PROMOTION AS THE CAUSE OF CRISES

SUMMARY

Two groups of crisis theories, 748. — Failures the chief phenomena in the crisis, 749.- Promotion activity the cause of prosperity, 750. — Relation between promotion and failures, 752. Newly-promoted concerns fail, 752. Old concerns fail because of competition of new, 755. — All kinds fail because of inability to cope with dynamic conditions, 756. The part of credit in the cycle, 761.- Exhaustion of loanable funds, 761.- Falling reserve ratios or falling reserves, 762. Gold movements before crises, 763. Break down of credit not the main cause of crises, 764. - Crisis failures include insolvent as well as solvent concerns, 765. — Promotion the cause of crises, 766.

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THEORIES of crises may be divided into two chief groups. One holds that industry is normally in a condition of stable equilibrium and that a crisis is the disturbance of this equilibrium by unpredictable causes. The second maintains that industry is normally unstable and that its equilibrium is eventually ruptured by steadily operating and cumulative forces.1 This article falls in the second group. It will attempt to show that even when prosperity is not interrupted by extraneous causes such as natural calamities (crop failures, fires, floods, and so on) or by political disturbances, threats of war, and the like, active promotion, the cause of rising prosperity, still sets in operation forces which lead to a financial crisis, tend to check promotion activity, and cause a return to a condition of depression such as characterized the beginning of the period.

It is often said that industrial depression and financial disturbance are but different phases of a given situa

1 Jones, Economic Crises, ch. I, gives a good discussion of the theories of industrial equilibrium; cf. also Taylor, Kinetic Theory of Crises, University of Nebraska Studies, January, 1904.

tion. But just how the depression and the financial phenomena are related remains to be satisfactorily explained. It is proposed, as just stated, to show that crisis and depression are the logical sequence of the business activity of the preceding period. Before entering on such an explanation, it is necessary to make clear the essential features of the financial crisis, on the one hand, and of the industrial depression, on the other.

The financial crisis, I maintain, is a situation in which a larger number than usual of debtors are unable to meet their obligations, primarily because industry and finance have failed to yield returns as large as the estimates upon which borrowings or subsequent expenditures were based, and secondarily because of a contraction of credit. Many writers are inclined to lay sole stress upon the failure of firms which suspend because they cannot obtain the customary credit accommodations - a phenomenon here classed as secondary. While such failures are strikingly prominent and very numerous during panic times, it should be recognized that the chief failures are those of genuinely insolvent concerns which have not made good during the preceding period of rising prosperity. In fact, the panic stage is very often precipitated by the failure of a prominent firm or firms. The crisis of 1837 in the United States was preceded by failures in the fall of 1836 of English firms doing business with this country. In 1857 the panic began with the failure of the Ohio Life Insurance and Trust Company. The difficulties of 1873 commenced with the failure of the New York Warehouse and Security Company and the banking house of Kenyon, Cox & Company. In 1884 trouble began with the failure of the brokerage firm of Grant & Ward and the Mercantile National Bank. The failure that

1 Cf. Taussig, Principles of Economics, vol. i, p. 400. Hull, Industrial Depressions, however, says there is no relation between the two.