Too Much Debt

Too Much Debt

The idea of over-investment may be viewed in reverse as over-indebtedness. Professor Irving Fisher of Yale University has taken this view of the business cycle. Actually there is no real distinction between over-investment and over-indebtedness. Professor Fisher's viewpoint has been helpful, however, because undoubtedly debts do intensify the fluctuation. Investments in capital equipment in the boom period are made with borrowed money. If business becomes unprofitable the debt structure re­mains but earnings are not sufficient to support it. Consequently the downward trend is encouraged. As prices fall the burden of debt becomes heavier; but to meet debts business men continue to sell, thus depressing prices further. No industry has illustrated this condition half so well as agriculture. During World War I when the prices of farm produce reached fabulous heights, farm­ers mortgaged farms to secure new lands for cultivation. With the collapse of foreign markets following the war, farm prices dropped, but the farmers still had to meet debts contracted when wheat was selling at $2.20 per bushel. At $.50 or $.75 per bushel they had to sell two or three times as much wheat to meet their debts. This of course further depressed the price of grain. The depression in agriculture was much deeper and longer lasting than it was in other industries.

Another explanation of the business cycle has been suggested by Professor W. C. Mitchell, Professor of Economics at the University of California and Director of Research in the National Bureau of Economic Research. Encouraged by the decline in costs which accompanies the depression, business men are stimu­lated to produce. This brings on the period of revival. The tend­ency to increase production, however, will eventually bring about increased costs. Business men produce beyond the efficient capacity of their present equipment; less efficient plants are brought into production. The increase in demand for labor brings in the less efficient members of the labor force. In spite of this decline in efficiency, wages, rent, interest, and prices of raw ma­terials all increase, many of them at a faster rate than the prices of finished goods. When, therefore, the inevitable point is reached where the margin of profit is insufficient to warrant continued production and the credit structure will not support higher prices, the downswing sets in.