"...it should be recalled that we never undertook to explain everything about any crisis or depression. There was, in particular, the important class of 'understandable but non-essential incidents'. In this instance they may be exemplified by the activities of, say, Hatry or Kreuger and so on; even German experience might have been somewhat different but for the impulsive personality of the leading man of the Darmstadter und Nationalbank. An example of more important elements of this class of phenomena is the violence- not simply the occurrence- of the boom and the crash in the stock market of the United States, which forms no part of the essentials of our process, yet powerfully influenced it. But the boundaries of this class should not be extended too far. The building booms and their slackening from about 1928 on, for instance, or the bulk of the difficulties in the agrarian sectors do not belong here but were perfectly normal elements of that process.
"The American debt situation and the American bank epidemics- there were three of them- are in a class by themselves. Given the way in which both firms and households had run into debt during the twenties, the accumulated load- in many cases, though not all, very sensitive to a fall in price level- was instrumental in precipitating depression. In particular, it set into motion a vicious spiral within which everybody's efforts to reduce that load for a time only availed to increase it. There is thus no objection to the debt-deflation theory of the American crisis, provided it does not mean more than this. The element it stresses is part of the mechanism of any serious depression. But increase of total indebtedness at the rate at which it had occurred in this country is neither a normal element of the mechanism of Kondratieff downgrades nor in itself an 'understandable' incident, like speculative excesses and the debts induced by these. It must be attributed to the humor of the times, to cheap money policies, and to the practices of concerns eager to push their sales; and it enters the class of understandable incidents only if we include specifically American conditions among our data. Similarly, bank failures are of course very regular (though still not essential) occurrences in the course of any major crisis and invariably an important cause of secondary phenomena, in particular, again, of downward cumulative processes. Those epidemics cannot, however, be considered as wholly explained by the ordinary mechanism of crisis or by that mechanism plus the fact of of excessive indebtedness all round or even by all that plus the stock exchange crash. The American epidemics become fully understandable only if account be taken of the weaknesses peculiar to the American banking structure, which made it succumb as no European system would have succumbed under similar circumstances- in particular, the presence, fostered by legislation and public opinion, of a large number of small and inefficient banks and the absence of anything like the English tradition.
"Third, there were external factors. In noticing them in Chap VII Sec C. we found that their importance, so far as the causation of the world crisis is concerned, may easily be overestimated. In particular, it would be unwarranted to attribute any of the major features of the American depression to a "flood of imports." Imports, on the contrary, fell rapidly at the critical time; they totaled $4.4 billions in 1929, little over 3 in 1930, little over 2 in 1931, and about 1.3 in 1932.
"It is true that the indirect influence of policies, certainly in the case of Germany and possibly also in the case of England, on short capital movements had much to do especially with what in a narrower and perhaps more proper sense should be called the crisis. And the provisional solution that had been arrived at for the problem of international payments was bound to break down in any major depression and, before doing so, to accentuate its difficulties. We do not even wish to palliate the influence of such monetary disorders as occurred before the depression had the chance of tearing up the flimsy tissue of pseudo gold currencies. The South American, especially the Argentinian, disorders and the fall of the price of silver have undoubtedly played some role. But all this looms so large because a depression occurred for other reasons. As a man may suffer from many ills and yet for an indefinite time lead a vigorous life without being seriously inconvenienced by them until, when his general vitality has ebbed away, those ills or any one of them may suddenly acquire what to the specialist's eye will seem of paramount or even fatal importance; so the economic organism always does bleed from many wounds which it bears lightly in three out of the four cyclical phases, and which spell discomfort when one cycle, distress when two, catastrophe when all three cycles are in the depression phase. No doubt, external injuries were of unusually great importance in this case, but explanation cannot be derived from them. (It should not be forgotten, however, that the crisis was nowhere else anything like so severe as in the United States, the country most nearly free from injury by external factors).
From Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process
Joseph Schumpeter
Chapter IX "The World Crisis and After" |
