cycle, and failures, the essential factor in the financial phase of the cycle? An answer to this question is necessary before a working theory of crises can be said to be evolved. It is not enough to say that the failures are due to miscalculations in business. That does not explain why there should be more miscalculations at one time than another; nor does it show the relation between the industrial and financial phases of the crisis. The problem put in another form is: to what extent has promotion been a factor in bringing about these extra failures which constitute a crisis?

Analysis of any crisis situation shows that the two phenomena, promotion and failures, are closely related. Yet the relationship is more complex than writers admit who say that the failures are due merely to overinvestment, or improvident investment, or exhaustion of capital, or some one factor. Not one class, but a considerable number of classes of failures directly or indirectly connected with promotion activity may be marked out. I have outlined three of the most important.

First, there are the failures of the newly-promoted concerns because of miscalculations in promotion. Here is found the much-talked-of anarchy of production. Investment is often carried too far in a given line and the market finally becomes overstocked with the particular commodity or service produced by these new conOr, it happens that promotion is premature; as for example in railway building before our crises of


1 Professor Taussig, Principles of Economics, vol. i, pp. 410-411, gives recognition to the complexity of the crisis situation. He says: "In sum, the causes of industrial depression seem to be reducible to various kinds of maladjustment, all connected with the intricate division of labor and the long stretch from production to consumption. There is likely to be maladjustment in the planning of some particular kind of capital, — railways, or electric enterprises, or textile mills. There is likely to be maladjustment in a greater addition to the total community's capital than is justified by the total of its available savings. There is excess or deficiency in the stocks of dealers and middleThere is accentuation of the whole series of misfits because of the psychological

men. factor."

earlier date. While the capital is not from the social standpoint wasted, yet if the enterprises in question cannot find or stimulate enough demand for their products or services to meet their obligations they must sooner or later pass into receivers' hands.

The tendency for investment to follow a single line and to keep up until that line is greatly overdone is, I believe, more characteristic of the earlier crises than of the later ones. The era of distinctive railway crises apparently passed away with the crisis of 1884. The promotion activity preceding the European crisis of 1900-01 and the world crisis of 1907 spread out over much broader fields than formerly, resulting in proportionately less overdoing of any particular line. No one kind of investment was conspicuous in either case.

A study of the lines of investment followed in the last twenty or thirty years convinces one that investment manias are still present, but that they are localized and short-lived. Russia has recently had a more pronounced railway mania than any other country except the United States.1 Germany extended her electric lighting system by leaps and bounds.2 The boom in bicycles culminated in 1896, when over £17,000,000 of English capital went to cycle companies, as contrasted with £155,000 two years later. In the United States also a minor bicycle crisis occurred in 1896, as evidenced by the failure of over 5 per cent of all manufacturers and dealers in cycles. Another boom occurred in breweries and distilleries when, in 1894-1905 inclusive, over £88,000,000 of English capital was invested in those lines. Of this amount over £54,000,000 was invested during the three years 1896, 1897, and 1898.

1 Raffalovich, Le Marché Financier, 1898-99, p. 435.

2 London Economist, 1900, p. 1072.

Bradstreet's, 1897, p. 354.

In fact, in 1898 breweries and distilleries ranked first among English industrial undertakings. In 1902 and 1903 there was a boom in stores and trading companies. In 1905 an unusually large amount of English capital went to build railways in the Americas, especially in Argentina, and in India, China, and Japan. The mania characteristics, however, have been more pronounced in mining investment than in most other lines. In 1895 occurred the boom in South African mining shares. In 1896 the Westralian mining mania reached its height. In a single month - April, 1896 eighty-one Westralian companies were launched. Between March 1, 1894, and September 30, 1896, no fewer than 731 Westralian gold-mining companies asked British investors to subscribe an aggregate of almost £76,000,000.2

Over-investment or partial over-production, always an inadequate explanation of the great mass of failures which make up a crisis, is surely less prominent than formerly. This relative absence of mania in promotion should be a factor in reducing the severity of crises and may account in part for the short-lived effects of the crisis of 1907. Possibly it was a factor also in prolonging the period of prosperity in the United States from 1897 to 1907, with a slight interruption in 1903, — a period double the average length of good times in the past.

Of course there will always be some miscalculations in investment. Companies are formed to produce new commodities. There is no possible way to anticipate the demand for an unmarketed commodity, no precedents of demand in former years to be followed. Necessarily, they must first prepare the product for market and trust to their ability to stimulate a sufficient

1 Journal Royal Statistical Society, vol. lxi, p. 145.

2 Van Oss gives a good account of the boom in Century, vol. xl.

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demand. It is inevitable, therefore, that losses as well as gains among such companies should be great, that much capital should be wholly or partially wasted. The losses under such circumstances cannot be due to a lack of managerial ability, since the complete avoidance of mistakes in investment would necessitate more than human foresight. For this reason the proposed socialistic oversight of investment, or any other plan, would not avail to protect from many mistakes in promotion. A second class of failures arises from the competition of the newly-promoted companies with old concerns. The newer companies have the advantage of freely introducing the latest inventions and processes, of locating advantageously with reference to sources of raw materials or to markets and the like. It is by such competition that, as Ely says,2 the minimum expenses of production today become the marginal expenses of production tomorrow. This competition works hardship to the old concerns, yet it is by this process that the consumer receives the benefit of changes in the course of progress. A familiar example of the operation of the principle is the construction of houses for hire even after a city has a large number of unrented houses; because the preference of renters will be for the new, modern houses. It will be the owners of the old houses and not the later enterprisers that will suffer from the increased investment in rental properties.

Competition of new concerns with the established concerns also involves more than stated above. Not only is there competition between such allied lines as electricity and gas, cycles and automobiles, phonographs and pianolas, but between automobiles and

1 Jones says that the existence of improperly used capital indicates a lack of managerial ability, but that generalization seems too broad. It would not be applicable in this case.

2 Outlines of Economics, p. 174.

furniture, phonographs and sewing machines, and so on. The organization and operation of new companies involves not only the stimulation of demand for more commodities but, whenever possible, the withdrawal of demand from old lines to new. There is a limit to the amount of goods the consumer can procure; if he buys commodities of one kind, it cuts down his ability to purchase commodities of other sorts. The placing of new or additional commodities on the market undoubtedly changes the currents of demand and it is beyond human powers to foresee those changes hence miscalculations.

In the third class of failures are those of concerns which have been unable to cope with the rapid changes in the cost of production and operation so characteristic of a prosperity period. The producer has to reckon not only with rapid changes in demand. Even when demand is sustained or increasing, unforeseen changes in cost of production often result in fatal miscalculations. In the first place, the increased demand for capital goods to equip the new concerns upsets completely the old price schedules, since it means heavy demands for some commodities, such as coal and iron, and little or no increased demand for other less generalized commodities that do not enter so largely into schemes of promotion. It is true that prices are normally dynamic; yet during a period of active

1 Cf. Patten, The Theory of Prosperity. He maintains that the downward tendency of prices is due, not to the competition of producers, but to the power of substitution possessed by consumers. If the newly produced commodities satisfy more intense wants than the old, demand is transferred from the old to the new. See pp. 70, 71.

It is a matter of great importance to business, not that promotion activity through credit expansion causes prices to rise, but that it causes such unequal rises. This disturbance in the field of production is a more important feature of rising prices, I believe, than is the changed relation between debtor and creditor given so much attention by Professor Fisher and others. Compare also A. S. Johnson, Introductory Economics, p. 225: "The business relations most seriously disturbed by price changes, however, are those of creditor and debtor."

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