Popular Science Monthly/Volume 11/July 1877/Over-Consumption or Over-Production?

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WHY does the prevailing business depression continue? Why are the times so "hard?" Why is the long-hoped-for revival of trade so backward? What is it that has put the times so disastrously out of joint?

Every one is asking these questions, and nearly every one is ready with an answer. Some will declare that the trouble is all of the green-backs; others will go so far as to affirm that the lack of greenbacks is the cause. Almost every one will assert that over-speculation has something to do with it: some will attribute the whole mischief to the intense railway "craze" of a few years ago, and the consequent losses. Not a few are confident that extravagance and over-trading are the explanation. There seems to be no general agreement of opinion; even men of equal business knowledge and experience differ essentially in their views as to the genesis and remedy of the evil, and the professors of political science are scarcely nearer of accord.

There has recently come from an eminent English authority in political economy an authoritative declaration in the matter. No one will deny that Prof. Bonamy Price's essay denominated "One per Cent."[1] is eminently readable; the professor knows how to give literary grace and vivid interest to a theme commonly considered "dry;" it is further true that anything he may utter on the topic is entitled to great respect and. consideration. At the same time there is no reputation so exalted that the assertions and arguments made public under its sanction should not be and may not be examined and tested. Now, to our mind Prof. Price is often logically wrong in his essay referred to; we can but think that many of the reasons he assigns for the great business depression—which now prevails in America, England, and Germany—are fallacious and misleading, and, with all modesty, it is our present purpose to give the reasons why.

The title of "One per Cent." is given to Prof. Price's article because one per cent, has been for some time the ruling rate of discount in the London money-market (just as from two to three per cent, has been for many months the quotation for call loans in Wall Street), funds in the hands of bankers being in excess of the needs of borrowers and traders. Trade is curtailed, production restricted, stagnation is evident in every branch of industry, and this general paralysis causes in the financial centres such a flow of money that it is offered to loan at an almost nominal discount.

The cause of this wide-spread depression, according to Prof. Price, is one, and one only— "over-spending, over-consuming, destroying more wealth than is produced. This," he says, "is the real fons mali, the root of all the disorder and the suffering, the creator of the inevitable sequence of cause and effect. Men have acted as a man who farmed his own land and had consumed not only the portion of the crops which were his true income. . . but had himself and his dependents devoured a portion of the seed-corn and the breeding-stock, had exchanged a portion of the produce which was required for wages in the coming year for foreign luxuries, or had consumed these necessary reserves on an excess of drainage, however valuable in itself and ultimately enriching."

This is the core of Prof. Price's argument. The prostration of trade has arisen from extravagance, he repeatedly declares. "The commercial depression, so long, so monotonous, so heavy, and so dull, came from the excessive consumption of English capital in unwarranted constructions beyond savings, and unwarranted expenditure in living by all classes, which destroyed wealth without repairing it with new productions."

But elsewhere he says: "Up to the extent of the savings of the nation, expenditure on railways can do no economical or financial harm; and these invaluable developers of wealth may on such a basis be rationally acquired for the public good. Any outlay made out of savings, be what it may, is innocent of mischief; it may do no good, but it does not impoverish. But what are savings? The surplus of wealth made over wealth consumed. If it is turned into capital and applied to increased production, the nation becomes richer; if it is expended on any luxury or any folly, the nation is where it is." These declarations no one, we imagine, will dispute.

But Prof. Price, in attributing business stagnation to extravagance, to "over-spending and over-consuming," assumes the whole question. He produces no evidence whatever in support of the attestation. He does not show that consumption and expenditure have exceeded production; he declares that capital has been impaired, but gives no facts nor figures in support of the affirmation. The whole groundwork of his theory is boldly and flatly assumed, without the slightest regard whether there is evidence to support it or not. It is grossly illogical to assume that there is over-spending simply because to casual observation there is high and extravagant living. A class may be extravagant; a group of people may be impairing their capital; but where are the figures to show that the English people as a whole have been indulging in undue excesses, have reduced the sum of their savings, "by which the means of producing are diminished?" There is absolutely nothing whatever upon which to base these assumptions! Prof. Price tells us in another place that "her (England's) producing power, her fixed capital, her machinery, remain unchanged," and that "she is compelled to shut up many of her factories, to dismiss or put on half-time immense numbers of her working-people, because there are fewer buyers of the articles they manufacture." This, he declares, is the very pinch of the matter. Indisputably it is, but whether fewer buyers is the consequence of over-consumption or of some other cause is also the pinch of the philosophy of the matter—and this let us ascertain, if it is possible to do so.

How is it, if the savings of a country have been really impaired, that capital at the same moment should be seeking investment at any rate of interest it can command—that all the financial centres are choked with an excess of money, for which it is impossible to find borrowers? Assuredly, loans at a low rate of interest imply an excess of capital over the needs of trade or production; it shows that business operations are restricted, for whatever reason, and have released capital from its ordinary uses to such an extent that it accumulates in trade-centres, seeking for borrowers that do not come. It can make no difference whether we call money capital or not; it cannot affect the heart of the question what it is that is offered at one per cent.—gold, notes, assets of any kind—whatever money may really be, it would seem clear that, if over-consumption had impaired the capital of the country, those individuals who could come into the field as lenders would be enabled to dictate terms to the needy borrowers. Over-consumption means a destruction of food, clothing, coals, metals, etc., to an extent that impairs the reserves of these products; but it must be a marvelously extensive over-consumption that impairs the means for restoring them—that renders it impossible for fixed capital—machinery, furnaces, shafts—to be set in productive operation.

Can Prof. Price give an instance where any civilized nation, unless at war, or suffering from some great calamity, has impaired its capital by over-consumption? Can he name a period when, at the end of any year, with the exceptions mentioned, England has possessed less wealth than at the beginning of that year? When, in modern times, have a people impaired their capital by over-consumption? When and where has extravagance brought a community to ruin? Where are the instances? What are the occasions? Who can produce the statistics that will establish this theory? Not but what there may be, and often are, hurtful extravagance and speculative excesses; but these are usually special to a class. The great body of a people are rarely consumers to the extent they are producers; quietly, in a million of minor ways, the wealth of a country increases even in times of depression. We find current in the journals a paragraph which affirms that last year the valuation of property in England, exclusive of London, increased $14,335,000—too little, no doubt, but something different from the destruction of more wealth than is produced. Very rarely, indeed, if ever, has the capital of a country in normal periods of peace been really impaired, however much distress an imperfect distribution of labor and of profits may have caused.

Let us say here that the ordinary idea of national extravagance—meaning excessive expenditure by the people, and not governmental expenses—is peculiarly erroneous; an assertion we confidently make, notwithstanding the fact that Prof. Price accepts the usual theory. He declares that "a nation is only an aggregate of individuals," that "analysis will always resolve the action of the single man, and the combined coöperation of a host, etc., into the same constituent parts;" that is to say, over-spending and over-consumption are of the same nature, whether exhibited by an individual or a community.

Now, we think it can be shown that expenditure in the case of an individual and expenditure in case of a large group of individuals have certain very essential differences. When a community exchanges its goods for foreign luxuries to an extent to impair its productive capital, or has invested in railways or similar enterprises so as to reduce its working capital, it is in the position of an individual who has lived beyond his income. But the difference between an individual and a community is, that the income of the former is absolutely fixed, that of the other is wholly expansive. In truth, in an immense number of things, a community is rich because it consumes, abundance being the product and consequence of extensive destruction.

It is evident that the immense consumption of coal has made coal cheap and abundant. It has rendered possible the employment of vast capital in the erection of costly machinery for the working of the mines, for the construction of adequate means of transportation, thereby making remote deposits accessible, and enabling capitalists to work the mines at the minimum of cost, which never would have been done had not the vast consumption of coal rendered it wise and practicable to do so. It is true the consumption of coal is increased by cheapness; but it is only by extravagance, so to speak, by free and extensive use of coal, that the machinery by which it is made cheap is put in operation. We have an immense wealth of coal because we consume coal so extensively; if we used but little we should have little, and this little would be dear.

This rule works in all or nearly all our staples. Cotton fabrics are a marvel of cheapness and abundance. The consumption and the possibilities of extended consumption have stimulated invention and industry so greatly that the world has become wealthy in its supply of this staple alone. Rarely, indeed, is there a woman so poor that she cannot own a calico gown; few are the men so destitute as to be without cotton shirts. We have this staple in almost unlimited abundance, as the direct result of the most extended consumption. It is the same thing with wool, with flax, with paper, with iron, with brick, with many other things.

So peculiarly different is the operation of expenditure with a community from that of an individual, that it is worth while to trace it still further. Let us suppose a town about to erect a grand cathedral, or some other public structure that requires a very large quantity of stone. At first flush it would seem as if a great deal of valuable material would be used in a purpose unnecessary and unproductive; but, as a practical fact, the building-material is likely to become more abundant and cheaper than it ever was before. The unusually large consumption of stone would lead either to the opening of new quarries or the erection of improved machinery for working the stone, and to the construction of railways, boats, etc., for facilitating its transportation; so that stone for building purposes would thereafter be cheaper and more abundant as the consequence of what at first sight appeared a wasteful consumption. In all staple things, at least, a nation is richer because it consumes, while a man is richer by what he saves. We are better housed, better fed, better clothed, we have a thousand things of taste and pleasure, because our eager and devouring appetites have stimulated energy, skill, invention, to their utmost to cater for us.

We say nothing as to which is the wisest direction for consumption to take, with all it stimulating power; we do not deny that consumption may make champagne, diamonds, silks, broadcloth, fine furniture abundant, at the cost of more useful and desirable things. The thing is simply that the energy, the zeal, the exertion of men are so expansive, that great demand compels to great production; and, of course, we understand the economic principle that there can be no production without capital; that if the working reserves of a community are really impaired, the productive force is also straitened.

It will be said that consumption is rather the product than the cause of abundance. Undoubtedly, use is greatly increased by abundance; there is, in fact, action and reaction, the one stimulating the other. It will also be adhered to by some that capital is the sole source of production. Assuredly capital is not fixed in activity, nor are human energies rigidly limited; and as the resources of Nature are fairly boundless, wealth is wrought out of her bowels in our mines, and extracted from her chemistry in our fields, to an extent immensely determined by the demands of consumers. In the old fable of the purse of Fortunatus a gold piece appeared as rapidly as the contents were withdrawn; in the new purse of Fortunatus, called production, two or more pieces appear as rapidly as one is withdrawn; but we must not lose the purse, which let us consider as capital.

There is something more to be said about national extravagance. What is it that railways, and bridges, and canals, and fine buildings, cost? We hear continually the money-price mentioned. This is most misleading. The price paid is simply a sum of money that has changed hands; it represents the cost of the structures to those who built them, but not the cost to the community. What is this cost? What does a church or a railway cost the people as a whole? Some have paid wages, and some have received wages. This is only diffusion. Some money has gone for stone, iron, and timber, but this is only diffusion. The community is less this iron, stone, and timber,[2] but we have already seen that, as the production of this material is unlimited, no practical loss is inflicted here. It is asserted by all economists that food and clothing for the laborers are part of the cost. But the laborers would have been fed in any case, although they might have held on to their old clothes longer, had not the wage-fund been distributed among them. Now, to our mind, the real cost of this church or railway is the cost of the energy that might have been more profitably employed elsewhere. If all the productive industries are in full operation; if it is released labor, and the material is not required for more necessary purposes, then it cannot be shown that the church and railway have impaired the wealth of the community at all—that is, it cannot be shown that they have fundamentally cost the community anything. They were erected by released energies, by labor not otherwise required, and the community is not the poorer by a mite in consequence of their construction. A church may be a very extravagant undertaking for those who pay the money-price for it; the railway may be a foolish and unremunerative enterprise; but this has to do with the individuals concerned; the community, in the supposititious cases we have made, might, let us suppose, have been better off had the expenditures of those individuals taken some other form, if the material and the labor had gone into something productive (let us believe there are other good things in the world than economic production); but no injury, no loss, no diminution of wealth has occurred—and this is the main thing. A passage quoted from Prof. Price in the earlier part of our article affirms this.

We hear a great deal about the railroad "craze" of a few years ago, and of the immense sums sunk in those foolish and extravagant ventures. But the sums of money commonly mentioned are misleading. As we have fully explained, the money simply changed hands; what was really lost by those enterprises was the goods and bullion exported to pay for the iron purchased abroad, and the food and clothing consumed by the laborers, over and above what their consumption would otherwise have been; in addition to which is the loss of the misdirected energy. This was all very large, no doubt; but far from being what the figures commonly quoted represent it to be. There is, moreover, no evidence that this loss was anything more than a part of our surplus; the assumption that it impaired our capital, and depleted our productive resources, is wholly groundless. No one can say, we imagine, that capital was withdrawn from any other pursuit; that productive industry in any direction was weakened by a secession of its resources by this "craze." The nation was much in the position of a merchant who has many ventures abroad, some of which have proved disastrous. His profits are reduced, but his ability to keep his numerous ships afloat is not impaired. Even had the railroad investments partially reduced our capital, it is really monstrous to assume that we could not have recovered from the blow in much less than four years of time. Whatever the cause of the business prostration may be, it evidently is something that lies deep, something far more serious than the loss of a part of our wealth. A merchant who loses all his profits is still enabled to go on; a merchant who loses even half of his capital is still enabled to go on: how is it, then, that the community is so nearly at a standstill because a portion of its surplus was lost? Distinctly the railway over-speculation, hurtful as it was, cannot account for the paralysis in industry which now, four years afterward, so generally exists.

Not a few people are convinced that paper-money is the cause of the difficulty. "Only return to specie payments," they say, "and all will be right." All the inflation and unhealthful stimulation caused by the greenbacks has ceased to be. It was predicted that a reaction must come upon the return to specie payments. It has come long before. It has come without contraction of the currency, the volume of which has ceased to exercise that hurtful influence that was supposed to be inseparable from it. It may be asked, moreover, if the currency is the cause of our suffering here, how is it that a similar condition of business affairs exists in England, where the currency has remained unchanged? There is no doubt in the world that an inflated currency does have a hot-house effect upon trade and production, and, as with all forced things, a corresponding reaction follows; but it is wholly inadequate to account for the present difficulty, although it has doubtless contributed toward it.

What, then, is the real cause of the evil? In endeavoring to answer this question, we shall probably startle not a few well-established convictions; but we bespeak a fair and patient hearing.

Almost any practical man of business, upon being asked what the trouble is, would attribute it to over-production. To this the economist promptly exclaims that there can be no such thing. "What," he would say, "over-production! too much wealth! an excess of prosperity! The thing is impossible. No people ever yet was made poor by an excess of wealth, by a superfluity of goods." This seems very plausible; but, if the economist is pressed, he will admit that there may be, and often is, over-production in certain things — that more may be produced of special articles than there are goods of other kinds to exchange for them — but general over-production is, he will reaffirm, impossible. Inasmuuch, however, as production is fairly never general, never uniformly active, there is always over-production in some branches of trade; and it so happens that this over-production is commonly coupled with great centralization of wealth and enormous appliances of machinery.

We must not be understood to utter a word against the power, the advantages, the immense boon of machinery; but, as all things have their compensations and their penalties, so machinery, beneficent and marvelous as it is, is one means of bringing about certain unfortunate consequences, as we think may be demonstrated.

Production and consumption do not have that intimate relation to each other they once had. In old times the weaver, for instance, was in contact with his customers: he wove cloth as he discovered the need; he cautiously set up a second loom when it became fully evident that it could be kept employed; and thus supply and demand went, as it were, hand-in-hand. But now gigantic mills filled with many spindles have little accurate relation to consumption. The power of production by means of improved machinery is something immense, and it is exercised with no very watchful or cautious regard to the immediate needs of the community. Goods are piled up in vast quantities in waiting for a future market, or for an anticipated change in price; or they are pressed upon the market at such low rates or on such long credits that buyers are seduced into over-purchases. In favorable times these establishments are run at high pressure. The old-fashioned nice relation between producer and consumer disappears. Speculation takes the helm. Much more is produced than there is corn, leather, or other goods, to exchange for it. The resources of the mills are great; they can borrow from the banks while they pile up their fabrics in their ware-rooms; they can by means of their concentrated capital keep their machinery running, even at a loss, if by so doing they can crush out a rival or manipulate the market.

But in the height of this prosperous run there is a check—no matter for what cause—and suddenly the work stops. There is little sale for goods produced; the fires must be put out, the doors closed, and thousands of operatives are deprived of employment. This would not be so unfortunate if this over-production had been diffused among the work-people. But it had not. Notwithstanding the high pressure and the excessive manufacture, wages have been kept down; while producing in six months as much as could be exchanged in a year, the workmen have not been paid in this way—their wages have been upon the basis of the whole year's work—as a result, they are turned empty-handed upon the street. And, what is particularly unfortunate, they are reduced as consumers to the minimum point. Here the evil works both ways. The excessive production which has shut up the mill has weakened the power of the community to absorb this production—the goose that laid the egg has been slain.

Inevitably the recovery from hard times brought about in this way must be slow. The spindles cannot be set in motion until the stock of goods on hand is reduced and a fresh demand revives; this demand cannot revive because the great body of consumers are in a state of impoverishment. This condition of things is entirely sufficient to explain the genesis and the prolongation of business prostration. Capital is not impaired: it is locked up in machinery that is silent, in goods that cannot be exchanged, in money that has no borrowers. It is the paralysis of consumption that is the cause; and this paralysis has been brought about by an unregulated production, by an excess that is not diffused, by the stoppage of wages, by the idleness enforced upon those who would be consumers, by the absence of an adjustment of production to consumption. Is it not clear that we must have a regulated production; that machinery with its magical facility must be put in check; that we must restore the old cautious and intelligent relation between the two factors of supply and demand?

We read lately a very angry denunciation of a combination between certain mine-owners in Pennsylvania to limit the production of coal. Why? If these men are attempting to make an artificial scarcity, it is wrong, and all attempts of this kind fail; but if they mean simply to regulate the marketing of coal—of coöperating so that an excess of the article shall not be thrown upon the market, and prices forced below cost—they are right. It is better for them to do this than in the heat of competition overstock the market, and then be forced to stop the works altogether, throwing all the miners out of employment. We should say that combination is just what is needed—so that the supply of material may be kept nearly on a par with the demand, and the mines uniformly worked at a sustained rate from one season to another. Spasmodic production is a dreadful evil. It is unfortunate for the consumer because it makes prices uneven, and it inflicts cruel injury upon laborers and operatives, and through them upon the whole community.

Here, then, is the evil. Speculation inflames it; currency inflation stimulates it; but undiffused, unregulated, and unrestrained production throws the whole complex machinery of trade out of order; it stirs the whole energies of the people into producing at one period, and arrests energies at another; in suddenly stopping production, it reduces consumption, and hence renders recovery the very labor indeed of Sisyphus. The only remedy we can discover is the wise cooperation of producers, the determination to put the production of goods in careful and just relation to the means possessed by the community for exchanging for them.

We hear recently a great deal of the example of France, and Prof. Price is among those who point admiringly to her in this crisis. Now, as every one knows, the savings of people in England, Germany, and America, are deposited in banks, whence they are loaned and become utilized as capital; in France the peasants hoard their savings in old stockings and secret corners. To withdraw from either of the former countries so large an amount as that of the indemnity paid Germany would greatly disturb trade; but the peasants, patriotically unearthing their hoardings of secret gold in exchange for government bonds, enabled the state, to the surprise of all, to pay her heavy penalty without distress or financial disturbance. But this was an exceptional position. We are scarcely to argue therefrom that hoarding is the true principle; that a nation is better off because its work-people hide their savings, withdrawing them from public use, rather than placing them in banks where they may become active capital. Prof. Price attributes the successful payment by France of the German indemnity to "the practice of one of the very greatest of economical virtues—she had saved." Now it was solely due to the manner in which her savings had been held. The fact seems to have dazzled everybody. The example of the French peasant is now held up on all sides—that he lives the narrowest and most restricted of lives; that his excessive economical spirit not only limits his comforts, but keeps him ignorant, superstitious, dull, spiritless, hopeless (the tragedy of the French peasant-life is only too well told in the pictures of Millet); that he has neither intellectual life nor any grace of art or refined civilization—these facts are nothing to the economist; the peasant has drudged and hoarded; he has refused himself and his family ease and comfort, and hoarded; he knows neither art, nor literature, nor science, but he has hoarded; he lives a life scarcely better than that of the beast of the field, but he has hoarded; his savings have nourished no industries, nor rewarded any art, nor promoted any intellectual end, and he himself has done his best by mere restriction to limit the productive resources of his land—but having saved and hoarded with the instinct with which a dog hides a bone he is held up for admiration! This sort of thing fully explains the shudder with which people generally hear the name of political economy. It is true, there must be economy; there must be saving; but there is economy and economy. The real cause of the more prosperous condition of France is not starved existence but sustained and unspeculative production. There is less concentration there, less wild overtrading; there are more diffusion and old-fashioned relation of production to consumption.

This equable and uniform production is like a stream that is fed by ten thousand springs and many affluents; it flows steadily on, calm, perennial, beneficent: but our speculative and spasmodic production is too much like a mountain-river, that at one season comes down in a flood and deluges the land, at another subsides into a rivulet, and all the land is parched.

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  1. Contemporary Review, London, and reprinted here in The Popular Science Monthly Supplement, No. 1.
  2. An exception must be made with timber. We are, in America, encroaching upon the forests, and hence consumption is now making this staple dearer; but, when all our hill-sides are covered with planted forests, the normal rule will operate in this product as in others.