12. ECONOMIC CRISES AND THE CONDITIONS NECESSARY TO PREVENT THEM

Economic crises, that is, stagnation of the market, unemployment and the accompanying phenomena, are conceivable only with falling prices.

Prices can fall for three reasons:

1. Because the conditions under which gold is produced do not allow the supply of money (demand) to be adapted to the supply of wares.
2. Because when the production of wares, and therefore of real capital, is increasing, the rate of interest upon the latter falls. No more money is then offered for the formation of new real capital, and the markets of wares destined for this use (an important part of production, especially when population is increasing) stagnate.
3. Because with increased production and prosperity money is melted by the goldsmiths in direct proportion to the increase in the supply of wares.

(*The Chinese are said to make silver figures which are much valued as the patron gods of the household. But silver is the general medium of exchange among the Chinese. The following course of events is therefore probable: For some reason silver flows into China in greater abundance than usual and stimulates trade and industry (trade-boom). Merchants prosper, and out of gratitude increase the size and weight of their silver household gods. The silver they obtain in exchange for their products - the cause of the trade activity - melted and disappears for ever in the household shrine. If, however, conditions are reversed and from lack of silver prices fall and business is bad (crisis), the Chinese merchant comes to the conclusion that his household god is powerless because it is too small. So he scrapes together the little silver he has, to increase its size. Even if there were no other causes, this cause alone would be sufficient to explain the striking arrest, extending backwards over a thousand years, of the development of China.

Has a European any right to laugh at the Chinese ? If trade is good he buys a gold watch-chain for ostentation, and if trade is bad he buys a still larger one to persuade others to give him credit. Both, for different motives, saw off the branch upon which they are sitting.)

Any one of these three causes of falling prices is sufficient alone to produce a crisis; and it is characteristic of them that when one cause (say the first, owing to sufficient discoveries of gold) fails to function, the others leap into the breach. One or other of these three causes of crisis regularly and inevitably occasions the periodic breakdown of economic life.

Only if gold continues to be discovered in such unusual quantities that, in spite of increased consumption of gold for industrial purposes, there is a large and steady rise of prices (at least 5 % annually), can economic life develop without crises. Even the resistance to the circulation of money caused by the fall of interest on real capital would give way to such a general rise of prices; the rise of prices would compel the circulation of money. But such a general rise of prices would in itself constitute a breakdown of the monetary standard.

The explanation of the causes of commercial crises indicates the condition which must be fulfilled to prevent their occurrence. The condition is that prices must never, under any circumstances, fall.

The next question is how this condition can be fulfilled. It can be fulfilled by:

1. Separation of money from gold and the production of money in accordance with the needs of the market.
2. A form of paper-money so contrived that it will be offered in all possible circumstances in exchange for wares, even if interest on capital (interest on money as well as interest on real capital) falls or disappears.

A form of money fulfilling these conditions will be described in Part IV of this book (Free-Money).