be increased
to 10 per cent, or more.
THIRD. The country's saving power has grown to
a tremendous total per annum, especially on account of
the vast fortunes that have been accumulating in indi-
vidual hands. So long as savings and surplus earnings
could find ready absorption in new constructions, i. e.,
in the Capitalistic Form of investment, well and good ;
but where this avenue of investment is largely closed,
and where, in consequence, the savings must find an
outlet in the harmful ''Impairing Form" of investment 8 ,
there, the greater the saving power, the greater will be
the harm done, and the longer will it take to re-establish
the equilibrium between the annuial savings and the
demand for them, i. e., the demand in the line of Capital-
istic investment.
As against these three points which work in the wrong
direction, we may hope that the many natural resources
of the country, still unexploited, will, sooner or later,
attract capital and enterprise, so that savings and sur-
plus earnings can again find employment in their iegiti-
168 Recent Ups and Downs of
mate sphere. This would assure the return of pros-
perity; though hardly in the shape of that over-strained
business activity which prevailed in the decade from
1897 to 1907.
WHAT OF THE FUTURE?
When business does revive, the question may arise,
shall we not again experience the same troubles which
led to the collapse of 1907? Have we any assurance
against their recurrence?
Much was said in the years 1906 and 1907 about the
danger threatening from the constant rise of wages and
prices, which, if unchecked, would ultimately have to
result in a collapse; and the argument was often heard
that a set-back in business activity would really be de-
sirable in that it would counteract the doings of labor
unions and trusts, on whom was placed the chief re-
sponsibility in bringing about this rise. The setback has
now taken place, and has indeed imposed a check upon
that dangerous tendency. After a revival of business,
however, labor unions and trusts will no doubt resume
their activities, and their success will depend largely
upon the extent to which business revives.
While their aggressions undoubtedly aroused much
attention, and provoked a great deal of hostile agitation,
designed to meet those aggressions, very little notice was
taken of another equally important factor the inflation
of our money volume, which resulted from the enormous
expansion of bank money 5 . As pointed out on page 161,
this inflation not only made possible the constant rise of
wages and prices, but harbored a distinct tendency of
its own in the same direction, thus proving fully as
harmful in its effects as the first-mentioned factor. To
successfully combat the unhealthy depreciation of our
country's money, evidenced by the rise of wages and
prices, the agitation should have been directed not only
Prosperity in the United States. 169
against the labor unions and trusts but fully as much
against the fearful inflation of the bank money. Few
people, however, even recognized the existence of this
factor. In fact, instead of devising means to restrain the
inflation, most of the financial authorities unwittingly
advocate additional facilites for expanding bank credits
still more, inasmuch as they demand greater freedom in
the issue of bank notes a remedy which may be likened
to giving liquor to an intoxicated man.
To guard against the excessive expansion of bank
money and bank credits two expedients seem appro-
priate: first, all commercial banks (including the Trust
Banks, so far as they create artificial money) should be
held to keep a large gold reserve, say 25 per cent, of the
amount of bank money 5 ; second, nothing should be done
to artificially augment the amount of cash in actual cir-
culation so as not to make it too easy for the banks to
increase their reserves, and therewith increase their loans
and the volume of bank money. If they simply could
print bank notes on the strength of their ".assets," put-
ting these notes in circulation, and for every million so
issued withdraw a million of gold from circulation, to
be used for reserve purposes, the inflation might go on
worse than before.
The proper method of dealing with an exceptional
demand for cash funds and bank loans is the one every-
where adopted in Europe: An advance of the rate of
interest. This would check, temporarily at least, many
security issues, such as could not afford to pay the ad-
vanced rate, and thus reduce the demand on the money
market. Most of the financial authorities in the United
States, however, argue the other way, and hold it essen-
tial to maintain a uniformly low rate of interest, even
when the demand for cash funds should become brisk.
To attain this end they propose the creation of an elastic
170 Recent Ups and Downs of
currency in the shape of bank notes, issuable at a low
rate of taxation, the volume to expand -or shrink accord-
ing to the demands of the money market. They overlook
the law of supply and demand. According to this law
the natural sequence to an extraordinary demand should
be : a rise of the interest rate.
i Where this does not take place, and where an excep-
tional demand for cash funds is simply met by the manu-
facture of cheap money, namely, by the printing of low-
taxed bank notes, another inflation of bank money is
likely to follow as soon as business revives. Inflation,
if once begun, harbors a certain tendency towards sus-
taining itself the more there is of it, the more is wanted,
see page 163.
True, the bank-note currency oughti to be elastic
enough to prevent the interest rate from going so high
that there would be danger of a collapse of the money
market. As it were, the increase of its volume should go
hand in hand with the increase of the interest rate. For
this purpose an "emergency currency" would answer,
subjected to a high tax, say 6 per cent. Such a tax would
allow the banks to issue emergency currency only when
the market rate of interest rules considerably higher
than 6 per cent., and the tax would drive the notes home,
to be canceled, as soon as the interest rate would subside,
i. e., as soon as the danger were over. (Also see page
187.)
>****
By following the latter suggestion we would have the
means at hand, not only for guarding against a renewed
collapse of the money market, but also for guarding
against a resumption of the inflation of bank money,
and therewith, indeed, we would have the factor under
control which proved most instrumental in bringing about
the collapse of 1907, and which, if not restrained, may
Prosperity in the United States. 171
prove equally dangerous in the future, after the revival
of business. Of the three disturbing elements considered
in the foregoing pages labor unions, trusts, and infla-
tion the latter seems about the only one which is amen-
able to our control, all efforts to check the other two
having so far proved futile. But by checking the one
we will, in an indirect way, attain the means for exercis-
ing at least a partial check on the other two. It would
hamper labor unions and trusts in two directions. In
the first place, the general demand would become smaller
because the factor now unduly swelling it, as pointed
out on page 161, would disappear; in the second place, if
labor unions and trusts should try, in spite of the smaller
demand, to materially raise wages and prices, they would
cause a comparative scarcity of money, and this of itself
would tend to counteract such a rise.
Continuous inflation of the bank money will natural-
ly lead to a collapse. Most of our financial authorities
are unable to see that the collapse of 1907 was due to
that cause. But another collapse may follow if after
revival of business the inflation should be resumed in
that reckless manner as before.
IN CONCLUSION.
In Chapters 1 to 6 I have established the theory that
depressions are due to Impair Savings. In the present
Chapter I have shown that the disturbances of 1893 and
1907 were brought about by causes of quite a different
nature; the one of 1893 being distinctly traceable to the
unhealthy condition of our foreign trade ; the one of 1907
having its origin in monetary conditions. The present
chapter, therefore, may seem to contradict the previous
ones. But the apparent conflict will disappear when con-
sidering the point elucidated in Chapter 1: that, though
Impair Savings always form the ruling and sustaining
172 Recent Upa and Donns of
element of a depression alter it once has set in, they
mar not constitute the factor which primarily caused the
economic disturbance and ushered in the depression. An
economic disturbance may be brought about whenever
any one of the various factors essential for prosperity
(see Chapter 7) is lacking; and a depression always ac-
companies the disturbance; but it takes Impair Savings
to give continuity to the depression after the cause of the
disturbance has ceased to operate.
Such is the case with our present situation (1908).
The collapse which took place in the fall of 1907 can
clearly be traced to the inflation of bank money and the
concurrent strain on the money market. At present,
however, these two adverse factors are no longer opera-
tive. So the causes which ushered in the depression have
disappeared. As nevertheless the depression continues,
a new factor must have stepped in to which that con-
tinuance is due. This new factor arose from a change
in the character of the saving process. It consists of
Impair Savings. Could this factor be removed, the de-
pression would speedily come to an end.
In 1893 the situation was somewhat different, inas-
much as the unhealthy condition of our foreign trade,
the cause which then inaugurated the panic, did not pass
away after the latter had subsided. Owing to the un-
favorable trade balance our gold supply had heavily been
drawn upon previous to 1893 (see page 141), thus weak-
ening our monetary position and making it easy for that
clique of reckless financiers to engineer the raid on the
stock market which presently developed into a panic.
This unhealthy condition of the foreign trade extended
over the whole period of the depression, and the latter
was not relieved until, in 1897, our foreign trade took a
decided turn for the better. So it may seem that the de-
pression was entirely a matter of foreign trade, and in
Prosperity in the United States. 173
no way due to Impair Savings. As a matter of fact, how-
ever, the latter fully played their part. They set in as
soon as the disturbance set in. Without them the panic
never could have attained the dimensions which it
reached; and without them the subsequent prolonged
depression would not have existed there would have
been more buying of commodities, and less unemploy-
ment, and more of an equilibrium between demand and
supply.
From whatever standpoint we approach the subject
of depressions, we will find that as soon as we probe the
matter to the bottom we inevitably encounter Impair
Savings as their underlying cause. Other factors, such
as described in this chapter, may engender more or less
economic disturbance; but only when Impair Savings
join (as they mostly do) will the disturbance assume
that chronic, paralyzing form which we call depression.
On page 132 I have spoken of an antidote for Impair
Savings, namely, enterprise. This is such a prominent
factor in the United States, and the country offers so
many opportunities allowing it to become effective, that
the antidote ought to seem powerful enough to make
the very formation of Impair Savings impossible. Yet
at present, 1908, we have the fact before us that enter-
prise is largely paralyzed, and but little is being done to
exploit our natural resources, so the antidote against
Impair Savings has become ineffective. The latter have
gained the upper hand. They destroy the equilibrium
between demand and supply, and thus engender de-
pression, at a time when all the elements of prosperity
seem to be at hand.
Have we any positive proof that Impair Savings are
really going on during the present depression? I think
we have despite the fact that a large share of our sav-
174 Recent Ups and Downs of Prosperity in the U. S.
ing power is constantly being absorbed by the issue of
new securities, especially in the railroad line, to an extent
(mite unusual for times of depression. The savings so
absorbed are turned to good advantage, and on this
account the depression of 1908 is far less severe than the
one of 1S93. But not nearly all of the savings now
made are thus absorbed for useful purposes; and the
balance will create harm. Wherever we see people " run-
ning behind" and gettine poorer, owing to general mar-
ket conditions and to the lack of employment, there we
see the effect of Impair Savings, thus giving us positive
proof that Impair Savings exist see page 120.
CHAPTER IX.
SUMMARY OF THE FOREGOING.
THE dual nature of the saving process, the radical
change in its character under varying circum-
stances stimulating business at one time, and depress-
ing it at another has so far not received due recogni-
tion on the part of economists. Practically only its
bright side has been studied. The dark side, though
often pointed out by authors of the present and of the
past, has been largely argued away. So strong, indeed,
is the sentiment of economists on this point, that where
they find anyone who doubts the ultimate usefulness of
the saving process, they will generally attribute such
doubts to ignorance of one of the accepted axioms of
economics. The sooner we discard the idea that so much
saving means so much increase of the community's
wealth, and the sooner we recognize that only a portion
of the savings now made will benefit the commonwealth,
the sooner will we be in a position to arrive at practical
measures for doing away with depressions of trade.
A BRIEF REVIEW.
Let us recapitulate the leading points of the Depres-
sion theory developed in this book.
"Lack of demand" is the fundamental feature of
all depressions. If we can learn the cause of the one, we
know the cause of the other.
In the course of ordinary business the producer and
seller of a dollar's worth of commodities will subsequent-
ly buy a dollar's worth of other commodities, either he or
his family; so the suppty should equal the demand, and
there should be no "lack of demand.'*
176 Summary of the Foregoing.
A complication arises by the interference of the sav-
ing 1 process. The saver, though selling his own services
or goods, does not care to buy those of others. And if
he omits to do so. there must be a shortage of the de-
mand. All economists agree in the opinion that the initial
stage of the saving process tends to curtail the demand.
So long as the saver (or somebody else for him)
promptly invests his savings or surplus earnings in the
"Capitalistic" manner, i. e., in new constructions or in
the creation of new wealth, that shortage of demand is
fully compensated for. He will call for working forces 6
to engage in such new constructions, and his savings will
be turned into income for these working forces. Then
the inherent tendency of the saving process, to create a
lack of demand, is fully counteracted. But if not so
counteracted, that inherent tendency will become effec-
tive despite the fact that the savings become invested,
and a shortage of the demand will follow a shortage en-
tirely due to the saving process. The latter then changes
from the "Capitalistic" to the "Impairing" form. It
serves no longer towards increasing the aggregate wealth
of the country, but leads to a mere shifting of wealth,
making the savers richer, others poorer.
This process has been demonstrated on page 40 by
means of my "Basic Calculation." If the savers save up
two billions in the course of a year, and become richer
by that much, while the country's wealth or property
increases only one billion, then they must have extracted
the other billion from the non-savers, the latter becom-
ing poorer to that extent. If the non-savers owned fifty
billions at the beginning of the year, they will own only
forty-nine billions at the end of it. So it was partly at
their expense that the savers became richer. Without
the saving process, this impoverishment of the non-sav-
ers would not have taken place.
Summary of the Foregoing. 177
How is this impoverishment effected? By lack of
employment.
Suppose that in a year of prosperity, the aggregate
savings amount to three billions, all of this being invest-
ed in new constructions, and becoming income for the
Constructive Working Forces. 7 If that three billions of
new constructions dwindles down, in a year of depres-
sion, to one billion, there will be two billion dollars '
worth of "Constructive" Forces thrown out of employ-
ment.
Now let us further suppose that the individuals repre-
senting the unemployed part of the Constructive Forces
had property which they could sell or borrow on, and
that, by doing so, they were procuring the means for con-
tinuing their style of living and their expenditures pre-
cisely in the manner they were used to when fully em-
ployed; what character would the depression assume
under such conditions?
The depression would then be confined strictly to
the Constructive Forces, to the trades usually engaged in
new constructions, and would in no way extend to the
"Commodity" Forces 7 . The latter, representing prob-
ably 85 per cent, of the whole, would find just as much
employment and just as much demand for their products
as before, our assumption being that the Constructive
Forces expend fully as much for commodities as form-
erly. Under such circumstances there would be no diffi-
culty to recognize the true character of the change in
the saving process. Instead of leading to an augmenta-
tion of the country's wealth in the shape of new con-
structions, it would merely lead to a "Change of Posses-
sion" of such property as already exists, the Constructive
Forces losing property (or becoming indebted) to the
extent of two billions a year, and the savers becoming
richer by that much.
178 Summary of the Foregoing.
In the foregoing we assumed that the Constructive
Forces, though not earning anything, would in no way
restrict their purchases of commodities. In reality, how-
ever, they will economize, and very much so, even if
owning property on which they could realize. They may
/educe their consumption to one-quarter of what it was.
In that case they would lessen their demand for commodi-
ties by a billion and a half. This lessening of the demand
would entail a lessening of the production of commod-
ities. This, again, would entail a corresponding unem-
ployment among the Commodity Forces 7 , and bring the
total loss of income, due to unemployment, to three bil-
lions and a half. Nor will the loss stop there. Owing to
the weli-known process of action and reaction, unemploy-
ment will spread from one trade to another, multiply, as
it were (Multiplying Principle) and bring up the loss
of income to an -amount much larger than the whole
amount of the savings. The more the people try to meet
the loss of income by economy and privation, and the
more they cut down their expenditures, the more will the
demand for commodities be lessened and the severer
will be the stagnation in trade.
The Change of Possession (of property already exist-
ing) is inseparable from this, the Impairing Form of the
saving process. The Change of Possession is enforced
by means of unemployment and by the loss of income re-
sultling therefrom. Among the unemployed (or only
partly employed) there are many who own property.
They need money to pay their living expenses. So they
must either borrow or realize on what they own. Un-
employment, therefore, and loss of income, form the whip
which forces people to part with their property, there-
with giving the savers an opportunity to invest their
savings either in buying the property or in lending
money on it. For every million of Impair Savings a mil-
Summary of the Foregoing. 179
lion of properties or securities must go into the possession
of the savers, otherwise the savings would accumulate in
the shape of hoards, and matters would become still
worse.
After the million has been thus invested, and the
money been expended by the receivers, for commodities,
the money returns into the channels of production and
trade, and the chain of mischief caused by the saving of
that individual million comes to an end.
*****
Ordinarily each individual member of the working
forces is not only a producer, but also a consumer. Under
the Impairing Form of saving or investing, however,
demand and supply are no longer united in the same
individual. Two individuals will no longer furnish two
supplies and two demands, but only one supply and one
demand; i.e., for working forces; the saver producing
without consuming,, and the consumer finding himself
without the opportunity to produce, his services being
left uncalled for.
Our economists have been arguing that inasmuch as
all savings funds are finally turned into goods or services,
thereby giving employment to working forces, the sav-
ing process can not give rise to a shortage of the demand,
even at times of depression. They overlook the fact that
before the saving funds are expended for goods or ser-
vices, unemployment stands in between unemployment
caused directly by the saving activity, when assuming
its Impairing Form.
I repeat, the saving activity always harbors the in-
herent tendency of causing unemployment and curtailing
the demand. This tendency is fully counteracted when-
ever the savings are invested in new constructions or in
the creation of additional wealth; but if not so counter-
acter, that tendency will become operative. The great-
180 Summary of the Foregoing.
er the amount of savings, and the smaller the proponion
which finds investment in new constructions, the greater
will be the harm inflicted upon the community. The hjjrm
so inflicted, invariably aggravated by the stepping in of
the Multiplying Principle, will fully account for all the
phenomena observed at a time of depression.
We cannot do away with depressions before we find
means to restrict or eliminate the Impairing Form of the
saving process.
THE THREE DEGREES OF BUSINESS ACTIVITY.
From the foregoing it follows that prosperity will be
high or low, according to the character of the saving
activity. In Chapter 8, however, a further factor has
been referred to, namely, the inflation of the money
volume, which likewise plays an important part in affect-
ing the course of business. Accordingly, we may dis-
tinguish three degrees of business prosperity, as follows:
1 HEALTHY BUSINESS. Best results are at-
tained when the annual savings 1 available for investment
are neither larger nor smaller than the amount of cash
capital required for new constructions 3 always presum-
ing, of course, that the other factors essential for pros-
perity (as enumerated in Chapter 7) are at hand. Then
the saving process will not disturb the equilibrium be-
tween supply and demand, and there will be no lack of
the latter. The aggregate of savings should not be too
large, hardly over 10 or 12 per cent, of the people's ag-
gregate income, in a new, progressive country; 5 per
cent, in an old well developed country. In the latter case
95 per cent, of all working forces would be absorbed
for purposes of production and distribution of commod-
ities, and only 5 per cent, for new constructions. Then,
if a lull in new constructions should take place, and part
Summary of the Foregoing. 181
of the Constructive Forces 7 should be thrown out of em-
ployment, this would represent only a fraction of 5 per
cent, of the aggregate of all working forces, so the reac-
tion on the remaining 95 per cent, and on business in
general would be but slight.
Such a healthy state of business is favored by a
reasonably even distribution of wealth, such as obtains
in France. The concentration of wealth in a few hands
is not desirable, especially in old countries. It will un-
duly promote the saving process (see page 66). And
though this may do no harm in a new country, like the
United States, so long as wealth and population are rapid-
ly expanding and all savings readily absorbed in new
constructions, it will do harm when a lull in new con-
structions sets in. Then savings become Impair Savings;
and the greater their volume, the more will the recovery
of business be impeded.
2. OVER-STRAINED BUSINESS. This takes
place whenever the supply of cash capital does not come
from the saving process alone, but is largely supple-
mented by the creation of artificial money, by an infla-
tion either of bank money 5 or of printed currency;
especially so of the latter. In the United States it was
principally the undue expansion of bank money (see page
161) which, in conjunction with the unusual extent of
new constructions, imparted that over-strained character
to business which marked the years preceding 1908.
These new constructions caused more demand for work-
ing forces than could be had. Besides, they distorted
the proportion between "Constructive" and "Commo-
dity" 7 Working Forces, the former reaching a figure
probably as high as 15 per cent, of the total, or more.
When, in 1908, a depression followed the panic of 1907,
there was still a fair demand for new constructions, but
by far insufficient to absorb all of the Constructive Work-
182 Summary of the Foregoing.
ing Forces then in existence. And the surplus could not
find employment among the Commodity Forces. These,
constituting 85 per cent, of the aggregate, were fully
capable of supplying the consumptibles needed for all,
even at the time of the great demand during the boom,
and are certainly so at present (1908), with the demand
largely reduced.
Over-strained business, though imparting the impres-
sion of excessive prosperity so long as it lasts, is bound
to come to an end sooner or later. It rests upon infla-
tion, and this can not go on forever. When the process
of inflation ceases, we find many unhealthy conditions
to have developed: a superabundance of Constructive
Forces, with no work for the greater part of them ; wages
unduly advanced, and therewith the general level of
prices; foreign trade in a precarious condition, the home
market having become a better one for foreigners to sell
in and a poorer one to buy in ; credits strained beyond
the limit of safety; a growth of the desire for big profits
at the expense of conservative business methods.
3. DULL BUSINESS. The cause of this has been
so fully considered in the course of this treatise that it
seems only necessary to say: If it is not due to the ab-
sence of any one of the known essentials to prosperity,
enumerated in Chapter 7, it is due to Impair Savings.
The conditions set forth under Point 1 are conducive
not only to a healthy state of business, but they also
favor stability. Those set forth under Point 2 tend
toward extremes too much business at one time, too
little at another.
At ''normal" times business ought to be of the char-
acter stated under Point 1 ; but we generally find much
of a co-admixture of the conditions embraced in Points
Summary of the Foregoing. 183
2 and 3 on the one hand there is more or less of Impair
Savings, as evidenced by the fact that the demand con-
stantly falls short of the supply; on the other, we find a
gradual but steady inflation going on, as evidenced by
the constant swelling of the volume of circulating money,
and much more so of bank money. 5 The latter especially
has, in the last decade, expanded to an extent which
seems to bring us near the limit. It has stimulated busi-
ness whil e it went on ; but in future we may have to do
without this unhealthy stimulant, and if so, we may not
again experience such a period of excessive boom as we
did of late.
Let it be well understood, the phenomenal business
activity witnessed in the United States, between 1897
and 1907, was largely caused by the phenomenal inflation
of the bank money. While all economists admit the stim-
ulating effect of an inflation of the currency, and while
but few of them will attribute a similar (though weaker)
influence to the inflation of bank money, such influence,
certainly existed, as explained on page 161. Also in
Germany has the inflation of the bank money played its
part towards creating the unusual business activity wit-
nessed there in recent years and the aftermath will be
severe, considering that the country has not (like the
United States) many opportunities left for the profitable
investment of savings 1 and that the latter, therefore, will
largely assume the character of Impair Savings, far more
so than with us. In either case the position as to foreign
trade and as to the <; balance of payments" has become
rather weak, America exporting gold, and Germany
struggling to retain her gold supply by means of a high
bank rate." If the inflation-stimulant should spread to
other countries, already weak in foreign trade, like Russia
or Austria, it probably will not develop very much before
the growing "balance of payments" inaugurates a drain
184 Summary of the foregoing.
on the gold supply, therewith deranging the country's
financial condition and making an end to the inflation
business.
ECONOMIC FALLACIES.
There is no science which contains so many contradic-
tions and conflicting views as may be found in economics.
Hardly two experts will everywhere agree on funda-
mental points and on their bearing. To a large extent
this dissension of views is due to the fact that the origin
of one pf the most important phenomena, namely, de-
pression and slack business, has so far remained unknown
in consequence of which every economist, who did his
own thinking, formulated a theory of his own to account
for those phenomena, and in doing so had to resort to
more or less "adjustment" in order to make the facts
agree with his theory. The true cause of depression
known, we will have a guide for testing many of the
conflicting opinions as to their correctness, and a num-
ber of views now current will have to be abandoned or
modified. In the following I enumerate some of these :
1. "Extravagance is one of the chief causes of our
present depression and of depressions in general.
Had we had less extravagance, or, what comes to the
same thing, more saving, at the time of the boom, less of
the people's income would have been spent for commo-
dities, and more of it for new constructions. Then the
proportion between "Constructive" and "Commodity"
Working Forces 7 , instead of being as 15 to 85, might have
been as 20 to 80. In consequence, new constructions
would have proceeded at a still faster rate, and we would
have arrived all the sooner at a superfluity of these, i. e.,
at a superfluity of productive capital. Then new con-
structions would come to a halt, the boom would cease,
and depression would set in. The depression would not
Summary of the Foregoing. 185
only set in so much the sooner, but would be more severe,
with consumption restricted (as premised) and the num-
ber of unemployed Constructive Forces much larger than
at present.
In a healthy development an increase of consumption
should go hand in hand with the increase of productive
capital. To restrict the former would mean a restriction
of the demand. The lack of demand, however, is just
what causes the depression.
2. Excessive extravagance during the boom was
evidenced by the excessive demand for consump-
tibles, which was almost greater than the produc-
tive power of the country. Therefore that scarcity
of labor. Without this excessive demand, that
mad rush for extending the productive capital
in order to meet the great demand would not
have developed. No doubt the scarcity of labor indi-
cated an unusual demand for the products of labor, i. e.,
for consumptibles. But I have shown, on page 161, that
this great demand for labor was principally caused by
the inflation of bank money. 5 A billion of additional
bank money means a billion of additional demand for
working forces. If the country's working forces repre-
sent a productive power of 20 billions per annum, and by
means of inflation the demand is increased to 21 billions
not only the demand, but also the income and the buy-
ing power then, indeed, the demand must seem unduly
large when compared with the productive power. That
excessive demand, however, as well as the seeming ex-
travagance deduced therefrom, must disappear as soon
as the inflation comes to a halt. The panic, therefore,
was not caused by extravagance, but by the inflation of
the bank money.
3. As we did not economize sufficiently during the
boom, we must do so now; the greater the economy, the
186 Summary of the Foregoing.
sooner shall we have the funds necessary for another era
of new constructions. Do we really need more of new
constructions at present and more economy to obtain the
funds for erecting them, or do we need the reverse less
economy and move buying of consumptibles, so as to pro-
vide employment for the productive capital already ex-
isting? I believe we need the latter.
Though we often hear the assertion that we did not
save enough and did not economize sufficiently during
the boom, the fact remains that, despite the seeming ex-
travagance, the country's aggregate savings were enor-
mous otherwise we would not have had the funds where-
with to create all those new constructions which sprung
up at that time.
4 The panic was due to over-production. Previous
to the panic the question was quite often raised as to
whether over-production was really going on, and the
question has as often been denied by all unbiased ob-
servers. Production did not run ahead of the demand
but merely followed it. For the cause of the great de-
mand I refer to Point 2.
5. Panics are due to a lack of equilibrium in produc-
tion. -This easy to say, but hard to prove. I have dis-
cussed this topic on page 70. As a rule, production will
follow the demand, and if so, how can there be a lack of
equilibrium in production?
6. Panics are caused by too rapidly "discounting"
the future through placing of capital (cash capital) in
fixed investments. -So long as the funds used for fixed
investments, i. e., for new constructions, like railroads,
factories, etc., come from the saving process, there is no
harm. And no harm if the funds are borrowed, provided
the lender derives them, directly or indirectly, from the
saving process. But the danger commences (even for
Summary of the Foregoing. 187
solid undertakings) if the funds are derived from the in-
flation process say, by extending the issue of bank
money. 5 Inflation has that peculiar quality of being self-
sustaining; the more there is of it, the more is needed
(see page 163). And as inflation cannot be carried on
indefinitely, a collapse is bound to ensue.
7. The panic was due, in part at least, to the
inelasticity of our currency volume, which fails
to respond to the varying demands of business.
To remedy this, bank notes should be freely
issued or retired according to the require-
ments of the money market. If, before the panic,
our currency had been given the right kind of elasticity,
the panic would most likely have been prevented say,
by allowing the issue of an emergency currency, subject
to a hiffh tax. But suppose that the tax had been low,
and the notes issuable ad libitum, even at the time of the
boom, what would have been the consequence? In face
of the insatiable demand for cash funds which ruled in
1906 and 1907, we would have had an inflation of the cur-
rency (see page 169), on top of the inflation of the bank
money. Then the collapse inevitably following excessive
inflation might have led to a similar distrust of bank notes
as did attach to the bank money, thus multiplying
disaster.
Inflation for the sake of temporary needs, say, for
moving the crops, does no harm, if followed by a corre-
sponding contraction. Inflation, however, if resorted to
in order to provide the funds for permanent investment,
is objectionable. It over-stimulates the general demand
while going on, but creates a shortage of demand when
coming to a halt. (See Point 2.)
8. Wliile at a time of great prosperity sav-
ings funds are absorbed almost exclusively in
new constructions, an occasional setback be-
188 Summary of the Foregoing.
comes necessary to provide for the money
markets "other requirements" These "other
requirements" are a myth. In Chapter 2 I have dis-
cussed all imaginable possibilities as to what they might
consist of, and have shown that none of them really
absorb the country's savings funds.
9. No harm can attach to the saving process so long
as the savings funds find ready employment. Even at
times of depression they accumulate in the money mar-
ket to a limited extent only, showing that they are ab-
sorbed. And as business men when absorbing them will
apply them to some useful purpose , the saving process
must always lead to a useful end. No argument has
occasioned greater confusion in the economic world than
this one, highly plausible as it appears. As a matter of
fact the seemingly "useful end'' often consists of noth-
ing but Impair Investments 8 a form of investment which
so far has remained unknown to our economists. Once
it is known, Argument 9 becomes untenable.
10. Savings funds, if failing to find useful employ-
ment at home, would simply go abroad. Except to a
very limited extent investments abroad can not be ef-
fected unless the state of the country's foreign trade
allows of it, the foreign investments being circumscribed
by the extent to which the trade balance (see page 135)
may be favorable a subject fully elaborated on page
134.
11. Though the saving process may cause a
shortage of demand at one time, say, during
a depression, the shortage will be compen-
sated for when the savings funds subse-
quently come to be invested. This view, though run-
ning counter to the one discussed under Point 9, is often
heard. Both views are wrong. If working forces 6 are
Summary of the Foregoing. 189
thrown out of employment, owing to lack of demand
caused by the saving process, and are kept idle for any
length of time, the productive power thus annihilated is
lost forever, and is not compensated for by the fact that
those working forces may find employment again later on.
12. Trade reactions are necessary evils, bound to
recur in rotation. If we should ever be able to guard
against Impair Savings, we would have the means of do-
ing away with those extended periods of depression, and
the belief in the inherent necessity of their recurrence
would prove fallacious.
********
In the foregoing I have discussed some of the views
now current on extravagance, economy, saving and some
other factors in connection with their bearing on our
economic status. Most of our economists believe that the
more we save (without hoarding) the better we are pro-
tected against depressions and disturbances. In contrast
with this belief I maintain that if at times of depression
or of slackening business we could check the saving pro-
cess, and could enforce more buying and less accumula-
tion on the part of the wealthy, we therewith could check
the depression. On the whole our saving power is too
large. In busy seasons too much is accumulated and in-
vested in new constructions, the latter fact again increas-
ing the business activity. If at such times we had more
consumption and less saving, and consequently less of
new constructions, the cycle of prosperity would last
longer. We would not so quickly arrive at a period of
superfluity of productive capital, with a consequent lull
in new constructions and a change of the saving process
from the Capitalistic to the Impairing Form.
If we could find a practicable method for controlling
and eventually limiting the saving activity, things would
190 Summary of the Foregoing.
soon shape themselves so as to conform to that healthy
state of business described on page 180. The demand
for working forces will then be as large as the supply;
there will be employment for practically all of them;
the feverish activity during a boom and the subsequent
period of stagnation will be supplanted by a uniformly
brisk state of business; the shifting and changing about
of working forces 6 will give way to a greater stability of
employment; of the working forces, fewer would be en-
gaged in new constructions and more in the production
of commodities, which would mean a larger allotment of
the fruits of labor to each individual, i. e., a higher
degree of prosperity.
Temporary economic disturbances may not be en-
tirely eliminated, but protracted periods of depression
would become impossible.
ONCE MORE, THE "NEGLECTED POINT."
It was not my intention when writing this book to
present a complete treatise on panics and depressions,
following up their origin, development and gradual
abatement. All that I have aimed at has been to bring
out the "Neglected Point," and I have branched out on
other subjects (for instance, the various depression
theories) no further than necessary to elucidate my own
views and defend my position. The object of this book
is to reveal the dual nature of the saving process, its
beneficent as well as its impairing form, and to bring out
the main features of the latter notably that strange
duplex action which, on the one hand, places investment-
seeking cash funds in the possession of the savers, while
on the other it creates market conditions which open up
opportunities for the investment of those funds this at
Summary of the Foregoing. 191
a time when the legitimate field of investment (new con-
structions, etc.) narrows down.
My investigations do not verify the universal belief
that in the end the saving activity will always benefit
the commonwealth as well as the individual saver. I
have shown that it is far from being an unmixed blessing.
It may harm as well as benefit the community. It will
either stimulate business activity or depress it; either en-
liven the demand, or diminish it. If it ceases to be useful
it at once becomes harmful. In its effects it is either con-
structive or destructive, never neutral.
Before we can find the proper remedy for depressions,
we must know their cause. I have stated, in this book,
what I believe to be their true cause.
As a rule, the reader will not consider a depression
theory complete unless it gives suggestions as to the
remedy ; -such, however, I am not prepared to offer. But
I dare say, if my depression theory should be accepted as
the correct one, a remedy will be discovered. And even
if a sweeping remedy for Impair Savings could not be
found, the knowledge of their existence and of the harm
they entail upon us, would go far in guiding us to shape
our economic policy, wherever legislative measures have
to be taken that bear upon the subject.
EXPLANATORY NOTES.
1st. In this treatise the term '"savings" is meant to
cover all surplus earnings: those of the millionaire as well
as those of the working man.
2nd. The term "capital" should always be under-
stood in the economic sense, meaning productive capital,
or capital goods, like factories, houses, railroads, ships,
etc. In common usage the term is often applied to cash
funds, such as are loanable or available for investment.
Wherever the latter kind of capital is referred to in this
book, it will be called ''cash capital."
3rd. The terms "new constructions," "new wealth,"
or "additional wealth," are largely identical with "new
productive capital," but they also include new acquisi-
tions of what may be termed "unproductive capital,"
such as houses occupied by the owners, hospitals, schools,
bridges, streets, pleasure boats and vehicles, and many
kinds of constructions not intended for business purposes,
in fact, all property left in the possession of the com-
munity at the end of the year in addition to what it
possessed at the beginning of the year.
4th. The term "money market''" should be under-
stood to include not only loanable funds, but all funds
available for investment in new enterprises. It does not
include, however, the liquid capital employed by business
men in carrying on their regular business; such funds
ore not available for new enterprises, nor for loaning
purposes.
5th. By "Bank Money" is meant the deposits of
business men and others in commercial banks, subject to
check; their "money in bank." It does not include de-
Explanatory Notes. 193
posits in savings banks. In the United States it would in-
clude deposits in National banks, State banks, and most
of those held by Trust banks.
6th. The term "working forces" should be under-
stood to mean only individuals, such as are engaged, di-
rectly or indirectly, in the production and distribution of
commodities or in the creation of any kind of wealth;
workingmen as well as men of other vocations manufac-
turers, farmers, merchants, transporters, capitalists, etc.
In fact, all men who derive an income from their being
connected with a particular trade should be considered
as constituting the working forces engaged in such trade
to the extent of that income; even the capitalist who
merely draws interest on the funds which he advances
to participants in that trade.
7th. The term "Constructive Working Forces" re-
fers to such individuals as are engaged, directly or in-
directly, in new constructions or in the creation of addi-
tional wealth; 3 whereas those who are engaged in the
production of commodities intended for consumption are
referred to as "Commodity Working Forces." This dis-
tinction does not exclude the possibility that one and the
same man, for instance a dealer, may partly belong in
the one class and partly in the other.
8th. The term "Impairing Form of Investment" has
been chosen to indicate that an impairment of the com-
munity's welfare is intimately connected with that form
of investment. But it should be understood that the
act of investing, as such, is not the cause of the impair-
ment; on the contrary, the act of investing is always
beneficial to the welfare of the community. The impair-
ment comes from some other cause, as explained in Chap-
ter 5, not from the investment.
9th. The term "impoverishment" should not be un-
194 Explanatory Notes.
derstood to mean reduction to poverty, but merely "be-
coming poorer." A man may become impoverished by
$1000 and still be a rich man.
10th. The term "alienation of property" should be
understood in a broad sense and to include not only the
selling of property in cases of urgent need, but also the
borrowing on it, say, in the shape of a mortgage or other
pledge; and the term "borrowing" ("borrower") should
also be understood to cover both, borrowing as well as
selling. A very familiar instance where a man borrows
on his property, or even on mere credit, is furnished by
the "running behind" of a business man who does not
earn his expenses in times of depression and whose bal-
ance-sheet at the end of the year shows a loss where it
used to show a surplus. Such loss reduces his wealth;
and unless he allows his plant or his stock to run down,
others will gain what he loses. If at the end of the year
he has less money on hand, others have so much more ; if
his outstanding accounts have become smaller, the com-
munity owes him so much less and has become relatively
richer ; if he has more notes outstanding, those who hold
the notes have acquired a kind of lien on his property
(which amounts to an alienation on his part) and at the
same time have found investment for their funds when
buying those notes. Just so if the State's income runs be-
hind in years of general depression, and if bonds are
issued to make up for the deficit ; this gives the savers an
opportunity for investing their surplus earnings; but to
the same extent the community becomes indebted; i. e.,
poorer.
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