Depressionandindustrialstagnationfollowonlyincasethepecuniaryexigenciesofthesituationareofsuchacharacterastoaffectthetrafficofthebusinesscommunityinaninhibitoryway。Butbusinessisthequestofprofits，andaninhibitionofthisquestmusttouchtheseatofitsvitalmotives。Industrialdepressionmeansthatthebusinessmenengageddonotseetheirwaytoderiveasatisfactorygainfromlettingtheindustrialprocessgoforwardonthelinesandinthevolumeforwhichthematerialequipmentofindustryisdesigned。Itisnotworththeirwhile，anditmightevenworkthempecuniaryharm。Commonlytheirapprehensionofthediscrepancywhichforbidsanaggressivepursuitofindustrialbusinessisexpressedbythephrase“overproduction。“Analternativephrase，intendedtocoverthesameconcept，butlessfrequentlyemployed，is“underconsumption。“15*
　　Thecontroversialquestionastothetenabilityofanygiven“overproduction“doctrinemay，forthepresentpurpose，beleftononeside；itliesoutsidethetheoryofbusinessandithasnomeritsordemeritsforthepurposesofatheoryofbusiness。Thepointofinteresthereisratherthegroundofitsacceptationamongbusinessmenandthemeaningwhichthisnotionhasforthem；thatistosay，itischieflyofinterestheretoinquireintothehabitsofthoughtwhichgivecogencyandeffecttothedogmaof“overproduction“aspracticallyheldbythebodyofbusinessmen，-whatitpracticallymeans，whythedogmaisheld，andwhatisitseffectonthecourseofbusinessenterprise。
　　“Overproduction，“or“underconsumption，“asitismetwithintheviewsofbusinessmen，isneitheravacantdogmanorashiftyapologywherewithtocovertheirowndelinquencies，butaveryconcretelyrealstateofaffairs。Itisastateofaffairsthatprevailswhenbusinessispersistentlydull；andtheconceptcoveredbythetermcomprisesthesufficientcauseofthedulness，intheapprehensionofthebusinesscommunity，eventhoughtheymaynotalwaysspeakofthedifficultybythatname。
　　Itmaybeworthwhile，evenattheriskoftedium，topointoutthatthisconceptof“overproduction“applies，nottothematerial，mechanicalbearingofthesituation，buttoitspecuniarybearing。Thenotionisneverseriouslyentertainedthatthereisormaybeanembarrassingexcessofgoods，oroftheappliancesfortheirproduction，abovewhatwouldbeofsomehumanuseifthebusinesssituationpermittedthemtobeturnedtouse。
　　1Thesupplyofconsumablegoodsis，practically，nevergreaterthanthecommunity’scapacityforconsumingthem。Anembarrassingexcessinanylineispracticallyaremotecontingencyatthemost。16*Therearemanyeloquentpassagesintheeconomicmanualswhichmaybecalledinwitnessofthistruism，wheremuchpainsistakentoshowthathumanwantsare，inthenatureofthecase，indefinitelyextensible。Nothingstandsintheway，wearetold，but“difficultyofattainment“ofthegoodswithwhichtosatisfythesewants。2Intimesofdepression，or“hardtimes，“thereis，underthemodernindustrialsystematleast，nooverproductioninthesenseofaproductionsolargeastoovertaxtheworkingcapacityoftheindustrialappliancesandprocessesemployed，norsolarge，even，astoovertaxthenormalpowersoftheforceofworkmenorrequirethemtoworkovertimeandholidays。Quitethecontrary。
　　Thatsortofthinghappensonlyinbrisktimes，whenthereisnooverproduction。Seriouslytorecitesuchplatitudesasthesemayseemlikeatriflingwiththepatienceoftheprinter，oritmaybetakenforalight-headedexcessof“wissenschaftlicherMethode“；butthesetwoformulationsappeartocoveralltheconceivablewaysinwhichoverproductionmayoccur，solongasthetermisconstruedfromthepointofviewofthemechanicalfactsofthecase。Seenfromthissideaperiodofdepressionisaperiodofunderproduction；millstunonhalftimeornone，andthesupplyofgoodsthatfindsitswayintothehandsofconsumersissensiblyscantforthedemandsofcomfort。
　　Thedifficultyis，ofcourse，apecuniaryone，andthephraseisusedbybusinessmeninthatpecuniarysenseinwhichithasanimmediatebearingonbusiness。“Excessivecompetition“isanalternativephrase。Thereisanexcessofgoods，orofthemeansofproducingthem，abovewhatisexpedientonpecuniarygrounds，-abovewhatthereisaneffectivedemandforatpricesthatwillrepaythecostofproductionofthegoodsandleavesomethingappreciableoverasaprofit。Itisaquestionofpricesandearnings。Thedifficultyisthatnotenoughofaproductcanbedisposedofatfairpricestowarranttherunningofthemillsattheirfullcapacity，orrunningthemataratenearenoughtotheircapacitytoyieldafairprofit。Or，toturnthepropositionabout，asbusinessmenareinthehabitofdoing，thereismoreofanoutputofferedthanwillbecarriedoffatafairprice，suchapriceaswillaffordfairorordinaryprofitsontheinvestmentandtherunningexpenses。Thereistoolargeaproductivecapacity；thereare，toomanycompetitiveproducersandtoomuchindustrialapparatustosupplythemarketatreasonableprices。Thematterreducesitselftoaquestionoffairpricesandordinaryprofits。17*
　　Ifthereisalargevolumeofoutstandingcreditobligations，thatwillcomplicatethesituation。Thereisalwaysaconsiderableamountofinterestbearingsecuritiesoutstanding，andtheclaimsofthesesecuritieshavetobesatisfiedbeforedividendscanbepaidonstock，orbeforeprofitsaccruetoindustrialventureswhichhaveissuedtheSecurities。Thesefixedcharges，togetherwithothersofalikekind，narrowthemarginfromwhichprofitsarederivedandincreasethehandicapwhichaseasonofdulltimesbringstothebusinessmeninchargeofindustry。Atthesametimefixedchargesprecludeshuttingdown，exceptatasureandconsiderableloss。Thebusinessmeninvolvedareconstrainedtogoon，andintheabsenceofwidecombinationsinindustrytheyareconstrainedtogoonatsuchcompetitivepricesastoprecludereasonableprofits。
　　Thequestionoffairpricesandreasonableprofitshassomereferencetocurrentratesofinterest。A“fair“rateofprofitsissucharateasbearsareasonablerelationtothecurrentrateofinterest，althoughthisrelationofprofitstointerestratesdoesnotappeartobeastrictone。Still，thereundoubtedlyissomereferencetothecurrentrateofinterestasasortofzerolinetowhichprofitsshouldnotdecline。Newinvestmentsaremadeonthebasisofcurrentratesofinterestandwithaviewtosecuringthedifferentialgainpromisedbytheexcessofprospectiveprofitsoverinterestrates。
　　Inaperiodofdepressiontheaggregateindustrialequipmentis，notoriously，notrunningatitsfullcapacity；therearemanyidleandhalf-idleplantsandmanyidleworkmen。Theconcernsinquestionfindthemselvesunabletodoafullrunofbusinessatreasonableprofits。Still，unlessthedepressionisofexceptionallyshortduration，thereisalwayssomenewinvestmentgoingon。Moreorlessofnewcapitalcontinuestofinditswayintoindustrialbusinessincompetitionwiththeconcernsthatarealreadyinthefield。18*Incaseofaprotracteddepressiontheaggregateofnewinvestmentssomademay，inthecourseofyears，amounttoaveryconsiderableadditiontotheindustrialoutfit，andtheproductionofthenewestablishmentsmayveryappreciablyincreasetheaggregateoutput。Indeed，theoutputofthenewestablishmentsisanotablefactorinswellingthesupplyandkeepingdownprices。Butthenewinvestmentsmadeduringthedepressionareprofitable，atleastatthestart。Orevenifthisshouldbequestionedwhenstatedinthisbroadway，itwillatleastholdtruethattheyarecommonlyentereduponwithawell-advisedexpectationoftheirbeingprofitableifthesituationdoesnotmateriallychangebetweenthetimewhenthenewventurewasentereduponandthetimewhenthenewequipmenthasgotunderway。Iftheintervalbetweentheinceptionofthenewenterpriseanditscompletionisalongone，thesituationmaysochangeinthemeantimeastoleaveitunprofitableevenifithasbeenconservativelyplanned。Therearealso，ofcourse，fraudulententerpriseswhicharenotexpectedbytheirpromoterstopayaprofitontheinvestment；andthereareprobably，also，alwayssomeventuresentereduponduringdulltimeswithaviewtobeingbeforehandinpreparationforbettertimes。Butafterallhasbeensaidinqualificationofthemainproposition，itremainstruethatsomenewinvestmentisgoingonwithawell-advisedexpectationofreasonableprofitsonthebasisofcurrentcosts，prices，andratesofinterest。19*Therateofinterestintimesofdepressionmaybeunsatisfactorytolenders；
　　itmaybediscouragingbycomparisonwiththecustomaryrangeofinterestratesduringbettertimes。Still，theobstacletobusinessisnottobesoughtinaneffectualdiscouragementoflenders，forinpointoffactmoneyisreadilytobehadongoodsecurityduringanyprotracteddepression。20*
　　Thereisalsothefactthatinvestmentiscontinuallygoingon，whicharguesthatthedifficultyisneitherthatcapitalcannotbefoundforinvestment，northatinvestmenthasnoprospectofreasonableprofits。Practically，noexceptionalamountoffluentfundsiswithheldfromthemarket，-exceptintimeofpanic，whichisanothermatter。Itmaybeaddedthattherateofinterestneednotbenotablylowintimeofdepression，justas，ontheotherhand，aperiodofbusinessexaltationisnotuniformlyaccompaniedbyanotablyhighrateofinterest。
　　Butalowordecliningrateofinterestiseffectiveinthewayofdepressingthebusinesssituation，eventhoughadepressionmaygoonwithoutit。Thelineofitsbearinguponbusinessdepression，oratleastoneline，isasfollows:
　　Establishedbusinessconcernsparticularlycorporationsengagedinindustryhavesomeappreciablefixedinterestchargestomeet-onleases，mortgages，andinterest-bearingsecuritiespreferredstockandbonds。Theseoutstandingobligationsandsecuritiesmayhavebeennegotiated，“floated，“atanearlierperiodofhigherinterestratesandhigherprofits，ortheymayhavebeencarriedoverthroughaperiodofhigherinterestrates。
　　Intheformercasetheseinterestchargesareexcessivelyhighascomparedwiththepresentcapitalizedvalueofthepropertyonwhichtheyrest，computingthecapitalizationonthebasisofthepresentcostofreplacingthispropertyandthepresentinterestchargewhichthiscostofreplacementwouldbear。Inthelattercasetheoriginalcapitalizationofthecorrespondingitemsofpropertywillhaveundergoneapracticaleffective
　　recapitalizationatalowerfiguretocorrespondwiththehigherrateofinterestprevalentduringtheintervalinquestion；andinthesubsequentperiodoflowinterest，thefixedchargeonthisrecapitalizationisexcessivelyhighascomparedwiththecurrenteffectivecapitalizationoftheproperty。Theliabilitiesareexcessive，inrespectoftheirinterestcharges，ascomparedwiththepresentearning-capacityofthepropertyrepresentedbythem。21*
　　Whatgiveseffecttothisdrawbackforthebusinessenterpriseswhichhavesuchfixedinterestchargestomeetisthefactthatthenewinvestments，andthoseconcernsthathavegoneintobankruptcyorreceivers’hands，comeintocompetitionwiththeold。Theseneworrejuvenatedconcernsarenotcommittedtoascaleoffixedchargescarriedoverfromahigherinterestlevel；
　　andthesearethereforecarryingonlysuchinterestchargesasthecurrenteffectivecapitalizationoftheirpropertywillwarrant，whethereffectivecapitalizationbetakentomeancostofproductionoftheequipment，earning-capacityoftheconcern，ormarketquotationofitssecurities。Theseunincumberedcompetitorsarepresumedtobemakingreasonableprofitsatcurrentprices，andtheirpresenceinthecompetitivemarketthereforeprecludesanadvanceofpricestosuchascaleaswouldaffordareasonableprofittotheotherestablishmentsafterpayingtheirinterestchargesonwhatis，ineffect，over-capitalizedproperty。
　　Thistentativeexplanationofdepressionappliesonlysofarastheperiodofdepressionisatimeofrelativelylowratesofinterest。Butdepressiondoesnotuniformlycoincidewithlowinterestrates；besideswhich，thereareotherfactsinthecasewhichlimittheapplicabilityoftheexplanationformulatedabove。Toexplainprotracteddepression，e。g。，thislineofargumentwouldbeconvincingonlyonthesuppositionofaprogressivelyfallingrateofinterest，-aconditionnotcommonlymetwithinaprotractedperiodofdepression。
　　Butthisexplanation，applicablewithinalimitedrangeofthephenomenathatmakeupaperiodofdepression，pointsthewaytoanotherclassofconsiderationsthatgofartowardexplainingtherest。Itappearsthatthephaseofthedifficultycoveredbythisexplanationistraceabletoadiscrepancybetweentheacceptedcapitalization，theinterestcharges，andtheearning-capacity。Anditappearsequallyplainthattheonlyremedyapplicabletothecasebarringaspeculativeexaltationofbusinessisarecapitalizationoftheconcernsaffectedonalowerbasis，tofittheloweredcostofproductionoftheequipmentanditsloweredearning-capacity。Butunderexistingconditionsoflawsucharemedycannotbeappliedtotheinterestbearingsecurities，-exceptbyprocessofinsolvency，-anditisveryreluctantlyappliedtoothercapitalizedwealth；