§ 16. THE SECONDARY DEPRESSION.

The upshot of all that we have so far said is that the causation of the crisis and of the depression must be traced back to the mechanism of the boom. We understand now not only why the boom simply comes to a halt but also why it is usually followed by a painful process of contraction and liquidation. A satisfactory explanation of the boom implies, therefore, the explanation of the crisis as well. For this reason the theory of crises and cycles is essentially a theory of the boom. In the crisis, what has been sown during the boom has to be reaped; a readjustment of the disjointed economic system cannot be avoided. This is a point which must be emphasized strongly. But it is also a point which must not be driven too far. As the dramatic development of the present crisis abundantly proves, there is no denying the fact that the depression may, under certain circumstances, grow to dimensions quite out of proportion to the preceding boom, so that it loses more and more its function of readjustment and degenerates into a secondary depression void of any function whatsoever except to test the strength of the patience of the people in enduring a cumulative process of senseless and murderous economic destruction. Instead of restoring the economic equilibrium disrupted by the boom, the depression may lead, after a while, to a new disequilibrium which, caused by the process of the chronic depression itself, has nothing to do with the old set of disturbing factors. To explain this, a special theory of the depression becomes necessary. Its task is to describe how the original process of liquidation and adaptation in the primary depression comes to set in motion a cumulative process of recession, the conditions of disequilibrium being continuously reproduced on an ever-declining level of economic activity.

To begin with, the primary depression is characterized by a process of general economic contraction which is, broadly speaking, equivalent to a process of deflation. This deflation is the unavoidable reaction to the inflation of the boom and must not be counteracted, otherwise a prolongation and aggravation of the crisis will ensue as the experiences in the United States in 1930 have shown. But the deflation connected with the secondary depression is quite different in nature. Its raison d’être no longer lies in the impossible situation created by the preceding boom. It results from a set of causes which only come into being as a result, and during the course, of the secondary depression. Neither the primary deflation nor the secondary (“induced”) deflation has anything in common with that sort of deflation which has been practised several times in monetary history as a policy of wilfully diminishing the volume of currency in order to raise the purchasing power of money. Like the inflation of the boom period, the deflation of the depression is the passive endurance of a process rather than an active policy, but, unlike the primary deflation which is a necessary reaction to the boom inflation, the secondary deflation is an independent process which we can freely combat. And unlike the boom inflation which undoubtedly has the positive function of accelerating economic development, the secondary deflation, being void of any positive function, not only can but should be combated.

The important thing now is to realize that this secondary deflation has a very complicated structure which must be thoroughly grasped in order to avoid widespread misconceptions which are apt to lead business-cycle policy at this time dangerously astray. For this reason the term “deflation” must be applied with caution to this phenomenon. We have already said that it would be an error to think of it as being a result of a policy aimed at wilfully diminishing the volume of currency. It would be wrong to suppose that this secondary deflation has been launched by anybody on purpose though it is perhaps fostered by all kinds of ill-advised measures. It would be equally wrong, however, to connect the secondary deflation primarily with the behaviour of the general price level.

The secondary deflation is, of course, accompanied by a fall of the price level, but this is only a part, and not even the most important part, of a more general process, and the fall of prices is by no means a true measure of the whole extent of the process. To think otherwise and to define the secondary deflation in terms of the general price level is only to repeat in the opposite direction the erroneous conception of the boom as a price-level phenomenon, a conception which did so much harm during the last American boom. This obnoxious habit of thinking preferably in terms of the general price level may be aptly denounced as a “price-level complex.” We shall see later on that this habit has recently led, in the United States, to practical consequences hardly less disastrous than those experienced during the boom. The boom as well as the depression are not so much phenomena of price levels as phenomenon of quantities instead of one of prices, the same will be true production of capital goods). The sensational fall of prices of raw materials and agricultural products which has occurred during the present depression must not be allowed to conceal the fact that the general decline of prices is merely a rather weak reflection of the process of general economic contraction, as expressed in the statistics of production, incomes and unemployment. The obvious reason is that the effect on prices of the contraction of demand is to a great extent balanced by the contraction of the volume of production, with the marked exception of the greater part of the production of raw materials and agricultural products. In these latter cases the volume of production has been adapted very inadequately to the shrinking demand and in some instances an expansion of production has even occurred. Since the downward trend in the secondary depression has, on the whole, been primarily a phenomenon of quantities instead of one of prices, the same will be true of the upward trend. Anticipating the further treatment of this question, we may draw the conclusion at this point already that the process of contraction of the secondary depression cannot be counterbalanced by reflation (meaning a policy aimed at raising the general price level), but by re-expansion, apart, once again, from the special problem provided by the markets in raw materials and agricultural products. In other words, the policy of credit expansion at this time can be carried fairly far without bringing about a marked rise of the general price level, a statement which resumes a trend of thought which the reader will recall from the end of the last section.

If the fall of the price level is a very incomplete and inadequate index of the secondary deflation, what else is this mysterious and elusive thing? If we next turn to the behaviour of the volume of currency, we shall find that this also provides no real clue, and that for two reasons: firstly, because the volume of currency (cash) represents only the base of our modern money system, and secondly, because the shrinkage of the demand for cash engendered by the economic contraction is, to a large extent, compensated by the increased demand for hoarding and for the strengthening of the liquidity of the banks.⁴ Consequently, the shrinking volume of currency is also only a weak reflection of the general economic contraction.⁵ The only adequate way of characterizing the secondary deflation is to point to the contraction of the total demand, especially as it is expressed by the contraction of credit money (the main symptoms being the immobility of banking accounts, the shortening of the banks’ balance-sheets, the shrinkage of the clearing-house figures, &c.). This contraction of the total demand—which goes on behind the curtain of a more constant volume of currency—is the essential thing, the prime mover of the secondary depression. It is closely connected with the contraction of incomes and, also, though not so closely, with the contraction of costs, and ends in the general contraction of production which, in turn, reacts towards a contraction of demand and incomes. This mechanism of the secondary depression operates through a double “lag” which is self-maintaining as long as the vicious circle of the depression remains unbroken: firstly, the contraction of production tends to lag behind the fall of prices since it means a contraction of incomes and demand, and, secondly, the contraction of costs tends also to lag behind the falling prices. In the first case, it is the disproportion between supply and demand, and, in the second case, it is the disproportion between costs and prices, i.e., the lack of profitability, which tends to be continuously maintained.

But why this continuous contraction of demand? Why do not the forces which are always working for economic equilibrium reassert themselves? To put the matter briefly, the whole trouble may be ascribed to the disastrous destruction of that harmony between the process of the formation of incomes and the process of the utilization of incomes which constitutes an essential condition of general economic equilibrium. The discrepancy tends to become cumulative and leads to a continuous fall of demand on commodity markets, which in turn tends to bring about a yet further fall. The stream of money flowing to economic units—business firms and private households—and flowing out again is interrupted. Sums which flow in do not flow back to commodity markets, or else they flow back either only partially or after long delay. For purposes of illustration reference may be made to the large number of firms which are holding themselves as liquid as possible instead of using their funds for replacing old machinery let alone for making additional investments, or to those households which are actually hoarding money or leaving their banking accounts idle.⁶ A special form of this process of sterilization of purchasing power is the preference on the part of the public for accumulating funds on banking accounts rather than investing them on the securities markets, a preference which is tantamount to preferring liquidity and security to profit. This “bearishness” (Keynes) of the public towards investment in securities is a very important part of the whole machinery of the secondary depression which must be taken into account by any rational policy of initiating the recovery.

In all these cases money is being saved in a form, and under circumstances, which largely prevent it from being invested, so that the rate of saving is continuously greater than the rate of investment. As long as this is the case, savings not only add nothing to the wealth of the community but are positively harmful for economic welfare. Saving in this case is not only “abortive” (Robertson) but downright destructive—always in the relative sense that the money saved finds no outlet in new investments. Or in other words: money is withheld from expenditure on consumption goods, without any compensation for this non-consumption taking place in the form of investments in capital goods. The general contraction of demand is, then, tantamount to an excess of savings over investment. By force of logic, these two things must be identical.⁷

Now, every attempt on the part of producers to get rid of their surplus production, resulting from the fall of demand, by lowering prices and costs and by curtailing output will necessarily be self-frustrating. For it will lead to a new fall in demand so long as the discrepancy between the formation of income and the utilization of income (i.e., saving and investment) is not overcome, either by an increase of investment or by a decrease of saving. The general economic contraction brought about by this process of secondary deflation completes the vicious circle by impairing the chances of increased investment; and that for two reasons. In the first place, the general “crisis of confidence” which now breaks out serves as a kind of death-blow to the willingness of entrepreneurs to undertake new investment, while, secondly, this crisis of confidence is very apt to lead to the most fatal disturbances in the money and credit system. It may be remembered that, ever since the international liquidity crisis of 1931, the banking system in many countries has remained for a long time in a state of paralysis in which its willingness to finance new investment has been almost negligible. It is not difficult, moreover, to understand that the process of economic contraction is very apt to undermine the financial status of the banks by freezing and reducing the value of their assets, and this unfavourable development on the debit side tends also to impair the credit side of the banks’ balance-sheets, as it is conducive of fright among the depositors so that the financial position of the banks is pinched from both sides. In this way a situation may ensue which gives the superficial appearance as if there were still something inherently unsound in the banking system as an inheritance from the (primary) crisis, a vestige of the debaucheries of the boom which must be cured by a strong medicine before any new expansion can set in. But, as our reflections show, banking difficulties at an advanced stage of the depression may just as well be caused by the vicious circle set in motion by the excess of savings over investment. This was undoubtedly the situation in Germany in 1932, and it seems that some disturbances in the financial situation in France and in Switzerland in recent times ought to be interpreted in the same way. In other words, it is quite arguable that if the right moment for turning the tide of the depression by new credit expansion is missed, a relapse to a situation similar to the primary crisis may ensue. On top of all this, serious congestions in the monetary circulation may add to the difficulties, and the aggravation of the confidence crisis, together with the drop of prices and the progressive disintegration of the world’s economic system, may make every idea of new investment seem nothing short of foolish.

Especially important in this connexion is the weak condition of the securities markets. For if equilibrium is to be restored by an increase of investment (which is one of the two alternatives, the other being a decrease of saving), it can be possible only on two conditions. In the first place, the banking system must be prepared to grant new credits, a stage that may, at this time, be fairly said to have been reached in the leading countries. But the various unsuccessful attempts made in the United States at pumping additional credits into the arteries of the national economy have proved that the willingness of the banking system to give new credits does not in all circumstances suffice to bring about a credit expansion. To this end, a second condition must be fulfilled, viz., the existence of entrepreneurs who are willing to take new credits for investment purposes so as to render the credit expansion really effective by enlarging the volume of circulating media instead of merely enhancing the liquidity of somebody. The American experiences have amply verified the surmise that even a rate of interest which approaches zero may be insufficient, in the conditions of the secondary depression, to induce entrepreneurs to enter upon new investment. If in such a situation the elasticity of demand for credit becomes almost absolutely rigid, attempts at credit expansion will not lead to the desired expansion of the total demand for commodities, but merely to an increase of general liquidity.

Now the reluctance of entrepreneurs to enter upon new investment is due not only to the confidence crisis, to the recession of prices, and to the over-investment of the previous boom, but also to the fact that entrepreneurs do not dare, for the purpose of long-term investment, to have recourse to short-term credits—almost the only available method of financing new investment at this stage—unless a marked recovery of the stock exchange points to the possibility of an early funding of the preliminary advances of the banks. That is the reason (apart from the immediate psychological effects) why rising stock markets are a necessary condition for general recovery and why every measure and every event which has the effect of driving the public away from the stock markets constitutes a serious blow to recovery. And for the same reason it is the acid test for every recovery programme whether it succeeds in “priming” the securities markets, or not.⁸ Again, it must not be forgotten that a rising stock market provides a tremendous relief also to the banks by improving their liquidity and by enhancing thereby their willingness to enter upon new credit expansion. This is done in two ways: (a) by offering the banks an opportunity for turning their own securities into cash, and (b) by doing the same for their debtors, thereby thawing their frozen assets.

The situation on the stock markets is a point which can hardly be overstressed if a real understanding of the present depression and its course is desired. For it seems that in this respect things have taken, during the preceding boom and the subsequent depression, a course which has become a special feature of the post-war development, especially in the United States, where, in the absence of those political disturbances which account for some of the worst aspects of the depression in Europe, the malignant progress of the depression demands a special explanation. One of the reasons accounting for the American crash seems to be precisely the abnormal situation on the securities markets.

Many factors have contributed to this, the frenzied speculation of 1929 being one of the most obvious. Among these factors, however, the fact deserves greater attention than it has so far received that after the war a larger proportion of capital to be invested than before the war has gone into time deposits (or savings accounts) instead of being invested by the public directly in securities. This may be inferred from the fact that in many countries the ratio of time deposits to demand deposits has markedly increased, most of all in the United States where, for the United States as a whole, the percentage of time deposits to total deposits has risen from 23 in 1913 to 45 in 1932 while, for the U.S. National Banks, the corresponding rise has been even from 9 to 47.⁹ In order to grasp the significance of this change-over in favour of time deposits, one has to take into account the further fact that there corresponds to this change on the liabilities side a change also, in large measure, on the assets side, viz., the equally excessive enlargement of banks’ investments in securities. In other words, the public is investing its money in securities indirectly by way of the banks, thereby combining security with a high degree of liquidity and also—if the banks are paying good interest on time deposits as they have done in the United States, in Germany and elsewhere—with a reasonable degree of profit. The banks are bearing the risk of possible depreciation of the securities held in stock, but—unfortunately even South-American bonds included!—this risk seemed so small during normal times that in the United States there even came into being a new school of Bank Liquidity which preached this sort of investment as the last word in the art of banking.¹⁰ In the light of later experiences we may safely say now that this development was unsound and dangerous, so much so that the name “deposits disease” does not seem altogether inapt. When during the depression the confidence in the banks began to crumble and deposits were withdrawn the American banks had to sell out their securities on a weak market, thereby causing a collapse on the stock exchange to an absolutely abnormal extent out of all proportion to the mere influence of speculation. In contrast to the United States and several other countries, France is the outstanding example of a country which has remained absolutely free from the “deposits disease,” the percentage of demand deposits having even slightly increased between 1913 and 1932. This notable fact is a very telling expression of the investment habits of the French population and of the kind of banking institutions corresponding to them. Since the great commercial banks of the type of the Crédit Lyonnais pay practically no interest on deposit accounts they offer no incentive to the public seeking investment for their disposable capital. It seems to the present writer that this accounts, to a large extent, for the fact that France has been relatively free from the kind of financial disturbances which have shaken American economic life to the core.

After this outline has been given of the destructive machinery of the secondary depression, it is a pertinent question to ask: where does it end? Bitter experience has taught us in recent times that, in the course of such a process, production may shrink to seventy, sixty or even fifty per cent, of the original volume, and we may well ask whether there is any mechanism operating to prevent a shrinkage to ten per cent, or less. In pure theory such a monstrous thing is not entirely inconceivable. But we may congratulate ourselves that a kind of automatic safety brake is provided against this final catastrophe. In order to understand this, it has to be recalled that the depression can be stopped only in two ways, either by an increase of investment up to the level of saving or by a decrease of saving down to the level of investment. As regards the first alternative, it is surely possible that during the course of the depression something may occur which gives an incentive to new investments. The satisfaction of replacement demand cannot be deferred for ever, and here or there a new line of investment may even seem profitable, although the mechanism of the secondary depression works strongly against this. There are even certain industries whose profitability is likely to be enhanced as the depression progresses.

Leaving aside the industry of manufacturing books on crises and cycles, there are two big industries likely to prosper inversely to the depression, the armaments industry and the gold-mining industry. It is a remarkable fact that throughout the present depression the shares of the great armaments firms have not only kept their level but soared continuously at a time when almost all other shares were sagging, and it is surely not a too far-fetched idea to suppose that the rising prosperity of this branch of industry owes much to the political repercussions of the general economic and social atmosphere created by the protracted depression, especially in certain countries. What has been achieved recently in the way of economic recovery is, indeed, due, to no small extent, to the boom in all kinds of war materials. Certainly the temporary German recovery after 1933 must be largely ascribed to this factor, and it is no secret that countries like Sweden have greatly profited therefrom. But while in the case of the armaments industry the influence of the depression depends on many and uncertain intermediary factors, the favourable effect on the gold-mining industry is direct and quasi-automatic and this for a simple reason. “So long as there exists at least one country on a full gold standard, an essential condition of which is freedom to buy gold from or sell gold to the central institution at a fixed price, there is literally an unlimited demand for the commodity at that price. In other words, not only is a minimum price for the product of the industry guaranteed, but there is, besides, no limit to the amount the market will take. Added to this, the effective minimum price, translated into terms of the producing countries’ currencies, has risen substantially in recent years, without a corresponding rise in costs, in consequence of widespread departure from the gold standard. Happily, prosperity in any one industry cannot fail to contribute to recovery in others, and in this respect gold producing is not exceptional.”¹ The world’s gold production has, in fact, increased from 1930 to 1934 by about one-third.

But if all this fails to turn the tide, then, in the last resort, the automatic safety brake comes into action. As economic contraction proceeds, there finally comes a moment when, even without any increase in the rate of investment, equilibrium is restored owing to the rate of saving having been pushed down to the level of the rate of investment. This occurs when, on the one hand, general impoverishment forces people to consume savings and, on the other hand, the increasing budget deficit cannot possibly be covered any longer either by reducing expenditure or by raising taxation, except at the expense of a revolution. At this moment the crisis has quite definitely touched bottom. Making due allowances for the necessary qualifications to this statement with which we shall deal later, and fully recognizing all its dangerous implications, we must not ignore the truth contained in the bold conclusion that the one situation in which a budget deficit cannot possibly be avoided is precisely the situation where it is highly salutary. This proves that those are, after all, right who maintain that even the severest crisis will cease in the end—provided that the political and social framework will stand the heavy pressure. Even if we do nothing, the natural course of things will bring about its own solution though in the cruel way in which nature likes its solutions—with several thousands more having recourse to the gas-hose, several hundreds more being killed in civil warfare, and (consequent on the general destitution and exasperation) with the hysteria of the masses and their leaders increasing to such a degree as to shake State and society to their foundations. But the question why we should cross our arms in resignation is the more pertinent since the political convulsions arising from this process may lead to a very dangerous turn in economic policy which is apt to make the economic crisis a real crisis of our entire economic and social system. It would be easy to write the world’s history of the last years largely in terms of this analysis.

There remain two final questions relating to the phenomenon of the secondary depression. After having answered the question as to where it ends, it seems an equally legitimate question to ask where it begins. This question is the more important since, in contrast to the primary depression, an opposite course of action is indicated during the secondary depression. While it is wrong to obstruct the inevitable course of the primary depression by new injections of additional credits, this is just the remedy for curing the secondary depression. What are, then, the symptoms that tell us exactly where the primary depression turns into the secondary depression? No cut-and-dried answer to this question seems possible, since a more or less broad period of a doubtful nature divides the two phases, a period in which the right policy seems to be to stay on the safe side and to await events. But there are some broad principles which can be used for diagnosing the appearance of the second phase. The simplest is the mere elapse of time after which it may be reasonably expected that the primary depression has fulfilled its purging mission. It would reveal an incomplete understanding of the process of the secondary depression if we were to take the appearance of fresh disturbances as a sure sign that the process of salutary purging has not yet come to an end. For as the depression progresses it always breeds new disproportions. If production shrinks to 50 per cent., there will scarcely be any investment which does not turn out to be a “faulty investment,” there will hardly be any wages which are not too high, and there will hardly be any bank or industrial firm which does not get into serious trouble. But, still, this is all rather vague. More conclusive is the symptom of persistent mass unemployment which may be taken as an indication that the primary depression has quite outgrown the dimensions imposed by its function of readjustment, and most conclusive of all will be the fact that the depression has also engulfed the industries producing consumption goods. This statement will be easily understood after the analysis given in the last sections.

The second of these final questions is a rather disquieting one. How are we to interpret the experiences of the secondary depression of to-day in the light of past experiences and of a more distant future? Is this depression of the nature of an historical accident and therefore an exception to the rule, or is it just the other way round, viz., that it is rather the milder form of the pre-war depression that is the exception? Is it not arguable that the tendency to degenerate into a secondary depression may be inherent in every primary depression, and that it is just a miraculous accident if this tendency does not become manifest? Possibly there existed before the war powerful forces which pulled the cart promptly out of the ditch by providing irresistible incentives for new investments and thus quickly absorbing excess savings? Perhaps imperialistic expansion? Or the pressure of a growing population? To argue in this way has always been the habit of staunch Marxists, but it is no wonder that the recent experiences of the present depression have rallied an even wider circle of followers to this view. Some of these even go to the length of asserting that there is a permanent tendency for investment to be outrun by savings and therefore a tendency towards a chronic depression which is only interrupted by short-lived fits of concentrated investment. According to these gloomy pessimists—mostly sanguine inflationists in disguise, if not actually prophets of the end of capitalism—our economic system is headed for a sort of economic “entropy” where all economic energy will be paralysed by a suffocating excess of savings—unless there are huge earthquakes, big wars, and other pleasant things.

Enough has been said on these points to make a refutation of such wild surmises hardly necessary. It all boils down to the question as to whether it is conceivable that savings can ever become so abundant that we do not know what to do with them even at a rate of interest approaching zero. To this question, of course, only one answer is possible. Over-saving as such is an inconceivable thing, belonging to the same species as other economic scares like over-production. As long as the last peasant is not provided with a harvester, and the last suburban proletarian with a villa and a Rolls Royce, as long as not all the railways of the world are electrified, all countries covered with magnificent automobile roads and all cities of the world blessed with underground railways, it is futile to discuss this point. To designate booms as periods where the pressure of excess savings is temporarily relieved by adequate investments is really a very curious misrepresentation of actual facts. As we know, it is just the excess of investments over savings which is the essence of the booms. The very fact that recourse has to be had to forced savings (credit expansion) in order to finance the huge investments of the boom period and so to set in motion the familiar process leading to the crisis abundantly proves how utterly undeserving of discussion this view is.

But all this does not dispose of the possibility that, once overinvestment has set in motion the process leading from the boom to the depression, our economic system may tend to fall into the coma of the secondary depression unless strong incentives of an extraordinary character drag it promptly out again. This is certainly a question worthy of discussion. It has happened in the recent case, and it has happened several times before in the history of depressions. But all this is neither here nor there. The real point is whether the “strike of entrepreneurs,” which is virtually at the bottom of the secondary depression, is likely to be of any significance under ordinary circumstances or whether the opposite is true. It would be rash to give any peremptory answer to this question since it is a question of greater or lesser probability into which many psychological factors enter. All we can say is that it is indeed not likely that things are exactly as the pessimists would make us believe—unless an unusual constellation of circumstances contrives to bring about that set of abnormal psychological reactions in which the secondary depression thrives. That is just what has happened to-day. It is the personal view of the present author that capitalism, as such, is essentially inimical to economic inertia. By virtue of its basic principles it has, like nature, a horror vacui which leaves no gap unfilled. It takes a great deal to kill this stupendous vitality inherent in capitalism, but in the last five years the world has managed somehow, if not actually to kill it, at least to knock it half-conscious, so that the wonder is not that so much of the previous vitality has gone, but that so much still remains. But even if this view should be incorrect and if the recurrence of deadlocks should become a regular feature of capitalism in the future, it would be wiser to apply some judicious measures to help capitalism along than to scrap it altogether.

Although even in earlier periods of long-lasting depression tendencies to treat it as a special phenomenon have not been absent, the theory of the secondary depression is the result of a rather recent development which only attained the dignity of a piece of analysis recognized in academic circles under the pressure of the present world depression. The very first treatment on the lines of the savings-investments approach, made famous later by Mr. Keynes, is perhaps to be found in an obscure little pamphlet in German published in 1903 in Brooklyn by an American business-man writing under the pseudonym of J. J. O. Lahn.² His real name was N. Johannsen under which his later publications are known.³ He clearly recognizes that long depressions must be explained by the deflationary effect of savings which are not adequately absorbed by investments, a process likely to be made cumulative by the entrepreneurs’ losses and their repercussions. He calls the savings thus made inactive and harmful “impaired savings,” reminding us of the term “abortive savings” introduced more than twenty years later by Mr. Robertson.⁴ Mr. Johannsen’s pamphlet is full of shrewd observations and bold analysis, and his whole treatment is such that Mr. Keynes is right in giving him the credit of having “come very near to the truth,”⁵ though Mr. Keynes does not seem to know his first pamphlet of 1903. But, as Mr. Keynes justly observes, the weak point in his argument is that he “regarded the failure of current savings to be embodied in capital expenditure as a more or less permanent condition in the modern world due to a saturation of the capital market, instead of as a result of a temporary but recurrent failure of the banking system to pass on the full amount of the savings to entrepreneurs, and overlooked the fact that a fall in the rate of interest would be the cure for the malady if it were what he diagnoses it to be.” In this Mr. Johannsen has, indeed, come very near to the view rejected above. The main fact accounting for this is that, at that time, the nature of credit expansion and its role in financing the boom was, if at all, only dimly perceived. The real development of the theory of the secondary depression on defensible lines has been the result of a stream of thought which has become more and more prominent during the course of the present depression among various writers of different countries. Most outstanding in this respect has been Mr. Keynes’ Treatise on Money which appeared in 1930. The treatment given in this paragraph owes much to this great work, notwithstanding the substantial reservations and differences which need not be repeated here. The present author must resist the temptation to follow up in detail the various phases of increasing heresy and to compare the developments in the different countries, emanating from the growing dissatisfaction with the orthodox view and the restrictionist policies connected therewith. As for his personal share in this development he may be permitted to say that he first became convinced of the defectiveness of the orthodox view and of the need for a special theory of the secondary depression while acting as a member of the German Reich Committee on Unemployment in the spring of 1931. The report of this committee clearly reflects its conviction that something could be done to shorten the road to recovery by arousing the national economy from the torpor into which it seemed to have fallen through the degeneration of the crisis. But in this the committee was much ahead of the development of common and even academic opinion so that its recommendations unfortunately went unheard at that time.⁶ In subsequent years the present writer tried on several occasions to elaborate his point of view.⁷ It coincides largely with the views of a number of writers in other countries, notably with those of Mr. Robertson in England,⁸ of Professor Ohlin in Sweden,⁹ of Professor Viner in the United States,¹ of Professor Haberler and Dr. Mahr in Austria,² and of Professor Verrijn Stuart in Holland.³ It is to be hoped that by the joint effort of these much may be achieved in giving to the theory of the secondary depression that degree of refinement and qualification which it still badly needs.