to purchase jewelry, or any consumption good that is not a necessity are examples of abuses of credit.

Summary.-Banks serve the public in many ways. The most important duties of banks are concerned with receiving and keeping of deposits, making of loans, discounting promissory notes, and issuing bank-notes. In the United States there are several kinds of banks. These include national banks, savings-banks, trust companies, state banks, and private banks. The chief business of banks is dealing in credit. Among the instruments of credit are checks, drafts, promissory notes, bonds, and trade acceptances. Clearing-houses are devices for settling balances between banks.

Business depends upon credit; without it there could be no business in the modern sense. Credit has many advantages. Among the more prominent are those mentioned in the text. But it should be remembered that there are disadvantages; credit is sometimes too freely used and business enterprises are started without a sufficient guarantee of success; credit too freely used in speculation may result in a panic; borrowing for consumption is often unwise.

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS I. Name every kind of bank that does business in your community. Show the difference between the various banks.

2.

Get a copy of the most recently published statement of some bank. Show what each item means.

3. Why should banks have only "quick assets"? Which of the following are quick assets: real estate, government bonds, stock in an oil company, notes due in one year, demand notes?

4.

5.

6.

7.

Find out to what extent trade acceptances are used in your

community.

Describe the business of a clearing-house.

Is there a clearing

house in your city? If not, how do banks settle their balances in dealing with one another?

Would it be economic to borrow money to go to college? To pay a doctor's bill? To pay a premium on an insurance policy? To take a vacation in the country? To buy a diamond ring?

Would it ever be economic to mortgage a house in order to obtain money for the purchase of an automobile for pleasure? 8. Some stores endeavor to secure a large number of patrons with charge accounts. Why do they do this? What are the advantages and disadvantages of charge accounts to purchasers?

CHAPTER XX

INDUSTRIAL DEPRESSIONS AND CRISES

A close relationship exists between financial crises and industrial depressions. Some economists consider them as two aspects of the same thing. A crisis is generally followed by an industrial depression. In the United States there were financial crises in 1818, 1825, 1837, 1847, 1857, 1873, 1875, 1884, 1893, and 1903. Financial crises have generally occurred about once in ten years. This fact led the English economist Jevons to associate crises and industrial depressions with sun-spots. The larger sun-spots occur at intervals of about ten years, and Jevons maintained that they influenced the climate and rainfall on the earth and so acted unfavorably upon agriculture. The theory of the influence of sun-spots upon the productivity of agriculture is not without some plausibility, but the sun-spot theory has few advocates, and crises have often occurred when the crops were good. They have also occurred in years that did not meet the ten-year interval, such as in 1869 and 1907.

True Explanation of Regular Occurrence of Crises.There seems to be a regular cycle from good times to industrial depressions, then a slow recovery followed by prosperity after which the cycle is repeated. Good times are said to contain the seed of their own destruction. When times are prosperous a feeling of optimism prevails;

people buy freely and prices rise. The banks have abundant funds and loans are not difficult to secure. Established industries increase their capacity and new industries are established, many of them without sufficient working capital. The process cannot, however, continue forever. Some business concerns begin to find difficulty in selling their goods. The banks begin to increase rates on loans and discounts, money is hard to get and confidence is shaken. Some of the weaker concerns fail and soon all begin to retrench.

Overproduction and Crises.-General overproduction is impossible, as it would imply that there are more goods of all kinds than the people can consume, but overproduction of one product is not uncommon. For example, there was overproduction of railroads immediately after the Civil War. The railroads could not yield any profits until the country had grown large enough in population and industries to support them, and in the meantime those who had financed the railroads suffered. When the railroads were being built optimism prevailed. There was a wild speculation in railroad securities and other essential industries were neglected.

The industrial fabric is like a house of cards. A collapse in one place may result in the whole structure falling. When there is overproduction of some commodity or service, the produce: cannot sell at a price sufficient to carry on his business. Failure or temporary embarrassment is inevitable, and if the industry should be a sufficiently large one it will drag others into insolvency and will affect the banks from which it may have borrowed funds. Under the present industrial system depressions will occur from time

to time. A crisis naturally extends from one country to another. Some crises have been world-wide, others have been confined to one country. Frequently a crisis has a local cause, like the bank failures in North Dakota in 1921.

Crises can be rendered less serious by conservative banking and by business houses preparing for possible times of depression in their days of prosperity.

Crop Failures and Crises.-The failure of an important crop, such as cotton in the Gulf States or wheat in the Northwest, is the cause of a local depression, which may extend over the whole country. Banks lend to the farmers. If the crops fail, the farmer cannot pay his debts. The failure of an important crop has its effects upon the railroads and upon many industries. If the farmers have no revenue, they cannot buy machinery and other supplies.

The Relation of Middlemen to Crises.-Professor Taussig, in his Principles of Economics, vol. I, pp. 405-406, calls attention to the part played by the distributing middlemen-the wholesalers and jobbers and retailers-in reference to crises:

"These constitute the immediate purchasing public for the 'producers.' When they buy freely, business is brisk; when they hold off, business is dull. They are not only subject to the psychological contagion; they are also moved by very simple calculations of profit and loss. Their operations are almost exclusively in the simple purchase and sale of goods, and their success depends almost solely on prices. They buy freely when they think that prices will rise, and cut down purchases when they think that prices will fall. The very fact that they so think, and accordingly act, accelerates the fall in the other. During