CHAPTER II. THE PHENOMENA OF ECONOMIC FLUCTUATIONS. § 1. GENERAL SURVEY.

Anyone who realizes that all life, whether regarded from the point of view of Nature or of society, is governed by a certain rhythm, will instinctively suppose that it cannot be otherwise in the economic sphere. That it is so need therefore cause no surprise. On the contrary, it would be surprising if the fundamental law of rhythm did not operate here.¹ In fact the first thing which must be pointed out is that the rhythm of economic life is a complex one, consisting in the main of three types of undulation which are distinguishable from one another by their amplitude, their intensity and their extensiveness (that is, their spatial extent), and which, as they occur simultaneously and in close proximity to each other, have a far-reaching effect one upon the other.

First of all we have the undulation with the shortest vibration, a rhythm to which we usually apply the somewhat restricted term “seasonal fluctuations.” I say “restricted,” because seasonal fluctuations do not merely include the actual climatic rhythm of the seasons, which leaves its mark in some way or other on almost every branch of production, particularly, of course, on agriculture, the definitely seasonal industries (building, inland navigation, industries producing agricultural implements, &c), and foreign trade. They also include every other possible short-wave oscillation, such as those fluctuations connected with fixed habits of payment and delivery, changes in fashion, and many more. We shall deal, then, in general with those economic fluctuations the amplitude of which does not exceed one year. Among these short-wave variations we may therefore also include those economic fluctuations which I have called “Anticipatory Cycles,”² to denote the well-known phenomenon that supply or demand tends temporarily to concentrate—if a change in prices is about to take place or is assumed to be about to take place—by way of advancing future or postponing present transactions (buyers’ strike). This can often happen outside the actual economic cycle (for example, when political events are in the balance or when a new tax on some commodity is expected), but it has, of course, a special significance when it happens within the compass of the cycle itself, as this attitude of buyers and sellers, which is expressed in the “anticipatory cycle,” is apt to accentuate the direction in which the cycle is moving at the moment, stimulating the upward trend or deepening the depression. The consequence of these phenomena, combined with vicissitudes of a local or individual kind, is that, independently of the effects of the economic cycle proper, we always have a certain minimum of unemployed workers and means of production. The resulting “margin of unemployment” in countries like England and Germany, before the World War, was estimated at something like 2-3%.³ On the other hand, of course, the seasonal fluctuations can easily obscure the picture of the cycle proper, and lead to a false economic prognosis, if seasonal influences have not been eliminated from the statistics relating to the cycle, which is only possible within certain limits.

We must guard against the belief that the seasonal fluctuations form a self-contained rhythm. On the contrary, they are as much influenced in intensity and amplitude by the cycle proper as they in their turn influence the latter. Thus Akerman in particular has shown that the seasonal fluctuations in the production of pig-iron are very marked during a period of depression, while they become insignificant during a boom. Similarly, he advances the interesting theory that seasonal fluctuations play an active part in the course of the cycle, so that, for instance, the seasonal increase in economic activity in spring or autumn may contribute towards turning the tide of the depression. However that may be, one thing at least seems evident, that it is very difficult clearly to separate seasonal fluctuations from cyclical fluctuations.⁴

We turn now from this description of the seasonal fluctuation to the other extreme, the so-called secular trend of development, which leaves its mark on economic history in the shape of giant waves. It is the underlying trend of all economic data, continuing over long periods and through seasonal and cyclical variations of production, population, the volume of business, foreign trade, prices, accumulation of capital, &c. This is the point where the economist must be prepared to give place to the historian and historical philosopher, and to let them decide the vexed question of whether it is possible also to discover and determine an economic rhythm, an up and down movement in the long periods of world history, running parallel to the course of political and cultural development. Changes in the basic “data” of national and world economy (changes in technique, in the popularity of articles of consumption, in forms of enterprise, in the organization of the economic system, in the size and composition of the population, changes in the geographical location of markets, in economic ethics, in the political, social, and natural milieu, and many other things) have of late been described as structural changes in contrast to merely cyclical (or conjunctural) changes. Many people to-day are of the opinion that the present world crisis should be viewed not as a cyclical but as a structural phenomenon, just as it was felt that there were many structural factors in the boom which preceded the crisis, especially in the United States. Within the long-run development during the major chronological periods whose laws we are accustomed to examine only from the point of view of the historical philosopher, we observe a certain well-defined regularity to which attention has only comparatively recently been directed. A closer study of the economic development of the last 100 years shows that every 20-25 years or so a period whose general course reveals an upward trend is succeeded by a period whose economic data prove that the general tendency has been downward. Apart from the fluctuations within these periods the average price level, business profits and the production figures in the one period, the depression period, are lower than those in the other, the period of prosperity. These long-term periods of depression and prosperity naturally also lend to the cycles a favourable or unfavourable note. Thus in the period from 1848-1873 the upward tendency dominated, while from 1895-1913. The riddle of these long waves of depression and prosperity has not yet been fully solved.⁵

Of course, it is still permissible to assume that mere chance may have played a large part in determining the situation. This assumption is all the more permissible since the statistical material relating to economic events is very incomplete for the greater part of the nineteenth century. Anyone, however, who is not satisfied with this explanation, could suggest two other possible causes. First, it is a striking fact that periods of depression have hitherto always followed a particularly violent crisis, and, indeed, the aforementioned period of depression of 1873-1894 is the best example of this. One may therefore assume that it took the economic system a long time to recover from the convulsions of that crisis. Secondly, however, it is to be assumed that the difference in the average price level in periods of depression and prosperity is connected with corresponding changes in the financial system. This is quite clearly shown by a comparison of the periods 1873-1894 and 1895-1913. Compared with its predecessor and especially with its successor, the first-named period is distinguished by a scarcity of gold relatively to the increased world monetary demand brought about by the international extension of the gold standard, while the period of 18951913 shows an increase in the monetary supply, due particularly to the continual spread of the use of bank money (cheques).

Within this double rhythm of the short-wave seasonal fluctuation and the long-wave oscillation from prosperity to depression there vibrates the most important rhythm of economic life, the rhythm of the general trade or business cycle, which has sometimes been christened the “Juglar Cycle,” in honour of the pioneer student of the trade or business cycle, the French economist Clement Juglar.⁶

§ 2. THE NATURE OF THE TRADE CYCLE.

It is a prevalent custom to give the term “trade cycle” a very wide meaning, making it include every fluctuation to which the market is subject, be it short wave or long wave, local, national or international in nature. It is in this sense that the term is often used in the language of the commercial world. In science, however, it has become more and more customary to reserve the term “trade cycle” for that type of economic fluctuation which is distinguished by the following predominant peculiarities :

1. It is as a rule a total or all-embracing phenomenon, that is, it is one which affects the whole economic process, over and above independent fluctuations of particular branches of economic activity. This “all-embracing” character of the trade cycle can be seen from the fact that as a rule the statistical indices which reflect the general course of the whole economic process change markedly during it. This applies especially to the price level, the volume of money and credit, the rate of interest and of wages, the level of employment, and volume of production. As a “total” phenomenon the fluctuation is also apt to affect the budget and the population figures.

It is in accordance with the logic of economic development, which tends towards an increasing degree of integration of the various branches of the economic system, particularly of late of those connected with money and credit, that the “totality” of the cycle should extend increasingly into the international sphere. Thus one of the chief characteristics of the present crisis is that it is a world crisis in the true sense of the word, and is afflicting the whole earth in varying degrees, sweeping over the globe like a great flood, indifferent as to whether it is inundating rich or poor countries, conquerors or conquered, democrats or dictators, lands in the tropical or temperate zones, agrarian or industrial countries. The details of how trade cycles become international in their effect cannot be fully discussed here. Only one thing must be emphasized, and that is that the connexion between the currency systems of the various countries effected through the gold standard plays a very considerable part in the international diffusion of the waves of the trade cycle. If there is a boom in an economically important country, it is synonymous with an expansion of the supply of credit and with a tendency to drive up prices. The trade balance becomes unfavourable, gold flows out, and starts a similar tendency, to an expansion of credit in the country receiving the gold.⁷ That is the basic pattern of the relationship as far as the monetary diffusion of the waves of the economic cycle is concerned. Hand in hand with it goes the international connexion formed by international trade in credit and goods.

2. The form of the cyclical fluctuation is furthermore distinguished by the fact that (as its name implies) it is cyclical and is subject to a characteristic rhythm. That is to say that each phase of the trade cycle is to be regarded as a definite though not always strictly diagnosable phase, which along with other phases goes to form an economic cycle. Each phase develops from the one before—in a way which the theory of economic cycles has to explain—until the initial phase is again reached and a new cycle begins. The phase of the depression (the fall) is followed by the phase of the boom (the rise), which sooner or later, with or without the acute change which we call a crisis, passes into the phase of a new depression which then makes way for a new economic cycle. This rough picture of the sequence of phases can be analysed in greater detail. Thus, according to Spiethoff,⁸ who further subdivides the “cyclical phases” into “alternating stages,” the typical course followed by the trade cycle may be analysed as follows: (1) recession, (2) primary rise, (3) secondary rise, (4) boom, (5) shortage of capital, (6) crisis,—recession and primary rise together forming the “slump,” and the secondary rise, boom and shortage of capital together forming the “up-swing.” The Harvard Committee of Business Research divides the business cycle into five phases: depression, recovery, business prosperity, financial strain, and industrial crisis. The German Institut für Konjunkturforschung has decided in favour of a four-part schema: depression, business prosperity, acute strain, and crisis. These are all refinements of the basic type of the cyclical economic fluctuation, which continually repeats itself in expansion and contraction.

We must not forget, however, that these pictures of the phase sequence only represent a basic schema, which is in reality liable to manifold variations. No trade cycle is an exact replica of its predecessor. Each has its special peculiarities, which also give a special character to the individual phases. They vary in their length, in their intensity, in their predominant symptoms, in their geographical extent and in their effect upon the individual branches of the economic system; and, finally, also in the speed with which they spread. Lastly, economic history shows more than one example of an economic phase relapsing, after a short time, into the preceding phase, as, e.g., a depression being followed by a new depression after a very short period of recovery. Such relapses are so frequent that some students in this field (especially in the United States) distinguish a still shorter cycle of half the duration within the “Juglar Cycle” (the so-called “40-month cycle”). An example of this secondary fluctuation may be seen in the depression of 1903 in the United States, which followed the depression of 1900 after the short space of three years, while there was no sign of it in Europe.

3. This brings us to the question of the duration of the trade cycle, on which we have already touched. Speaking generally, we may say that the trade cycle lies between the short waves of seasonal variations and the long-period waves of prosperity and depression. Basing our calculations on the more or less reliable economic history of the last eighty years, we may assume that the average duration of the trade cycle—from one peak of the cycle to the other or from one crisis to the other—is a period of five to eleven years at the most, although here, too, there is no unanimity among students of the trade cycle and some assert that the irregularity is still greater.⁹ According to Spiethoff’s table German economic history from 1843-1913 shows the following turning points (from upward swing to recession, sometimes taking the acute form of a crisis)—

1847-48	Turning point from shortage of capital to recession.
1857	Crisis.
1866-67	Turning point from shortage of capital to recession.
1873	Crisis.
1882-83	Turning point from shortage of capital to recession.
1890-91	Turning point from shortage of capital to recession.
1900-01	Turning point from shortage of capital to recession.
1907-08	Turning point from shortage of capital to recession.
1913	Last turning point before the world war.

According to this table there was a space of six to nine years between the turning points. Still greater irregularities were calculated for England and the United States.

Even if it is possible to some extent to determine the absolute range in the time periods within which the trade cycle has hitherto run its course, the marked irregularity of the interval makes it impossible to speak of a real periodicity of the phases and crises in the sense of a uniformity of interval. All present-day students of the trade cycle are unanimous in agreeing that such a periodicity does not exist, although in the teachings of the older students of crises and cycles it had assumed almost a mythical character, and had given the trade cycle something of the uncanny inexorability of a cosmic process: indeed, they actually associated it with cosmic processes, especially with the frequency of the maximum number of sunspots. If, nevertheless, people still talk of a periodicity of crises and cycles, they can only mean the already explained cyclical character of business phases, that is, the regularity of the phase-sequence. As this use of the term is liable to lead to misunderstanding, however, it should be discontinued.

4. Finally, it is a significant peculiarity of the trade cycle that in spite of that “totality” to which we have already referred, it is first and foremost a fluctuation affecting the industrial-commercial section of the economic system, while agriculture, especially, more or less follows its own laws of movement and development, which in their turn of course exert a strong influence On the industrial-commercial movement. In this connexion it is essential to remember that the cyclical nature of the fluctuations in economic history can only be established from the moment when this industrial-commercial superstructure of the economic system assumed visible proportions, in other words, from the moment when the modern—“capitalistic”—structure of the economic system came into being. The trade cycle as we know it therefore doubtless made its first appearance in and with capitalism. This of course does not mean that even a socialistic regime, which retains the extensive use of capital and the highly differentiated character of the “capitalistic” economic order, will be exempt from similar rhythmical disturbances of its equilibrium.

That agriculture, on the whole, should obey its own laws of movement and development, follows from its peculiar nature, which clearly differentiates it from industry. The length of the periods of production and turnover, the enormous number of producers, peculiarities in the formation of agricultural prices, the special nature of the agricultural credit problem, the strong conservatism of the farmer (to whom agriculture represents not only a means of livelihood but also a form of life to which he clings despite the most adverse circumstances), the extraordinary irregularity in the supply of agricultural products, the marked inelasticity of the demand, the harassing slowness with which agricultural production costs are capable of adjustment to falling prices—all these things must be held responsible for the fact that while the cycle of rise and fall in agriculture may come into close contact with the trade cycle, it yet forms a movement by itself. It is correspondingly true that agrarian crises generally last very much longer than the industrial-commercial crises within the trade cycle, and easily become lingering and chronic in character. One of the worst agrarian crises of this kind was that which was in the main caused by the rise of the superior competition of the newly opened-up virgin territories (especially in the Middle-West of the United States of America). It lasted from the end of the ‘seventies till almost the end of last century. It is, however, surpassed in gravity and international extent by the present agrarian crisis, whose origins may be traced back to 1921 and which represents a gigantic process of contraction and liquidation mainly caused by over-production.

The inner connexions and inter-actions between agrarian and industrial cycles have as yet, comparatively speaking, been little explored, as they are in fact very intricate and by no means easy to define. While it cannot be disputed that prosperity or depression in the non-agricultural branches of the economy decides to a great extent whether there shall be prosperity or depression in agriculture (especially for the products the demand for which is more elastic, e.g., dairy products), the question as to how the state of agriculture, inversely, influences the state of business, cannot be answered so simply. A depression in agriculture may accompany an industrial-commercial prosperity—more, it may perhaps stimulate this prosperity by bringing down the price of food and raw material, and by driving workers into industry. The proximity of industrial-commercial prosperity and agrarian depression in the United States from 1925 to 1929 is a good example of this. The question must therefore be handled with the greatest caution.¹

§ 3. THE TYPICAL COURSE OF THE TRADE CYCLE.

When we speak of the typical course of the trade cycle, we must be careful to remember the already-mentioned fact that every trade cycle possesses features that cannot be compressed into any schema representing the “typical” course of the cycle. Any such schema will always have something artificial about it. And yet the number of typical characteristics in the individual phase of the trade cycle is great enough to justify such a schema of the “typical” course.

(1) The Upward Swing of the Cycle.

We begin at the point where business has reached the end of the period of depression and is in a state of comparative equilibrium, when all the important economic data have more or less settled down and the crisis is finally liquidated, while the forces which will bring about a new rise in economic activity have not yet begun to operate. Commodity prices, business profits, rates of interest and of wages persist at a low level, which combines with the reduced volume of production, the flagging of the spirit of enterprise, the lack of effective purchasing power, and the low level of employment, to form an unrelieved picture of economic lethargy. The easy state of the money market corresponds to the low rate of interest. With this, in turn, is connected, in this last stage of the depression, the rise of fixed-interest-bearing securities. This is partly because the easiness of the money market provides credits for speculative operations on the stock exchange, partly also, however, because the nominal interest on fixed-interest-bearing securities tends to be higher than the reduced rate of interest on new loans, and because, with the progressive consolidation of the economic position, owners of saving deposits gradually pluck up sufficient confidence to contemplate transferring their bank deposits into securities, but sometimes fight shy of investing in dividend-paying stock because of the still depressed state of production.

The longer this situation lasts, the more surely are all these factors of depression transformed into factors of recovery. The low rate of interest, the low prices, the low wages, the pressure of the demand, which was held off during the depression, the rationalization of the whole economic apparatus enforced by the depression—all these things have hitherto never failed in the long run to bring new sustenance to the spirit of enterprise as it slowly begins to revive, and to be spurred on by external stimuli (inventions, political events, bumper harvests, &c). The depression moves by its own motive force towards the upward swing, which now gradually develops and, avalanche-like, reinforces the symptoms diametrically opposed to those of the depression: rise in demand, gradual clearing of stocks, followed by the beginning of a rise in production, expansion of credit with all the favourable consequences for employment, rates of interest, profits, wages, and prices which inevitably follow once this situation has firmly established itself. All these factors in turn combine to produce a whole series of repercussions.

As we have shown, the earliest symptoms of the revival of business begin to appear in the money market. In the course of the depression an easing of the market, reflecting the increased readiness of the banks to give credit, has taken place, which has an extremely important bearing upon the course of the whole economic process. This easing of the credit market is, as we have already seen, connected with a fall in the rate of interest, which reflects the unwillingness of the entrepreneurs to undertake new investments. The money therefore accumulates in the banks, this being a marked characteristic of the depression and, as we shall see later, one of its chief sources. The further the rate of interest falls, however, and the more distant business is removed in time, spirit, and substance from the convulsions of the crisis, the nearer comes the moment when the savings deposits, the interest on which has been falling lower and lower, will again be invested in securities, and at the same time the increased readiness of the banks to expand credit will be applied to new investments which seem profitable as compared with the low rate of interest. The first step towards a rise in investments in the economic system is the investment of capital in fixed-interest-bearing securities; this in turn frees the banks from many uncomfortable debtors and thus increases their readiness to give credit. At a later stage of the development there is a rise in share values, while the rise in the price of fixed-interest-bearing securities, as a result of the gradual levelling up in the rate of interest, which is characteristic of the recovery period, gives way to a gradual fall. Not only the Stock Exchange figures but also the issue statistics reflect this characteristic development, behind which, as the ultimate great source of strength for the upward swing, stands the expansion of the volume of credit. This expansion of the volume of credit, again, depends upon two essential conditions: the greater readiness of the banks to lend, and the greater readiness of the business man to borrow, or what is almost the same, to invest. The question as to how this double readiness comes about at the beginning of the recovery period does not concern us here, as it would take us deep into the analysis of the causes of the trade cycle. It is important, however, to recognize at this point that the low rate of interest prevailing at the beginning of the upward swing increases the readiness to invest. Projects which were not profitable at a rate of interest of 5% become profitable when the rate of interest falls to 4%, and the further the rate of interest falls, the wider becomes the range of profitable investments for capital. And this brings us to a problem which has become specially important during the present depression: the problem whether the low rate of interest exercises always and under all conceivable circumstances the instigating influence attributed to it. The present experiences show clearly that it does not, for even a rate for short-term money of 1% or less fails to lead to a corresponding increase of investments. It has to be noted, however, that it is hardly conceivable that an unusually low rate for long-term credits, i.e., on the capital market, would not be a strong stimulus for an increase of investments. This is especially to be expected in the building industry. There is nobody who would not take advantage of a long-term rate of 1% for building a neat little villa. The building industry is, indeed, playing an important role in turning the tide of the depression.² It is obvious, however, that the transference of the abundance of the money market to the capital market is an essential prerequisite for economic recovery, a fact which has a special bearing on the recovery programmes of the present day.

The rise in the volume of investment—this much of the mechanism of the economic recovery is already clear—gradually sets the whole economic system in motion in a nexus of reciprocal reactions leading finally to a mobilization of all the reserves of material and human factors of production and thereby completing the picture of the boom. Production and employment increase and with them the national income and the national wealth. But it should also be quite clear at this point that this rise appears first and foremost in those industries which produce the capital goods necessary for the expansion of the productive equipment (machines, iron and steel, building materials, &c.) and are thus known as capital goods industries in contrast to the consumption goods industries. Modern trade-cycle theory is indeed unanimous concerning the fundamental principle that the alternation of boom and depression is first and foremost an alternation in the volume of long-term investments and thus in the activity in the industries producing capital goods. All economic phases, and especially the boom, are wont to attain their maximum effect in these industries: hence the striking increase in the consumption of iron and coal.

The animation of the whole economic process which characterizes the period of recovery leads further to a rise in prices, not only in single branches of the economic system or in particular markets, but as a rule throughout the whole economic system, so that certain economists (Hahn, for instance) have interpreted the general rise in prices as the most important symptom of the recovery. This general rise in prices has, at the first glance, something paradoxical about it, as it is during a period of increased production that it takes place. Indeed, such a rise in prices would not be logically possible, if the tendency of prices to fall owing to the increased output of goods were not counter-balanced by tendencies on the money side for prices to rise, either through an increase in the amount of money and credit, or through a speeding-up of the velocity of circulation of money. We come very near to understanding the essential nature of the trade cycle if we imagine the boom as a small inflation and the depression as a small deflation, and thereby link up our conception with ideas that have become familiar to us through the great currency upheavals of recent times. The overheating of the economic machine, the rise in prices, the urge to get out of money into goods and into real property, the speculation fever, the tremendous building activity—all that we know from the time of the great German inflation recurs in a lesser degree during every economic boom.

We also know from our experiences of the inflation that while the rise in prices is indeed general, it is by no means uniform; it is, we might say, general but not universal. The prices of raw materials and of half-finished goods are apt to rise more quickly than those of finished goods, and wholesale prices more quickly than retail prices. Above all, the increases in the rates of wages and of interest, that is, of two very important prices, usually lag behind the general rise in prices until the last stages of the boom, while the incomes of government employees and of rentiers remain right behind. The gradation in the increase of prices also implies a corresponding stratification of incomes. This lag in the various groups of prices and incomes is, as will be shown later, an extremely important link in the mechanism of the boom. As a consequence of these changes in the price and income structure it is obvious that consumption must also undergo typical changes: the degree of change will depend in each individual case on that factor which the economist calls “elasticity of demand,” which denotes the degree, varying with each individual commodity, in which demand reacts to changes in the consumers’ purchasing power and changes in prices. The greater this elasticity is, the greater the variations to which the consumption of a commodity will be subject during the trade cycle. When income is rising during the boom, the increase in purchasing power affects first and foremost those goods of which one consumes little when times are bad and much when times are good. The consumption of bread is therefore more constant in general than the consumption of gramophone records. That is why boom periods are often the times when certain articles, hitherto confined to a few persons as being articles of luxury, find their way to the masses. A particularly good example of this may be seen in the recent boom period from 1925-1929, especially in the United States. It was during this period that the automobile, for instance, first became a popular means of transport, and gramophones, wireless sets, vacuum cleaners, and similar articles also benefited from this circumstance.

Finally, we may mention that in the course of the boom, owing to the rise in prices, the increasing demand of industry for raw materials, and the increased importance of the home market, there appears a tendency towards an adverse balance of trade, with a corresponding tendency to an increase in foreign indebtedness (that is, a tendency to borrow more from abroad than is lent abroad).

(2) The Crisis or the Acute Reaction.

At this juncture we shall leave out of account the question of what forces, sooner or later, finally bring about the end of the boom, and shall confine ourselves to describing the symptoms in which this turning point is expressed. At the top of the list we must place the tensions on the money and capital market which appear in the course of the boom period, and finally lead to those disruptions which we call a crisis, an expression which we shall examine more closely in the next paragraph. The difficulties of financing investments increase, and with them the rate of interest rises, reflecting the decreasing readiness of the banks to give credit (a reluctance concomitant with impaired bank liquidity), as well as the continued and now more and more pressing urgency of the need of credit—all phenomena which are summarized in the term “shortage of capital.” The rising rate of interest on the money market makes speculation on the stock exchange more and more difficult, the more so since the stock exchange is quickest and most nervous in registering the change in the outlook. Security prices go down, and the more the acute reaction assumes the character of a crisis, the more dramatic and the heavier is the crash in prices. New issues fall to a minimum, thereby stopping up one of the principal sources of industrial finance. As it is no longer possible for industrial undertakings, which have got into debt with the banks owing to the enlargement of plants during the boom period, to liquidate these debts by the issue of new shares or debentures, and so to “fund” their debts, the banks make the unpleasant discovery that a large part of their advances are “frozen,” that is, that they cannot be called in for some time, and that no further turnover of the corresponding deposit accounts takes place. The banks become anxious and still less willing to give credit, which in the end makes the situation still more acute. The position of the banks may immediately become precarious, if they have invested a large part of their assets in securities whose decline in value now affects them directly, and if, in addition, their depositors become panic-stricken and cause a “run.” At this moment the crisis begins to subside into its worst and most dramatic form: the credit crisis.

The more or less sudden contraction on the money and capital market leads first of all to a cessation of the expansion of production, and then to a decline in production, with its accompanying phenomena of increasing unemployment, fall in incomes, collapse of firms, and drop in prices. The drop in prices, combined with the rise in the rate of interest, the contraction of credits, the decline in the velocity of circulation of money, and the resultant repercussions on production, produces an unhealthy state of affairs which we may describe as a deflation, with the same justification as we called the boom period a small inflation.

(3) The Depression.

The acute collapse, the particularly violent form of which we call a crisis, gradually passes into the state of chronic reaction known as the depression, which represents in general a reversal of the boom. It is characterized by the fact that the collapse of the towering edifice of prices, production, and credit, erected by the boom, is gradually retarded and finally brought to a standstill. The economic process then generally lingers for some time at this extreme low level. The liquidation comes to an end, the weakest firms are eliminated, all kinds of irregularities which had crept in during the optimistic period of the boom, are now recognized as impossible of continuance, and are gradually tightened up, production is cut down to the uttermost, security prices are practically halved, and stocks are cleared. In short, the general clean-up is now at an end, but the new upward trend does not follow immediately. The end of the liquidation phase on the one hand and the falling off of production and of the spirit of enterprise on the other now lead to a continuous decline in the interest rate, especially for short-term credit (money market), in which available money is now invested because of the fear of long-term investments. With this glut of funds on the money market, the interest rate for short-term credit may sink to 1% or even less, as happened in Switzerland and other countries during the depression of 1930. The official rate of discount of the central banks is also correspondingly low.

It is at this point that the full force of the effect of the collapse of the boom upon the labour market is apt to be felt, and the unemployment figures are driven up above the level prevailing at the time of the acute reaction. This is in the main to be explained by the fact that for some time many contracts still run on and firms try to keep their employees going by producing for stock and by working shorter hours. The output of the capital-goods industries, which reached a particularly high point during the boom period, now drops inversely to its lowest level, and only improves when at the beginning of the upswing there is an increase in building activity, which pre-war experience shows to have reacted at a very early stage to the stimulus given to new investment by the low interest rate. In Germany there was before the war a correspondingly early rise in the values of mortgage debentures. This rôle which building-production played before the war as a branch of production, which used to expand as early as at the later stage of the depression, is so important that we must earmark it for future theoretical analysis. It will be clear even at this stage that it acted as an important brake on the depression in the same way as it had a modifying influence on the boom period by its early decline. An important safety-valve for production when the home markets are stagnant has hitherto been the export trade,³ through which many industries are able at such a time to find an outlet to compensate for the lack of demand at home. This safety-valve function of the export trade is based in general on the fact that in spite of the increasingly international character of the trade cycle, the world market, by reason of its size, of the national nuances in the course of the cycle, and of the difference in the economic structure of the individual countries (industrial states—agrarian states!), offers many possibilities of getting round the depression in the home market. The best historical example of the fact that the depression has a tendency to stimulate a favourable balance of trade was the development of the German export trade in the year 1931, when under pressure of the crisis an export surplus of nearly 3 milliard RM. was achieved.

§ 4. ECONOMIC CRISES.

Scientific research into the phenomena of economic fluctuations started out from the study of the crisis. This is understandable when we consider that the crisis is the most marked expression of the fluctuations of economic equilibrium and must be of particular interest to the economist because of the practical need to help and to alleviate the situation or to prove or repudiate reproaches levelled against the capitalist system as a result of the havoc wrought by the crisis. To-day, when we are in the midst of the most devastating of all economic crises, this starting-point is more comprehensible than ever, and we can also understand better than we did before that economic crises may claim a special treatment, even though we do not renounce our hard-won point that crisis is only a phase within the trade cycle. Once we understand that point, we have made an important advance on the earlier idea that the crisis is an accidental disaster in economic life. The attempt to explain the recurrence of such accidents led to the building up of special “theories of the crisis,” while according to the modern conception the explanation of crises must be deduced from the explanation of the trade cycle, and there is therefore no room for a special theory of the crisis outside of the general theory of the cycle. To explain periodic economic crises means, according to the idea prevailing to-day, to explain the boom and the forces leading to its collapse.

This is not, however, to dismiss the question as to whether every crisis is necessarily a cyclical crisis, or whether there may not also be crises which are essentially independent of the cycle. As far as agrarian crises are concerned, this question has already been answered in the affirmative. But it is also possible to imagine crises of the whole economic structure, which come in from outside, and cannot be construed as a reaction to a preceding boom. The causes may be political or natural catastrophes. The probability of such “exogenous” crises is not, however, very great. We are brought face to face with the intricate relationships of the innermost heart of our economic system when we remember that a political catastrophe like the Great War or a natural catastrophe like the Japanese earthquake of 1923, instead of retarding economic life, generally enlivens it, and thus tends to bring about not a crisis but a boom. Certainly catastrophes lead to an impoverishment of the economic system, but we must guard against confusing impoverishment with a crisis, all the more so as this confusion is an extraordinarily common one. If we agree to understand by an economic crisis a temporary paralysis of the economic process which leads to a disturbance of the exchange apparatus with its consequences of over-production, surplus stocks, and insolvencies, we realize that it is characterized not by a scarcity but by a superfluity of goods, while the hall-mark of impoverishment is a deficiency of goods. This deficiency of goods generally spurs on the economic machine to make the highest number of revolutions of which it is capable, as was very markedly the case during the war. An economic crisis is therefore not an expression of shortage but of abundance or—to put it better—of what seems to us “abundance” because of the temporary paralysis of the process of exchange and of the economic process in general. That it leads in the long run to an impoverishment of the economic system is self-evident, but this does not affect the question of the origin of crises, which is the question we are discussing here. Nevertheless the possibility of non-cyclical crises cannot be flatly denied,⁴ for it is precisely these that are meant when it is asserted that the present world-economic crisis is not merely a cyclical but a structural crisis, which, it is alleged, reflects the inner rottenness or instability of the economic structure and is accordingly to be described as a permanent crisis. To prove this people refer loosely to the presumed inevitable collapse of the world-economic system, the emergence of anti-capitalistic tendencies, the ossification of capitalism, the political and economic chaos of the world, the technical revolutions of the last ten years, and much more of the same kind. The question as to whether we are justified in interpreting the present world crisis as a structural and permanent crisis has already been discussed in the introductory chapter and something more will be said about it later. In any case it cannot be denied that it started from a cyclical crisis.

To revert to the “normal” cyclical crisis, we shall now seek to answer the question whether the reaction which follows the boom need necessarily always take the form of a crisis. The answer to this question depends on the definition which we give to the term crisis. If we reserve this expression for that form of the reaction which is marked by the suddenness and the stormy nature of the collapse, we shall find many examples, in the very recent history of business cycles, of reactions which were no crises in this dramatic sense of the word. Real crises happened in Germany in the years 1857 and 1873 and in the United States in the year 1907, whilst the cyclical reaction in Germany in the year 1907 showed just as few marks of a crisis as in the years 1913-1914. There can of course be no doubt as to the real crisis character of the present world-economic crisis. As we base the meaning of crisis on the characteristic signs of the “suddenness “and the “stormy nature of the collapse,” we cannot of course possibly claim that this definition has any precision. How fast and how far must security prices fall before we can speak of a crisis? How great must the number of bankruptcies be? In many cases, therefore, the decisive factor must be the feeling whether the reaction is accompanied by a definite credit crisis or not. It is therefore understandable that some economists⁵ should call every transition from boom to depression a crisis, and that, on the other hand, an authority like Mitchell⁶ is emphatic in refusing to apply the term “crisis” to any definite cyclical phase.

The cyclical crisis, like the entire trade cycle, must of necessity be conceived as a “total” crisis, which differentiates it from the crises of isolated branches of the economic system (partial crises), which can be traced to the most varied causes and are of no interest in this connexion. Partial crises (a crisis in shipbuilding, in the English coal industry, in vine-growing, &c.), may naturally crop up in any phase, though they are apt to be modified in the boom phase and made more acute in the depression phase. The grave crisis of the American bituminous coal-mining industry (in Kentucky and West Virginia) during the recent unprecedented boom in the United States is a significant example of the lack of connexion between the trade cycle and the emergence of partial crises.⁷

The fact that the cyclical crisis is “total” in character does not prevent it from appearing at times in different forms and coming to a head in this or that sector of economic life. In so doing it would of course lose its character of a “total” cyclical crisis and become a mere partial crisis, if it remained confined to that particular sector. This must be kept in mind when considering the numerous attempts to find a classification of types of crisis.⁸ For it is either a case of partial crises, when any attempt at classification would be meaningless since it would amount to nothing more than a catalogue of all the branches of economic activity; or it is a question of “total” crises, in which case the only purpose a classification can have is to show the possible variations of the crises with respect to their starting-point and climax, the danger here being that the character of “totality” may be obscured. With, this reservation in mind, we reproduce Spiethoff’s classification, which distinguishes the following types of crises:—

1.Credit crises, which are characterized by the collapse of the credit system and the general scramble for cash.

2.Speculation crises, whose sphere of influence is that of the pricing process. Their sub-divisions are:

(a)The stock-market crisis, with over-speculation in security transactions.

(b)The commodity-market crisis, with over-speculation in commodities.

3.Promotion crises, arising out of over-speculation in the promotion of new enterprises, based on wrong expectations or not fully financed.

4.Capital crises, arising out of over-speculation in loans and in investments in undertakings which have been begun, but for the completion of which there is an insufficient supply of capital available in the economic system.

Among these various types of crises the credit crisis deserves most attention, because it is representative of the crisis in its most acute and devastating form. How it comes about and how it usually runs its course has been shown in a particularly vivid manner by the recent credit crisis in Germany in the summer of 1931. The result of the Reichstag elections in the autumn of 1930 had, by reason of the alarming gains of the radical parties, especially of the National-Socialist party, deeply shaken confidence in the future course of political and economic events, at the same time leading to a noticeable disturbance of the German credit system. Following on this the distrust of the creditors (particularly of the foreign creditors) of the German banks became daily more acute in the early summer of 1931, under the influence of the failure of the Oesterreichische Kredit-Anstalt in Vienna and the revelation of the gravity of Germany’s situation by the Hoover Moratorium. The Oesterreichische Kredit-Anstalt collapsed on the 11th of May; from the 23rd of May credit-withdrawal notices began to pour into Germany from abroad like an avalanche; on the 20th of June, Hoover, the President of the United States, announced the one-year moratorium on political debts, but as the matter had to be debated for a fortnight with the French Government, the psychological effect of Hoover’s announcement was not only entirely wasted but was even the exact opposite to what had been intended, as the attention of the whole world had now been drawn to Germany’s desperate plight. The withdrawals of credit—strengthened by the flight of capital at home—went on increasing. Between the end of May and the 1st of July withdrawals from the Reichsbank in gold and devisen amounted to 1400 million EM., beside the 500 million or so which the banks had drawn out of their own reserves. To increase the tension there then came the failure of a big wool concern (the Norddeutsche Wollkämmerei und Kammgarnspinnerei) in Bremen. The desperate efforts of the Reichsbank to get new credits from abroad could no longer avert the disaster. On 12th July the Darmstädter and National Bank, which had suffered particularly heavy losses through the failure of the Norddeutsche Wollkämmerei had to declare itself insolvent. On 13th July the run spread to all the banks.

As the Reichsbank failed tragically to recognize the need of the hour—the immediate provision of any amount of cash required regardless of reserve regulations—the banks could only satisfy the demands of a portion of those who wished to withdraw their money, which only increased the panic. Finally, business over the counter was stopped entirely (a bank “holiday” was proclaimed), to be gradually resumed later. As the Reichsbank was unfortunately very slow in realizing that the greatest liberality in the placing of ready money at the disposal of its customers was the most effective and least harmful means of combating the panic, the German economic system had for more than a fortnight to suffer the agony of, first, a complete and, later, a partial crippling of its whole financial machinery. After many, to some extent very useful, relief measures (the establishment of a transfer association “Ueberweisungsverband,” and of the “Acceptance and Guarantee Bank,” the guaranteeing by the Reich of the deposits of the Darmstädter and National Bank, the taking over of the preference shares of the Dresden Bank, &c.) and after the Reichsbank had raised its discount rate on 1st August to 15%, bank payments were resumed, partially on 3rd August and wholly on 5th August. The resumption proved a complete success. Only the withdrawals from the savings banks continued till the end of the year, temporarily causing great anxiety. The stock exchanges, which had been closed on 13th July, were not reopened until 3rd September, and were reclosed after a few weeks, on 21st September, until further notice, as a result of the new shock of the credit crisis in Great Britain.

The credit cisis of Great Britain was a direct result of the German credit crisis, which indeed shook the credit system of the whole world. As Britain had very large sums involved in the short-term credits which were “frozen” in Germany, international distrust now turned towards that country also, in a way which increasingly took on the characteristics of a panic. Repeated though moderate increases in the discount rate of the Bank of England failed to stem the outflow of short-term money, and even the aid obtained from repeated raisings of credits could not close the hole which had been torn in the British gold reserves, while the publicity given to the great deficit in British finances and the growing agitation for the devaluation of the pound and the abandonment of the gold standard, caused the distrust to become greater and greater. In face of this “run” by the creditors and after no less than 200 million pounds had been paid to creditors abroad within eight weeks, the British Government announced on 20th September, 1931, the suspension of the convertibility of notes into gold and thereby of the gold standard. The value of the pound was left to the free play of supply and demand in the foreign-exchange markets, which resulted in a short time in its depreciating by almost a third of its value.

The British credit crisis differed from the German credit crisis substantially in that in the British case there was absolutely no run of the home creditors on the banks, and thus no crippling of the internal financial machinery. The run remained confined to the foreign creditors. While Germany succeeded in a short time in re-establishing to some extent the value of the mark by a number of artificial means (compulsory exchange control, legislation to prevent the flight of capital, standstill agreements), in Britain the external stability of the currency was abandoned. Other countries also were drawn into the international credit crisis and a number of them let their currencies follow the fall in the pound, particularly the Scandinavian countries and the British dominions. Later Japan also entered this group of countries abandoning the gold standard. At the end of the year the credit crisis flared up in the United States, where the public were getting more and more nervous, and very many of the smaller banks fell victims to the creditors’ panic. The full explosion came here more than a year later in the spring of 1933, just when the new Roosevelt administration took office. As is invariably the case, the avalanche was started by a minor accident (the difficulties of the Union Guardian Trust Company of Detroit), but out of this there grew a panic which forced every bank in the country, including the twelve reserve banks themselves, to close their doors. The essential difference between the credit crisis in the United States and in Europe was that the American crisis had all the characteristics of a real panic and that it was absolutely confined to an internal drain, the flight of capital, and sudden withdrawals of foreign funds being almost totally absent.⁹ Even in France the nervousness was noticeable in anxious withdrawals, hoarding of cash, and a few bank failures (particularly that of the Banque Nationale de Crédit).

The credit crisis of 1931 was without any doubt the most dramatic collapse of the kind that the world had ever seen. The consequences made themselves felt in a general intensification of the crisis, in an increase in the hindrances to the functioning of the international financial machinery (exchange control, clearing agreements, &c.) and in a further shrinkage in the volume of production.

The closest great historical predecessors of the credit crisis of 1931 were the American credit crisis of 1907 and the Japanese one of 1927. The first-named in particular won a certain measure of fame as the events of the year 1907 were mainly responsible for the reform of the American system of banks of issue by the Federal Reserve Law of 1913.¹ The American credit crisis of 1907—christened the “Knickerbocker Crisis” after the Knickerbocker Trust Company, the institution which was principally concerned—led to the wholesale suspension of payments by the American banks, to the shooting up of the rate of interest for call money to fantastic heights (as high as 125%) and, lastly, to the utilization of various substitutes for cash payments (particularly the Clearing-house Certificate).

The real essence of the credit crisis is the collapse of the psychological foundations of our economic system, which cannot exist without a definite minimum of confidence, as it depends on credit—which really means confidence—in all its forms. The modern credit system cannot stand a sudden loss of confidence, since it is extremely sensitive and has been shaped according to the utmost limit of pressure which it can stand. If the psychological net tears, the experience of every crisis teaches us that there is only one method of restoring equilibrium at once: the promptest and most unsparing readiness of the banking system to repay every deposit in cash. This readiness presupposes that the central bank, unreservedly and without hesitation or petty chicanery, should place at the disposal of the banks all the cash desired by the panic-stricken public. The dangerous hesitation which central banks often betray in stamping out the fire of the banking crisis has perhaps much to do with the general failure to realize cold-bloodedly that this crisis is at bottom nothing but the sudden preference on the part of the public for one sort of money (cash) instead of another (bank money). This momentary metamorphosis, which amounts to an atavistic recession, can, if given free play, have disastrous consequences, but the widespread belief that it involves an inflation of some kind is really unfounded. There is therefore no reason why the central bank should not apply its extinguisher instantaneously and liberally.

The more quickly this “bold generosity” is declared, the less—as Anglo-American banking literature is never tired of recommending from first-hand experience—it will require to be used, the more quickly will the credit crisis be overcome and the less marked will its repercussions be on the circulation and production of goods. Again and again experience teaches that at such times of panic the public only wants the money it cannot get, while it does not want the money which it can get.² The longer one hesitates, however, the more fatal will these repercussions be, the more difficult it will be to overcome the crisis, and the greater sacrifices it will cost when one is eventually forced to do what one should have done in the very beginning, viz., keep the banks open to satisfy the claims of everyone desiring payment. This old truth was forgotten in Germany in the summer of 1931.

REFERENCES.

W. C. Mitchell, Business Cycles, The Problem and Its Setting, New York, 1928.

E. Wagemann, Economic Rhythm, New York, 1930.

A. Spiethoff, article “Krisen” in the Handwörterbuch der Staatswissenschaften, 4th ed.

G. Cassel, The Theory of Social Economy, 2nd ed., London, 1932.

A. Aftalion, Les Crises Périodiques de Surproduction, Paris, 1913.

F. Lavington, The Trade Cycle, London, 1925.

J. Akerman, Om det Ekonomiska Livets Rytmik, Stockholm, 1928 (an abbreviated and somewhat different version in English : Economic Progress, Economic Crises, London, 1932).

A. B. Adams, Economics of Business Cycles, New York, 1925.

W. Röpke, Die Konjunktur, Ein systematischer Versuch als Beitrag zur Morphologie der Verkehrswirtschaft, Jena, 1922.

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¹ J. Akerman, Om det Ekonomiska Livets Rytmik, Stockholm, 1928.

² W. Röpke, Die Konjunktur, Jena, 1922, p. 23.

³ The most comprehensive study of seasonal fluctuations has been made by Professor R. Bachi in his book “Le fluttuazioni stagionali nella vita economica italiana,” Annali di Statistica, V 9, Rome, 1919.

⁴ It follows from these and other considerations that the phenomenon of “excess capacity,” which rightly plays such a prominent rôle in present-day discussions, is a general one, to some extent always in existence regardless of the business cycle. As a certain percentage of the workers is always without employment, a certain part of the plant is almost always idle, a certain part of the lodgings empty, &c. In all these respects, a minimum “excess capacity” (generally being that part of the total capacity that is qualitatively marginal) is necessary in order to give to the whole economic system that indispensable “play” without which it could not work freely. Cf. also J. M. Clark, Strategic Factors in Business Cycles, New York, 1934, pp. 149-151.

⁵ The discoverer of the phenomenon of the “long wave” seems to have been the Dutchman Van Gelderen (“Springvloed beschouwingen over industrielle ontwikkeling en prijsbeweging” in De Nieuwe Tijd, 1913, pp. 253-277, 369-384, 445-464). Cf. also S. de Wolff, “Prosperitäts- und Depressionsperioden,” in Der lebendige Marxismus (Festschrift for K. Kautsky), Jena, 1924, from p. 13; Kondratieff, “Die langen Wellen der Konjunktur,” Archiv für Sozialwissenschaft und Sozialpolitik, 56th vol., 1926, from p. 573; Wl. Woytinsky, “Das Rätsel der langen Wellen,” Schmollers Jahrbuch, 55th year, 1931, from p. 577; F. Kuczynski, Das Problem der langen Wellen und die Entwicklung der Industrie-warenpreise, 1820-1933, Bâle, 1934; F. Simiand, Les fluctuations économiques à longues périodes et la crise mondiale, Paris, 1932.

⁶ Juglar’s book, Des crises commerciales et de leur retour périodique, which made him a pioneer in the study of the business cycle, was published in 1860.

⁷ This question will be treated in greater detail and in a somewhat modified form later on when we come to discuss the compatibility of the gold standard and internal stability, pp. 164 et seq.

⁸ Article, “Krisen,” Handwörterbuch der Staatswissenschaften, 4th ed., vol. 6.

⁹ Especially the leading authority on all these questions : W. C. Mitchell, Business Cycles. The Problem and Its Setting, New York, 1928, chap. iv.

¹ For a careful examination of the problem see L. H. Bean, Post War Interrelations between Agriculture and Business in the United States, a study published by the U.S. Department of Agriculture, 1930. Cf. also C. v. Dietze, Agrarkrisen, Konjunkturzyklen und Strukturwandlungen, in presentation to L. Elster, Jena, 1931; M. Sering, Internationale Preisbewegung und Lage der Landwirtschaft in den aussertropischen Ländern, Berlin, 1928; G. F. Warren and F. A. Pearson, The Agricultural Situation, New York, 1924; W. Röpke, “Das Agrarproblem der Vereinigten Staaten, II. Die gegenwärtige Lage der Landwirtschaft,” Archiv für Sozialwissenschaft und Sozialpolitik, vol. 59, 1928, from p. 96; S. C. Pervushin, “Cyclical Fluctuations in Agriculture and Industry in Russia 1869-1926,” Quarterly Journal of Economics, vol. 42, May 1928; E. Altschul, “Agrarwirtschaft und Industriezyklus,” Wirtschaftskurve der Frankfurter Zeitung, 1931, No. iv, from p. 394; A. H. Hansen, “The Business Cycle and its Relation to Agriculture,” Journal of Farm Economics, 1932, from p. 59; Timoshenko, The Rôle of Agricultural Fluctuations in the Business Cycle, Ann Arbor, 1930; W. Abel, Agrarkrisen und Agrarkonjunkturen in Mitteleuropa vom 13. bis zum 19. Jahrhundert, Berlin, 1935.

² In the exact assessment of this rôle there is still a great deal of divergence of opinions. One holds (for instance, Spiethoff, Boden u. Wohnung, 1934) that building reaches its peak at the end of the depression and in the early stages of the recovery. This also seems the view of J. M. Clark, Strategic Factors, &c., pp. 27-33. Other authors (especially A. Aftalion, Les Crises Périodiques de Surpro-duction, Paris, 1913, vol. 1, pp. 127-131) believe that building is essentially a boom industry. In the opinion of E. Wagemann, the Director of the Institut für Konjunkturforschung in Berlin, residential construction is essentially a depression industry, while public building has been concentrated in the past in times of boom (E. Wagemann, Einführung in die Konjunkturlehre, Leipzig, 1929, pp. 124-126). Wagemann’s view seems to be confirmed by experience and reflection, though it must be admitted that the problem is a complicated one. In English literature, it seems to have been curiously neglected. Cf. A. K. Cairncross, “The Glasgow Building Industry (1870-1914),” The Review of Economic Studies, vol. 2, October 1934, and W. H. Newman, The Building Industry and Business Cycles, Chicago, 1935.

³Cf. Soltau, “Statistische Untersuchungen über die Entwicklung und Konjunkturschwankungen des Aussenhandels,” Vierteljahrshefte zur Konjunkturforschung, Ergänzungsheft 2, 1926.

⁴ The fact that the crises of the pre- and early capitalist period were generally such non-cyclical crises, arising out of political or natural catastrophes or adventurous speculations, will be specially emphasized in the next chapter.

⁵ Thus A. Aftalion, Les Crises Périodiques de Surproduction, Paris, 1913, vol. 1, p. 12, and J. Lescure, Des Crises Générales et Périodiques de Surproduction, 3rd ed., Paris, 1923, p. 2.

⁶ W. C. Mitchell, ibid., pp. 378-381.

⁷ Even stock-exchange crises and financial stringency may emerge without connexion with the trade cycle. Examples : Germany, 1877; England, 1878; Argentine, 1891; United States, 1896; China, 1912, &c.

⁸ Thus W. Sombart in “Versuch einer Systematik der Wirtschaftskrisen,” Archiv für Sozialwissenschaft, vol. 19, 1904; A. Spiethoff, op. cit.; M. Bouniatian, Les Crises Economiques, Paris, 1922, from p. 31.

⁹ For a fuller account of the American crisis of 1933 see T. E. Gregory, Gold, Unemployment and Capitalism, London, 1933, pp. 146-161.

¹ H. Schumacher, Die Ursachen der Geldkrisis, Dresden, 1908; Sprague, The History of Crises under the National Banking Acts, Washington, 1911; A. Andrew, “Substitutes for Cash in the Panic of 1907,” Quarterly Journal of Economics, vol. 22, 1908.

² It is known that the Deutsche Bank effectively prevented a run of deposit creditors at the beginning of the Great War, on Helfferich’s advice, by answering the first rush with the opening of new counters for the paying-out of accounts and thereby at once stopping the panic.