promotion price fluctuations are greatly accentuated.1 Table I gives the rise of prices for different groups of commodities for a succession of prosperity periods. Not only is the amount of rise significant, but the difference in rise between different groups and between the same group of commodities in the several periods is striking.



Before the Crisis Food of


Drugs House


Cloths Fuel Metals and
and and and Build- and Fur- Miscel- com-
Cloth- Light- Imple- ing Chem-nishing laneous modi-
ing ing ments Mate- icals Goods


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The increased demand for goods to further promotion and for consumption means also an increased demand for labor, and hence an upsetting of old wage scales. It is true that general wages do not rise more rapidly than

1 Contracts for production are greatly disturbed by these rapid changes in price. Hull, op. cit., pp. 118-119, says: "We have known of iron-furnaces and steel-works which were not in operation when the boom commenced, and in consequence made no contracts during the low-priced period, but after prices had advanced largely these plants were put into operation, consequently made all their contracts at the high prices, and were thus enabled to reap large profits. On the other hand, we have known of other concerns that contracted all they could make for more than a year ahead at the low prices, and, before they were able to fill these orders, the advance in labor and raw materials so enhanced the cost of manufacture that the boom brought them out with a loss. For this reason, the profits of the producers of construction materials during a boom are, as a rule, very disappointing."

• Computed from the Bureau of Labor's Relative Wholesale Prices of Commodities. The figures represent not the average yearly rise, but the difference between the lowest and highest prices of the period.

prices. Much has been written regarding the inertia of wages. Professor Commons even evolves a crisis theory from the wage situation. He says that immigration and the tariff together prevent wages from rising as rapidly as the prices of commodities; thus profits expand. The enormous increase in profits stimulates production until over-production results, and so on.1 But the individual producer is not concerned with general wages any more than with general prices. He is interested only in the rate of wages he himself is obliged to pay. While the wages of some kinds of labor rise slowly, the wages of other kinds of labor rise rapidly - even more rapidly than do prices. The result is that many employers of labor find it increasingly difficult to secure the necessary wages fund.

According to the United States Bureau of Labor fulltime weekly earnings from 1900 to 1907 advanced 17.6 per cent; and prices during the same period rose 17.2 per cent, or practically to the same extent as wages. But when wage changes in particular industries are examined, it is found that the rise in hourly wages for the same period, 1900-1907, varied from 6 per cent to 44 per cent. Out of the 41 industries given, 28 show a higher rise than the general average of 17.6 per cent, and 13 fall below the general average. Within particular industries even wider wage fluctuations occur. For example, in a typical New England cotton mill the extreme variations in wages in 1910 as compared with 1898 were, on the one hand, a falling off of 18 per cent in the hourly earnings of oilers in the spinning department, and, on the other hand, an increase of 66 per cent in the wages of spoolers. The rapidly changing wage scales in every line undoubtedly is a very important

1 Races and Immigrants, pp. 156-157.

* Investigation of Wages and Prices, vol. i, p. 53, in Senate Documents, vol. 63.

factor in producing the miscalculations which occur during the periods of business activity.1

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Another element in the cost of production -the rate of interest is also subject to extreme fluctuations. Promotion activity calls for heavy loans to finance the new companies, and the resulting increase in production requires a corresponding increase in commercial loans. Active speculation during the period of prosperity is also an important factor in increasing the demand for loans. The outcome is that interest rates are much higher during a period of active investment than when promotion is relatively inactive. For example, putting it on an index number basis, the average yearly rate of the Bank of England was 127 during the three periods of active promotion outlined in Table II, as compared with 100 during the three periods when promotion had declined.

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1 Mitchell in his excellent book, Business Cycles, discusses also the deterioration of the quality of labor. In the industries that find it necessary to work their employes overtime, fatigue lessens the efficiency of the laborers. The pressure of orders also makes the employer willing to add to the labor force any help that may be available even altho the efficiency of such help may be far below the average. "Where humanitarian motives are not allowed to interfere with business policy, the less efficient employes are the first to be discharged after a crisis. Hence the relatively small working forces of depression are the picked troops of the industrial army. When a revival has grown into full prosperity, on the contrary, employers are constrained to accept any help to be had. They must take on men who are too old, and boys who are too young, men of irregular habits, men prone to malinger, even the chronic 'trouble makers.' Raw recruits of all sorts must be enlisted and trained in a hurry at the employer's expensc. A deterioration in the average efficiency of the working forces inevitably follows" (p. 477).

• Computed from figures given by De Greef, Le Crédit Commercial et la Banque Nationale de Belgique, pp. 405–406.

Evidenced by the applications for capital in the London market.

The total effect of promotion activity is, therefore, to cause rapid changes in particular prices, in particular wages, and in rates of interest. For this reason all industries, new and old alike, are placed upon an increasingly speculative basis. It is inevitable that many should fail; not merely because of a lack of business ability, altho, of course, the incompetent are rapidly weeded out, but because of the general upheaval in costs of production produced by promotion. Most writers on crisis subjects direct all their attention to the nature of investment. They overlook altogether the great disturbance of the industrial equilibrium from the process of investment. So important is the latter factor, I hold, that if all investment should be judiciously made, and if it turned out ultimately that there had been no wasting of capital or overcrowding of particular industries, crises nevertheless would not be eliminated.

To the three major causes of industrial disturbance described above-miscalculations in investment, increased competition from the newly organized concerns, and the disturbance to industry resulting from the rapid and unequal changes in costs of production and operation-might be added a considerable number of other factors of lesser importance, which play a part in producing the extra failures in business which constitute a crisis. Among these are speculation on the exchanges, and in land, the general laxity of business methods and morals characteristic of a period of prolonged prosperity, extravagence, lack of adequate capital, and so on. But it is not necessary for the present purpose to enter into these. All the above-mentioned phenomena together account for the fact that as time passes, there is an increasing number of enterprisers who find that their profits are dwindling, and the number of firms failing becomes larger than usual, altho the

majority, up to the very time that the extra failures begin, may still be enjoying great prosperity. As the difficulties of the minority increase, confidence in the future, which is necessary to maintain investment activity, is gradually undermined and investment slows up. With the stoppage of investment the demand for promotion commodities falls off sharply, distrust of the future becomes widespread, the demand for all commodities decreases and depression in business becomes general. This is the typical transition from prosperity to depression.

What part does credit play in the cycle? It is affected by prosperity in various ways.

In the first place, investment tends to exhaust the loanable funds of a country. Perhaps it would be more accurate to say that investment and the speculation which accompanies promotion together tend to exhaust a country's loan fund. As the prosperity period advances, an increasing proportion of the available funds is devoted to speculative purposes, so that new enterprises find it increasingly difficult to secure loans and even established business complains of the difficulty in securing legitimate credit accommodations. The expanded condition of bank loans is evidenced by the falling ratio of reserves to deposits, since deposits originate chiefly from loans. Almost every crisis is preceded by a fall in the reserve ratio.

Central banks often find themselves confronted not only by a falling reserve ratio but also by an actual decline in cash holdings. Increased business activity a country over requires larger cash holdings by the country banks for reserve purposes and increases the demand for currency in convenient form. These demands are met by a lowering of the reserves of the banks in the financial centers.

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