Principles Of Political Economy

This is the ideal extreme case of what is called a commercial crisis. There is said to be a commercial crisis when a great number of merchants and traders at once either have, or apprehend that they shall have, a difficulty in meeting their engagements. The most usual cause of this general embarrassment is the recoil of prices after they have been raised by a spirit of speculation, intense in degree, and extending to many commodities. When, after such a rise, the reaction comes and prices begin to fall, though at first perhaps only through the desire of the holders to realize, speculative purchases cease; but, were this all, prices would only fall to the level from which they rose, or to that which is justified by the state of the consumption and of the supply. They fall, however, much lower; for as, when prices were rising, and everybody apparently making a fortune, it was easy to obtain almost any amount of credit, so now, when everybody seems to be losing, and many fail entirely, it is with difficulty that firms of known solidity can obtain even the credit to which they are accustomed, and which it is the greatest inconvenience to them to be without, because all dealers have engagements to fulfill, and, nobody feeling sure that the portion of his means which he has intrusted to others will be available in time, no one likes to part with ready money, or to postpone his claim to it. To these rational considerations there is superadded, in extreme cases, a panic as unreasoning as the previous over-confidence; money is borrowed for short periods at almost any rate of interest, and sales of goods for immediate payment are made at almost any sacrifice. Thus general prices, during a commercial revulsion, fall as much below the usual level as during the previous period of speculation they have risen above it; the fall, as well as the rise, originating not in anything affecting money, but in the state of credit.

Professor Jevons seriously advanced a theory that, inasmuch as the harvests of the world were the causes of good or bad trade, and that their deficiency would regularly be followed by commercial distress, then a periodic cause of bad harvests, if found, would explain the constant recurrence of commercial crises. This cause he claimed to have found in the sun-spots, which periodically deprive the crops of that source of growth which is usually furnished by the sun when no spots appear.[243] It has not received general acceptance.

In the United States financial disasters have occurred in 1814, 1819, 1825, 1837-1839, 1857, and 1873. Those of 1837 and 1873 seem to have been the most serious in their effects; but this field, so far as scientific study is concerned, has not been fully worked, and much remains to be learned about these crises in the United States. The crisis of 1873 was due to excessive railway-building. It was testified[244] concerning the New York banks in 1873 that “their capital needed for legitimate purposes was practically lent out on certain iron rails, railroad-ties, bridges, and rolling-stock, called railroads, many of them laid down in places where these materials were practically useless.”