The Influence of Commercial Crises on Opinions About Economic Doctrines

In answer to your invitation, now, what I propose to do is to call your attention to some features of the economic situation of civilized nations at the present time with a view to establish two points: 1. To explain the vacillation and feebleness of opinions about economic doctrine which mark the present time, and 2. To show the necessity, just at this time, of calm and sober apprehension of sound doctrine in political economy. At the outset let me ask you to notice the effects which !lIS 214 THE FORGOTTEN MAN AND OTHER ESSAYS have been produced during the last century by the de velopments of science and of the industrial arts. Formerly, industry was pursued on a small scale, with little or no organization. Markets were limited to small districts, and commerce was confined to raw materials and colonial prod ucts. Producer and consumer met face to face. The con ditions of the market were open to personal inspection.

The relations of supply and demand were matters of per sonal experience. Production was carried on for orders only in many branches of industry, so that supply and demand were fitted to one another, as we may say, phys ically. Disproportionate production was, therefore, pre vented and the necessity of redistributing productive effort was made plain by the most direct personal experi ence. Under such a state of things, much time must elapse between the formation of a wish and its realization. Within a century very many and various forces have been at work to produce an entire change in this system of industry. The invention of the steam engine and of the machines used in the textile fabrics produced the factory system, with a high organization of industry, concentrated at certain centers. The opening of canals and the improve ment of highways made possible the commerce by which the products were distributed. The cheapening of printing and the multiplication of means of advertising widened the market by concentrating the demand which was widely dispersed in place, until now the market is the civilized world. The applications of steam power to roads and ships only extended further the same development, and the tele graph has only cheapened and accelerated the means of communicating information to the same end.

What have been the effects on industry? 1. The whole industry and commerce of the world have been built up into a great system in which organization has become essential and in which it has been carried forward COMMERCIAL CRISES 215 and is being carried forward every day to new developments. Industry has been growing more and more impersonal as far as the parties to it are concerned. Our wants are satisfied instantaneously and regularly by the cooperation of thou sands of people all over the world whom we have never seen or heard of; and we earn our living daily by contributing to satisfy the wants of thousands scattered all over the world, of whom we know nothing personally. In the place of actual contact and acquaintance with the persons who are parties to the transactions, we now depend upon the regu larity, under the conditions of earthly life, of human wants and human efforts. The system of industry is built upon the constancy of certain conditions of human existence, upon the certainty of the economic forces which thence arise, and upon the fact that those forces act with perfect regularity under changeless laws. If we but reflect a mo ment, we shall see that modern industry and commerce could not go on for a day if we were not dealing here with forces and laws which may properly be called natural be cause they come into action when the conditJons are ful filled, because the conditions cannot but exist if there is a society of human beings collected anywhere on earth, and because, when tpe forces come into action, they work them selves out, according to their laws, without possible escape from their effects. We can divert the forces from one course to another; we can change their form; we can make them expend themselves upon one person or interest instead of upon another. We do this all the time, by bad legislation, by prejudice, habit, fashion, erroneous notions of equity, happiness, the highest good, and so on; but we never destroy an economic force any more than we destroy a physical force.

2. Of course it follows that success in the production of wealth under this modern system depends primarily on the correctness with which men learn the character of ~16 THE FORGOTTEN MAN AND OTHER ESSAYS economic forces and of the laws under which those forces act. This is the field of the science of political economy, and it is the reason why it is a science. It investigates the laws of forces which are natural, not arbitrary, artificial, or con ventional. Some communities have developed a great hatred for persons who held different religious opinions from themselves. Such a feeling would be a great social force, but it would be arbitrary and artificial. Many com munities have held that all labor, not mental, was slavish and degrading. This notion, too, was conventional, but it was a great social force where it existed. Such notions, either past or present, are worth studying for historical interest and instruction, but they do not afford the basis for a science whose object is to find out what is true in regard to the relations of man to the world in which he lives. The study of them throws a valuable sidelight on the true relations of human life, just as the study of error always throws a sidelight upon the truth, but they have no similarity to the law that men want the maximum of satisfaction for the minimum of effort, or to the law of the diminishing return from land, or to the law of population, or to the law of supply and demand. Nothing can be gained, therefore, by mixing up history and science, valu able as one is to the other. If men try to carry on any operation without an intelligent theory of the forces with which they are dealing, they inevitably become the vic tims of the operation, not its masters. Hence they always do try to form some theory of the forces in question and to plan the means to the end accordingly. The forces of nature go on and are true only to themselves. They never swerve out of pity for innocent error or well-intentioned mistakes. This is as true of economic forces as of any others. What is meant by a good or a bad investment, except that one is based on a correct judgment of forces and the other on incorrect judgment? How would sagacity, COMMERCIAL CRISES ~17 care, good judgment, and prudence meet their reward if the economic forces swerved out of pity for error? We know that there is no such thing in the order of nature.

I repeat, then, that the modern industrial and commer cial system, dealing as it does with vast movements which no one mind can follow or compass in their ramifications and which are kept in harmony by natural laws, demands steadily advancing, clear, and precise knowledge of eco nomic laws; that this knowledge must banish prejudices and traditions; that it must conquer baseless enthusiasms and whimsical hopes. If it does not accomplish this, we can expect but one result - that men will chase all sorts of phantoms and impossible hopes; that they will waste their efforts upon schemes which can only bring loss; and that some will run one way and some another until society loses all coherence, all unanimity of judgment as to what is to be sought and how to attain to it. The destruction of capital is only the least of the evils to be apprehended in such a case. I do not believe that we begin to appreciate one effect of the new civilization of the nineteenth century, viz., that the civilized world of to-day is a unit, that it must move as a whole, that with the means we have de vised of a common consent in regard to the ends of human life and the means of attaining them has come also the necessity that we should move onward in civilization by a common consent. The barriers of race, religion, language, and nationality are melting away under the operation of the same forces which have to such an extent annihilated the obstacles of distance and time. Civilization is con stantly becoming more uniform. The conquests of some become at once the possession of all. It follows that our scientific knowledge of the laws which govern the life of men in society must keep pace with this development or we shall find our social tasks grow faster than our knowl edge of social science, and our society will break to pieces 218 THE FORGOTTEN MAN AND OTHER ESSAYS under the burden. How, then, is this scientific knowledge to grow? Certainly not without controversy, but certainly also not without coherent, steady, and persistent effort, proceeding on the lines already cut, breaking new ground when possible, correcting old errors when necessary.

3. It is another feature of the modern industrial system that, like every high organization, it requires men of suita ble ability and skill at its head. The qualities which are required for a great banker, merchant, or manufacturer are as rare as any other great gifts among men, and the quali ties demanded, or the degree in which they are demanded, are increasing every day with the expansion of the modern industrial system. The qualities required are those of the practical man, properly so called: sagacity, good judg ment, prudence, boldness, and energy. The training, both scientific and practical, which is required for a great master of industry is wide and various. The great movements of industry, like all other great movements, present subordi nate phenomena which are apparently opposed to, or in consistent with their great tendencies and their general character. These phenomena, being smaller in scope, more directly subject to observation and therefore apparently more distinct and positive, are well calculated to mislead the judgment, either of the practical man or of the scientific student. In nothing, therefore, does the well-trained man distinguish himself from the ill-trained man more than in the balance of judgment by which he puts phenomena in their true relative position and refuses to be led astray by what is incidental or subsidiary. If, now, the question is asked, whether we have produced a class of highly trained men, competent to organize labor, transportation, com merce, and banking, on the scale required by the modern system, as rapidly as the need for them has increased, I believe no one will answer in the affirmative.

4. Another observation to which we are led upon noticCOMMERCIAL CRISES 219 ing the character of the modern industrial system is that any errors or follies committed in one portion of it will produce effects which will ramify through the whole sys tem. We have here an industrial organism, not a mere mechanical combination, and any disturbance in one part of it will derange or vitiate, more or less, the whole. The phenomena which here appear belong to what has been called fructifying causation. One economic error produces fruits which combine with those of another economic error, and the product of the two is not their sum, nor even their simple product, but the evil may be raised to a very high power by the combination. If a number of errors fall to gether the mischief is increased accordingly. Currency and tariff errors constantly react upon each other, and multi ply and develop each other in this way. Furthermore, the errors of one nation will be felt in other nations through the relations of commerce and credit which are now so close. There is no limit to the interest which civilized nations have in each other's economic and political wisdom, for they all bear the consequences of each other's follies.

Hence when we have to deal with that form of economic disease which we call a commercial crisis, we may trace its origin to special errors in one country and in another, and may trace out the actions and reactions by which the effects have been communicated from one to another until shared by all; but no philosophy of a great commercial crisis is adequate nowadays unless it embraces in its scope the whole civilized world. A commercial crisis is a distur bance in the harmonious operation of the parts of the in dustrial organism. During economic health, the system moves smoothly and harmoniously, expanding continually, and its health and vigor are denoted by its growth, that is, by the accumulation of capital, which stimulates in its turn the hope, energy, and enterprise of men. Industrial disease is produced by disproportionate production, a ~!lO THE FORGOTTEN MAN AND OTHER ESSAYS wrong distribution of labor, erroneous judgment in enter prise, or miscalculations of force. These all have the same effect, viz., to waste and destroy capital. Such causes disturb, in a greater or less degree, the harmonious work ing of the system, which depends upon the regular and exact fulfillment of the expectations which have been based on cooperative effort throughout the whole industrial body.

The disturbance may be slight and temporary, or it may be very serious. In the latter case it will be necessary to arrest the movement of the whole system and to proceed to a general liquidation, before starting again. Such was the case from 1837 to 184~, and such has been the case for the last five years. It is needless to add that this arrest and liquidation cannot be accomplished without distress and loss to great numbers of innocent persons, and great positive loss of capital, to say nothing of what might have been won during the same period but must be foregone. The financial organization is the medium by which the various parts of the industrial and commercial organism are held in harmony. It is by the financial organization that capital is collected and distributed, that the friction of exchanges is reduced to a minimum, and that time is economized, through credit, between production and con sumption. The financial system furnishes three indicators prices, the rate of discount, and the foreign exchanges through which we may read the operation of economic forces now that their magnitude makes it impossible to inspect them directly. Hence the great mischief of usury laws which tamper with the rate of discount, and of fluc tuating currencies which falsify prices and the foreign exchanges. They destroy the value of the indicators, and have the same effect as tampering with the scales of a chemist or the steam-gauge of a locomotive.

In the matter of prices we have another difficulty to contend with, which is inevitable in the nature of things.

COMMERCIAL CRISES We must choose some commodity to be the denominator of value. We can find no commodity which is not itself subject to fluctuation in its ratio of exchange with other things. Great crises have been caused in past times by fluctuations in the value of the commodities chosen as money, and such an element is, no doubt, at hand in the present crisis, although it had nothing to do with bringing it about. It follows that any improvement in the world's money is worth any sacrifice which it can possibly cost, if it tends to secure a more simple, exact, and unchanging standard of value. The next point of which I wish to speak is easily intro duced by the last remark; that point is the cost of all improve ment. The human race has made no step whatever in civilization which has not been won by pain and distress. It wins no steps now without paying for them in sacrifices. To notice only things which are directly pertinent to our present purpose: every service which we win from nature displaces the acquired skill of the men who formerly per formed the service; every such step is a gain to the race, but it imposes on some men the necessity of finding new means of livelihood, and if those men are advanced in life, this necessity may be harsh in the extreme. Every new machine, although it saves labor, and because it saves labor, serves the human race, yet destroys a vested interest of some laborers in the work which it performs.

It imposes on them the necessity of turning to a new occu pation, and this is hardly ever possible without a period of distress. It very probably throws them down from the rank of skilled to that of unskilled labor. Every new ma chine also destroys capital. It makes useless the half worn-out machines which it supersedes. So canals caused capital which was invested in turnpikes and state coaches to depreciate, and so railroads have caused the capital invested in canals and other forms to depreciate. I see no !l!l!l THE FORGOTTEN MAN AND OTHER ESSAYS exception to the rule that the progress won by the race is always won at the expense of some group of its members. Anyone who will look back upon the last twenty-five years cannot fail to notice that the changes, advances, and improvements have been numerous and various. We are accustomed to congratulate each other upon them. There can be no doubt that they must and will contribute to the welfare of the human race beyond what anyone can now possibly foresee or measure. I am firmly convinced, for my opinion, that the conditions of wealth and civilization for the next quarter of a century are provided for in excess of any previous period of history, and that nothing but human folly can prevent a period of prosperity which we, even now, should regard as fabulous. We can throw it away if we are too timid, if we become frightened at the rate of our own speed, or if we mistake the phenomena of a new era for the approach of calamity, or if the nations turn back to medireval darkness and isolation, or if we elevate the follies and ignorances of the past into elements of economic truth, or if, instead of pursuing liberty with full faith and hope, the civilized world becomes the arena of a great war of classes in which all civilization must be destroyed. But, such follies apart, the conditions of pros perity are all provided.

We must notice, however, that these innovations have fallen with great rapidity upon a vast range of industries, that they have accumulated their effects, that they have suddenly altered the currents of trade and the methods of industry, and that we have hardly learned to accommodate ourselves to one new set of circumstances before a newer change or modification has been imposed. Some inven tions, of which the Bessemer steel is the most remarkable example, have revolutionized industries. Some new chan nels of commerce have been opened which have changed the character and methods of very important branches of COMMERCIAL CRISES 223 commerce. We have also seen a movement of several nations to secure a gold currency, which movement fell in with a large if not extraordinary production of silver and altered the comparative demand and supply of the two metals at the same time. This movement had nothing arbitrary about it, but proceeded from sound motives and reasons in the interest of the nations which took this step.

There is here no ground for condemnation or approval. Such action by sovereign nations is taken under liberty and responsibility to themselves alone, and if it is taken on a sufficiently large scale to form an event of importance to the civilized world, it must be regarded as a step in civilization. It can only be criticized by history. For the present, it is to be accepted and interpreted only as an indication that there are reasons and motives of self-interest which can lead a large part of the civilized world to this step at this time. The last twenty-five years have also included political events which have had great effects on industry. Our Civil War caused an immense destruction of capital and left a large territory with millions of inhabitants almost entirely ruined in its industry, and with its labor system exposed to the necessity of an entire reformation. Part of the expendi tures and losses of the war were postponed and distributed by means of the paper currency which, instead of imposing industry and economy to restore the losses and waste, created the foolish belief that we could make war and get rich by it. The patriotic willingness of the nation to be taxed was abused to impose taxes for protection, not for revenue, so that the industry of the country was distorted and forced into unnatural development. The collapse of 1873, followed by a fall in prices and a general liquidation, was due to the fact that everyone knew in his heart that the state of things which had existed for some years before was hollow and fictitious. Confidence failed because every 224 THE FORGOTTEN MAN AND OTHER ESSAYS one knew that there were no real grounds for confidence.

The Franco-Prussian war had, also, while it lasted, pro duced a period of false and feverish prosperity in England. It was succeeded by great political changes in Germany which, together with the war indemnity, led to a sudden and unfounded expansion of speculation, amounting to a mania. Germany undoubtedly stands face to face with a new political and industrial future, but she has postponed it by a headlong effort to realize it at once. In France, too, the war was followed by a hasty, and, as we are told, unwise extension of permanent capital, planned to meet the ex traordinary demand of an empty market. In England the prosperity of 1870-187~ has been followed as usual by de velopments of unsound credit, bad banking, and needless investments in worthless securities. Here then we have, in a brief and inadequate statement, circumstances in all these great industrial nations peculiar to each, yet certainly sufficient to account for a period of reaction and distress. We have also before us great fea tures of change in the world's industry and commerce which must ultimately produce immeasurable advantages, but which may well, operating with local causes, produce temporary difficulty; and we have to notice also that the local causes react through the commercial and credit rela tions of nations to distribute the evil.

It is not surprising, under such a state of things, that some people should lose their heads and begin to doubt the economic doctrines which have been most thoroughly es tablished. It belongs to the symptoms of disease to lose confidence in the laws of health and to have recourse to quack remedies. I have already observed that certain phenomena appear in every great social movement which are calculated to deceive by apparent inconsistency or divergence. Hence we have seen the economists, instead of holding together and sustaining, at the time when it COMMERCIAL CRISES 225 was most needed, both the scientific authority and the positive truth of their doctrines, break up and run hither and thither, some of them running away altogether. Many of them seem to be terrified to find that distress and misery still remain on earth and promise to remain as long as the vices of human nature remain. Many of them are fright ened at liberty, especially under the form of competition, which they elevate into a bugbear. They think that it bears harshly on the weak. They do not perceive that here "the strong" and "the weak" are terms which admit of no definition unless they are made equivalent to the industrious and the idle, the frugal and the extravagant.

They do not perceive, furthermore, that if we do not like the survival of the fittest, we have only one possible alter native, and that is the survival of the unfittest. The former is the law of civilization; the latter is the law of anti civilization. We have our choice between the two, or we can go on, as in the past, vacillating between the two, but a third plan - the socialist desideratum - a plan for nourishing the unfittest and yet advancing in civilization, no man will ever find. Some of the crude notions, however, which have been put forward surpass what might reason ably have been expected. These have attached themselves to branches of the subject which it is worth while to notice. 1. As the change in the relative value of the precious metals is by far the most difficult and most important of the features of this period, it is quite what we might have expected that the ill-trained and dilettante writers should have pounced upon it as their special prey. The dabblers in philology never attempt anything less than the problem of the origin of language. Every teacher knows that he has to guard his most enthusiastic pupils against precipi tate attempts to solve the most abstruse difficulties of the science. The change in the value of the precious metals which is going on will no doubt figure in history as one of ~~6 THE FORGOTTEN MAN AND OTHER ESSAYS the most important events in the economic history of this century. It will undoubtedly cost much inconvenience and loss to those who are in the way of it, or who get in the way of it. It will, when the currency changes connected with it are accomplished, prove a great gain to the whole commer cial world. The nations which make the change do so because it is important for their interests to do it. Now, suppose that it were possible for those who are frightened at the immediate and temporary inconveniences, to arrest the movement - the only consequence would be that they would arrest and delay the inevitable march of improve ment in the industrial system.

2. The second field, which is an especial favorite with the class of writers which I have described, is that of prog nostications as to what developments of the economic system lie in the future. Probably everyone has notions about this and everyone who has to conduct business or make investments is forced to form judgments about it. There is hardly a field of economic speculation, however, which is more barren. S. The third field into which these writers venture by preference is that of remedies for existing troubles. The popular tide of medicine is always therapeutics, and the less one knows of anatomy and physiology the more sure he is to address himself exclusively to this department, and to rely upon empirical remedies. The same procedure is followed in social science, and it is accompanied by the same contempt for scientific doctrine and knowledge and remedies. To bring out the points which here seem to me important, it will be necessary to go back for a moment to some facts which I have already described.

One of the chief characteristics of the great improvements in industry, which have been described, is that they bring about new distributions of population. If machinery dis places laborers engaged in manufactures, these laborers are COMMERCIAL CRISES 227 driven to small shopkeeping, if they have a little capital; or to agricultural labor, if they have no capital. Improve ments in commerce will destroy a local industry and force the laborers to find a new industry or to change their abode. When forces of this character cooperate on a grand scale, they may and do produce very important redistributions of population. In like manner legislation may, as tariff legislation does, draw population to certain places, and its repeal may force them to unwelcome change. We may state the fact in this way: let us suppose that, in 1850, out of every hundred laborers in the population, the eco nomical distribution was such that fifty should be engaged in agriculture, thirty in manufacturing, and the other twenty in other pursuits. That is to say that, with the machinery and appliances then available, thirty manu facturing laborers could use the raw materials and food produced by fifty agricultural laborers so as to occupy all to the highest advantage. Now suppose that, by improve ments in the arts, twenty men could, in 1880, use to the best advantage the raw materials and food produced by sixty in agriculture. It is evident that a redistribution would be necessary by which ten should be turned from manufacturing to land. That such a change has been pro duced within the last thirty years and that it has reached a point at which is setting in the counter movement to the former tendency from the land to the cities and towns, seems to me certain. There are even indications of great changes going on in the matter of distribution which will correct the loss and waste involved in the old methods of distribution long before any of the fancy plans for correct ing them can be realized, and which are setting free both labor and capital in that department. Now if we can economize labor and capital in manufacturing, transporta tion, and distribution, and turn this labor and capital back upon the soil, we must vastly increase wealth, for that 228 THE FORGOTTEN MAN AND OTHER ESSAYS movement would enlarge the stream of wealth from its very source.

Right here, however, we need to make two observations. 1. The modern industrial system which I have described, with its high organization and fine division of labor, has one great drawback. The men, or groups of men, are dissev ered from one another, their interests are often antagonis tic, and the changes which occur take the form of conflicts of interest. I mean this: if a shoemaker worked alone, using a small capital of his own in tools and stock, and working for orders, he would have directly before him the facts of the market. He would find out without effort or reflection when "trade fell off," when there was risk of not replacing his capital, when the course of fashion or competition called upon him to find other occupation, and so on. When a journeyman shoemaker works for wages, he pays no heed to these things. The employer, feeling them, has no recourse but to lower wages. It is by this measure that, under the higher organization, the need of new energy, or of a change of industry, or of a change of place is brought home to the workman. To him, however, it seems an arbitrary and cruel act of the master. Hence follow trade wars and strikes as an especial phenomenon of the modern system. It is just because it is a system, or more properly still, an organism, that the readjustments which are necessary from time to time in order to keep its parts in harmonious activity, and to keep it in harmony with physical surroundings, are brought about through this play of the parts on each other.