ABSTRACT
The typical cycle of the nineteenth century was primarily caused by overinvestment – or so I believe. There was the growth of the industrial system, successively affecting different sectors. It required new investment induced by demand, given optimistic expectations, and was made possible by rapid technological change. Demand for the produce in fact expanded, but there were limits to the absorption of new machinery, besides limits to the growth of consumption demand. The producers had, in the phase of optimism, increasingly incurred debts, and loss of confidence and difficulties to pay on the part of indebted entrepreneurs and traders led to the famous, potentially catastrophic panics which then required intervention by the Bank of England in the paradigmatic British case. The reaction characteristically did not consist of attempts to stabilise accumulation itself. Instead, the Bank of England learned to use discretion in the support of banks, which were the first and main victims of the payment difficulties (Bagehot, 1996 [1873], cf. Schefold, 1996). They had accumulated bills which, when it had become difficult to sell, stood for assets which had fallen in value, and the banks needed fresh money to sustain the corresponding losses. The intellectual and politically relevant result of the process was that theories of money, and of monetary policy on the part of the Central Bank, flourished, with, in particular, the understanding of the international exchanges. The example of a different development of the crisis and of a very different reaction on the part of the political system and economic theorising is provided by the crisis of 1873 in the German realm which followed upon German unification and upon the boom which had been engendered by that process (Plumpe, 2010). The bubble created at the stock exchange by the formation of many new shareholding companies, some of them built on shaky foundations, resulted in a bust, and this in a depression that lasted into the 1890s with a period of slow growth and falling prices. The primary reaction was again not to confront the causes of the crisis directly. Instead social policy was developed. As an example, we shall discuss Wagner’s use of business cycle considerations to argue for his system of state intervention below.1
