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A period of depression cuts down the existing stock of
goods, and the retrenchment of production, coupled with
the constant increase of population, creates a void in
the market. To fill this there is a renewed activity; as
prices begin to rise, existing plants find it difficult
to meet the demand. Plants are remodeled and extended.
Preparation for future production on a large scale takes
place. Large investments of fixed, capital are made in
buildings, machinery and the like, and those branches of
industry which chiefly serve the purposes of
construction, such as the iron industry, make
extraordinary advances. Mills and railroads are built to
supply an anticipated demand. This is usually overdone,
and the facilities of production increase more rapidly
than the effective demand for products.
Credit is unduly expanded, and it is natural that the
money markets feel the first shock when the inevitable
readjustment takes place.
While the phenomena of a crisis and its attendant
consequences are generally recognized, the widest
variety of opinion exists as to the causes of such
economic disturbances. Writers are prone to lay stress
upon local or temporary conditions, and to generalize
from them. In truth, the phenomena of a crisis are so
complex, and the conditions which may aggravate it so
numerous, that it is not surprising to see the latter
considered as primary causes. Thus, speculation, the
currency, the tariff, bad harvests, have all been made
responsible for crises. These are frequently concomitant
forces impelling a crisis, but crises are so numerous
that there must be some deeper underlying cause.
It has already been noted that panics are most severe in
the most advanced and most rapidly developing countries.
They are apparently an incident of a changing economic
organization. Stationary nations do not feel them. A
change in the economic organization of a nation is not
the result of plan, but the resultant of individual
initiation in trade and industry. The adoption of new
machinery, of new motive power, and new means of
communication displaces the old, and renders some
portions of capital useless. This waste of capital, and
its absorption in enterprises not immediately
remunerative, disturbs the normal relations of capital
to employment and causes crises.
We come, in short, to the conclusion that crises are
caused by a lack of coincidence in the laws of growth,
of production, and consumption. Changes in the former
are rapid, those of the latter slow and gradual.
Production is always prone to advance more rapidly than
consumption. This proposition seems at variance with
accepted theories of political economy, but in reality
it harmonizes with them. The struggle for existence
which lies at the root of economic life is a contest
between Nature's limitations and potential consumption,
which is unlimited. But concrete consumption and
potential consumption are two different things.
Indeed, we seem to be drawing near the familiar
proposition that crises are caused by overproduction.
This proposition has been vigorously opposed by those
who have taken it in an absolute sense, and have
revolted at the idea that production could ever outstrip
man's needs, as implying man's incapacity for further
development. But if we understand overproduction as a
false distribution of products over a series of years in
comparison with man's actual consumption, and a false
choice of objects of production in comparison with man's
potential consumption, we need not revolt at the
statement that overproduction---along certain lines---is
the cause of crises. Such a statement of the causes of
crises seems to lack the precision which characterizes
the attribution of crises to definite phenomena, but it
must be remembered that the more complex the phenomena
to be accounted for, the more general must, of
necessity, be the cause to which they are ascribed.
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