Appendix Ii.

"OVER-CONSUMPTION" CONSIDERED AS CAUSE OF DEPRESSION.

It is of course quite possible that a temporary over-production in one or several trades may be explained by a correspondent under-production in others--that is to say, there may be a misplacement of industrial enterprise. But this can afford no explanation of the phenomenon Depression of Trade, which consists in a general or net over-supply of capital, as evidenced by a general fall of prices.

In like manner it is possible to explain a commercial crisis in a single country, or part of a commercial community, as the reaction or collapse following an attempt to increase the quantity of fixed capital out of proportion to the growth of the current national income, by a reckless borrowing. This attempt of a single country to enlarge its business operations beyond the limits of the possible savings of its own current income, Mr. Bonamy Price and M. Yves Guyot speak of under the questionable title of Over-consumption. Since they tender this vice of over-consumption as the true and sufficient explanation of commercial crises, it is necessary to examine the position.

Professor Bonamy Price applied the following analysis to the great crisis in the United States of 1877:--

"We are now in a position to perceive the magnitude of the blunder of which the American people were guilty in constructing this most mischievous quantity of fixed capital in the form of railways. They acted precisely like a landowner who had an estate of £10,000 a year, and spent £20,000 on drainage. It could not be made out of savings, for they did not exist, and at the end of the very first year he must sell a portion of the estate to pay for the cost of his draining. In other words, his capital, his estate, his means of making income whereon to live was reduced. The drainage was an excellent operation, but for him it was ruinous. So it was with America. Few things in the long run enrich a nation like railways; but so gigantic an over-consumption, not out of savings, but out of capital, brought her poverty, commercial depression, and much misery. The new railways have been reckoned at some 30,000 miles, at an estimated cost of £10,000 a mile; they destroyed three hundred million of pounds worth, not of money, but of corn, clothing, coal, iron, and other substances. The connection between such over-production and commercial depression is here only too visibly that of parent and child. But the disastrous consequences were far from ending here. The over-consumption did not content itself with the wealth used up in working the railways and the materials of which they were composed. It sent other waves of destruction rolling over the land. The demand for coal, iron, engines, and materials kindled prodigious excitement in the factories and the shops; labourers were called for from every side; wages rose rapidly; profits shared the upward movement; luxurious spending overflowed; prices advanced all round; the recklessness of a prosperous time bubbled over; and this subsidiary over-consumption immensely enlarged the waste of the national capital set in motion by the expenditure on the railways themselves. Onward still pressed the gale; foreign nations were carried away by its force. They poured their goods into America, so over-powering was the attraction of high prices. They supplied materials for the railways, and luxuries for their constructors. Their own prices rose in turn; their business burst into unwonted activity; profits and wages were enlarged; and the vicious cycle repeated itself in many countries of Europe. Over-consumption advanced with greater strides; the tide of prosperity rose ever higher; and the destruction of wealth marched at greater speed."

Now, in the first place, our analysis of saving and the confinement of the term consumption to direct embodiments of utility and convenience forbid us to acknowledge that the action of the United States or the analogy of the improving landowner is a case of over-consumption at all. If the landowner borrowed money on his estates in order to live in luxury for a season beyond his income, or similarly, if a State raised loans in order to consume powder and shot, the term over-consumption rightly applies. But where the landowner borrows so much money to improve his land that he is unable to hold out till the improvements bear fruit, and must sell his land to pay the interest, he is not rightly accused of over-consumption. His reduced consumption later on while practising retrenchment is simply a process of "saving" which, when complete, is to take the place of an amount of "saving" previously made by some one else and borrowed by him. What happened was simply this. A, wishing to drain his land, had not "saved" enough to do it; B has saved, and A, borrowing his "saving," holds it for a time in his shape of drainage. If he can continue to pay interest and gradually "save" to pay off the capital, he will do so; if not, as in the case supposed, B, the mortgagee, will foreclose and legally enter upon his savings in the shape of "drainage" which he really owned all along. But even if A in this case were rightly accused of over-consumption, this over-consumption must be considered as balanced by the under-consumption of B, so that as regards the community of which A and B are both members there is no over-consumption.

Now, precisely the same line of reasoning applies if for the individual A we take the country of the United States. If it tries to increase its factories, machinery, etc., in excess of its ability to pay, it can only do so by borrowing from other countries; and if it cannot pay the interest on such loans, the "savings," in the shape of fixed capital which it has endeavoured to secure for itself, remain the property of the other countries which have effected the real saving which they embody, assuming them to have a value. If the action of the United States be called over-consumption, it is balanced by an under-consumption of England, France, or other countries of the commercial community. Mr. Price sought to avoid this conclusion by saying nothing about the individual from whom the landowner or the country from which the United States borrowed in order to increase the fixed capital. But as the landowner and the United States, ex hypothesi, did not make their improvements out of their own savings, they made them out of somebody else's savings, and that conduct which is styled over-consumption in them is balanced by an equal quantity of under-consumption in some other party. If thus we look at the individual landowner or the single country of the United States, we might say, accepting Price's view of consumption, that he and it were guilty of over-consumption, and that this was the cause of the commercial crisis. But since this over-consumption is absolutely conditioned by a correspondent under-consumption of some other member of the industrial community, it is not possible to conclude with Professor Price that over-consumption can even for a time exist in the community as a whole, or that such a condition can be the explanation of a crisis commonly felt by all or most of the members of that community.

What actually happened in the case of United States railways was that a number of people, either in America or in Europe, under-consumed or over-saved: their excessive saving could find no better form to take than American railways, which, ex hypothesi, were not wanted for use. A number of persons who might have made and consumed three hundred million pounds' worth more of corn, clothing, coals, etc., than they actually did consume, refused to do so, and instead of doing so made a number of railway lines, locomotives, etc., which no one could consume and which were not wanted to assist production. What occurred was a waste of saving power through an attempt to make an excessive number of forms of capital.

Even if, some years later, many of these forms obtained a use and a value, none the less they represent an excess or waste of "saving" to an extent measured by the normal rate of interest over that period of time which elapsed before they fructified into use. In a word, what had happened was not over-consumption, but under-consumption.

M. Guyot appears to think that in the community as a whole too much saving can be put into the form of "fixed" capital and too little into circulating capital, and that such a condition of affairs will bring depression. "Fixed capital," he says, "cannot be utilised if there is no available circulating capital. Ships and railways are useless if there are no commodities for them to convey; a factory cannot be worked unless there are consumers ready to buy its products. If, then, circulating capital has been so far exhausted as to take a long time replacing, fixed capital must meanwhile remain unproductive, and the crisis is so much the longer and more severe."

To this there are two sufficient answers. The prevalence of low prices for goods of various kinds as well as for plant in a time of depression, the general glut of goods which forms one phase of the depression proves that the crisis does not arise from storing too much saving in plant and too little in goods. Where there exists simultaneously a larger quantity of plant, raw material, finished goods, and labour than the industrial society can find use for, no assertion of maladjustment, either as between trade and trade, country and country, fixed and circulating capital, will afford any explanation. Secondly, M. Guyot gives away his entire position by admitting "a factory cannot be worked unless there are consumers ready to buy its products." A "consumer" here can logically only mean one who buys finished goods for personal use, and if this be generally applied it amounts to a clear admission that under-consumption is the reason why there appears to be a glut of capital, fixed or other.

FOOTNOTES:

Contemporary Review, March 1888.

Report on Industrial Depressions, Washington, 1886.

Report, pars. 61-66.

Report, par. 106.

Contemporary Review, July 1887.

Contemporary Review, March 1888.

Report of the Commissioner of Labour, Washington, 1886, pp. 80 to 88.

D.A. Wells, Contemporary Review, August 1887.

Lord Playfair, in the Contemporary Review, March 1888, gives a number of interesting illustrations of recent economies in transport and manufacture.

Statist, 1879, quoted Bowley, England's Foreign Trade in the Nineteenth Century, p. 80.

Essays in Finance, vol. i. p. 137, etc.

For the view that over-consumption is cause, see Appendix II.

"What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people." (Wealth of Nations, p. 149b, McCulloch.) "Everything which is produced is consumed; both what is saved and what is said to be spent, and the former quite as quickly as the latter." (Principles of Political Economy, Book I., chap. v., sec. 6.)

An able analysis of the nature of "paper savings" is found in Mr. J.M. Robertson's Fallacy of Saving. (Sonnenschein.)

Chap. v. § 5.

Bk. III., chap. xiv. § 3.

The stock of a small retailer will not, however, in all cases vary proportionately with the aggregate sales of all classes of goods. A small shopkeeper, to retain his custom and credit, is often required to keep a small stock of a large variety of goods not often in request. If he sells them rather more quickly, he does not necessarily increase his stock in hand at any particular time.

It likewise determines the quantity of plant and stock at a, b, c, d down each of the perpendicular lines, for the demand at each of these points in the production of plant and machinery is derived from the requirements at the points A, B, C, D, E. The flow of goods therefore up these channels, though slower in its movement (since in the main channel only goods flow, while fixed capital is subject to the slower "wear and tear"), is equally determined by and derived from the consumption at F. The whole motive-power of the mechanism is engendered at F, and the flow of money paid over the retail counter as it passes in a reverse current from F towards A, supplies the necessary stimulus at each point, driving the goods another stage in their journey.

Böhm-Bawerk, Positive Theory of Capital, p. 67. See Appendix I. for conflict of opinion among English economists.

Principles of Political Economy, Bk. I., chap. v. § 3; see also Bk. III., chap. xiv. § 3.

It should be noted that an increased amount of consumption in the future does not necessarily compensate for a disturbance of the current balance of saving and spending, for an increased proportion of future income will have to be spent in order to compensate.

It must be borne in mind that many articles of utility and enjoyment must in their final processes be produced for immediate consumption. The "saving" of perishable goods is confined to a saving of the more enduring forms of machinery engaged in their production, or in some few cases to a storing up of the raw material. So likewise that large portion of productive work termed "personal services" cannot be antedated. These limits to the possibility of "saving" are important. No amount of present sacrifice in the interest of the next generation could enable them to live a life of luxurious idleness.

Ruskin, Unto this Last, p. 145.

This does not necessarily imply a stimulation of new saving. A fuller vitality given to existing forms of capital will raise the quantity of real capital as measured in money. Mills and machinery which have no present or future use, though they embody saving, have no value and do not increase real capital.

Scope and Method of Political Economy, p. 162.

Production and Consumption, chap. iv. § 2.

Contemporary Review, May 1879.

Principles of Social Economy, p. 245. (Sonnenschein.)