Conflicting Theories Of Crises

Conflicting Theories Of Crises

Between the phenomena that appeared after the First World War and those that followed the Napoleonic Wars there are striking resemblances. We have already noted these in the sphere of inter­national commerce, but they are no less impressive in the matter of crises. Hardly had the treaties of Vienna been signed than a series of industrial crises in 1815, 1818, and 1825 shook England, and, therefore, the continental countries also. A hundred years later the Treaty of Versailles had hardly been signed when the crisis of 1920 broke out in the United States, followed ten years later by the still more violent one of 1930. This latter, bringing unemployment on an unprecedented scale to the United States, to Germany, and to England, and causing the collapse of the principal currencies of the world, will always figure in history as a particularly tragic event.

Is this a mere chance resemblance? Certainly not. Every prolonged and widespread war makes goods scarce and generally forces Govern­ments to resort to paper money. Hence comes a general rise in prices. The coming of peace brings back the ordinary volume of production and compels Governments to return to normal financial methods. The new flood of goods, and the mere ending of the creation of pur­chasing power (even without any withdrawal of the paper money), then cause prices to fall. The greater the previous rise the faster is this fall. When this unavoidable readjustment begins it takes the form of a crisis, but it may last for many years. If, then, the mere alterna­tion of booms and depressions that characterizes modern industrial development provokes new crises, these are reinforced by the general tendency of prices to fall. This readjustment took place after the Napoleonic Wars, after the American War of Secession, and after the war of 1870-71. An examination of the general price-curves at each of these periods shows this so plainly that it is surprising to find so many people astonished by it when it happened after the First World War. It was particularly grave at that time because of the enormous extent to which prices had previously risen, and the severity of the crises that followed was thereby increased. The persistence of this factor must never be forgotten in interpreting these crises, for without it their extent and virulence would remain inexplicable.

But the analogy with the period after the Napoleonic Wars does not end there. The end of a great war brings not only a readjustment of prices: this readjustment extends to the whole of production. Factories doing war work are turned over to the production of con­sumers' goods. They have to adapt their plant and make sure of their normal markets. In primarily agricultural countries, like France in 1815, the difficulties are less, because the peasant, as soon as peace is restored, finds his land ready to receive the seed and make it grow. But even to him the dislocation of agricultural markets by the war, as well as disturbances to cultivation, present difficult problems, as we saw after 1918.

But in industrial countries it is the entire orientation of capital and labour that has to be modified. Ricardo, like Adam Smith, called attention to this in the pages already quoted. And this readaptation is made harder by the accompanying fall in prices that makes strenuous efforts necessary if cost is to be reduced. For if at the beginning of a war the necessary adaptation is made easier by the rise in prices, it is impeded after the war by their fall. After 1815 England was the only truly industrialized country in Europe, and it was in England that the return of peace caused the most serious disturbances. Labour troubles and unemployment assumed proportions at that time which stirred the whole world. At the beginning of the twentieth century industrialization had spread to France, Germany, and the United States, and these countries experienced the difficulties from which, in 1815, England had been almost the only sufferer. But it was once again in England that unemployment lasted longest, especially after the crisis of 1920. Germany, the United States, and France did not experience it in all its gravity until after 1930. England at the begin­ning had her areas of unemployment, whose distress she compared to that of the French devastated regions, so that she called them her "devastated areas." The problem of unemployment, therefore, as a principal characteristic of crises, was presented with peculiar force to British economists. All their theories show the effects of it, especially those of Keynes, and the way to restore 'full employment' has the largest place in their proposals. These circumstances must be kept in mind in reading the abundant economic literature that has been evoked by these events. This abundance is itself another point of resemblance with the post-Napoleonic period.

The old controversies between Sismondi, Ricardo, and J. B. Say are still famous, and the majority of the later theories of crises have been influenced by them—not only those of Rodbertus and Marx, ascribing them to maldistribution of incomes, but also those of Tooke and the Currency School, putting the blame on excessive credit or the uncontrolled issue of bank-notes. At no time since then has this great subject ceased to occupy the economists, particularly after the crises of 1900 and 1907. But the two crises that followed the First World War in 1920 and 1929, both originating in the United States, extended so far (especially the second one), disturbed so profoundly the economic life of the great nations, had such lasting repercussions, monetary, industrial, and even political, and dislocated international trade so violently that the best-known economists in all countries have been led (as after 1815) to express their views on their causes and the remedies to be applied. These controversies recall by their extent those of the beginning of the nineteenth century. It is a significant fact that the curiosity of present-day historians and economists alike as to earlier events has been awakened and aroused by many historical works in which these events are studied in the light of the present.

These post-war theories also show signs, as is only natural, of the changes that the last hundred years have wrought in the machinery of economic life. In the matter of credit, for instance, it is no longer the bank-note that takes the first place, as in the works of Juglar or Laveleye, since for more than fifty years the bank-note has been super­seded by the current account. It is, therefore, the current account, made available by the cheque, the 'written money,' that plays the chief part in modern theories of crises. In the matter of production those industries that make what are called "production goods"— such as machines, girders, rails, metal plates, steel and copper wire, etc.—have acquired increasing importance as compared with those making "consumption goods." This distinction between the two groups of undertakings, ignored by Sismondi and J. B. Say, plays a prominent part in modern theories. Particular stress is laid on the more violent fluctuations to which the first group are subject. And finally, the influence of saving on the orientation of industry is rarely mentioned by earlier writers, except Sismondi and Malthus, whereas the enormous development both of creative saving and of reserve saving during the past century has turned the attention of economists to the mechanism of saving and its influence on the birth or develop­ment of crises. So we find that theories of saving constitute a new and important part of the modern doctrines. While these doctrines emphasize certain aspects of crises that have hitherto been little studied, they none the less retain some profound resemblances to the older theories. To-day, as a century ago, they can be classified accord­ing to whether their authors ascribe decisive influence to the inter­vention of credit, to the uneven rhythm of industrial production, or to under-consumption.

These distinctions, however, are but secondary ones in comparison with a certain fundamental opposition that is to be observed between two classes of thinkers. There are in the first place those who, follow­ing the tradition of Ricardo and Say, continue to look on crises as fleeting and unavoidable incidents in economic progress, due to insufficient foresight, to the mistakes inseparable from all human activity, to accidents that interrupt a period of expansion, and so forffl. Another and more numerous group, on the other hand, follows Sismondi in suspecting that the regular recurrence of crises indicates the influence of some factor peculiar either to the organization of credit, or to the methods of production in modern communities, or to the distribution of incomes or expenditure. The constant recurrence of booms and slumps seems to this group of writers an indication that some permanent influence, itself subject to a necessary rhythm of expansion and contraction, determines the ups and downs of economic development, and they devote all their energies to discovering it. As Haberler so well puts it in the far-reaching report in which he sum­marizes and discusses all the known interpretations of the economic cycle, these economists admit that a process of expansion and con­traction cannot continue indefinitely, because it gives birth itself to forces that oppose and eventually upset it. At the end of the chapter we shall see emerging from these controversies a third conception of crises, which seems to-day to be winning over those who are interested primarily in the positive study of the phenomenon. While taking into account all the influences already noticed it leaves the door open to other- and new influences. Thus it envisages not one single mode of operation but several.