an up-swing period, they add to their stocks, thinking to sell them at an advance, or at least to protect themselves against a later rise in the prices of what they buy.

"Then comes the shock-a bad failure, a financial panic. They jump to the conclusion that 'things are going down,' countermand old orders as far as possible, give new ones, live from hand to mouth in their purchases and sales, and wait until they think that prices have touched bottom. Sooner or later a good crop, the unexpected profitableness of some new venture, a turn in foreign trade, some such event gives the start to a new upward movement. The middlemen reach the conclusion that it is time to buy again, and to take advantage of low prices. Business becomes more active, optimism returns. Prices go up, and quickly, because all the dealers now think that they will go up, and buy in consequence. There is thus an accumulation of extra stocks in their hands in times of rising prices, and a depletion in times of low prices; some really increased flow to consumers at the one stage, some really lessened flow at the other; but also an alternate excess and deficiency of the supplies held in the middlemen's reservoir."

The Banks and Crises. In times of business depression the banks are confronted with a difficult situation. Business houses desire loans because they cannot market their goods to advantage. They do not usually want cash, but desire credit or assurance that they will be taken care of if necessity should arise. Good banking demands that legitimate enterprises should receive all the support that a bank can wisely give.

But another difficulty is apt to arise. Depositors want

their money. A vague distrust often, without reason, is enough to start a run on a bank. A rumor spreads that a bank is in trouble. Crowds of depositors assemble from all quarters and form long lines in front of the paying teller's window. They are panic-stricken with the fear that they will not get their money. Let confidence be restored and the run on the bank ceases. Experience has taught that large amounts of cash lying on the desk of the paying teller will satisfy many that their fear was without reason and they will go home.

Banks have an interest in sustaining each other. A failure of one bank is sure to embarrass some other bank. Under the Federal Reserve system it is not difficult for a member bank which is financially sound to secure cash when needed. It merely has to send securities to the Federal Reserve Bank of its section and get cash for them.

A clearing-house may aid member banks, as has been done repeatedly in New York. In the crisis of 1907 the banks of New York sustained banks which had done a sound, conservative banking business, but allowed others to fail because they had engaged in reckless banking. In that same crisis many sound banks did not have at hand sufficient cash to meet the demands of depositors and restricted withdrawals to small amounts. Such a procedure was unusual, but pardonable. It need not occur under the Federal Reserve banking system as previously explained.* One reason for increased demands for cash in time of panic is that confidence in checks and other instruments of credit is shaken. People wish "real money" and are inclined to accept nothing else.

* See pages 207-210.

In time of panic the banks see their deposits diminishing and the demand for loans increasing. They can secure cash for meeting the demands of insistent depositors by selling some of their securities or by discounting some of their commercial paper. Loans may be discouraged by raising rates of interest. This will result in discouraging any one from borrowing, unless he really needs the money and is willing to pay for it.

Summary. Industrial depressions and crises are closely related. Industrial depressions come when goods cannot be sold at a profit. Business houses restrict their output and hard times result. It has been observed that depressions come in cycles of about ten years. Prosperity leads to overexpansion and overspeculation and these bring on a depression. Though overproduction of all goods is impossible, there may be overproduction of one product; in this case it is impossible to sell the product at prices which will pay for its production and a business depression comes to producers of that article. This may involve others. Crop failures may result in a depression, which may cause a financial crisis. Financial crises are the result of a collapse in credit and make money scarce. In time of crises banks are in need of money and so they raise rates of interest in order to discourage loans. To secure additional money they sell securities and discount commercial paper. These are not profitable transactions in time of depression. The Federal Reserve banking system furnishes a means for member banks getting money in time of need.

TOPICS FOR DISCUSSION, DEBATE, AND SPECIAL REPORTS

I. What goods have you known to sell at less than the cost of production? What was the cause and the result?

2.

Give an account of some speculation in real estate in your vicinity. What were its results?

3. What was Black Friday? References: Any of the larger histories of the United States covering the period since the Civil War.

4.

Give an account of the crisis of 1893. Reference: Same as above.

5. Are the present times prosperous or the reverse? What is the

outlook for the future?

6. How may the Federal Reserve Banks prevent or lessen the

CHAPTER XXI

INTERNATIONAL TRADE

Nature of International Trade.-Trade between nations does not differ essentially from trade between different parts of the same nation. Goods are made where they can be produced to the greatest advantage. Oranges are grown in California and in Florida and shipped to the east and north. Shoes are made in New England and New York and shipped to California and Florida. Each section profits by doing what is best suited to it. Likewise Italy and Spain grow fruits for northern Europe and in return import manufactured articles. Brazil sends coffee to the United States and imports automobiles.

It does not necessarily follow that a country will send out only articles which it can produce more cheaply than the country with which it is trading.

For example: Country A produces iron at a cost of twenty dollars per ton and coal at a cost of five dollars per ton. Country B produces iron at a cost of eighteen dollars per ton and coal at a cost of two dollars per ton. Under these circumstances in Country A four tons of coal are equal in value to one ton of iron, but in Country B nine tons of coal are equal in value to one ton of iron. It will clearly be profitable for Country B to export coal and import iron, although it can produce each more cheaply