depressions are not due to protectionist or free-trade systems, to despotic or republican forms of government, to paper or metallic money systems, to capitalistic or domestic forms of industry. Depressions and booms have alternated in all countries, regardless of fiscal, monetary, or political conditions. They were known 200 years before the coming of modern capitalism. Nor can the explanation be found where Jevons sought it—in the sky. Jevons noted the periodicity of depressions, and attributed it to failures in the world's harvest, which in turn were the result of the periodical appearance of spots on the sun; hence the famous sun-spot theory. But one of the worst crises of last century came in a year of excellent harvest, and when the sun's face was exceptionally freckled; the theory therefore had to be discarded as 66 mere romancing,” and one writer declared that sun-spots were no more the cause of depression than were the spots on a leopard's back. In recent years, however, the theory has been revived in modified form, and all now admit that the effect of the weather on crops may have much to do in causing commercial disturbances.

Other explanations also fall to the ground for want of definite data to support them. For instance, those of Marx and Hobson, known as the underconsumption theories, were to the effect that labour receives so small a share of the wealth it helps to create that it is unable to purchase all the goods it produces. Capital receives as its share more than it can spend; it invests the surplus, and so increases the amount of goods produced, without increasing in the same ratio the spending power of labour. Hence eventually the markets are overcrowded with goods which the labourers cannot buy, and so there is a depression. Men are thrown out of work until the surplus stocks are sold off. In short, depression and want are due to over-plenty of goods, or rather to the inability of the mass of the people to buy more, because of the unequal distribution of wealth. To remedy this the socialist looks to socialism as a remedy. Hobson urges bigger wages, smaller profits, and less saving, which would at once increase the spending power of the bulk of the population and reduce the fear of over-investment and over-production. These theories have not yet been supported however by adequate data. There is nothing available to show, for example, that the over-supply of houses, boots, clothes, or food is responsible for any crisis.

No one explanation will suffice. The economic system is like a big complex machine. When a machine stops it may be because something has gone wrong in any one of its hundred parts and adjustments; it may be because of the inexperience or inattention of the man in charge; it may be due to a breakdown or stoppage of the power supply; it may be because the man in charge of the machine or the power plant wants it to stop. Any one of these causes produces the same result. So it is in the business world. A crisis and depression may be the result of any one of a great number of causes. These causes can be grouped under four headings:

(1) The Failure to Realize a Profit. The aim of business is the making of profit. Men will not carry on production or sale unless they can pay their way and have a surplus left over for themselves. Hence so long as a big profit is possible investment and production are keen, and prosperity is general. But when for any reason-increased wages, cost of raw material and rate of interest or discount, inability to push prices higher to make up for these increases, shrinkage of demand, etc.-profit declines and possibly disappears, then activity is checked. No new firms are established, no new machines, rolling-stock, buildings, etc., are wanted; the demand for raw

material declines, and a depression develops. This shrinkage of the rate of profit in the last stage of a boom is a well-known feature of the business cycle, and is regarded by some authorities as the general cause of depressions. It leads to a consideration of one of the most important features of modern industry--i.e., speculation. Production to-day is often carried on in anticipation of demand. Between the buying of the raw material and the packing of the finished article months or years may elapse. The business man buys and makes because he expects to be able to sell his goods, when they are ready. at a price which will repay him for his outlay, risk, and trouble. Such speculation is legitimate; it is necessary if mankind is to have its goods waiting to be bought when it wants them. But obviously the speculator's expectations may not be fulfilled. People may not want the goods, or they may be unwilling to pay the price asked; or other speculators may also have been producing the same goods in anticipation of the demand, and so competition between rivals compels a reduction of price. In any such case the speculator suffers, and may be ruined.

(2) Unwise Investment. In times of booming trade, when everyone desires to get rich quickly, many tempting but unsound schemes are dangled before the eyes of the public. Speculation of an illegitimate kind becomes rife; the stock exchanges are the scene of frantic booms, in which shares, good and bad, change hands at fabulous prices. Speculation in land and goods is general. Eventually these inflated prices break; no dividends are forthcoming, and those who have been unable to "unload" find themselves with costly but useless scrip, land, or goods on their hands.

(3) Unwise Finance. As we saw in the last chapter, credit is the motive-power which makes it possible for the economic machine to work. Practically every enterprise depends at some time or other upon being able to get advances from the banks, either in the form of overdrafts or by the discounting of bills. Now banks are run for profit, like all other enterprises, and therefore in boom times they are tempted to grant the many applications for credit, steadily raising their rate of interest as the applications grow more numerous. Hence they may give credit to unsound ventures; they may allow too much credit, and pass the safety line in the relation between advances and reserves. Eventually they realize the danger of their position, and endeavour to get back to safety; they refuse any new applications for credit, increase the rate of interest on existing advances, and order their debtors to reduce their overdrafts. Thus in order to save themselves they may take steps which paralyze further production.

(4) The Forgetfulness and Optimism of the Average Man. Decade after decade similar developments take place, similar blunders are made. This is undoubtedly due to the fact that men so rapidly and easily forget the past. In a crisis they burn their fingers; but the blisters eventually get better. After each collapse they vow that never, never again will they be bitten, just as after every war they vow that there shall be no more wars. But when the road to profit opens once more, the vows are forgotten, the unpleasant memories fade. Men go in to conquer; of course, this time it is going to be different, and they will know when to stop. But in practice it is not different, and men get so caught up in the whirl that probably they could not stop even if they remembered to want to do so.

Under the stress of the forces just outlined, a period of prosperity comes to an end, and, if nothing untoward interferes, industry sinks gradually back into quietude. Unfortunately, it has often happened that just at the critical

moment something snaps, some economic earthquake takes place. This may be one of many things-the collapse of some big firm, a bad harvest, the breath of war or peace, new legislation concerning trusts, wages, tariffs, or taxation, an industrial dispute, repudiation of debts by some government, the discovery of a new cheap process, the breaking of prices in one or more commodities, etc. Should such an event happen at the critical moment the period of boom and over-confidence may end in a short, sharp spasm, a crisis, maybe degenerating into a panic, with a rapid plunge into depression.

Details of 19th Century Fluctuations. Let us illustrate the above analysis by examining some of the chief fluctuations of the last hundred years. The depression which followed the Peace of 1815 was due to two main causes. (1) Europe wanted goods, just as she wanted them in 1920, but was too poor to buy anything but the barest necessities of life. Taxation was heavy, money was scarce, and English firms which had produced goods in vast quantities, hoping for big orders when peace opened the European markets, found it impossible to sell their wares. (2) The stoppage of government orders for war materials meant the disappearance of a customer who had been buying at least £1,000,000 of goods a week. A bad harvest in England (1816) and the failure of the Irish potato crop added to the misery, and so the years 1815-18 were times of general suffering, with frequent riots, widespread theft, and murders for bread. In Switzerland some villages set up big boilers in which to make bone soup, and boiled the bones three times over.

Out of this misery emerged gradually a time of prosperity. By 1820 the tide was rising high, and the commercial world passed into a state of almost insane optimism, which eventually brought the crash of 1825. That collapse was due to three causes. (1) Over-investment and share speculation in home industries, such as canals, gas, mining, and manufactures. (2) The fatal lure of overseas investments. Big loans were made to the South American republics, foreign mining companies were floated to exploit the wealth of a land where even domestic utensils were said to be made of silver and gold, and merchants shipped vast quantities of goods to South America in search of buyers. (3) Excessive loans by the private banks, chiefly in the form of notes. Everybody was in a hurry to become rich, and blindly rushed to invest. In three years 600 companies were floated, of which 60 were foreign mining concerns. Then in 1825, when the companies failed to pay the dividends expected, when the republics repudiated their debts or were unable to pay any interest, and when the skates and warming-pans sent to Rio de Janeiro would not sell, panic set in, and there was a run on the banks. The latter could not honour all their own notes, and in six weeks 70 provincial banks failed. From the misery which followed Britain gradually recovered, experienced a boom, and fell again in 1837. On this occasion "wild cat'' banking, speculation, and over-issue of notes, especially in America, were largely responsible. England was hit by the failure of over 600 American banks in 1837, and the period up to 1840 was black. Any further rash issue of notes was checked by the Bank Charter Act of 1844. Again came recovery, boom, and collapse in 1847. The preceding years had seen heavy investment in railways. In four years, thanks to the activities of Hudson, the railway (share) king, nearly £200,000,000 of railway shares had been floated. Some were good, some were not. The thirst for profit took many innocent people into speculation, buying in order to sell quickly at a higher price. By 1847 it had become evident that there would be little return

on some shares, and no return on others. The bubble was pricked, the railway mania turned into a panic, and depression came.

Of the subsequent depressions little need be said. That of 1857 was due to the collapse of the American railway boom, and had serious effects in Britain and Germany. That of 1866 was the result of abuses of the new toy, limited liability joint stock. One big English firm, Overend & Gurney, which had a reputation second only to the Bank of England, made advances to unsound ventures, and fell to pieces with a resounding crash when the character of the debtor companies was discovered. Black Friday, May 11, 1866, is the classic example of a panic. Since that time Great Britain has been free from any such dramatic breakdown. This is due to the more cautious credit policy and growing amalgamation of the banks, the freedom from excessive note issue, and the increased solidarity in the financial world. Big banks have realized that if they allow any one of their number to break the effect on all will be disastrous. Hence on numerous occasions, when one bank has been tottering, the others, including the Bank of England, have come to its assistance, shouldered its responsibilities, and saved the situation. In America the crisis disappeared much later. Lack of banking solidarity and an inelastic note issue made it difficult to cope with such crises as developed in 1893 and 1907. In 1913 therefore the Federal Reserve Bank was established to stand behind the banks, enforce a more cautious policy of credits, and give assistance when trouble threatened.

The British depression of 1894 was due to paper-money troubles and overcapitalization of trusts in America, and to the bank and land smashes in Australia; that of Germany in 1901 was the result of a period of feverish profit-hunting, over-investment, and speculation. In 1907 trust antics played an important part, and the deliberate attempts of certain interests to break a rival helped to toss Wall Street into chaos and the world into depression. The depression of 1920 showed in its development many features common to earlier periods. Many parts of the world were too poor to buy even necessaries, and the exchange position rendered foreign trade precarious and unsatisfactory. The demand for higher interest, wages, and profit made it necessary to push prices ever higher until a point was reached when people would not or could not buy. The war period saw many firms inflate their capital enormously, and during 1919 and early 1920 company flotations were countless. The check on demand and the reduction of government purchases made the realization of an adequate rate of profit on this enlarged capital impossible. Finally, many firms bought raw material or goods at high prices, hoping to be able to sell them at still higher ones, but their hopes were not fulfilled. The banks, after having allowed liberal credit, began in the middle of 1920 to draw in their horns; interest rates were raised, new credit was refused, and old overdrafts had to be reduced.

Fluctuations in Australia. In Australia the prime factor is to be found in the effect of the weather on agricultural or pastoral production. A drought brings financial difficulties, for the farmers cannot repay their loans to the banks, and a brief period of depression comes until the rain brings a better day. But financial and commercial considerations have also played an important part. Dealings in land, live stock, and mining shares tend at times to foster the speculative spirit, which eventually over-reaches itself in its quest for gain and brings down the whole country with it. In 1827, for instance, there was a wild outburst of speculative live stock buying; men bought simply to sell at a profit. Then came a drought, which knocked the

whole movement to pieces and plunged the colony into gloom. Similarly in 1843 a period of vigorous land speculation in Melbourne, marked by subdivision sales and the consumption of unlimited champagne, came to a sudden end with disastrous results. This desire to acquire wealth simply by buying in order to sell again at a profit, instead of by actual production, has time and time again brought misfortune to one or other of the states. The big smash of 1893 was largely the result of a boom in city and suburban allotments. Great expectations were entertained of the early rapid growth of Melbourne and other cities. Hence began a rush to buy and sell land around the cities. The banks caught the fever, and lent money heavily to buyers, creating a large issue of notes in order to be able to do so. Then came the check, with the realization that the cities were not going to grow so quickly. The exaggerated prices paid for land were not maintained, and both the banks and those who found themselves with the land left on their hands were faced with ruin.

Books Recommended.

Hobson, J. A., "The Industrial System''; Hyndman, H. M., “Commercial Crises of the 19th Century''; Beveridge, W. H., “‘Unemployment''; Mitchell, W., "Business Cycles'; Coghlan, T., 'Labour and Industry in Australia.''