§ 12. Rhythmic changes in weather and in crops. The periodic though not quite regular recurrence of crises has suggested the thought that they may be causally related with some one dominating force such as is found in the conditions of nature. The English economist Jevons attempted toward the end of the nineteenth century to show statistically a relationship between financial crises and the variation in sun-spots. This idea has usually been treated as whimsical, but the continued efforts of physicists to discover a causal relation between sun-spots and the weather suggests that a real causal relation between the physical and the economic phenomena may yet be found. The alteration of seasons of poor with seasons of good harvests, "lean years with fat years," follows a line strikingly suggestive of the curve of the business cycle. Some reasons for this relationship are apparent. For example, in America, since about 1865, farm products have constituted the larger part of our exports, so that a succession of large harvests has usually acted to stimulate exports (one of the features of a period of prosperity), to give us a larger credit balance in international trade, and to reduce the rate of exchange. Large harvests of the staple agricultural crops in America have been shown to be closely related to the amount of rainfall in the three most important growing months. Recently it has been shown that the rainfall of the Ohio Valley occurs in cycles of about eight years, and in a larger cycle of thirty-three years, and that the cycle of yield per acre of the nine principal crops corresponds closely with the cycle of pig-iron production (one of the best single indices of growing business and of an upswing in the business cycle) dated from one to two years later. There is found what is called in statistics a high degree of correlation (.719 in the former and .800 in the latter case), indicating that there is that percentage of probability that there is some causal relation between the two sets of figures. As the cycles of rainfall and of harvests are not coincident in different countries, it will require further study to adjust to these observations the fact of the world-wide extent of the great financial crises. But a better understanding of objective conditions of this kind will give fuller meaning to the interpretation of the financial and the psychological features of crises.

» See on tariff legislation and business crises, ch. 16, § 13.

§ 13. "Glut" theories of crises. Many explanations of the causes of financial crises have been offered.10 Nearly all of these belong to the general group of " glut" theories, of which genus there are two species, under-consumption and over-production theories. These are, in truth, but two aspects of the same idea.11 The one view is that too many goods are produced, the other that too few are consumed. The overproduction theorist, seeing that in a crisis warehouses are filled with goods that cannot be disposed of for what they cost (or at best not so as to give a profit), and that factories are shut down and men are out of employment for lack of demand, declares that productive power has grown too great. The under-consumption theorist, seeing the same facts, says that the trouble is lack of purchasing power. He observes that there are some people who would like to buy more of some of these things, but that such people lack income with which to buy. Usually he asserts that this is because production grows faster than wages, wages being fixed, as he believes, by the minimum of subsistence - a theory akin to the iron law of wages. The Marxian socialist's theory of crises is a more complex variety of this type, being connected with the "theory of surplus value," in which the capitalist class is conceived of as gradually appropriating the surplus value produced by the workers until there is no longer enough purchasing power left in the workers' hands to purchase the products of the capitalists' factories.

10 In the first annual report of the United States Commissioner of Labor is given a long catalog of theories that have been suggested, many of them quite fantastic.

11 See Vol. I, ch. 38, on abstinence and production. Believers in the glut theory usually condemn efforts to encourage frugality among the masses, calling it the "fallacy of saving."

These views have wide vogue, but they have the same taint of illogicalness as the "fallacy of waste" and the "fallacy of luxury."12 Both in over-production and in under-con-sumption theories, the inequality of demand and supply is looked upon as a general one. There is supposed to be not merely an unequal and mistaken distribution of production, but a general excess of productive power. Such theories overlook the fact that an income, either of money or of other goods, coming even to the wealthiest, will be used in some way. It may be used either for direct consumption or for further indirect use in durable form. Through miscalculation there may be, at a given moment, too many consumption goods of a particular kind, but the durable applications could find no limit until the material world became incapable of improvement; but that day is inconceivable. At the time of a crisis, there is unquestionably a bad apportionment of productive agents, and a still worse adjustment of their valuations, but these facts should not be taken as proving that there is an excess of all kinds of economic goods.

§ 14. Monetary theories of crises. Another group of theories of crises connects them with the supply of money, either too great or too small. The unregulated issue of banknotes has been assigned as the cause of crises, especially such as those of 1837 and 1857 in America, when bank-note issues greatly contributed to the unsound expansion of credit. The issue of government paper money years before, leading to inflation and speculation, was by many believed to be the cause of the crisis of 1873. The reverse view is taken by the advocates of a cheap and plentiful money. They say that these crises were caused, not by the expansion but by the contraction of the money stock; for example, not by the inflation of prices through the issue of greenbacks in 1862 to 1865, but by the contraction of the currency from 1866 to 1873.

12 See Vol. I, ch. 37, § 6 and § 9.

There is only a fragment of truth in these various views. If it may be said to be "lack of money" at the moment of a crisis that is the immediate cause of particular failures and losses, it is "money" only in the figurative sense of credit and immediately available purchasing power. The question is, whether in any reasonable sense it can be said that it was lack of a circulating medium before the crisis that brought it on. There is no support for this view, except in the rare case when the money standard is undergoing a rapid change, as in the United States from 1866 to 1873, and the statement then needs much modification and explanation. The monetary theories of crises are a bit nearer to the truth than are those of the over-production type, for a crisis is always connected with prices and credit. But it is clear that these rhythmic price changes occurring in the business cycle are not due to the same causes as are the general movements of the price level, due to an increasing or decreasing output of gold or again to a paper-money inflation. Statistics show that, while a general price level is slowly changing like a tidal movement, the effect of the rhythmic business cycle appears now in hastening, now in retarding, the changes in the price level.