There is prostration of trading strength. Labourers are thrown out of employment, wages fall, new works are not commenced, or are at a stand-still. Mr Brassey, in his interesting book on "Work and Wages," has described the position of the railway construction industry after crises, its violent recoil from vehement demand for labour and abnormal wages into the depths of paralysis. The ordinary language of the press of all countries on the specific effect of the panic in the money-market is, as before remarked, that it is the consequence of a monetary crisis. This is a complete mistake. The blow which cripples trade and industry is always struck before the panic. As said above, the panic is an agonising inquiry, Who is to lose? on whom is the loss to fall? But the loss invariably has preceded. The banking market is a huge mass of creditors and debtors. The wealth has perished - which creditors are safe? which lose? Which debtors will pay? which not? That is the terror of Lombard Street. There is no destruction of capital in the money market, for it is absolutely destitute of capital. The merchant who got his bill discounted - that was done in the money market -bought corn; what has he done with it? The corn has been eaten. Then what did the eaters reproduce in its place? - anything or nothing? The eating of the corn is wholly outside of the money market; and it is because the corn and other wealth have been destroyed that the banking market is let in for a settlement of losses. One effect, however, it must be freely admitted, the monetary crisis does produce in causing that stoppage of industry which Mr Brassey describes, and it is very instructive to understand it rightly. In such enterprises as railways, town improvements, etc., worked by Joint-Stock Companies, those who take shares command that portion of the nation's wealth which belongs to them to be consumed. Shares are seldom paid for out of income, they are investments of property. Each new call sentences a new portion of wealth to be destroyed for the making of the railway, or any other object of the Company. Now the panic stops this process sharply and decisively. Calls are not paid; the shares are practically unsaleable, which means that other owners of wealth will not take the places of the former shareholders, and continue the destruction of capital. Thus particular enterprises - especially such as Mr Brassey has cognizance of - are brought to a standstill. So far the crisis does throw people out of employment, but it does this because the wealth which carried on the undertaking to the day of stoppage has perished, and there is none other to take its place.
But not only is the disposition of shareholders to invest property brought to an end by the discovery which is called a crisis, but much other expenditure also terminates which was equally a destruction of capital. A prosperous time of such speculation as consists of applying capital to new undertakings, with its premiums and its demand for labour, invariably leads to an increase of expense of living. As already explained, if all England took to eating and drinking up and consuming everything in the land in one year, the abundance and luxury and enjoyment of riches would be what the world had never seen. The same process goes on upon a smaller scale when the speculation which orders the consumption of capital on unproductive undertakings is in full play. Workmen earn higher wages, contractors earn larger profits, dealers in the money market gather up fortunes, and every one spends freely, even lavishly. This spending, this consumption is not of savings, not of wealth, commodities, which were a surplus over and above the ordinary rate of living, but of capital, of wealth appropriated to industry. The day of crisis arrests all this, so that here again the monetary panic acts on the labour markets of every land. But, as before remarked, it is the destruction which preceded the day of panic which renders the loss so long irretrievable.
We thus obtain the explanation of the long depression of trade which follows a crisis. The destruction of capital which yields no return is arrested; the capital lost it takes a very long time to replace, not seldom years. Then succeeds a period of calm, whilst the lessons of the bitter past still live in the public memory. People are shy of entering upon new schemes which consume wealth which cannot be restored for years.
But confidence gradually revives, excitement begins to raise its head again, projects for making new railways, docks, beautifying towns, and the like, reappear, and the decennial law, supposed by Economical philosophers like Mr Mill, verifies itself in a new crisis. It is no law of trade, however, no condition imposed by nature on its machinery, but a law of human feeling. There is no inherent necessity for such recurring periods; they spring from moral forces, and by moral forces they may be annulled. Let bankers learn the lessons which they teach; let them reflect on the nature of the schemes which they support, not their soundness only - for it may be admitted that, as a whole, they do not support unsound projects - but the capacity of the national capital to execute them at the time without temporary disaster. Above all let the promoters of new enterprises study political economy, and learn the meaning of the word savings; they will then know that savings are the excess of goods made above goods consumed, and that it is this excess alone which can, without impoverishment and consequent trouble to the money market, be applied to new undertakings. On the perception of this law, and obedience to what it prescribes, depend the prevention of panics and crises.
But it may be asked - How can one discover whether a nation is devoting to unremunerative enterprises more than the amount of its savings? What banker is up to such a task? It may not be easy; but it is none the less a natural and imperative duty; and it is not impossible. The education of bankers, by study and experience may do much in this matter; the signs of the times may be read, if only the observing faculty and the intelligence to understand are present. More especially must they cease thinking about the reserve of gold being a little greater or a little smaller, or indeed about money, cash, and the state of the circulation. They will never understand the world they live and act in so long as such matters occupy their best attention. The Bank of England sets an example of much judgment in this matter; it is not given to make loans to schemes which must necessarily consume much capital that cannot be quickly replaced. No one has accused it of helping on the construction of new railways in uninhabited regions, or even of new lines carelessly in settled countries; unlike the House of Overends, it does not scatter its resources over half the world. If bankers practised universally banking as good as that of the Bank of England, business would be steadier and disasters less frequent and less ruinous. If, on the contrary, they grasp at every large profit that presents itself, the cause for mischief exists at once, and it will be realised.