The Theory of Business Enterprise

Chapter 7: The Theory of Modern Welfare

Thorstein Veblen

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Before business principles came to dominate everyday life the common welfare, when it was not a question of peace and war, turned on the ease and certainty with which enough of the means of life could be supplied. Since business has become the central and controlling interest, the question of welfare has become a question of price. Under the old regime of handicraft and petty trade, dearth (high prices) meant privation and might mean famine and pestilence; under the new regime low prices commonly mean privation and may on occasion mean famine. Under the old regime the question was whether the community's work was adequate to supply the community's needs; under the new regime that question is not seriously entertained. 

But the common welfare is in no less precarious a case. The productive efficiency of modern industry has not done away with the recurrence of hard times, or of privation for those classes whose assured pecuniary position does not place them above the chances of hard times. Distress may

(178)  not be so extreme in modern industrial communities, it does not readily reach the famine mark; but such a degree of privation as is implied in the term "hard times" recurs quite as freely in modern civilized countries as among the industrially less efficient peoples on a lower level of culture. The oscillation between good times and bad is as wide and as frequent as ever, although the average level of material well-being runs at a higher mark than was the case before the machine industry came in. 

This visible difference between the old order and the new is closely dependent on the difference between the purposes that guide the older scheme of economic life and those of the new. Under the old order, industry, and even such trade as there was, was a quest of livelihood; under the new order industry is directed by the quest of profits. Formerly, therefore, times were good or bad according as the industrial processes yielded a sufficient or an insufficient output of the means of life. Latterly times are good or bad according as the process of business yields an adequate or inadequate rate of profits. The controlling end is different in the present, and the question of welfare turns on the degree of success with which this different ulterior end is achieved. Prosperity now means, primarily, business prosperity; whereas it used to mean industrial sufficiency. 

(179) A theory of welfare which shall account for the phenomena of prosperity and adversity under the modern economic order must, accordingly, proceed on the circumstances which condition the modern situation, and need not greatly concern itself with the range of circumstances that made or marred the common welfare under the older regime, before the age of machine industry and business enterprise.[1] Under the old order, when those in whose hands lay the discretion in economic affairs looked to a livelihood as the end of their endeavors, the welfare of the community was regulated "by the skill, dexterity, and judgment with which its labor was generally applied."[2] What would mar this common welfare was the occasionally disastrous act of God in the way of unpropitious seasons and the like, or the act of man in the way of war and untoward governmental exactions. Price variations, except as conditioned by these untoward intrusive agencies, had commonly neither a wide nor a profound effect upon the even course of the community's welfare. This holds true, in a general way, even after resort to the market had come to be a fact of great importance in the life of large classes, both as an outlet for their products and as 

(180) a base of supplies of consumable goods or of raw materials, - as in the better days of the handicraft system. 

Until the machine industry came forward, commerce (with its handmaiden, banking) was the only branch of economic activity that was in any sensible degree organized in a close and comprehensive system of business relations. "Business" would then mean "commerce," and little else. This was the only field in which men habitually took account of their own economic circumstances in terms of price rather than in terms of livelihood. Price disturbances, even when they were of considerable magnitude, seem to have had grave consequences only in commerce, and to have passed over without being transmitted much beyond the commercial houses and the fringe of occupations immediately subsidiary to commercial business. 

Crises, depressions, hard times, dull times, brisk times, periods of speculative advance, "eras of prosperity," are primarily phenomena of business; they are, in their origin and primary incidence, phenomena of price disturbance, either of decline or advance. It is only secondarily, through the mediation of business traffic, that these matters involve the industrial process or the livelihood of the community. They affect industry because industry is managed on a business footing, in terms of price and for the sake of profits. So long as 

(181) business enterprise habitually ran its course within commercial traffic proper, apart from the industrial process as such, so long these recurring periods of depression and exaltation began and ended within the domain of commerce.[3] The greatest field for

(182)  business profits is now afforded, not by commercial traffic in the stricter sense, but by the industries engaged in producing goods and services for the market. And the close-knit, far-reaching articulation of the industrial processes in a balanced system, in which the interstitial adjustments are made and kept in terms of price, enables price disturbances to be transmitted throughout the industrial community with such celerity and effect that a wave of depression or exaltation passes over the whole community and touches every class employed in industry within a few weeks. And somewhat in the same measure as the several modern industrial peoples are bound together by the business ties of the world market, do these peoples also share in common any wave of prosperity or depression which may initially fall upon any one member of this business community of nations. Exceptions from this rule, of course, are such periods of prosperity or depression as result from local (material) accidents of the seasons and the like, - accidents that may inflict upon one community hardships which through the mediation of prices are transmuted into gain for the other communities that are not touched by the calamitous act of God to which the disturbance is due. 


The true, or what may be called the normal, crises, depressions, and exaltations in the business world are not the result of accidents, such as the failure of a crop. They come in the regular course of business. The depression and the exaltation are in a measure bound together. In the recent past, since depression and exaltation have been normal features of the situation, every strongly marked period of exaltation (prosperity) has had its attendant period of depression; although it does not seem to follow in the nature of things that a wave of depression necessarily has its attendant reaction in the way of a period of business exaltation. In the recent past - the last twenty years or so - it has been by no means anomalous to have a period of hard times, or even a fairly pronounced crisis, without a wave of marked exaltation either preceding or following it in such close sequence as conveniently to connect the two as action and reaction. But it would be a matter of some perplexity to a student of this class of phenomena to come upon a wave of marked business exaltation (prosperity) that was not promptly followed by a crisis or by a period of depression more or less pronounced and prolonged. Indeed, as the organization of business has approached more and more nearly to the relatively consummate situation of to-day, - say during the last twenty years of the nineteenth century, - periods of exaltation have, 

(184) on the whole, grown less pronounced and less frequent, whereas periods of depression or "hard times" have grown more frequent and prolonged, if not more pronounced. It might even be a tenable generalization, though perhaps unnecessarily broad, to say that for a couple of decades past the normal condition of industrial business has been a mild but chronic state of depression, and that any marked departure from commonplace dull times has attracted attention as a particular case calling for a particular explanation. The causes which have given rise to any one of the more pronounced intervals of prosperity during the past two decades are commonly not very difficult to trace; but it would be a bootless quest to go out in search of special causes to which to trace back each of the several periods of dull times that account for the greater portion of the past quarter of a century. Under the more fully developed business system as it has stood during the close of the century dull times are, in a way, the course of nature; whereas brisk times are an exceptional invention of man or a rare bounty of Providence. 

What current economic theory has to say on the common welfare is more frequently found under the caption of crisis and depression than in any other one connection. And the theory of crisis and depression has, as is well known, been one of the less happy passages in the economists' reper-

(185) -tory of doctrines. It has been customary to approach the problem from the side of the industrial phenomena involved - the mechanical facts of production and consumption; rather than from the side of business enterprise - the phenomena of price, earnings, and capitalization. This untoward accident of a false start is probably accountable for the fact that no tenable theory of these phenomena has yet been offered. The solutions attempted have commonly proceeded by an analysis of industrial life apart from business enterprise; that is to say, they have sought to explain the occurrence of crises under that old-fashioned "natural economy" or "money economy" under which crises did not normally occur.[4] 

Taking as a point of departure the patent fact that crises, depressions, and brisk times are in their first incidence phenomena of business, of prices and capitalization, an explanation of their appearance and disappearance, and of their bearing upon the common welfare, may be sought by harking back to those business principles that underlie 

(186) modern capitalistic enterprise. An analysis of the current, common-sense business views of price and investment should indicate the genesis and manner of growth of these mass movements of the business community, as well as the character of those circumstances which may further or inhibit such movements. Business depression and exaltation are, at least in their first incidence, of the nature of psychological fact, just as price movements are a psychological phenomenon. 

The everyday circumstances which condition the modern business management of industry are sufficiently well known, and they have already been reviewed in some detail in earlier chapters; but they may perhaps advantageously be outlined again in so far as they bear immediately on the question in hand. 

(1) Industry is carried on by means of investment, which is made with a view to pecuniary gain (the earnings). The business man's endeavors in managing the affairs of the concern in which investment has been made look to the same end. The gains are kept account of as a percentage on the investment, and both they and the industrial plant or process through the management of which they are procured are counted in terms of money, and, indeed, in no other terms. The plant or process (or the investment, whatever form it takes) is capitalized on the basis of the gains which accrue

(187)  from it, and this capitalization proceeds on the ground afforded by the current rate of interest, weighted by consideration of any prospective change in the earning-capacity of the concern. The management of the concern is effected by a more or less intricate and multifarious sequence of bargains. The decisive consideration at every point in this traffic of investment and administration is the consideration of price in one relation or another. 

(2) The industry to which the business men in this way resort as the ways and means of gain is of the nature of a mechanical process, or it is some employment (as commerce or banking) that is closely bound up with the mechanical industries. Broadly, it is such industry as lies under the dominion of the machine, in that it is involved in that comprehensive quasi-mechanical process of modern industrial life that has been discussed in an earlier chapter. This implication of each industry in a comprehensive system, or this articulation with other branches of industry, is of such a nature as to place each industrial concern in dependence on one or more other branches of industry, from which it draws its materials, appliances, etc., and to which it disposes of its output; and these relations of dependence and articulation form an endless sequence. That is to say, the interindustrial relations into which any branch of industry necessarily enters do not run to a final term in any 

(188) direction; within the process of industry at large there is no member that stands in the relation of an initial term to any sequence of processes. The ramification of industrial dependence is without limits. The method of these relations of one concern to another, or of one branch of industry to another, is that of bargaining, contracts of purchase and sale. It is a pecuniary relation, in the last resort a price relation, and the balance of this system of interstitial relations is a price balance. 

(3) These interstitial pecuniary relations, between the several concerns or branches of industry that make up the comprehensive industrial system at large, involve credit relations of greater or less duration. The bargaining, by means of which industry is managed and the interstitial relations adjusted, takes the form of contracts for future performance. All industrial concerns of appreciable size are constantly involved in such contracts, which are, on an average, of considerable magnitude and duration, and commonly extend in several directions. These contracts may be of the nature of loans, advances, outstanding accounts, engagements for future delivery or future acceptance, but in the nature of the case they involve credit obligations. Credit, whether under that name or under the name of orders, contracts, accounts, and the like, is inseparable from the management of modern industry in all that con-

(189) -cerns the working relations between businesses that are not under one ownership, or between which the relations resting on separate ownership have not been placed in abeyance by some such expedient as lease, pool, syndicate, trust agreement, and the like. Credit relations of one kind and another are also found expedient and profitable at many points where their employment is not precisely unavoidable. These extended credit relations are requisite to the most expeditious and profitable conduct of business, and so to the highest degree of success of the business. Under the regime of the machine industry and modern business methods it is probably fair to say that the use of credit, apart from loan capital and leases, unavoidably goes to the extent required to cover all goods in process of elaboration, from the raw material to the finished goods, in so far as the goods change hands (in point of ownership) during the process. 

(4) The conduct of industry by competing business concerns involves an extensive use of loan credit, as spoken of in Chapter V above. 

The four conditions recited are characteristic features of that recent past during which brisk times, crises, and depressions followed one another with some regularity as incidents of the normal course of business.[5] Certain qualifications of this 

(190) characterization are necessary to fit the immediate present. These will be indicated presently. 

In brisk times the use of credit is large; it may be as a cause or an effect of the acceleration of business; most commonly it seems to be both a cause and an effect. No appreciable business acceleration takes place without an extension of credit, at least in the form of contracts of purchase and sale for future performance, if not also in the form of loans. In times of protracted depression the use of credit seems on the whole to be somewhat restricted, at least such is the current apprehension of the case among business men. Still, it cannot confidently be said that seasons of protracted depression are due solely to an absence of credit relations or to an unwillingness to enter into credit relations. A comparison of the course of interest rates, e.g., does not warrant the generalization that the readiness with which loans can be negotiated need be appreciably different in brisk and in dull times.(6*) The readiness with which contracts of purchase and sale are negotiated is appreciably greater in brisk times than in times of depression; that, indeed, is the obvious difference between the two. 

Of the three phases of business activity, depression, exaltation, and crisis, the last named has 

(191) claimed the larger and livelier attention from students, as it is also the more picturesque phenomenon. An industrial crisis is a period of liquidation, cancelment of credits, high discount rates, falling prices and "forced sales," and shrinkage of values. It has as a sequel, both severe and lasting, a shrinkage of capitalization throughout the field affected by it. It leaves the business men collectively poorer, in terms of money value; but the property which they hold between them may not be appreciably smaller in point of physical magnitude or of mechanical efficiency than it was before the liquidation set in. It commonly also involves an appreciable curtailment of industry, more severe than lasting; but the effects which a crisis has in industry proper are commonly not commensurate with its consequences in business or with the importance attached to a crisis by the business community. It does not commonly involve an appreciable destruction of property or a large waste of the material articles of wealth. It leaves the community at large poorer in point of market values, but not necessarily in terms of the material means of life. The shrinkage incident to a crisis is chiefly a pecuniary, not a material, shrinkage; it takes place primarily in the intangible items of wealth, secondarily in the price rating of the tangible items. Apart from such rerating of wealth, the most substantial immediate effect of a crisis is an 

(192) extensive redistribution of the ownership of the industrial equipment, as noted in speaking of the use of credit. 

The play of business exigencies which lead to such a period of liquidation seems to run somewhat as follows: Many firms have large bills payable falling due at near dates, at the same time that they hold bills receivable also in large amounts. To meet the demand of their creditors they call upon their debtors, who may in their turn have bills receivable or may hold loans on collateral. The initial move in the sequence of liquidation may be the calling in of a call loan, or a call for additional collateral on a call loan. At some point, earlier or later, in the sequence of liabilities the demand falls upon the holder of a loan on collateral which is, in the apprehension of his creditor, insufficient to secure ready liquidation, either by a shifting of the loan or by a sale of the collateral. The collateral is commonly a block of securities representing capitalized wealth, and the apprehension of the creator may be formulated as a doubt of the conservative character of the effective capitalization on which it rests. In other words, there is an apprehension that the property represented by the collateral is over-capitalized, as tested by the current quotations, or by the apprehended future quotations, of the securities in question. The market capitalization of the col-

(193) -lateral has taken place on the basis of high prices and brisk trade which prevail in such a period of business exaltation as always precedes an acute crisis. When such a call comes upon a given debtor, the call is passed along to the debtors farther along in the sequence of liabilities, and the sequence of liquidations thereby gets under way, with the effect, notorious through unbroken experience, that the collateral all along the line declines in the market. The crisis is thereby in action, and the further consequences follow as a well-known matter of course. All this is familiar matter, known to business men and students by common notoriety. 

The immediate occasion of such a crisis, then, is that there arises a practical discrepancy between the earlier effective capitalization on which the collateral has been accepted by the creditors, and the subsequent effective capitalization of the same collateral shown by quotations and sales of the securities on the market. But since the earlier capitalization commonly, in the normal case, comes out of a period of business prosperity, the point of inquiry is as to the ground and method of this effective capitalization of collateral during the period of prosperity that goes before a crisis, and this, in turn, involves the question of the nature and causes of a period of prosperity. 

The manner in which the capitalization of col-

(194) -lateral, and thereby the discrepancy between the putative and actual earning-capacity of capital, is increased by loan credit during an era of prosperity has been indicated in some detail in Chapter V above. But it may serve to enforce the view there taken, if it can be shown on similar lines that a period of prosperity will bring on a like discrepancy between putative and actual earning-capacity, and therefore between putative and eventual capitalization of collateral, even independently of the expansion effected by loan credit. 

A period of prosperity is no more a matter of course than a crisis. It has its beginning in some specific combination of circumstances. It takes its rise from some traceable favorable disturbance of the course of business. In such a period the potent fact which serves as incentive to the acceleration of business is a rise of prices. This rise of prices presently becomes general as prosperity progresses and becomes an habitual fact, but it takes its start from some specific initial disturbance of prices. That is to say, prices rise first in some one industry or line of industries.[7]


 By new investments, as well as by extending the operations of the plants already employed, business men forthwith endeavor to take advantage of such a rise. The endeavor to market an increased supply of the things for which there is an enlarged demand, brings on an increased demand and an advance of prices in those lines of industry from which the concerns that had the initial advantage draw their supplies. In part by actual increase of demand and in part through a lively anticipation of an advanced demand, aggressive business enterprise extends its ventures and pushes up prices in remoter lines of industry. This transmission of the favorable disturbance of business (substantially a psychological phenomenon) follows very promptly under modern conditions, so that any differential advantage that accrues at the outset to the particular line of industry upon which the initial disturbance falls is presently lost or greatly lessened. In the meantime extensive contracts for future performance are entered into in all directions, and this extensive implication of 

(196) the various lines of industry serves, of itself, to maintain the prosperity for the time being. If the original favorable disturbance of demand and prices, to which the prosperity owes its rise, falls off to the earlier level of demand, the era of prosperity has thereby a term set to its run; although the date of its termination is always at some distance in the future, beyond the time when the original demand has ceased to act. The reason for this retardation, whereby the close of an era of prosperity is always delayed, other things equal, beyond the lapse of the cause from which it has arisen, is (1) the habit of buoyancy, or speculative recklessness, which grows up in any business community under such circumstances, (2) the continued life of a considerable body of contracts for future performance, which acts to keep up the demand for such things as are required in order to fill these contracts and thereby keeps up prices in so far. In general it may be said that after the failure of the favorable price disturbance to which it is due, an era of prosperity will continue for that (indefinite) further period during which the fringe of outstanding contracts continues to dominate the business situation. Some further, new contracts will always continue to be made during this period, and some unfilled contracts will always be left standing over when the liquidation sets in; but, broadly speaking, the wind-up 

(197) comes, not when this body of outstanding contracts have run out or been filled, but when the business of filling them and of filling the orders to which they give rise no longer occupies the attention of the business community in greater measure than the rest of current business. 

The run of business exigencies on which an era of prosperity goes forward may be sketched in its general features somewhat as follows: Increased demand and enhanced prices, with the large contracts which follow from such a state of the market, increase the prospective earnings of the several concerns engaged. These prospective earnings may eventually be realized in full measure, or they may turn out to have been putative earnings, only. that is largely a question of how far in the future the liquidation lies. The business effect of increased prospective earnings, however, is much the same whether the event proves the expectation of increased earnings to have been well grounded or not. The expectation in either case leads the business men to bid high for equipment and supplies. Thereby the effective (market) capitalization is increased to answer to the increased prospective earnings. This recapitalization of industrial property, on the basis of heightened expectation, increases the value of this property as collateral. The inflated property becomes, in effect, collateral even without a formal 

(198) extension of credit in the way of loans; because, in effect, the contracts entered into are a credit extension, and because the property of the contracting parties is liable to be drawn into liquidation in case of non-fulfilment of the contracts. But during the free swing of that buoyant enterprise that characterizes an era of prosperity contracts are entered into with a somewhat easy scrutiny of the property values available to secure a contract. So that as regards this point not only is the capitalization of the industrial property inflated on the basis of expectation, but in the making of contracts the margin of security is less closely looked after than it is in the making of loans on collateral. There results a discrepancy between the effective capitalization during prosperity and the capitalization as it stood before the prosperity set in, and the heightened capitalization becomes the basis of an extensive ramification of credit in the way of contracts (orders); at the same time the volume of loan credit, in set form, is also greatly increased during an era of prosperity.[8]

An era of prosperity is an era of rising prices. When prices cease to rise prosperity is on the wane, although it may not promptly terminate at that juncture. This follows from the fact that the 

(199) putative increase of earnings on which prosperity rests is in substance an apprehended differential gain in increased selling price of the output over the expenses of production of the output. Only so long as the selling price of the output realizes such a differential gain over the expenses of production, is the putative increased rate of earnings realized; and so soon as such a differential advantage ceases, the era of prosperity enters on its closing phase. 

Such a differential advantage arises mainly from two causes: (1) The lines of industry which are remote, industrially speaking, from the point of initial disturbance, - from which, that is to say, the lines of industry first and chiefly affected by the rise draw supplies of one kind or another, - these remote lines of industry are less promptly and less acutely affected by the favorable disturbance of the price level; this retardation of the disturbance affords the industries nearer the seat of disturbance a differential advantage, which grows less the farther removed the given enterprise is from the point of initial disturbance.[9] (2) The chief and most secure differential advantage in the case is that due 

(200) to the relatively slow advance in the cost of labor during an era of prosperity. Wages ordinarily are not advanced at all for a considerable period after such an era of prosperity has set in; and so long as the eventual advance of wages does not overtake the advance in prices (which in the common run of cases it never does in full measure), so long, of course, a differential gain in the selling price accrues, other things equal, to virtually all business enterprises engaged in the industries affected by the prosperity. 

There are, further, certain (outlying) lines of industry, as, e.g., farming, which may not be drawn into the movement in any appreciable degree, and the price of supplies drawn from these outlying industries need not rise; particularly they need not advance in a degree proportionate to the advance in the prices of the goods into which they enter as an element of their expenses of production. To an uncertain but commonly appreciable extent there is also a progressive cheapening of the processes of production during such an era, and this cheapening, particularly in so far as it affects the production of the goods contracted for, as contrasted with the appliances of production, serves also to maintain the differential advantage between the contracted sale price and the expenses of production of the goods contracted for. 

In the ordinary course, however, the necessary 

(201) expenses of production presently overtake or nearly overtake the prospective selling price of the output. The differential advantage, on which business prosperity rests, then fails; the rate of earnings falls off. the enhanced capitalization based on enhanced putative earnings proves greater than the earnings realized or in prospect on the basis of an enhanced scale of expenses of production; the collateral consequently shrinks to a point where it will not support the credit extension resting on it in the way of outstanding contracts and loans; and liquidation ensues, after the manner frequently set forth by those who have written on these subjects.[10]

At some point in the system of investment and business extension will be found some branches of industry which have gradually lost what differen-

(202) -tial advantage they started out with when they entered on the era of prosperity; and if these are involved in large contracts and undertakings which are carried over into the phase of the movement at which this particular branch of industry has ceased to have a differential advantage in the price of its output over the cost of its supplies of material or labor, then what may have been a conservative capitalization of their holdings at an early phase, while their earning-capacity rested on a large differential advantage, will become an excessive capitalization after their earning-capacity has declined through loss of their differential advantage. Some branch or branches and some firms or class of firms necessarily fall into this position in the course of a period of phenomenally brisk times. A business concern so placed necessarily becomes a debtor, and its liabilities necessarily become, in some degree, bad debts. It is forced by circumstances to deliver its output at prices which preclude its obtaining such a margin as its extension of business presupposed. That is to say, its capitalization becomes excessive through shrinkage of its earning-capacity (as counted in terms of price). A concern of this class which is a debtor is precluded from meeting its obligations out of its current earnings; and if, as commonly happens in an appreciable proportion of cases, its obligations have already been aug-

(203) -mented to the extent which its recent earning-capacity would warrant, then the concern is insolvent for the time being. If the claims against it are pressed, it has no recourse hut liquidation through forced sales or bankruptcy. Either expedient, if the case is one of considerable magnitude, is disastrous to the balanced sequence of credit relations in which the business community is involved. The system of credit relations prevailing at such a time has grown up on the basis of an earning-capacity transiently enhanced by a wave of differential price advantage; and when this wave has passed, even if it leaves prices higher all around, the differential advantage of at least most concerns is past. The differential price advantage has come to the several branches or firms in succession, and has, in the typical case, successively left each with an excessive capitalization, and has left many with a body of liabilities out of proportion to their subsequent earning-capacity. This situation may, evidently, come about in this manner, even without lowering the aggregate (pecuniary) earning-capacity of the business community to the level at which it stood before the wave of prosperity set in.[11]


But when such a situation has come, all that is required to bring on the general catastrophe is that some considerable creditor find out that the present earning-capacity of his debtor will probably not warrant the capitalization on which his collateral is appraised, In self-defence he must decline the extension of a loan, and forced liquidation must follow. Such a liquidation involves 

(205) cutting under the ruling prices of products, which lessens the profits of competing firms and throws them into the class of insolvents, and so extends the readjustment of capitalization. 

The point of departure for the ensuing sequence of liquidation is not infrequently the failure of some banking house, but when this is the case it is pretty sure to be a bank whose funds have been "tied up" in "unwise" loans to industrial enterprises of the class spoken of above.[12] 

The abruptness of the recapitalization and of the redistribution of ownership involved in a period of liquidation may be greatly mitigated, and the incidence of the shrinkage of values may be more equably distributed, by a judicious leniency on the part of the creditors or by a well-advised and discreetly weighted extension of credit by the government to certain sections of the business community. Such measures of alleviation were had, with happy effect, in the case of a recent stringency which is sometimes spoken of as an averted crisis. But where the situation answers the specifications 

(206) recited above, in respect of a large and widely prevalent discrepancy between earning-capacity and capitalization, a drastic readjustment of values is apparently unavoidable. 

The point has already been adverted to once or twice that the most substantial immediate outcome of such a liquidation as is involved in a crisis is a redistribution of the ownership of the property concerned in the liquidation, whereby creditors and similar claimants gain at the expense of the solvent debtors. Such being the case, it would logically follow that the large creditors should see and follow up their advantage by concertedly pushing the body of debtors to an abrupt liquidation, and so realizing as large a gain as possible with the least practicable delay, whenever the situation offers. 

Such may be the logic of the circumstances, but such is not the course practically taken by the large creditors under the circumstances. For this there is more than one reason. It is not, apparently, that human kindness overrules the creditors' impulse to gain at the expense of the debtors. The ever recurring object-lessons afforded by operations in the stock and money market enforce the belief that when one business man gets the advantage of another he will commonly use the advantage without humanitarian reserve, if only the advantage is offered him in terms which he can comprehend. But short-sightedness and lack of insight beyond 

(207) the conventional routine seem to be fairly universal traits of the class of men who engage in the larger business activities. So that, while it would be to the unequivocal advantage of the large creditor, in point of material gain, to draw in his debtor's property at such a reduced valuation as comes in a period of abrupt liquidation, yet he does not ordinarily see the matter in that light; because the liquidation involves a shrinkage of the money value of the property concerned, and the business man, creditor or debtor, is not in the habit of looking beyond the money rating of the property in question or beyond the most immediate future. The conventional base line of business traffic, of course, is the money value, and a recognition of the patent fact that this base line wavers incontinently, and that it may on occasion shift very abruptly, apparently exceeds the business man's practical powers of comprehension. Money value is his habitual bench-mark, and he holds to the conviction that this bench-mark is stable, in spite of the facts.[13]


It is true, cases occur, from time to time, of transactions of some appreciable magnitude in which some degree of recognition of this fact is met with. Some large business man may yet rise to the requisite level of intelligence, and may comprehend and unreservedly act upon the fact that the money base line of business traffic at large is thoroughly unstable and may readily be manipulated, and it will be worth going out of one's way to see the phenomenal gains and the picturesque accompaniments of such a man's work. Parenthetically it may be remarked that if such a degree of insight should become the common property of the business community, business traffic as now carried on might conceivably collapse through loss of its base line. What is yet lacking in order to such a consummation is perhaps nothing more serious than that business capital be reduced to a somewhat more thorough state of intangibility than it has yet attained, and that does not seem a remote contingency.[14]


There is, however, another and more constraining circumstance which hinders the large creditors from wilfully pushing the debtors to a reckoning when things are ripe for liquidation. As was indicated above, the sequence of credit relations in an era of prosperity is endlessly ramified through the business community; whereby it happens that very few creditors are not also debtors, or stand in such relation to debtors as would involve them in some loss, even if this loss should not be commensurate with their eventual gain at the cost of other debtors. This circumstance by itself has a strong deterrent effect, and when taken in connection with what was said above of the habitual inability of the men in business to appreciate the instability of money values, it is probably sufficient to explain the apparently shortsighted conduct of those large creditors to seek to mitigate the severity of liquidation when the liquidation has come due. 

The account here offered of the "method" of crises and eras of prosperity does not differ greatly from accounts usually met with, except in explaining these phenomena as primarily phenomena of business rather than of industry. The disturbances of the mechanical processes of industry, which are 

(210) a conspicuous feature of any period of crisis, follow from the disturbance set up in the pecuniary traffic instead of leading up to the latter. While industry and business stand in a relation of mutual cause and effect, in this as in other cases, the initiative in such a movement belongs with the business traffic rather than with the industrial processes. 

Industry is controlled by business exigencies and is carried on for business ends. The effects of a wide disturbance in business, therefore, reach the industrial processes pretty directly, and the consequences, in the way of an expansion or curtailment of industrial activity and an enlarged or shortened output of product, are, of course, both immediate and important. As a primary effect, on the industrial side, of an era of prosperity, the community gains greatly in aggregate material wealth. The gain in material wealth, of course, is not equably distributed; most of it goes to the larger business men, eventually in great part to those who come out of the subsequent liquidation on the credit side. To some extent this aggregate material gain is offset by the unavoidable waste incident to the stagnation that attends upon an era of prosperity. It is further offset by the fact that good times carry with them an exceptionally wasteful expenditure in current consumption. Also, the usual and more effectual impetus to an era of prosperity, when it is not an inflation of the currency, is some 

(211) form of wasteful expenditure, as, e.g., a sustained war demand or the demand due to the increase of armaments, naval and military, or again, such an interference with the course of business as is wrought by a differentially protective tariff. The later history of America and Germany illustrates both these methods of procuring an era of prosperity. These methods, it will be noticed, are, in their primary incidence, of the nature of a waste of industrial output or energy; but the prosperity achieved is, none the less, to be recognized as a beneficial outcome in point of heightened industrial activity as well as in point of increased comfort for the industrial classes. 

To the workmen engaged in industry, particularly, substantial benefits accrue from an era of prosperity. These benefits come, not in the way of larger returns for a given amount of work, but more work, fuller employment, at about the earlier rate of pay. To the workmen it often means a very substantial gain if they can get a fuller livelihood by working harder or longer, and an era of prosperity gives them a chance of this kind. Gradually, however, as prosperity - that is to say, the advancing price level rises and spreads, the increased cost of living neutralizes the gain due to fuller employment, and after the era of prosperity has been under way for some time the gain in the amount of work obtainable is likely to be fairly offset by the increased

(212)  cost of living. As noted above, much of the business advantage gained in an era of prosperity is due to the fact that wages advance more tardily than the prices of goods. An era of prosperity does not commonly bring an increase of wages until the era is about to close. The advance of wages in such a case is not only a symptom indicating. that the season of prosperity is passing, but it is a business factor which must by its own proper effect close the season of prosperity as soon as the advance in wages becomes somewhat general. Increasing wages cut away the securest ground of that differential price advantage on which an era of prosperity runs. 

Periods of crisis or of prosperity are, after all, relatively simple phenomena with strongly marked features, and a passable explanation of them is correspondingly easy. They have also the ad vantage of having received much attention at the hands of the students of economic history. On the other hand, protracted depression, not traceable to widespread hardship or calamity arising from circumstances outside the range of business transactions, is a relatively new and untried subject for economic theory. Newer, more obscure. with less pronounced features and less definite limits than movements of speculative advance or speculative crises, this phenomenon has to a less extent engaged the steady 

(213) attention of students. An inquiry into the life history and the causes and effects of depression, from the point of view of a theory of business, may therefore scarcely be expected to yield concise or secure conclusions. 

Since industry waits upon business, it is a matter of course that industrial depression is primarily a depression in business. It is in business that depression is felt, since it is on the business side of economic activity that the seat of economic sensibility may be said to lie; it is also in business (pecuniary) terms that the depression is measured whenever a measure or estimate of the matter is attempted. In so far as there is an attendant derangement of the mechanical processes and of the mechanical articulation of processes in industry, the derangement follows from the pecuniary exigencies of business. Depression and industrial stagnation follow only in case the pecuniary exigencies of the situation are of such a character as to affect the traffic of the business community in an inhibitory way. But business is the quest of profits, and an inhibition of this quest must touch the seat of its vital motives. Industrial depression means that the business men engaged do not see their way to derive a satisfactory gain from letting the industrial process go forward on the lines and in the volume for which the material equipment of industry is designed. It is not worth their while, and it might 

(214) even work them pecuniary harm. Commonly their apprehension of the discrepancy which forbids an aggressive pursuit of industrial business is expressed by the phrase "overproduction." An alternative phrase, intended to cover the same concept, but less frequently employed, is "underconsumption."[15]

The controversial question as to the tenability of any given "overproduction" doctrine may, for the present purpose, be left on one side; it lies outside the theory of business and it has no merits or demerits for the purposes of a theory of business. The point of interest here is rather the ground of its acceptation among business men and the meaning which this notion has for them; that is to say, it is chiefly of interest here to inquire into the habits of thought which give cogency and effect to the dogma of "overproduction" as practically held by the body of business men, - what it practically means, why the dogma is held, and what is its effect on the course of business enterprise. 

"Overproduction," or "underconsumption," as it is met with in the views of business men, is neither a vacant dogma nor a shifty apology wherewith to cover their own delinquencies, but a very concretely real state of affairs. It is a state of affairs that prevails when business is persistently 

(215) dull; and the concept covered by the term comprises the sufficient cause of the dulness, in the apprehension of the business community, even though they may not always speak of the difficulty by that name. It may be worth while, even at the risk of tedium, to point out that this concept of "overproduction" applies, not to the material, mechanical bearing of the situation, but to its pecuniary bearing. The notion is never seriously entertained that there is or may be an embarrassing excess of goods, or of the appliances for their production, above what would be of some human use if the business situation permitted them to be turned to use. 

(1) The supply of consumable goods is, practically, never greater than the community's capacity for consuming them. An embarrassing excess in any line is practically a remote contingency at the most.[16] There are many eloquent passages in the economic manuals which may be called in witness of this truism, where much pains is taken to show that human wants are, in the nature of the case, indefinitely extensible. Nothing stands in the way, we are told, but "difficulty of attainment" of the goods with which to satisfy these wants. (2) In times of depression, or "hard times," there 

(216) is, under the modern industrial system at least, no overproduction in the sense of a production so large as to overtax the working capacity of the industrial appliances and processes employed, nor so large, even, as to overtax the normal powers of the force of workmen or require them to work overtime and holidays. Quite the contrary. That sort of thing happens only in brisk times, when there is no overproduction. Seriously to recite such platitudes as these may seem like a trifling with the patience of the printer, or it may be taken for a light-headed excess of "wissenschaftlicher Methode"; but these two formulations appear to cover all the conceivable ways in which overproduction may occur, so long as the term is construed from the point of view of the mechanical facts of the case. Seen from this side a period of depression is a period of underproduction; mills run on half time or none, and the supply of goods that finds its way into the hands of consumers is sensibly scant for the demands of comfort. 

The difficulty is, of course, a pecuniary one, and the phrase is used by business men in that pecuniary sense in which it has an immediate bearing on business. "Excessive competition" is an alternative phrase. There is an excess of goods, or of the means of producing them, above what is expedient on pecuniary grounds, - above what there is an effective demand for at prices that will repay 

(217) the cost of production of the goods and leave something appreciable over as a profit. It is a question of prices and earnings. The difficulty is that not enough of a product can be disposed of at fair prices to warrant the running of the mills at their full capacity, or running them at a rate near enough to their capacity to yield a fair profit. Or, to turn the proposition about, as business men are in the habit of doing, there is more of an output offered than will be carried off at a fair price, such a price as will afford fair or ordinary profits on the investment and the running expenses. There is too large a productive capacity; there are, too many competitive producers and too much industrial apparatus to supply the market at reasonable prices. The matter reduces itself to a question of fair prices and ordinary profits.[17]

If there is a large volume of outstanding credit obligations, that will complicate the situation. There is always a considerable amount of interest bearing securities outstanding, and the claims of these securities have to be satisfied before dividends can be paid on stock, or before profits accrue to industrial ventures which have issued the Securities. These fixed charges, together with others of a like kind, narrow the margin from which profits are derived and increase the handicap which a season of dull times brings to the business 

(218) men in charge of industry. At the same time fixed charges preclude shutting down, except at a sure and considerable loss. The business men involved are constrained to go on, and in the absence of wide combinations in industry they are constrained to go on at such competitive prices as to preclude reasonable profits. 

The question of fair prices and reasonable profits has some reference to current rates of interest. A "fair" rate of profits is such a rate as bears a reasonable relation to the current rate of interest, although this relation of profits to interest rates does not appear to be a strict one. Still, there undoubtedly is some reference to the current rate of interest as a sort of zero line to which profits should not decline. New investments are made on the basis of current rates of interest and with a view to securing the differential gain promised by the excess of prospective profits over interest rates. 

In a period of depression the aggregate industrial equipment is, notoriously, not running at its full capacity; there are many idle and half-idle plants and many idle workmen. The concerns in question find themselves unable to do a full run of business at reasonable profits. Still, unless the depression is of exceptionally short duration, there is always some new investment going on. More or less of new capital continues to find its way 

(219) into industrial business in competition with the concerns that are already in the field.[18] In case of a protracted depression the aggregate of new investments so made may, in the course of years, amount to a very considerable addition to the industrial outfit, and the production of the new establishments may very appreciably increase the aggregate output. Indeed, the output of the new establishments is a notable factor in swelling the supply and keeping down prices. But the new investments made during the depression are profitable, at least at the start. Or even if this should be questioned when stated in this broad way, it will at least hold true that they are commonly entered upon with a well-advised expectation of their being profitable if the situation does not materially change between the time when the new venture was entered upon and the time when the new equipment has got under way. If the interval between the inception of the new enterprise and its completion is a long one, the situation may so change in the meantime as to leave it unprofitable even if it has been conservatively planned. There are also, of course, fraudulent enterprises which are not expected by their promoters to pay a profit on the investment; and there are probably, also, 

(220) always some ventures entered upon during dull times with a view to being beforehand in preparation for better times. But after all has been said in qualification of the main proposition, it remains true that some new investment is going on with a well-advised expectation of reasonable profits on the basis of current costs, prices, and rates of interest.[19]

The rate of interest in times of depression may be unsatisfactory to lenders; it may be discouraging by comparison with the customary range of interest rates during better times. Still, the obstacle to business is not to be sought in an effectual discouragement of lenders, for in point of fact money 

(221) is readily to be had on good security during any protracted depression.[20] There is also the fact that investment is continually going on, which argues that the difficulty is neither that capital cannot be found for investment, nor that investment has no prospect of reasonable profits. Practically, no exceptional amount of fluent funds is withheld from the market, - except in time of panic, which is another matter. It may be added that the rate of interest need not be notably low in time of depression, just as, on the other hand, a period of business exaltation is not uniformly accompanied by a notably high rate of interest. 

But a low or declining rate of interest is effective in the way of depressing the business situation, even though a depression may go on without it. The line of its bearing upon business depression, or at least one line, is as follows: Established business concerns (particularly corporations) engaged in industry have some appreciable fixed (interest) charges to meet - on leases, mortgages, and interest-bearing securities (preferred stock and bonds). These outstanding obligations and securities may have been negotiated, "floated," at an earlier period of higher interest rates and higher profits, or they may have been carried over through a period of higher interest rates. In the former 

(222) case these interest charges are excessively high as compared with the present capitalized value of the property on which they rest, computing the capitalization on the basis of the present cost of replacing this property and the present interest charge which this cost of replacement would bear. In the latter case the original capitalization of the corresponding items of property will have undergone a practical (effective) recapitalization at a lower figure to correspond with the higher rate of interest prevalent during the interval in question; and in the subsequent period of low interest, the fixed charge on this recapitalization is excessively high as compared with the current effective capitalization of the property. The liabilities are excessive, in respect of their interest charges, as compared with the present earning-capacity of the property represented by them.[21] 

What gives effect to this drawback for the business enterprises which have such fixed interest 

(224) charges to meet is the fact that the new investments, and those concerns that have gone into bankruptcy or receivers' hands, come into competition with the old. These new or rejuvenated concerns are not committed to a scale of fixed charges carried over from a higher interest level; and these are therefore carrying only such interest charges as the current effective capitalization of their property will warrant, whether effective capitalization be taken to mean cost of production of the equipment, earning-capacity of the concern, or market quotation of its securities. These unincumbered competitors are presumed to be making reasonable profits at current prices, and their presence in the competitive market therefore precludes an advance of prices to such a scale as would afford a reasonable profit to the other establishments after paying their interest charges on what is, in effect, over-capitalized property. 

This tentative explanation of depression applies only so far as the period of depression is a time of relatively low rates of interest. But depression does not uniformly coincide with low interest rates; besides which, there are other facts in the case which limit the applicability of the explanation formulated above. To explain protracted depression, e.g., this line of argument would be convincing only on the supposition of a progressively falling rate of interest, - a condition not 

(225) commonly met with in a protracted period of depression. 

But this explanation, applicable within a limited range of the phenomena that make up a period of depression, points the way to another class of considerations that go far toward explaining the rest. It appears that the phase of the difficulty covered by this explanation is traceable to a discrepancy between the accepted capitalization, the interest charges, and the earning-capacity. And it appears equally plain that the only remedy applicable to the case (barring a speculative exaltation of business) is a recapitalization of the concerns affected on a lower basis, to fit the lowered cost of production of the equipment and its lowered earning-capacity. But under existing conditions of law such a remedy cannot be applied to the interest bearing securities, - except by process of insolvency, - and it is very reluctantly applied to other capitalized wealth; besides which it is, practically, very difficult to effect such an avowed recapitalization as applied to the stock of incorporated companies, particularly in the case of those whose stock is ostensibly the capitalized value of their plant. 

Such a readjustment of nominal value to actual value as shown by the facts of earning-capacity is continually going on, in some measure; but it does not cover the entire range of facts involved, 

(226) and it is nearly always of the nature of a reluctant concession, following only after the need of it has become somewhat pressing. It can, therefore, in the common run of cases, not catch up with the progressive difficulty which it is designed to meet, in so far as the difficulty is of a progressive character. 

A discrepancy between accepted capitalization and current earning-capacity, similar to the discrepancy discussed above but of a progressive character, arises under modern conditions apart from a fall in the rate of interest. The discrepancy pointed out and provisionally disposed of above, due to a fall in interest rates, is a discrepancy between the nominal value (accepted capitalization) of the older establishments, computed on their earlier earning-capacity or on the original cost of their equipment, on the one hand, and their present actual value on the other hand, computed on their current earning-capacity in competition with rivals that have the advantage of a lower cost of equipment, or, in other words, a lower interest charge per unit of earning-capacity. Under the regime of the later, more fully developed machine production, a discrepancy having a similar effect arises out of a persistent divergence between the past cost of production of a given equipment and the current cost of a like or equivalent equipment at any subsequent date, - suppos-

(227) -ing that there intervenes no inflation of prices and no extraneous cause making for a speculative advance.[22]

Suppose prices of finished goods to be stable or to vary by inconsequential fluctuations, negligible for purposes of the argument, and suppose the rate of interest to be in a similarly negligible position. In other words, suppose such a condition as the business community would recognize as ordinary, normal, sound, without ground for pronounced hopes or fears. Under modern circumstances, dominated as the modern situation is by the machine industry, such a state of affairs is unstable, even apart from any disturbance of an extraneous kind. 

It is unstable by virtue of the forces at work in its own process, and these forces, on the whole, make for a progressive change in. the direction of depression. It has appeared above that the depressing effect which a relatively low (declining) rate of interest has upon industrial business is due to its setting up a discrepancy between the accepted capitalization of older establishments and the cost of new establishments of an equivalent earning-capacity.

(228)  Now, under the circumstances of the more fully developed machine industry, such as it has stood for a couple of decades past, a similar discrepancy results from the gradual but uninterrupted progressive improvements of industrial processes. "The state of the industrial arts," as the older economists are in the habit of calling it, is no longer to be conceived as stationary, even for the time being. No "statical" theory of the industrial arts or of business prosperity is tenable, even for the purposes of a "statical" theory of the industrial situation. Progressively increasing efficiency of the processes in use is a pervading trait of the industrial situation. No two successive years are now on the same, or virtually the same, plane in respect of the efficiency of the industrial arts; indeed, the "period of production" can no longer safely be construed to begin and end on the same level in this respect. At the same time the progressively wider and more close-knit articulation of the several industries in a comprehensive process is also going forward, and this also affects all branches of industrial business in some degree and in the same direction, as will appear presently. 

The items of the equipment (plant, materials, and in a measure even good-will) in which any industrial enterprise invests, and by the use of which the business men in industry turn out their output of vendible goods, are themselves products 

(229) of the machine industry. Machine processes, ever increasing in efficiency, turn out the mechanical appliances and materials with which the processes are carried on, at an ever decreasing cost; so that at each successive step the result is a process having a higher efficiency at a lower cost.[23] This is now no longer a sporadic effect of ingenious contrivances having a local and limited application, to be handled as trade secrets and exploited as an enduring differential advantage. 

The cost of production of "capital goods" is steadily and progressively lowered, as counted in terms of the processes involved in their production. In a competitive market this is reflected, with greater or less promptitude, in the prices of such capital goods to all buyers. But the buyers whose purposes this lower scale of prices particularly subserves are chiefly the new investors who go into business in the way of new industrial establishments or extensions of the old. Each new venture or extension goes into the competitive traffic of producing and selling any line of staple goods with a differential advantage, as against those that have gone before it, in the way of a lower scale of costs. A successively smaller aggregate value of new equipment will turn out a given volume of 

(230) vendible product. In so far as there is no collusive control of the output or the prices, this means that the newcomers will cut under the scale of prices at which their predecessors have been content to supply the goods. The run of competitive prices is lowered; which means that at the new competitive prices, and with their output remaining on its old footing as regards expenses of production, the older establishments and processes will no longer yield returns commensurate with the old accepted capitalization.[24] From the inherent character of the machine industry itself, therefore, it follows that the earning-capacity of any industrial enterprise enters on a decline from the outset, and that its capitalization, based on its initial putative earning-capacity, grows progressively antiquated from the start. The efficiency of the machine process in the "instrumental industries" sets up a discrepancy between cost and capitalization. So that a progressive readjustment of capitalization to correspond with the lowered earning-capacity is required by the nature of the case It is also, in the nature of the case, impracticable.


In so far as the process of investment and business management involves the use of credit, in the way of interest-bearing securities or loans equivalent to such securities, this element of credit retards the readjustment by force of the fixed charges which it involves. This retardation (aided as it is by the reluctance of business men to lower their capitalization) is of sufficient effect to hinder recapitalization, on the whole, from overtaking the progressive need of it, with the result that a fair or "ordinary" rate of profits on industrial investments is not permanently attainable in the field of open competition. In order that the rate of interest should effectually further business depression in this way, therefore, it is not necessary that the rate should rise or fall, or that it should be relatively high or low, or that it should be uniform over the field, but only that there should be a rate of interest in each case, and that there should be some appreciable volume of credit involved in industrial investments. Credit is, in fact, a ubiquitous factor in modern industrial business, and its effects in the way indicated are therefore to be counted in as a constant force in the situation. 

However, even apart from the presence of this ubiquitous credit element, a similar effect would probably result from the progressive enhancement of industrial efficiency when this enhancement proceeds at such a rate as has been the case for some 

(232) time past. As has been shown in an earlier chapter, business men keep account of their wealth, their outgo and their income, in terms of money value, not in terms of mechanical serviceability or of consumptive effect. Business traffic and business outcome are standardized in terms of the money unit, while the industrial process and its output are standardized in terms of physical measurements (mechanical efficiency). In the current habits and conventions of the business community, the unit of money is accepted and dealt with as a standard measure. The stability of the standard unit cannot be effectually questioned within the scope of business traffic. According to the practical metaphysics of the business community, the money unit is an invariable magnitude, whatever may be true of it in fact. A man imbued with these business metaphysics and not given to fine-spun reflection, as business men commonly are not, is richer or poorer in his own apprehension, according as his balance sheet shows a greater or less number of these standard units of value. Investment, expenses, vendible output, earnings, fixed charges, and capitalization run in terms of this value unit. A reduction of earnings or of capitalization, as rated in terms of the value unit, is felt as an impoverishment. The reduction of capitalization in these terms is, therefore, a hardship, which is only reluctantly and tardily submitted 

(233) to, even if it carries no hardship in the way of a reduced command over the material means of production, of life, or of comfort. A business man's rating in the business community likewise rests on the pecuniary magnitude of his holdings and his transactions, not on the mechanical serviceability of his establishment or his output; and this business rating is a large part of the business man's everyday ambition. An enhancement of it is a source of secure gratification and self-respect, and a reduction of it has a very substantial contrary effect.[25]  A reduction of the pecuniary showing is submitted to only reluctantly and tardily, after it has become unavoid-

(234) -able, and only to the least feasible extent. But under conditions, such as now prevail, which involve the requirement of a progressive rerating of this kind, this reluctant concession never overtakes the need of readjustment, - and the discrepancy between capitalization and earning-capacity is therefore chronic so long as no extraneous circumstances come in temporarily to set aside the trend of business affairs in this respect. It may, therefore, be said, on the basis of this view, that chronic depression, more or less pronounced, is normal to business under the fully developed regime of the machine industry.[26]

This deplorable trend given to business by the excessive prevalence and efficiency of the machine industry can, however, be set aside by several factors more or less extraneous to the industrial system proper. Even within the mechanical system of industry there is at least one factor of some consequence that consistently acts to mitigate the trend indicated, and that may even put it in abeyance from time to time. As has been pointed out above, questions of business are fundamentally questions of price. A decline of prices which 

(235) widely touches business interests brings depression. Conversely, an appreciable advance in prices, from whatever cause, means improvement in business. Such an advance in prices may come of a speculative movement; which in turn may arise from a variety of circumstances, for the most part circumstances extraneous to the industrial process. For the present, however, the question of a speculative movement is best left on one side. Another factor touches the case more intimately. As has more than once been the case, prices may be advanced through a freer supply of the precious metals, or by an inflation of the currency, or a more facile use of credit instruments as a subsidiary currency mechanism. Now, the growing efficiency of industry has an effect in lowering the (material) cost of production of the precious metals and so increasing the ease with which they are supplied, after the same manner as it affects the supply of goods for industrial or consumptive use. But the increased supply of the precious metals has, of course, an effect upon prices contrary to that exerted by the increasing supply of goods. In so far as this effect is had, it acts to correct or mitigate the trend of business toward chronic depression.[27]


But certain circumstances come in to qualify the salutary effect of a lowered cost of the precious metals. Improvements in the industrial processes affect the (industrial) cost of production of the precious metals in a less degree than the cost of other goods; at least, such seems to have been the case recently. But beyond this, and of graver consequence, is a peculiarity affecting the value of the money metals. The annual product of the money metals is not annually consumed, nor nearly. The use of them as money does not consume them except incidentally and very slowly. The mass of these metals in hand at any given time is very considerable and is relatively imperishable, so that the annual accretion is but a small fraction of the aggregate supply. The lowered cost of the annual supply has therefore but a relatively slight effect upon the aggregate value of the available supply. 

The case is different as regards the annual output of vendible products, whether for industrial or consumptive use. In this case, and particularly as regards this matter of new Investments and extensions of Industrial equipment, the annual output counts for by far the greater factor in making the current value of the available supply, if indeed it 

(237) is not to be regarded as substantially the only factor that comes in question here. Accordingly, it is only under very exceptional circumstances, at times when the precious metals are supplied with extraordinary freedom, that the in creased output of these metals can offset the trend of business toward depression. Ordinarily this factor can count for no more than a mitigation of the "tendency of profits to a minimum." And even this mitigating effect, it may be remarked, appears to be of less radical consequence for the general situation of business now than it was during the earlier phases of the machine industry's regime. The most telling effect of an increased supply of the precious metals seems to be the incitement which it gives to speculative inflation.[28]

It will be noted that the explanation here offered of depression makes it a malady of the affections. The discrepancy which discourages business men is a discrepancy between that nominal capitalization which they have set their hearts upon through habituation in the immediate past and that actual capitalizable value of their property which its current earning-capacity will warrant. But where the preconceptions of the business men engaged have, as commonly happens, in great part been 

(238) fixed and legalized in the form of interest-bearing securities, this malady of the affections becomes extremely difficult to remedy, even though it be true that these legalized affections, preconceptions, or what not, centre upon the metaphysical stability of the money unit. 

But while it is true that depression is primarily a business difficulty and rests on emotional grounds, that does not hinder its having grave consequences for industry and for the material welfare of the community outside the range of business interests. Business enterprise, it is true, proceeds on metaphysical grounds and is swayed by considerations of nominal wealth rather than by considerations of material serviceability; but, none the less, business enterprise and business metaphysics control the course of industry. 

Dull times in business means dull times in industry, of course. But a caution is necessary on this head. The yearly output does not usually vary extremely between brisk and dull times, except as measured in price. As measured in material terms the discrepancy in the volume of output between brisk and dull times is much less. The gross output as measured by weight and tale is less in dull than in brisk times, other things equal; but the deficiency as measured in these terms is much less than the price returns would indicate. Indeed, the output as measured by 

(239) weight and tale need not average very appreciably less during a protracted depression than during a preceding period of good times.[29] The volume of business as well as the volume of output (by weight and tale) of industry may increase during a few years of depression at nearly if not quite as high a rate as during a corresponding period of good times. A transition from dull to brisk times, however, commonly if not invariably involves a rapid increase in values, while a converse transition involves a corresponding shrinkage of values, though commonly a slower shrinkage, - except where a crisis intervenes. 

The primary hardship of a period of depression is a persistent lesion of the affections of the business men; the greatest secondary hardship is what falls upon the workmen, in the way of partial unemployment and a decline in wages, with consequent precariousness and reduction of their liveli-

(240) -hood.[30]

For those workmen who continue to find fairly steady employment during the depression, however, even at reduced wages, the loss is more apparent than real; since the cheapening of goods offsets the decline in wages. Indeed, the cheapening of the means of living is apt to offset the fall in wages fully, for such workmen as have steady work. So that in the case of the workmen also, as well as in that of the business men, the distress which dull times brings is in some part a spiritual, emotional matter. 

To the rest of the community, those classes that are outside of business enterprise and outside of the industrial occupations proper, that is to say, those (non-industrial) classes who live on a fixed salary or similar fixed income, dull times are a thinly disguised blessing. They suffer in their affections from the reflected emotional detriment of the business community, but they gain in their ease of livelihood and in their savings by all the difference between the price scale of brisk and of dull times. To these classes an era of prosperity brings substantially nothing but detriment.[31]


Depression is primarily a malady of the affections of the business men. That is the seat of the difficulty. The stagnation of industry and the hardships suffered by the workmen and other classes are of the nature of symptoms and secondary effects. Any proposed remedy, therefore, must be of such a nature as to reach this emotional seat of the trouble and restore the balance between the nominal value of the business capital engaged and the earnings of the business; that is to say, a remedy, to be efficacious, must restore profits to a "reasonable" rate; which means, practically, that prices must be brought to the level on which the accepted capitalization has been made. Such a remedy, to offset the disastrous cheapening of products through mechanical improvements, has been found in business coalitions and working arrangements of one kind and another, looking to the "regulation" of prices and output. Latterly this remedy is becoming familiar to the business community as well as to students of the business situation, and its tangible, direct, and unequivocal efficiency in correcting this main infirmity of modern business is well recognized. So much so, indeed, that its urgent advisability has been formulated in the maxim that "Where 

(242) combination is possible competition is impossible." What is required is a business coalition on such a scale as to regulate the output and eliminate competitive sales and competitive investment within a field large enough to make up a self-balanced, passably independent industrial system, - such a coalition of business enterprises as is loosely called a "trust." 

Such a business coalition, if it is comprehensive and closely controlled, can adjust the output of goods and services to the market with some nicety, and can maintain the balance of the ruling prices, or the price scale agreed upon, with such effect that the received capitalization need not become obsolete even in the face of very radical improvements in the processes of industry. Its effect, in the case of ideal success, is to neutralize the cheapening of goods and services effected by current industrial progress. It offsets industrial improvements in so far as these improvements affect the cost of goods more than they affect the value of the money metals. It might seem at first sight that by this inhibitory effect of the trust the entire advantage derivable from industrial improvements within the scope of the trust should inure to the gain of the business men in the combination, but such does not appear to be the practical outcome. The practical outcome appears more nearly to be that material advantage inures to no one from

(243)  industrial improvements under the control of the trust, in so far as the trust successfully carries its point. This feature of trust management will be taken up again in a different connection. 

In addition to its prime purpose of checking the decline of earnings on past investments, such a business coalition is also enabled to distribute any unavoidable effect of the progressively reduced cost of production of the productive goods employed, somewhat equably over the entire field of industry comprised in the coalition, and so obviate the pressure of this untoward industrial progress falling with exceptional severity at any given point. Economies effected are at the same time made to accrue to the collective business organization, showing themselves in the way of increased dividends and increased effective (market) capitalization of the coalition's property, instead of being dissipated in competitive selling, and so going to the body of consumers or to the industrial system at large.

To return to a point temporarily set aside above. By supposition, in what has just been said, anything like a speculative inflation has been excluded from the discussion of business depression; and necessarily so, since the two do not come at the same time. But at one point the two show a feature in common. Under both of these two widely different conditions of the business situation 

(244) there is a discrepancy between the accepted capitalization and the actual earning-capacity.[31] But the two differ even at this point in that, in the case of inflation, the discrepancy is not felt until the climax, when a widespread realization of the discrepancy brings on an abrupt readjustment, in the crisis which follows inflation; whereas in a period of depression the sense of this discrepancy and the protest against it is the most striking circumstance of the case. The discrepancy between capitalization and earning-capacity in a period of speculative movement comes of an inflation of capitalization; whereas in time of depression the discrepancy is due to a shrinkage of earning-capacity, - both capitalization and earning-capacity being, of course, counted in terms of money values. A speculative movement offsets or checks the trend to depression whenever it occurs; and for some appreciable time past, such speculative movements appear to have been the only force which has from time to time broken the otherwise uninterrupted course of business depression. Under the regime of a perfected

(245)  machine industry and a perfect business organization, with active competition throughout, it is at least probable that depression would not be seriously interrupted by any other cause. 

But it has been a point of economic dogma in modern times - not to call it a point of theory, since it is not held on reasoned grounds - that depression and inflation, followed by crisis, succeed one another with a rough periodicity, interminably and in the nature of the case. The periodicity (with an interval of some ten to twelve years from phase to phase) has not been established with any cogent show of evidence, except for the period from 1816 to 1873; and even within that period the evidence has not been convincing to all students of these phenomena. A tentative explanation of the periodicity, such as there may have been within that period, as well as of its absence before and after the period in question, may be offered on the basis of the views here set forth. keeping in mind the point that the disturbance, both in the case of inflation and in that of depression, is a discrepancy between capitalization and earning-capacity, and also the manner in which this discrepancy arises, it may be said that prior to the earlier date mentioned the modern industrial system was not such a comprehensive and articulate process that a disturbance in one part or one member of the system need be transmitted forthwith through the channels 

(246) of business to all the rest. A speculative movement need not spread forthwith throughout the industrial system. The great episodes of speculation and collapse that occurred during earlier modem times were not of the nature of speculative inflation affecting the entire business community occupied with industry. They are rather of the nature of commercial speculation verging on gambling.[34] So also, the crises of that earlier time, when they were not collapses of gambling ventures, were commonly produced by some great disaster which brought an absolute material loss upon the community, such as crop failures, invasions, or heavy war expenditures. On the other hand, as regards periods of depression prior to the early years of the nineteenth century, they were also rare if not unknown, except when due to failure of resources or the burdens of government. The conditions out of which depression could come, as a persistent disturbance of business through a divergence between the capitalization and the earning-capacity of investments, were not had. The developed machine system was absent, and without this the cost of production of productive goods could not 

(247) be progressively lowered at a rate large enough to set up and maintain a persistent divergence between capitalization and earning-capacity in industrial enterprises. 

At some uncertain point in the first half of the nineteenth century the system of machine industry, and the business system based upon it, attained such a breadth and consistency that business disturbances of appreciable magnitude in any part would affect values throughout the system. It had then grown so large and was so closely articulated a structure that the relations of its members to one another and to the system as a whole were of greater moment for the fortunes of these members and for the orderly process of the whole than were the relations of the members to industrial factors lying outside the system of the machine industry and the business community. Hence industrial crises in the proper sense of the word seem well at home in this period. They spread with great force and facility whenever they came; and they had the true character of business crises, in that they ran with great severity without involving an appreciable aggregate loss of material wealth, except in terms of price. They commonly meant a cancelment of values, without appreciable aggregate loss of goods. They seem also to have been true to the staple definition of crises in that they followed upon a period of speculative inflation in industrial investments.


Chronic depression, however, does not seem to belong, as a consistent feature of the course of things, in this nineteenth-century period, prior to the eighties or the middle of the seventies. The usual course, it is commonly held, was rather: inflation, crisis, transient depression, gradual advance to inflation, and so on over again.[35]

 On the view of these phenomena here spoken for, an attempt at explaining this circuit may be made as follows: A crisis, under this early nineteenth-century situation, was an abrupt collapse of capitalized values, in which the capitalization was not only brought to the level of the earning-capacity which the investments would have shown in quiet times, but appreciably below that level. The efficiency and the reach of the machine industry in the production of productive goods was not then so great as to lower the cost of their production rapidly enough to overtake the shrinkage in capitalization and so prevent the latter from rising again in response to the stimulus of a relatively high earning-capacity. The shock-effect of the liquidation passed off before the cheapening of the means of production had time to catch up with the shrinkage of capitalization due to the crisis, so that after the shock-effect had passed there still remained an appreciable under-capitalization as a 

(249) sequel of the period of liquidation. Therefore there did not result a persistent unfavorable discrepancy between capitalization and earning-capacity, with a consequent chronic depression. On the other hand, the earning-capacity of investments was high relatively to their reduced capitalization after the crisis. Actual earning-capacity exceeded the nominal earning-capacity of industrial plants by so appreciable a margin as to encourage a bold competitive advance and a sanguine financiering on the part of the various business men, so soon as the shock of the liquidation had passed and business had again fallen into settled channels. But such a bold competitive advance means the beginning of an extension of credit and a speculative movement in industry, such as has been discussed some pages back in connection with crises. This movement has a cumulative character, after the manner there indicated, and its outcome is an inflation of capitalization and a large extension of credit, which normally ends in a period of liquidation. 

Within the period spoken of (1816-1873) this liquidation is apparently always brought on by some extraneous disturbance. But it seems that the theory would require us to say that the extraneous disturbance requisite to bring such a speculative movement to a head will be slighter the farther the movement has gone; so that in the 

(250) earlier stages of a given period of inflation a liquidation could be brought on only by some relatively violent disturbance, whereas at a higher phase of speculative inflation a relatively slight disturbance would suffice. 

Now, it takes some time for such a speculative movement to bring on so large a discrepancy between capitalization and earning-capacity as may not be adjusted by other means than a widespread and severe liquidation.[36] Hence a rough periodicity in the recurrence of these seasons of buoyancy and of collapse in capitalized values. Other factors, and varying ones, have, no doubt, been present in each of the historic crises of the nineteenth century, and these other factors would have to be taken due account of in any history of crises, and even in any theory of crises, which aimed at anything like an exhaustive treatment; but the factors here pointed out seem to be the characteristic and constant ones in the sequence of crises within this period, at the same time that they are the factors which are in a peculiar degree connected with that process of business management in modern industry which is the objective point of the present inquiry. 

Since the seventies, as an approximate date and 

(251) as applying particularly to America and in a less degree to Great Britain, the course of affairs in business has apparently taken a permanent change as regards crises and depression. During this recent period, and with increasing persistency, chronic depression has been the rule rather than the exception in business. Seasons of easy times, "ordinary prosperity," during this period are pretty uniformly traceable to specific causes extraneous to the process of industrial business proper. In one case, the early nineties, it seems to have been a peculiar crop situation, and in the most notable case of a speculative inflation, the one now (1904) apparently drawing to a close, it was the Spanish-American War, coupled with the expenditures for stores, munitions, and services incident to placing the country on a war footing, that lifted the depression and brought prosperity to the business community. If the outside stimulus from which the present prosperity takes its impulse be continued at an adequate pitch, the season of prosperity may be prolonged; otherwise there seems little reason to expect any other outcome than a more or less abrupt and searching liquidation. 

What would be an adequate pitch of the stimulus making for prosperity is, of course, not easy to say, but it is probably safe to say that in order to keep up the season of prosperity for a considerable

(252) number of years the stimulus would have to be gradually increased. That is to say in other words, the absorption of goods and services by extra-industrial expenditures, expenditures which as seen from the standpoint of industry are pure waste, would have to go on in an increasing volume. If the wasteful expenditure slackens, the logical outcome should be a considerable perturbation of business and industry, followed by depression; if the waste on war, colonization, provincial investment, and the like, comes to an abrupt stop, the logical consequence, in the absence of other counteracting factors, should be a crisis of some severity. [37]


It was said above that since the seventies the ordinary course of affairs in business, when undisturbed by transient circumstances extraneous to the industrial system proper, has been chronic depression. The fact of such prevalent depression will probably not be denied by any student of the situation during this period, so far as regards America and, in a degree, England.[38] For the Continent of Europe this characterization would have to be materially qualified. But the reply is ready to hand that governmental interferences with trade have been so ubiquitous on the Continent, particularly in the German-speaking communities, that their case is fairly to be thrown out of any general theory. It may also be questioned whether the industrial system of Germany, e.g., throughout this period conforms to the requirements of the theory in respect of the degree of development 

(254) of the machine industry which such a state of affairs supposes.[39] 

The explanation of this persistent business depression, in those countries where it has prevailed, is, on the view here spoken for, quite simple. By an uncertain date toward the close of the seventies the advancing efficiency and articulation of the processes of the machine industry reached such a pitch that the cost of production of productive goods has since then persistently outstripped such readjustment of capitalization as has from time to time been made. The persistent decline of profits, due to this relative overproduction of industrial apparatus, has not permitted a consistent speculative expansion, of the kind which abounds in the earlier half of the nineteenth century, to get under way. When a speculative movement has been set up by extraneous stimuli, during this late period, the inherent and relatively rapid decline of earning-capacity on the part of older investments has brought the speculative inflation to book before it has reached such dimensions as would bring on a violent crisis. And when a crisis of some appreciable severity has come and has lowered the capitalization, the persistent efficiency and facile balance of processes in the modern machine industry has overtaken the decline in capitalization without allowing time for 

(255) recovery and consequent boom. The cheapening of capital goods has overtaken the lowered capitalization of investments before the shock-effect of the liquidation has worn off. Hence depression is normal to the industrial situation under the consummate regime of the machine, so long as competition is unchecked and no deus ex machina interposes.[40] 

The persistent defection of reasonable profits calls for a remedy. The remedy may be sought in one or the other of two directions: (1) in an increased unproductive consumption of goods; or (2) in an elimination of that "cutthroat" competition that keeps profits below the "reasonable" level. If enough of the work or of the output is turned to wasteful expenditures, so as to admit of but a relatively slight aggregate saving, as counted by weight and tale, profitable prices can be maintained on the old basis of capitalization. If the waste is sufficiently large, the current investment in additional industrial equipment will not be sufficient to lower prices appreciably through competition.[41] 

Wasteful expenditure on a scale adequate to offset the surplus productivity of modern industry is nearly out of the question. Private initiative 

(256) cannot carry the waste of goods and services to nearly the point required by the business situation. Private waste is no doubt large, but business principles, leading to saving and shrewd investment, are too ingrained in the habits of modern men to admit an effective retardation of the rate of saving.[42] Something more to the point can be done, and indeed is being done, by the civilized governments in the way of effectual waste. Armaments, public edifices, courtly and diplomatic establishments, and the like, are almost altogether wasteful, so far as bears on the present question. They have the additional advantage that the public securities which represent this waste serve as attractive investment securities for private savings, at the same time that, taken in the aggregate, the savings so invested are purely fictitious savings and therefore do not act to lower profits or prices. Expenditures met by taxation are less expedient for this purpose; although indirect taxes have the peculiar advantage of keeping up the prices of the goods on which they are imposed, and thereby act directly toward the desired end. The waste of time and effort that goes into military service, as well as the employment of the courtly, diplomatic, and ecclesiastical personnel, counts effectually in 

(257) the same direction. But however extraordinary this public waste of substance latterly has been, it is apparently altogether inadequate to offset the surplus productivity of the machine industry, particularly when this productivity is seconded by the great facility which the modern business organization affords for the accumulation of savings in relatively few hands. There is also the drawback that the waste of time involved in military service reduces the purchasing power of the classes that are drawn into the service, and so reduces the amount of wasteful consumption which these classes might otherwise accomplish.[43] 

So long as industry remains at its present level 

(258) of efficiency, and especially so long as incomes continue to be distributed somewhat after the present scheme, waste cannot be expected to overtake production, and can therefore not check the untoward tendency to depression. But if the balance cannot be maintained by accelerating wasteful consumption, it may be maintained by curtailing and regulating the output of goods. 

"Cutthroat" competition, that is to say, free competitive selling, can be done away by "pooling the interests" of the competitors, so soon as all or an effective majority of the business concerns which are rivals in the market combine and place their business management under one directive head. When this is done, by whatever method, selling of goods or services at competitively varying prices is replaced by collective selling ("collective bargaining") at prices fixed on the basis of "what the traffic will bear." That is to say, prices are fixed by consideration of what scale of prices will bring the largest aggregate net earnings, due regard being had to the effect of a lower price in increasing sales as well as to the reduction of cost through the increase of output. The outcome, as regards the scale of prices, may easily be a reduction of the price to consumers; but it may also, and equally readily, be an increase of the average price. But the prices of the output which is in this way brought to a monopoly basis are nearly 

(259) certain to run more even than prices of the like output while sold competitively by rival concerns.

What has been said in the last paragraph supposes that the combination of business enterprises is so comprehensive as to place the resulting coalition in a position of practical monopoly. Such a result is not always attained, however, especially not in the earlier attempts at coalition in any particular branch of industry; although the endeavor is commonly related until at last a virtual monopoly is achieved. But even where no effective monopoly is achieved, a coalition of this kind has a salutary effect, at least temporarily. In almost all cases a consolidation of this kind is able to effect considerable economies in the cost of production, as pointed out in an earlier chapter, and such economies bring relief through enabling the combined industrial ventures to earn a reasonable profit at a lower price for their product than before. They are therefore able to go on on a scale of prices which was not remunerative while they stood on their old footing of severalty. But the relief which comes of such measures, so long as competitive selling goes on in rivalry with concerns standing outside the coalition, is only transient. The declining cost of production, and the consequent competitive investment and extension in the industry, presently catches up with the gain in economy; the margin of advantage in the competition is lost, 

(260)  and depression again overtakes the consolidated enterprises on their new footing. The remedy again is a wider coalition, making possible farther economies, and making some approach to a position of secure monopoly. 

It is only on a footing of monopoly that this grinding depression can be definitively set aside. But the monopoly need not be absolute in order to afford a somewhat enduring relief. What is necessary is that the monopoly should comprehend all but a negligible fraction of the business concerns and the equipment engaged in the field within which competition has kept profits below a reasonable level. What is a negligible quantity in such a case is not to be determined on general considerations, since it depends in each case on circumstances affecting the particular industry. But, in a general way, the more nearly complete the monopoly, the more effectually is it likely to serve its purpose.[44]

Such business coalitions have the effect of bringing profits to a reasonable level, not only by

(261)  making it possible to regulate output and prices, but also by the economies which are made practicable on this footing. Coalitions of a less comprehensive character, as spoken of above, also effect economies in the cost of production. But the larger coalitions which bring the business to a monopoly basis have not only the advantage which comes of the large-scale organization of the industrial process, but they also enjoy peculiar advantages in the matter of cost, due to their monopoly position. These added advantages are more particularly advantages in buying or bargaining for all goods, materials, and services required, as well as in selling the output. So long as the coalitions are not comprehensive enough effectually to eliminate competition, they are constrained to both buy and sell in competition with others. But when the coalition comes effectually to cover its special field of operation, it is able, not only to fix the prices which it will accept (on the basis of what the traffic will bear), but also in a considerable measure to fix the prices or rates which it will pay for materials, labor, and other services (such as transportation) on a similar basis, - unless it should necessarily have to do with another coalition that is in a similar position of monopoly.

 The rule which governs the fixing of rates on this side of the business dealings of a monopolistic 

(262) coalition is similar to that which guides its transactions in the matter of sales. Prices and rates, as, e.g., for materials and labor, are not depressed to the lowest possible point, but to the lowest practicable point, - to the point compatible with the largest net profits. This may or may not be a point below the rates necessary under a regime of competitive buying. It may be added that only in rare cases does a coalition attain so strong a position in respect of its purchases (of materials or services) as to lift this side of its business entirely above the reach of competition.[45]

Wherever this expedient of coalition has been found practicable, the chronic depression of recent times and the confusion and uncertainty which goes with a depressed competitive business situation have been obviated. The great coalitions do not suffer acutely from the ills of depression, except in cases where their industrial processes are to a peculiar degree in the position of intermediaries within the range of the competitive industries, as is the case, e.g., with most railroads. But 

(263) even in such a case the coalition which has a monopoly is more fortunate as regards the stability of its balance sheet than the same traffic would be without the advantage of monopoly. 

Barring providential intervention, then, the only refuge from chronic depression, according to the view here set forth, is thoroughgoing coalition in those lines of business in which coalition is practicable. But since this would include the greater part of those lines of industry which are dominated by the machine process, it seems reasonable to expect that the remedy should be efficacious. The higher development of the machine process makes competitive business impracticable, but it carries a remedy for its own evils in that it makes coalition practicable. The ulterior effects of thoroughgoing monopoly, as regards the efficiency of industry, the constancy of employment, the rates of wages, the prices of goods to consumers, and the like, are, of course, largely matter of surmise, and cannot be taken up in this inquiry, the present purpose being merely to give in outline an economic theory of current business enterprise. 

A further consideration hearing on the later phases of the business situation may be added. The great coalitions and the business manoeuvres connected with them have the effect of adding to the large fortunes of the greater business men; which 

(264) adds to the large incomes that cannot be spent in consumptive expenditures; which accelerates the increase of investments; which brings competition if there is a chance for it; which tends to bring on depression, in the manner already indicated. The great coalitions, therefore, seem to carry the seed of this malady of competition, and this evil consequence can accordingly be avoided only on the basis of so comprehensive and rigorous a coalition of business concerns as shall wholly exclude competition, even in the face of any conceivable amount of new capital seeking investment. 

What has made chronic depression the normal course of things in modern industrial business is the higher development of the machine process, given, of course, the traits of human nature as it manifests itself in business traffic. The machine process works this effect by virtue, chiefly if not altogether, of these two characteristics: (1) a relatively rapid rate of increasing efficiency; and (2) the close interdependence of the several lines of industrial activity in a comprehensive system, which is growing more comprehensive and closeknit as improvement and specialization of industrial processes go on. The last-named factor counts for more in proportion as the interdependence grows closer and more comprehensive. Disturbances are progressively transmitted with greater facility and effect throughout the system, and each 

(265) line of industrial business comes to stand in relatively intimate relations to an ever increasing range of other lines with which it carries on a traffic of purchase or sale. A consequence of this state of things is that any business coalition, in order effectually to serve its purpose of maintaining earnings and capitalization, is required to be of larger scope and closer texture. As the exigencies which enforce the resort to coalition uninterruptedly gain in scope and urgency, the "trust" must take the same course of growth to meet these exigencies; until, with some slight further advance along the accustomed lines, the trust which shall serve the modern business situation must comprehend in one close business coalition virtually the whole field of industry within which the machine process is the dominant industrial factor.[46]

To this there is a broad exception, given by the circumstances of the industrial organization. This organization rests on the distinction between business management and ownership. The workmen do not and cannot own or direct the industrial equipment and processes, so long as ownership prevails and industry is to be managed on business principles. The labor supply, or the working population, can therefore not be included in the ideally 

(266) complete business coalition suggested above, however consummate the machine system and the business organization built upon it may become. So that when the last step in business coalition has been taken, there remains the competitive friction between the combined business capital and the combined workmen. 

From the considerations recited above it appears that the competitive management of industry becomes incompatible with continued prosperity so soon as the machine process has been developed to its fuller efficiency. Further technological advance must act to heighten the impracticability of competitive business. As it is sometimes expressed, the tendency to consolidation is irresistible. Modern circumstances do not permit the competitive management of property invested in industrial enterprise, much less its management in detail by the individual owners. In short, the exercise of free contract, and the other powers inhering in the natural right of ownership, are incompatible with the modern machine technology. Business discretion necessary centres in other hands than those of the general body of owners. In the ideal case, so far as the machine technology and its business concomitants are consistently carried through, the general body of owners are necessary reduced to the practical status of pensioners dependent on the dis-

(267) -cretion of the great holders of immaterial wealth; the general body of business men are similarly, in the ideal outcome, disfranchised in point of business initiative and reduced to a bureaucratic hierarchy under the same guidance; and the rest, the populace, is very difficult to bring into the schedule except as raw material of industry. What may take place to accentuate or mitigate this tendency is a question of the drift of sentiment on the matter of property rights, business obligations, and economic policy. So far as the economic factors at play in the modern situation shape this drift of sentiment they do so in large part indirectly, through the disciplinary effect of new and untried circumstances of politics and legal relation to which their working gives rise. 


  1. Such a discussion as Patten's Theory of Prosperity applies to the regime of "natural economy", and passably also to that of handicraft and petty trade, but does not seriously touch the modern situation. The like is true generality for current discussions of this topic. 
  2. Wealth of Nations, Introduction. 
  3. This means, in concrete terms, prior to the regime of the machine industry. Since the coming in of the machine, modern business enterprise has taken over the management of industry; that is to say, industry has come to be managed by the method of investment for a profit by what is in aim and animus essentially the commercial method. As has been remarked above, capital has become vendible in a decisive degree. The material factors engaged in industry , particularly in the machine industry proper, are vendible in about the same (perhaps on an average in a higher) degree as the material items handled by commercial traffic are vendible. This is true of raw materials, labor power, and industrial equipment, but it is peculiarly true of the industrial equipment - the mechanical factors in the stricter sense. It is in these mechanical appliances primarily, but in the other factors of the machine industry in only a slightly lower degree, that the traffic of investment, and of purchase and sale connected with investment, is particularly active. Within these wider limits a further limitation may be made. "Vendibility" of all items involved is, as a broadly general rule, carried to the highest pitch in those branches of industry that have to do with the production of "producer's goods." These branches are at the same time, and partly in consequence of this fact, more widely and intimately related to other branches of industry than are any other group of industrial processes that might be named. It seems to be this extreme prevalence of vendibility, together with this more far-reaching and more exacting articulation with the industrial process at large, that chiefly gives substantial significance to a classification of these lines of industry as "Produktivmittel-Industrien" by late German writers. There is, for business purposes, a difference of degree, in both of the respects named, between this (ill-defined) group of industrial processes on the one hand, and the contrasted group occupied with the production of consumption goods on the other hand. The "productive-goods industries" show the modern industrial and business traits in an accentuated form and force, and they are, by consequence, in a strategically primary position in the business situation. 
  4. Cf., e.g., A. Spiethoff, Jahrbuch f. Gesetzgebung Verwaltung u. Volkswirtschaft, vol. XXVI. Heft 2 . "Vorbemerkungen zu einer Theorie der Uberproducktion." and vol. XXVII, pp. 348-353; Turgan-Baranowsky, Theorie und Geschicte der Handelskrisen in England, pp. 16-28; L. Pohle, Periodische Wirschaftskrisen, especially sec. II, with subjoined notes. 
  5. This is well exemplified in Tugan-Baranowsky (Handelskrise), who declares at the outset (p. 17) that money and price are negligible factors for the purpose in hand. He thereby commits himself to the position that these crises are phenomena of the material processes of economic life (production and consumption), not of business traffic. Hence the ultimate failure of this acute observer and theoretician to reach a tenable solution to the question. Substantially the is true of Marx, whom Tugan follows, though with large reservations. (Cf. Marx, Capital, vol. III, ch. XV) 
  6. The "cycle" of exaltation, crisis, and depression has frequently been describe. Perhaps as effective a description and analysis as any is that of Tugan-Baranowsky, Handelskrisen, chap. VIII. 
  7. Cf., however, Cassel, "Om Kriser och Daliga Tider," Ekonomisk Tidskrift, vol. vi, no. 2, pp. 69-78. 
  8. As, e.g., the era of prosperity 1897-1902 took its start from the demand for supplies caused by the Spanish-American War, though other favorable circumstances acted to give it volume. Mr Carver, possibly following suggestions given by Spiethoff's discussion, has suggested that the lines of business in which the favorable initial disturbance arises are necessarily those engaged in the production of "producer's goods"; the reason for this being that, in the nature of the case, "the value of producer's goods tends to fluctuate more violently than the value of consumer's goods," inasmuch as the value of producer's goods varies somewhat as the magnitude of the margin of profits, while that of the consumer's goods varies somewhat as the magnitude of the entire demand on which this margin of profits rests as an increment. (The value of producer's goods = f(delta), that of consumer's goods = f(demand + delta).) From the like line of argument it should follow that the initial break in time of crisis must come in some line of business occupied with producer's goods. Cf. Quarterly Journal of Economics, May l903, pp. 497-500. See also foot-note on p. 181 above. 
  9. Cf. Sombart, Kapitalismus, vol II, ch. I, on the motive forces at work in advancing business enterprise. 
  10. The "intitial disturbance" here spoken of may of course be of a progressive or recurring character, and so may keep the differential advantage going in a progressive manner, as, e.g., in the case of a progressive demand for supplies due to a protracted war or to a period of continued preparation for war, such as has occurred in America during the last few years. 
  11. There is a point or two of further detail in what may be called the method of prosperity and crisis, which are best discussed in connection with the phenomena of depression. These will, therefore, be taken up presently. The above characterization of an era of prosperity and the manner of its exhausting itself will serve as a description of the course which such an era takes under the regime of the more highly developed business methods of the high tide of the nineteenth century. For the earlier, less fully developed, business situation of the early nineteenth century the corresponding course of events runs somewhat different, owing, chiefly at least, (1) to a slower rate of transmission of any price disturbance, and (2) to the greater range and value of "outlying" industries which are very tardily if at all drawn into the exuberant movement of prosperity. In this connection it is worth noting that during this earlier period of the nineteenth century the production of specifically productive goods had not been carried to the point afterward attained, either in the differentiation and specialization of industries occupied with this class of goods or in the relative volume of this class of industries.
  12. The several phases of this sequence of exaltation and depression for any given business concern, may be stated as follows: - Let ea = earnings; pr = sale price of output; exp = expenses of production of output; mar = margin of gain on output = pr - exp; cap = intitial effective capitalization; yp = year's purchase at (current rates = int) = 1/int, disregarding risk; cr = normal credit extension on given cap = cap/n = f(cap/int). Then at the initial phase, ea = (mar = pr -exp)outp, cap = ea x yp = ea/int, cr = cap/n, At the subsequent phase, of exaltation, ea' = ea + delta ea = mar' x outp = [(pr' = pr + delta pr) - exp] outp =(mar + delta mar) outp > ea, cap' = ea'/int = (ea + delta ea)/int > cap, cr' = cap'/n = (cap + delta cap)/n > cr. At the concluding phase, of depression, ea'' = ea' - delta ea' = mar'' x outp = [pr' - (exp' = exp + delta exp)] outp < ea' cap'' = ca''/int = (ea'- delta ea')/int < cap', cr'' = cap''/n = (cap' - delta cap')/n < cr'. For simplicity of statement, in all this no account is taken of the element of risk, nor of the fluctuations of discount rates or the variations of volume of output. If these be included in the calculation as variables, the result is much the same. They are functions of the variables already included, and their inclusion would, on the whole, accentuate the oscillations shown by the computation as it stands. 
  13. A crisis may take its rise from credit extension in other than properly industrial business. Such, e.g., was in great measure the American crisis in l837, when the most obvious and disastrous inflation was in speculative land values and the credits based on them. But it is no stretch of the concept to say that in that case the situation out of which the crisis arose was an overcapitalization of the land values in question. Capitalized land is, of course, "capital" for business purposes as truly as any other body of values that are capitalized and drawn into the money market. 
  14. It is, in great part, through or by force of fluctuations of this base line of money values that large accumulations of wealth are made. One might almost say that this is the "normal" method by which saving are made and capitalized in later modern times. Fluctuations in the stock market, of course, are of this character, as are commonly also large variations of the course of prices outside the stock market, as well as fluctuations of the money market. The great gains of successful promoters of corporations and the like come in this manner usually. They are due to enlargement of the money value of a given block of industrial equipment independently of any change in the physical character of the equipment which comes near saying that the large fortunes originate in such changes of the base line, - from which it follows that the larger accretions to the volume of capital are of this origin. The large profits are made in the form of capital, which is acquired by virtue of a price variation. See foot-note, pp. 168-170. 
  15. A substantial move in this direction would be that advocated by Mr F.S. Stetson before the New York Bar Association, and reiterated before the United States Industrial Commission: "To permit the formation of a distinct class of business stock corporations whose capital stock may be issued as representing proportional parts of the whole capital without any nominal or money value." The market value of such shares would be the only value assigned them, and little of a base line in the way of a legally imputed value would remain. The de jure value would no longer hinder a free recognition of the facts. - Report of the Industrial Commission, vol. I. p. 976. 
  16. Cf. Hobson, Problem of the Unemployed, ch. V., Vialles, La consommation et les crises economiques, especially "Introduction" and ch. III. 
  17. Something that might bear such a construction occurs, e.g., locally, when a run of fish exceeds the ability of the workmen to take care of them. The fatuity of appealing to such an example is plain. 
  18. Cf. Smart, Studies in Economics, ch. VII. 
  19. For the present purpose a concern which passes through a liquidation and reappears with a rerated and reorganized capitalization and body of liabilities also has much of the character of a new investment. 
  20. Cf. L. Pohle, Bevolkerungsbewegung, Kapitalbildung und periodische Wirtschaftskrisen, who concludes that depression is due to a scarcity of capital as compared with population; the rate of increase of capital is conceived to fall short of the rate of increase of population, hence periodical depression. Cf., on the other hand, Macrosty, Trusts and the State, p. 133, who finds, by recourse to the testimony before the Royal Commission on the Depression of Trade and Industry, that there is at such times capital constantly seeking investment and entering into competition with what is already invested. Cf. Final Report of the Royal Commission on Depression of Trade and Industry (1886). "The replies received from Chambers of Commerce to the inquiries we addressed to them confirm the statements made by the witnesses who appeared before us. Those replies testify to the general maintenance or increase of the volume of trade, accompanied in many cases by a shrinkage in its value, and in all cases by a serious diminution of profit. They also show how general is the belief in commercial circles that overproduction, the fall of prices, and more effective foreign competition, assisted by high tariffs, go far to account for the existing position of trade and industry in this country." (pp. ix-x). Cf. also pp. xi-xv of the Report. 
  21. Cf., e.g., Burton, Crises and Depressions, ch. IV, especially pp 113-115. 
  22. More in detail, what happens in connection with interest-bearing securities carried over an interval of high interest rates and business activity may be formulated as follows: When current interest rates advance, securities bearing a fixed rate (of dividends or interest) decline on the market. That is to say, the effective capitalized value of the claim to these fixed rates of income, as shown by the market quotations, shrinks. At the same time, since the period during which this readjustment occurs is a period of acceleration in business, the earning-capacity (actual or putative) of the property on which these securities rest has increased over what it was at the time the securities were floated. Hence this property (industrial equipment) is also recapitalized, in the market quotations, at a higher value than it had when the securities were floated. The effective recapitalization carried out by the market quotations acts, for the present purpose, to the same effect upon the value of both of the items considered, this effect being to leave a margin of the property previously covered by the securities uncovered and available as collateral on which to float a new extension of credit, in the form of mortgage loan or interest-bearing security. In the common run of business procedure this available margin, between the current (higher) capitalized value of the property (collateral) and the current (lower) capitalized value of the securities resting upon it is promptly covered by a fresh credit extension ; whether this extension takes the set form of loan, bonds, preferred stock, and the like, or the less patent form of a larger volume of obligations in the way of contracts and the like, - the result, as touches the securities and their basis, being that the same nominal volume of securities with the same aggregate interest charge rests on a (materially) smaller block of the industrial equipment after this readjustment of capitalization is had than it did when the securities were placed. When depression ensues, and the rate of earnings and interest declines, the effective capitalization of the securities with a fixed rate of income is increased (if the securities are felt to be secure) to correspond with the lower rate of interest; whereas the capitalized value of the block of industrial equipment on which these securities (plus whatever may have been added in the interval) rest shrinks to correspond with the same facts. A discrepancy, such as was adjusted by a recapitalization during the interval of high rates, reappears, but in the inverse sense. And this discrepancy cannot be corrected, since the margin on which the previous adjustment was made has disappeared, and no corresponding margin on the other side emerges. Business accounts do not deal in negative quantities, except under stress of a necessity that violates the premises on which business accountancy proceeds. Recurring to the notation employed on page 153, and letting l = par value of securities with fixed charges, r = rate per annum of fixed charges, l' = market value (effective capitalization) of these securities, cap' = ea(yp = 1/int), l' = lr/int, but if int becomes int' (= int + delta int), l' becomes l'' = lr/(int + delta int = int') < l', cap' at the same time becomes cap'' = (ea + delta ea)/(int + delta int) = ea'/int'; whereas in a period of falling interest, int' = int - delta int, and i'' = lr/(int' = (int - delta int) > l'.
  23. Compare Hobson, Problem of the Unemployed, ch. V, and Tugan-Baranowsky, Handelskrisen, ch. I and VI. In his criticism (pp. 191-193) Tugan has quite missed the point of Hobson's theory as well as of his illustration, having apparently not understood Hobson's exposition, which is, in effect, very similar to his own. See also Hobson, Modern Capitalism, ch. VII, especially secs. 8 and 16. 
  24. The typical form taken by this acceleration in the machine production of machinery, but in fact it involves the production of other material factors as well as the mechanical apparatus, notably the materials used in industry. 
  25. The established concerns having been capitalized on the basis of past cost, we can say that in the older establishments, cap - f(cost), but in the new establishments with an equal earning capacity, cap1 = f(cost1 = cost - delta cost); hence the rate of earnings [ = f(ea/cost)] will be progressively higher as cost decreases: f(ea/cost) < f(ea/(cost - delta cost)) < f(ea/(cost - 2 delta cost), etc. 
  26. Recurring to the notation employed in note 2, page 168, and letting Um = unit of material efficiency, then a given established concern, A, with a given equipment Um(cap)a = Ue(cap) = Um(cap) = Ue(ea/int), presently finds itself in competition with a younger concern, B, having an equivalent material equipment = Um(cap)b procured at a lower cost and requiring lower earnings (=ea') and lower fixed charges. Um(cap)b = Uc(ea'/int = (ea - delta ea)/int) = Ue(cap' = cap - delta cap). But Um(cap)a = Um(cap)b as competitors in the market. Hence, with the competitive lowering of earnings, and therefore of effective capitalization, A's account comes to stand: Um(cap)a = Uc(cap') - Uc(cap - delta cap) < Un(cap). In effect A is overcapitalized by Uc(cap - cap'). A's nominal capital, Un(cap)a = Uc(cap' + delta cap), while A's effective capitalization Uc(cap')a = Uc(cap - delta cap). The business man's sensibilities in the case, therefore, suffer a lesion = f[Un(ea/int) - Uc((ea - delta ea)/int)], which is a monotonic function. The discrepancy between Un(cap)z and Uc(cap') is, in large part, embodied in securities with fixed charges; which makes a readjustment very difficult even apart from A's reluctance.  
  27. With the above analysis may be contrasted Marx's discussion of the declining rate of profits and the manner in which he conceives overproduction, speculation, and crises to arise out of the tendency of profits to a minimum. (Kapital, vol. III, ch. XV) In the same connection, see Tugan-Baranowsky's criticism of Marx, Handelskrisen, ch. VII. 
  28. In point of direct material serviceability, no doubt, a fresh supply of the precious metals is one of the least useful forms of wealth to the production of which industrial effort can be directed, but for the purposes of business prosperity at large it is probably the most serviceable solution that can be made to the aggregate wealth. Rapidly increasing efficiency in the production of other forms of wealth is detrimental to the business interests, in that it brings depression; but a rapid increase of the precious metals is the most fortunate material circumstances for the business interests that industrial activity can bring, because it puts off depression by keeping up prices. 
  29. Cf. Smart, Studies in Economics, Essay VI, "Must Prices Fall?" Distribution of Incomes, bk. II, ch. III. 
  30. Work goes on during dull times, though at a slackened pace, and extensions and improvements are continually being made. The volume of output consequently increases, so that, even if there has been a setback to production at the beginning of the depression, the aggregate output presently again reaches the volume which it had when the dull times set in. It may be added that the rate of consumption is also appreciably lower during dull times, particularly in the more wasteful forms of consumption. This lowered aggregate consumption offsets the lowered intensity of production during dull times to such an extent that it is probably safe to say that the net surplus product, measured by weight and tale, is at least not appreciably smaller during depression than during prosperity. Cf. Carroll D. Wright, Testimony in Report of the Industrial Commission, vol. VII. p. 25. 
  31. The reduced scale of living of the working population is the chief factor that counts as an offset against the reduction of the gross production during dull times, as indicated above. 
  32. Cf. articles by G. Cassel, "Om Kriser och Daliga Tider," now running in Ekonomisk Tidskrift (1904, Nos. 1 and 2), for a parallel discussion of the topics here dealt with. Mr Cassel's exposition connects more closely with the received notions of Capital, Production, etc. and goes more into detail at certain points, particularly on Saving, Investment (Kapitalbildning), and Pecuniary Expectancy (Vantandet). His exposition is not yet completed, but so far as may be gathered from what has come to hand he should reach substantially the same outcome as that given above. 
  33. In the case of a speculative inflation, cap = ea/cost x 1/int < cap' = (ea + delta ea)/cost x 1/int; in the case of depression, cap' = ea/(cost x int) > cap'' = (ea - delta ea)/(cost x int) In the former case the current capitalization during inflation, being cap', exceeds the bona fide capital value as proved by events, cap; while in the same of depression the nominal capital, being cap', exceed the capitalization warranted by current earning capacity, cap''. 
  34. So impressive a fact has the gambling character of early periods of inflation and crises been that it has led economists to look for gambling as a matter of course in later phenomena that have been classed as inflation and crises, even when no gambling element has been obviously present. It has been felt that gambling must presumptively be present whenever there is inflation or crises, because the showing of earlier history runs that way. 
  35. Cf., e.g., Burton, Crises and Depressions, ch. VIII, for a succinct account of depressions and crises in the United States during this period. 
  36. The speculative movement requires time, because the inflation is a cumulative one and is carried out unintentionally and in a sense unconsciously. 
  37. These extra-industrial expenditures that have brought prosperity are here spoken of as wasteful, not thereby implying that they may not be beneficial to the community even in respect to their effect upon the aggregate income or the aggregate accumulation of wealth in the community. They are called wasteful simply because these expenditures directly, in their first incidence, merely withdraw and dissipate wealth and work from the industrial process, and unproductively consume the products of industry. Indirectly they have a beneficial aggregate effect upon industry by inducing an employment of the fill productive efficiency of the industrial apparatus; so that in a very short time, it is at least conceivable, the aggregate net output of the industrial process may be as large and serviceable as before the wasteful expenditures were entered upon, even with the destruction of that portion of the product which goes to maintain the wasteful expenditures. At the same time, the effect upon business must be held to be patently favorable. The wasteful expenditures enhance demand and so increase the vendibility of the output, - they increase profits and raise capitalization. They therefore act unequivocally to advance the values of the business men's holdings and increase their gains, as counted in business terms. The wasteful expenditure is good for trade. It is only in the eventual liquidation that a disadvantageous business consequence comes in view. It will be seen that on this view of the effect of wasteful expenditure the position occupied by some early economists, as Malthus, Lauderdale, Chalmers, and others, as well as by some later ones, as Robertson, Hobson, is substantially well taken, although the defence of waste which these economists offer may be incomplete. Waste seems necessary to keep trade brisk, and therefore to keep the industrial processes working at their full capacity. The ulterior reason for this state of the case being the fact that the decisive ground which determines the margin of activity in business, and therefore in industry, is the business men's reluctance to accept a reduction of profits as measured in terms of price. The opponents of the Malthusian view failed to appreciate the decisive importance of price, as contrasted with serviceability, among the motives on which business proceeds. 
  38. The objection would not come unexpected that this state of the case is not to be taken as normal, - a point of opinion not readily to be decided, since it rests on a difference in the point of view. 
  39. Cf. Sombart, Kapitalismuc, vol. I, ch. XVIII-XX. 
  40. Cf. Hobson, Problem of the Unemployed, Appendix to ch. V. 
  41. Cf. Hobson, Problem of the Unemployed, ch. VI. Mr Hobson does not use the term "waste" in this connection. Also Vialles, Consommation, final chapter. 
  42. "Saving" at the same time takes place automatically in the current operations of coalition and incorporation, as indicated above, pp. 166-176. 
  43. Hobson (Problem of the Unemployed), whose analysis of overproduction and its relation to depression goes farther than any other, reviews and criticises (ch. VIII) the palliative measures that have been advocated. He finds them, all and several, inadequate and inconsequent, in that they do not touch the root of the evil - oversaving or "underconsumption." They do not touch this because they do not mitigate the automatic saving and investment process that necessarily goes with the possession of large private incomes. But in point of practical efficiency his own proposed remedies must also be scheduled under the head of "palliatives." These proposed remedies are measures looking to a "Reformed Distribution of Consuming Power" (ch. VI), such as taxation of "unearned" incomes, higher wages, shorter working day. The aim is "to increase the proportion of the total wealth of the community, which falling to them as wages shall be spent in raising the general standard of working-class consumption." The contemplated move is manifestly chimerical in any community, such as the modem industrial communities, where public policy is with growing singleness of purpose guided by business interests with a naive view to an increase of profits. Cf. also Smart, Studies in Economics, Essay VIII, On "Overproduction"; also Essay IX, "The Socializing of Consumption," particularly sec. 8, on "The Limits of Consumption," pp. 293-298. 
  44. The obvious remark may be added, for completeness of statement, that the various branches of industry lend themselves to management by monopoly in extremely varying degrees, some, e.g., farming, as an extreme instance, not being amenable to this method of management under existing circumstances; others, again, as, e.g., retail merchandising, can be managed by this method only to a very restricted extent; while at the other end of the scale, in such industries as railroading, monopoly management, more or less unqualified, is fairly unavoidable. 
  45. Hitherto probably none of the American coalitions have succeeded in freeing themselves from the inconveniences of competitive bidding for labor, and very few have achieved a purely monopolistic buying, either of materials or of any of the various kinds of services which they require. With regard to raw materials alone have some, as, e.g., the Standard Oil Company, been able to compass an effectual monopoly. Something approaching this position has been accomplished by a very few other coalitions, as, e.g., the Sugar Refineries, the Cotton Seed Oil Company, the United States Steel Corporation, and in a local way certain coal, railway, lumber, and warehouse companies. 
  46. It is, e.g., already apparent that the general railway system of America must presently come under one management, and it must fall into a coalition with the group of industries that are occupied with the supply and elaboration of iron, coal, and lumber.

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