our banking laws in the past have made our crises unusually severe. The elasticity of credit and note-issue secured by the recent currency act should do much to relieve financial stringency when a crisis arises. It should also do something to prevent its occurrence. But those who expect it to cause the industrial process to pursue a more even course are likely to be disappointed. The violence of the ebb and flow of business activity increases tremendously the difficulty of properly organizing society through price. It also reveals grave breaks in the organization. Capital is insecure and funded wealth may disappear overnight. The cycle is associated with a rhythm of overemployment, nonemployment, and underemployment. The capitalists and laborers whose products satisfy marginal wants are put in a very precarious economic position. The crisis destroys wealth, specialized talent, and organization, all of which must be replaced. The economic cycle involves the whole industrial system. No simple device will arrest the violence of its rhythm. It can be reached only by a complex of many complementary measures. If we are to control the cycle, we must learn to control the introduction of a new technique; the demand for goods must be steadied; we must develop an art of predicting business conditions; a means must be found for co-ordinating recently accumulated capital and opportunities for investment; a higher sense of responsibility in making loans must be developed by the bankers; a feeling of responsibility must be engendered in the promoter; and means must be devised for checking the speculative mania. In time, as our very rapid industrial development slows up, the sweep of the economic cycle may be expected to be less extreme. Then perhaps we shall hear complaints about a prosaic age that has no speculative prizes to dangle before the eyes of investors to tempt them to take chances with unknown opportunities. Then, perhaps, men will point to the "golden age" of the past, when unexploited opportunities were on all sides. They may go so far as to conclude that our violent fluctuations in business were a small price to pay for our rapid industrial development. 188. LABOR DISTURBANCES [NOTE.-Strained relations between labor and capital of course serve to make industry more uncertain. No single illustration can serve as an adequate index of the strained relations referred to, but the following table at least introduces the subject.] STRIKES, ESTABLISHMENTS INVOLVED, STRIKERS, AND EMPLOYEES THROWN OUT OF WORK, BY YEARS, 1881 TO 1905* a) Not including two strikes involving 33 establishments not reported. *From the Twenty-first Annual Report [1906] of the U.S. Commissioner of Labor, p. 15. See also 229. The Organization of the Labor Market. 189. BUSINESS FAILURES Α' The total number of enterprises of which account was taken, and the number of failures, since 1891, were as follows (Bradstreet's for January 23, 1897): The figures thus would indicate an annual ratio of failures to businesses of 1 per cent, more or less. But these were the overt failures only, in which there was loss to creditors. With them should be considered the much more numerous cases in which the field was abandoned from want of success, though all debts were met. The effect of the crisis of 1893, and the years of depression that followed, appears plainly in the record of failures. But it appears more strikingly still in certain figures as to the commercial repute of the bankrupt enterprises-figures which are further interesting as indicating how far the commercial agencies are successful in reporting the condition of the particular businesses. The failed enterprises were divided into three classes, according to their rating on the books of the agency; and the proportion of each class in the total of failures was then computed thus: Taken by permission from "Notes and Memoranda,” Quarterly Journal of Economics, XI (1896–97), 317–19. The proportion of failures (shown in the second column) among those whose credit was good, even though not of the best, increases with the crisis of 1893 and the succeeding years of depression. The shock and the trying times that followed caused the collapse of many enterprises, most of them doubtless really unsound and likely to succumb sooner or later, whose commercial rating had yet remained respectable, and who had been able to hold their own during the years of general activity and confident optimism. A similar effect, though not so marked, appears in the somewhat larger proportion of failures, from 1893 to 1896, among those rated as in "very good credit." The whole series of figures illustrates the course of events preceding and following a commercial crisis: before, hopeful speculation, and the continued prosecution of ill-directed enterprises; after, collapse, and the gradual and reluctant weeding out of the unsound elements. If then there are some who gain much, and who even seem to gain too much, it must not be forgotten that many others are losing. Here, 2 Taken by permission from Bradstreet's, XLI, 53. Adapted by permission from Émile Vandervelde, Collectivism and Industrial Evolution, pp. 90-91. (Charles H. Kerr & Co., 1906.) for example, are the figures for 2,554 German corporations, tabulated by Van der Borght for 1891-1892: 471 liquidated with deficits. 888 declared no dividends. 641 declared from 0 to 5 per cent. D. Risk Bearing in Modern Industrial Society 190. AVOIDANCE OF RISK Uncertainty being regarded as an evil by practically all normal persons, there is a constant effort to avoid or reduce uncertainties. This may be accomplished in various ways, of which the following are important: (1) by increasing their knowledge of the future; (2) by employing safeguards against mischances; (3) by insurance; (4) by speculative contracts, especially "hedging." We shall take these up in order. 1. Risk, being simply an expression for human ignorance, decreases with the progress of knowledge. The chief lines of progress in industry at the present time may be said to be those which tend to lift the veil which hides the future. Countless trade journals exist principally to enable their readers to forecast the future more accurately than they otherwise could. This the journals accomplish by supplying data as to past and present conditions as well as by instructing their readers in the relations of cause and effect. Our government weather bureau supplies weather forecasts which somewhat reduce this form of uncertainty for the farmers. Government reports of crop conditions and information as to diseases of plants and animals are more important influences in the same direction. Again the prediction as to the amount of ore to be obtained from a mine and the cost of obtaining it is today far less uncertain than ever before. Whereas formerly the mining prospect consisted of wild statements of the ore "in sight and the time and cost required to mine it, today the graduate of a Adapted by permission from Irving Fisher, Elementary Principles of Economics, pp. 427-30. (The Macmillan Co., 1912.) |