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. 
 

 
THIS BOOK IS DUE ON THE LAST DATE 
 STAMPED BELOW 
 
 AN INITIAL PINE OF 25 CENTS 
 
 WILL BE ASSESSED FOR FAILURE TO RETURN 
 THIS BOOK ON THE DATE DUE. THE PENALTY 
 WILL INCREASE TO 5O CENTS ON THE FOURTH 
 DAY AND TO $1.OO ON THE SEVENTH DAY 
 OVERDUE. 
 
 6 1934 , 
 
 1837 
 
 MAR 14 I960 
 
 MOV 
 
 1945 
 
 6Jan'53JK 
 
 L'BRARY 
 
 JUH2V 
 
 FFB 7 1351. 
 
 -r-^7 r-r 
 
 srrjTO 
 
 1 * * 
 
 JUN281961 
 
 RFTURNEr 
 
 JUN 3 
 
 LD 
 
 DEC 4- 
 
 UL'T 8 UU5 
 
 LD 21-100m-7,'33 
 
u. c. 
 
 BERKELEY LIBRARIES" 
 
 207679