Period of time since the end of the war to Spring 1920

The above favourable business, conditions continued after the war approximately up to the spring of 1920. The States of Central Europe which had up to then been under boycott, began to take part, directly or indirectly in the purchase of American goods. But it was soon evident that Europe, including the countries of the Entente, had become economically weakened and deprived of purchasing power. Even England was not in possession of a sufficient reserve fund in gold or American investments to be able to finance properly the purchasing operations in the United States; the rate of exchange of the English pound sterling had fallen in comparison with the dollar by 20 per cent., and the currency of the other European countries had fallen to 1/10 and even to 1/100 of the nominal value in gold. This inevitably led to the decrease of the purchasing capacities of these countries in respect to the United Slates and called forth an over-production crisis which had to take place in the United States for the very reason that the public economy had not been disorganised by the war.

It is interesting to note how the crisis panned out. The capitalist circles, as usual, would not believe that the favourable trade conditions had passed away. According to the report of the “Controller of the Currency” the total sum of credit opened by all the banks of the U.S. amounted to:

In Millions of Dollars

The credit increased by 20 per cent. in one year and during an evident fall of production. These are the data given by Professor Lederer; the average production for the period of time from 1911 to 1913 estimated at 100 per cent.

Data on the produce of farming according to the market statistics.

The same process is to be observed in regard to many other commodities and also in the transport enterprises. Furthermore, in spite of the decrease in production, the reserves in the warehouses have decreased but very insignificantly, constituting for instance in February 1920 – 534 per cent, in October 1920 – 504 per cent, of the turnover for the last month at the same time that, on the contrary, the unexecuted orders have decreased from 32 per cent. in February 1920 to approximately 10 per cent. of the turnover in October 1920. One may say that with the exception of separate cases the quantity of manufactured products has in general considerably diminished from the autumn of 1919 to the spring of 1920.

There are certain signs indicating that the advent of the crisis had been artificially accelerated by the large American capital. The concentration of property in trusts and the centralisation of the practical management of the enterprises has gone nowhere so far as in the United States. Therefore nowhere else can the market be so much under the direction of ruling capitalism as in the United States. Consequently there may be conditions which allow of the acceleration of the crisis. Unfortunately we have not got the corresponding American data on the basis of which we might judge how far our presumptions had been practically carried out. In the above mentioned article Professor Lederer says:

“When in spring 1919, together with the fall of American prices the rate of exchange of the European drafts and consequently also the purchasing capacity of the European countries decreased, the larger organisations of American capitalism, the banks, decided to limit the credits in future and to demand the return of loans advanced; this was soon carried out on a large scale. The limiting and the refusal of credit placed the industrial and commercial enterprises in a difficult position, compelling them to sell their goods promptly for the settlement of their liabilities. They could not keep their goods but were compelled to get rid of them even at a loss. True, they had received large profits under the favourable war conditions but nevertheless they looked upon their losses as a threat against their very existence, because they had to – and this was a second consequence of their situation so obviously pointed out by the above figures – reduce production, and consequently dismiss the workers, annul the orders for half-products, raw materials, etc. Thus, the crisis spread throughout the whole department of public economy. And in this way at the time when the whole world was still experiencing the greatest and most urgent need of American commodities, their production was forcibly reduced in order to avoid a worse evil, namely, the accumulation of stale goods, hopeless in the sense of finding a good sale. From the capitalist point of view such a limitation of credit was naturally most efficient, in that it averted a catastrophic over-production.”

It is significant that the rate of discount was raised on May 1st to 7 per cent, and has remained at that rate ever since.