François Simiand And Long- Term Price Alternations

In economic history there are not only relatively short 'cyclical crises,' but also long alternating periods of rising and falling prices, interrupted by shorter cyclical crises but not mingling with them. To these long periods and their alternations Frangois Simiand has devoted his researches. He has brought to the task a measure of statistical and historical learning and a concern for scrupulous objectivity that give a monumental quality to his works and account for the great influence he has exercised in France over a whole generation of investi­gators. His conclusions have a direct bearing on the theory of crises. Between the features of what Simiand calls Phase A (prolonged periods of rising prices) and Phase B (prolonged periods of falling prices) on the one hand, and the phenomena peculiar to the shorter phases of boom and depression on the other, there are striking resemblances.

According to Simiand the union of these two phases, A and B, is the essential feature of economic progress, and they are both indis­pensable to that progress. Their alternation is the means by which it is accomplished. Simiand almost regards this alternation as an organic rhythm in economic life and a condition necessary to its development. If it was desired to ' direct' the economic system, he says, it would be necessary to concentrate on systematically reproducing the alternation of these phases by using artificial monetary means for that purpose. No other economist had hitherto propounded a thesis like this. To them economic progress seems to result from technical causes, such as scientific discoveries and progress in means of transport, which are 'external' to the behaviour of prices, and they think that this progress can be just as well accomplished with stable prices as with those that rise or fall. Long-term price movements are in their view the effect of accidental circumstances, such as greater or less activity in the production of the precious metals or of goods. Most of them even assert (with perhaps excessive assurance) that the greatest possible stability of prices is the object to be pursued.

Simiand takes up quite a different position, unlike that of almost every one else. This gives his doctrine a marked originality, besides investing his intellectual personality with a kind of austere isolation, deliberately accentuated by a literary style that often disconcerts the reader by its lack of polish.

Phase A is characterized by a general rise in incomes, profits as well as wages, and great economic activity. Now, when the fall begins and Phase B commences, a general effort is made by entrepreneurs and workers alike to keep their incomes at the same level, as they do not wish to lose the benefit of them. This starts the era of great technical improvements and their general extension, and thus the economic system progresses. Here are his own words: case seeing the unit amount diminishing in proportion to the fall in prices, the producer, while doing his best to defend it, both in rate and in total amount, will at least (and even more so) defend his profit per head or per contract, by increasing the quantities that will have to bear this reduced or limited unit profit. Such a phase seems marked by a development of economic organization, by effort and progress in technique, by the development of mechanization, intensive rather than extensive, and by a definitely faster increase in quantities— after the initial period of stoppage has passed—than the phase of monetary expansion. It may be noted in passing that this orienta­tion of production will in such a phase require a still more rapid development of industries concerned with the means or agents of the increased and mechanized production, such as the iron and mineral industries.

But what is the origin of Phases A and B? What is the motive power that sometimes raises the general price-level, and sometimes checks the rise and causes a fall to follow? After long investigations and detailed study of the curves of prices and production of the precious metals and paper money, Simiand comes to a very clear conclusion, that the origin of these movements is entirely monetary. The origin of Phase A is to be found in the increase of supplies of money, either from increased yield of gold- or silver-mines or from the manufacture of paper money, while the restriction or slackening of the production of money is the origin of Phase B. The succession of these phases between 1815 and 1914 is clearly connected with the production of the precious metals. First there is a general fall between 1815 and 1850, then between 1850 and 1873 a recovery started by the discovery of the mines of California and Australia, next a new period of falling prices from 1873 to 1895, corresponding to a period of stationary pro­duction, and finally a period of rising prices from 1895 to 1929, started originally by the enormous production of the Transvaal mines and then maintained by the universal issue of paper money during the First World War.

This explanation is valid for long-term phases, but is it equally so for the cyclical crises that occur in A and B periods alike? Simiand has not asked himself this question. His investigations are not con­cerned with cyclical phases. But we should hardly go wrong in think­ing that for them too he would accept a monetary explanation—for instance, by substituting increase of credit for the production of the mines.

One question at once arises: does the succession of Phases A and B obey any organic necessity? Are they produced in virtue of a determinism like that which has been thought to determine the cyclical phases of boom and slump? In other words, is there a periodicity of phases like the alleged regular periodicity of cyclical movements? To this question Simiand gives only an evasive reply. Undoubtedly the occurrence of a B phase after an A phase seems almost inevitable. But why should a phase of rising prices or of greater creation of money be conditioned by an economic necessity? Without excluding all idea of organically necessary periodicity he yet hesitates to affirm it. Still less does he attempt to describe the mechanism by which this periodi­city would be produced. Moreover, he adds, this question of periodi­city loses interest if it is admitted that a voluntary increase of paper money may produce the same effects as an accidental increase of the precious metals. On this point, again, our author does not go into any detail. He only admits the possibility of what he calls "a managed monetary function capable of bringing about the alternation of Phases A and B."

Many objections arise here, for it seems difficult to attribute the succession of Phases A and B to any other causes than historical circum­stances that are largely accidental. There seems to be no feature suggesting the operation of any mechanism connected with strictly economic development. The discovery of the Australian and Cali-fornian gold-mines in the middle of last century, like the discovery and exploitation of the Transvaal mines at the end of the century, was due, if not to pure chance, at any rate to geographical or technical discoveries independent of economic evolution. The most that can be admitted is that the general fall in prices that follows a slackening in the production of gold tends to restore its activity by reducing the costs of production of the precious metal and stimulating the search either for new deposits or for new methods of exploiting existing ones. As for the idea that the spontaneous alternation of Phases A and B can be imitated by the ' rational' manufacture of paper money, this has no support from experience, and, even assuming it to be established, it would still have to be shown that the manufacture of paper money can be rationalized. The typical features of booms and slumps caused by the manufacture of paper money are certainly connected in some aspects with those that follow the discovery of new metallic deposits but they differ from them so radically in other aspects (especially in the fact that the issue of paper money is a national matter whereas the increase of metallic money is an international phenomenon) that as things are at present it is impossible to identify the two things 'rationally.'

Simiand has made a very interesting application of his theory to the world crisis of 1930.1 In his view this was not an ordinary cyclical crises, but the starting-point of a B phase succeeding an A phase which began about 1895 and continued till about 1929, for Simiand refuses to distinguish the rise in prices due to paper money from the preceding rise due to the influx of gold from the Transvaal. So the 1930 crisis and the depression that followed were merely manifesta­tions of the normal reversal of the trend of economic activity after a long period of rising prices. This interpretation is noteworthy, because it shows that to Simiand the 1930 crisis was not the ordinary kind of crisis but was superadded to a spontaneous long-term price movement. This view is, of course, shared by many economists. But Simiand does not regard this reversal as a result of the financial policy of the belli­gerents—a result that appears after every long and widespread conflict —but only as the normal arrival of a B phase succeeding by force of circumstances a preceding A phase. Recalling the statement that-— quite rightly, in our view—the 1930 crisis was a unique phenomenon, we are a little surprised that Simiand is unwilling, despite so much evidence from experience, to see in it the inevitable repercussion of war-time financial policies. Moreover, it may quite well be—and we have ourself maintained this thesis—that the 1930 crisis was both the beginning of one of these customary reversals of price movements at the end of a period of increase in gold supplies and the effect of an excessive rise in prices due to the financing of the war. The 1930 crisis would in this case show the combined effects of all the circum­stances making for a fall in prices, and this would explain its excep­tional virulence.

Simiand's researches remain, therefore, of very great value as a description of important economic phenomena. They reveal once more the attention given by twentieth-century economists to the dynamic aspect of economic phenomena. On the other hand they throw no light at all on the mechanism or mode of operation of crises in the strict sense. In short, what Simiand's investigations have resulted in is a new verification of the quantity theory of money. The psycho­logical reactions responsible for the fact that a new supply of the money material or a diminution in its creation affects production and prices are set by him in the clearest light. What Simiand tells us about is the human decisions that result from these increases and restrictions, and he thereby confirms a thesis that Classical economists have affirmed, though with less detail and scientific minuteness, in every age. But he has added some original views, and buttresses the whole by a wealth of arguments and harmonizing facts not previously met with.

Just as this book was going to press there appeared a very important work by Professor Dupriez, of Louvain, on the same subject as that dealt with by Simiand. It is entitled Des Mouvements economiques generaux (Louvain, 1947, 2 vols.). In it all the economic phenomena discussed in this chapter are subjected to searching examination from the point of view of Walras's theory of interdependence, and the author associates himself in many ways with the ideas set forth in our Section VI.
All the theories examined in this chapter constitute a great effort at formulating a dynamic theory of economic phenomena. More or less regular cyclical movements, great rises and falls in prices due to paper money, movements up and down, depending sometimes on the production of the precious metals and sometimes on the extent of technical progress or the abundance of production—these things have been sifted by the authors mentioned in this chapter with a view to describing the mechanism by which these movements are brought about. The difficulty of the problem is shown by the very number of the investigations that have been undertaken, and the variety of the points of view that have been suggested for the subject by these distinguished thinkers.

The result of this enormous amount of work is by no means insignifi­cant. Views are more and more plainly emerging which, when the dust of conflict has cleared away, will survive and remain. In this respect the work of the Swedish school, especially when made more accessible in translations to a wider public, will appear particularly useful and new. Without upsetting the notions that form the foundation of theories of equilibrium, and while still keeping in close contact with facts, the Swedish theories provide patiently worked-out plans, better adapted than the older ones to a variety of situations. It is on the lines traced out by these economists, and those on which certain American and continental authors are engaged, that we may hope to see established a theory more accessible to all, and more capable of supporting practical solutions. The danger to be avoided lies in the academic subtleties and controversies about ill-defined terms that have spread regrettably in some countries. They have been rightly denounced1 by a clever English economist, D. H. Robertson. The true path for political economy to follow remains always the faithful comparison of well-observed facts with theoretical constructions wide enough to take account of all these facts and not only of those that are peculiar to this country or that, as has too often happened since the First World War.