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Cornell University Library 
 HC 106.J64 
 
 An open letter to Prof. John B. Clark, P 
 
 3 1924 013 881 408 
 
 New York 
 
 State College of Agriculture 
 
 At Cornell University 
 
 Ithaca, N. Y. 
 
 Library 
 

 AN OPEN LETTER 
 
 TO 
 
 Prof. JOHN B. CLARK 
 Prof. J. LAURENCE LAUGHLIN 
 Prof. E. R. A. SELIGMAN 
 Prof. F. W. TAUSSIG 
 
 
 
 Under the above heading I recently sent you 
 
 circular letter on the subject of commercial 
 
 |epressions and their cause, also sent you the 
 
 mopsis of a treatise "A Neglected Point in 
 
 (onnection with Crises" relating to the subject. 
 
 '^hile an opinion from the above-named authori- 
 
 |es cannot be expected for some time to come, 
 
 have received a number of communications 
 [■om members of the Economic Association, and 
 
 long them one from a Professor in a neighbor- 
 ig city, which is so typical of the views now 
 revailing on the cause of depressions that a 
 
 Iscussion of it seems in 
 
 giibf^l^^Hart : 
 
 place. He says, in 
 
 "Our business "system' 
 process, not of making and distributing 
 what the community needs but of making 
 and selling the things that can be made 
 and sold for a money profit, ( Quite right ! ) 
 Money is made by forecasting the future, 
 and here enter the subjective factors : end- 
 less possibilities of undue optimism, bad 
 judgment, fear, etc., with endless conse- 
 quences, (Quite right.) The business 
 -process is living, not mechanical. (Here 
 I beg to differ. Time, it is living, but on 
 a mechanical basis, the same as all living 
 organisms ; and if there is anything wrong 
 with the mechanical basis, the organism 
 will wither.) The synopsis of your depres- 
 sion theory seems to me too mechanical 
 and too innocent. If the depression were 
 merely a matter of saving and investing 
 as you point out, it would all be clear 
 and cognizable by your method of reason- 
 ing, but business is an organic process and 
 not a mechanical interaction of forces." 
 
 AVhether the Professor would have come to 
 the same conclusion if, instead of merely read- 
 ing the synopsis, he had read my argument, as 
 given in the book, that I doubt. Nevertheless I 
 admit that his views on our business organism, 
 as above stated, are quite typical of the views 
 prevailing among the public as Avell as among 
 most of our economists. The latter have 
 so far been unable to detect any inherent 
 source of trouble with the fundamental or me- 
 chanical part of our business organization, and 
 in consequence most of them concluded that it 
 must be the psychical element of our business 
 life Avhere we have to look for the cause of de- 
 pressions. And now, where I come forward 
 with the discovery of a fundamental, mechanical 
 source of disturbance, the first impression among 
 the reader will be that I lose sight of the im- 
 portant psychical element. Just as if this part 
 of our social system was the only one in ques- 
 tion! 
 
 The ruling characteristic of depressions is the 
 "lack of demand" — the excessive preponderence 
 of the supply above the demand. Heretofore if 
 has been generally assumed that there was noth- 
 ing ftmdumvntaUij wrong with our business or- 
 ganism, so far as the equilibrium between de- 
 mand and supply is concerned, this point having 
 been considered as fully settled by the weil- 
 known axiom of J. jNIill "that a producer who is 
 willing to sell brings a demand upon the market 
 equivalent to what he sells." And as, despite 
 this axiom, actual facts have been showing a 
 constant discrepancy between demand and sup- 
 ply, the cause of this discrepancy was thought 
 to be of a psychical rather than of a fundamental 
 or mechanical nature. But this is 'hot so. In 
 
my boQk^X have given well-sustained evidence 
 sho^ingthat, J. ,i\iill's axiom is not reliable, and 
 that tket'e' is, a positive factor at work which 
 ^constantly tends to. niake the demand fall short 
 of the supply— ra factor which is counteracted 
 so I6ii^ as savings iami surplus earnings meet 
 prompt investment '~in new constructions, but 
 which becomes- operative as soon as this coun- 
 teraction ceases. If my evidence is correct it 
 indicates -the direction where to look for a 
 remedy. 
 
 Not only our present depression can be traced 
 to a cause which must be considered as purely 
 mechanical — I can point to other economic phe- 
 nomena which likewise were governed, by causes 
 of a mechanical nature; for instance, the panic 
 which preceded our present depression. It was 
 due to the over-expansion of bank credits, as in- 
 dicated by the enormous growth of deposits 
 (bank money) in commercial banks, which ex- 
 panded from 3,100 millions in 1897 to 9,600 mil- 
 lions in 1907. Of prominent men who sustain 
 the view that the collapse was caused by this in- 
 flation, I mention Prof. T. N. Carver, of Har- 
 vard University, and Mr. Maurice L. Muhleman, 
 of New York. Vie can even go further and 
 assign the overstrained character of business, 
 during the preceding years, to the same me- 
 
 chanical cause — the inflation of bank money. 
 Though ordinarily such inflation ip considered 
 as harmless, so long as not accompanied by an 
 inflation of the currency, I have shown inmybook 
 that both kinds of inflation tend to over-stimu- 
 late the business activity, though the one kind 
 in a lesser degree than the other. Without that 
 stupendous increase of bank loans and bank 
 money, all of the latter counting as so much 
 cash and accordingly augmenting the country's 
 money volume, we Avould not have seen that 
 period of excessive boom which we witnessed in 
 recent years. 
 
 Both phenomena, the overstrained business 
 activity as well as the final collapse, were due 
 to the same "mechanical" cause, the inflation of 
 bank money. 
 
 * * » 
 
 Wliere we see phenomena of stupendous im- 
 portance to be governed by what may be called 
 "mechanical" causes — should we slight the lat- 
 ter, simply because they do not cover the 
 "psychical element" of our business organism? 
 
 N. JOHANNSEN, 
 
 1151 Pacific Street, 
 
 Brooklyn, N. Y.. 
 
 September 10th, 1908. 
 
 CB/JY?^^ 
 
 •Ss^{^- 
 
The original of this book is in 
 the Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924013881408 
 
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