matter, not reducible to a stated rate. This is reflected, e.g., in the tenacious protests against the taking or paying of interest and in the ingenious sophistries by which the payment of interest was defended or explained away. Only under more settled commercial relations during the era of handicraft did the payment of interest gradually come to be accepted into full legitimacy. But even then gains from other business employments than mercantile traffic were apparently viewed as an increase due to productive labor rather than as a profit on investment.51 In industrial pursuits, as distinct from mercantile traffic proper, profits apparently come to figure as a regular and ordinary incident only when the industries come to be carried on on a mercantile basis by relatively large employers working with hired labor.
This orderly increase is, of course, taken account of in terms of the money unit. The "ordinary" rate of profits in business is looked upon as a matter of course by the body of business men. It is part of their common-sense view of affairs, and is therefore a normal phenomenon.52 Gain, they feel, is normal, being the purpose of all their endeavors; whereas a loss or a shrinkage in the values invested is felt to be an untoward accident which does not belong in the normal course of business, and which requires particular explanation. The normality, or matter-of-course character, of profits in the modern view is well shown by the position of those classical economists who are inclined to include "ordinary profits" in the cost of production of goods.
The precise meaning of "ordinary profits" need not detain the argument. It may mean net average profits, or it may mean something else. The phrase is sufficiently intelligible to the business community to permit the business men to use it without definition and to rest their reasoning about business affairs on it as a secure and stable concept; and it is this commonplace resort to the term that is the point of interest here.
At any given time and place there is an accepted ordinary rate of profits, more or less closely defined, which, it is felt, should accrue to any legitimate and ordinarily judicious business venture. However shifty the definition of this rate of profits may be, in concrete, objective terms, it is felt by the men of affairs to be of so substantial and consistent a character that they habitually capitalize the property engaged in any given business venture on the basis of this ordinary rate of profits. Due regard being had to any special advantages and drawbacks of the individual case, any given business venture or plant is capitalized at such a multiple of its earning-capacity as the current ordinary rate of profits will warrant.53
Proceeding on the common-sense view built up out of this range of habits of thought with respect to normal profits and price phenomena, the business community holds that times are ordinary or normal so long as the accepted or reasonable rate of profits accrues on the accustomed capitalization; whereas times are good or brisk if the rate of gain is accelerated, and hard or dull if profits decline. This is the meaning of the phrases, "brisk times" and "dull times," as currently used in any business community.
Under the exigencies of the quest of profits, as conditioned by the larger industry and the more sweeping business organization of the last few decades, the question of capital in business has increasingly become a question of capitalization on the basis of earning-capacity, rather than a question of the magnitude of the industrial plant or the cost of production of the appliances of industry. From being a sporadic trait, of doubtful legitimacy, in the old days of the "natural" and "money" economy, the rate of profits or earnings on investment has in the nineteenth century come to take the central and dominant place in the economic system. Capitalization, credit extensions, and even the productiveness and legitimacy of any given employment of labor, are referred to the rate of earnings as their final test and substantial ground. At the same time the "ordinary rate of profits" has become a more elusive idea. The phenomenon of a uniform rate of profits determined by competition has fallen into the background and lost something of its matter-of-fact character since competition in the large industry has begun to shift from the position of a stable and continuous equilibration to that of an intermittent, convulsive strain in the service of the larger business men's strategy. The interest of the business community centres upon profits and upon the shifting fortunes of the profit-maker, rather than upon accumulated and capitalized goods. Therefore the ultimate conditioning force in the conduct and aims of business is coming to be the prospective profit-yielding capacity of any given business move, rather than the aggregate holdings or the recorded output of product.
But this latest development in the field of industrial business has not yet come to control the field. It is rather an inchoate growth of the immediate present than an accomplished fact even of the recent past, and it can be understood only by reference to those conditions of the recent past out of which it comes. Therefore it is necessary to turn back to a further consideration of the old-fashioned business traffic as it used to go on by the competitive method before the competitive order began seriously to be dislocated and take on an intermittent character, as well as to a consideration of that resort to credit which has, in large part, changed the competitive system of business from what it was at the beginning of the nineteenth century to what it has become at its close.
Value of Loan Credit
(The Use of Loan Credit)
Credit serves two main uses in the regular course of such business as is occupied with the conduct of industry. - (a) that of deferred payments in the purchase and sale of goods - book accounts, bills, checks, and the like belong chiefly under this head; and (b) loans or debts - notes, stock shares, interest-bearing securities, deposits, call loans, etc., belong chiefly here. These two categories of credit extension are by no means clearly distinct. Forms of credit which commonly serve the one purpose may be turned to the other use; but the two uses of credit are, after all, broadly distinguishable. For many purposes of economic theory such a distinction might not be serviceable, or even practicable; it is here made merely for present use. It is chiefly with credit of the latter class, or rather with credit in so far as it is turned to use for the latter purpose, that this inquiry is concerned.
Suppose due credit arrangements have already been made - in the way of investments in stocks, interest-bearing securities and the like - such as to place the management of the industrial equipment in competent hands. This supposition is not a violent one, since a condition roughly approximating to this prevails in any quiescent period of industry when there is no appreciable depression. Under these "normal" conditions, the capital invested in any given industrial venture is turned over within a certain, approximately definite, length of time. The length of time occupied by the turnover may vary from one establishment to another, but in any given case the length of the turnover is one of the important factors that determine the chances of gain for the business concern in question. Indeed, if the general conditions of the trade and of the market are given, the two factors which determine the status and value of a given sound concern, as seen from the business man's standpoint, are the magnitude of the turnover and the length of time it occupies.
The business man's object is to get the largest aggregate gain from his business. It is manifestly for his interest, as far as may be, to shorten the process out of which his earnings are drawn,54 or, in other words, to shorten the period in which he turns over his capital. If the turnover consumes less than the time ordinarily allowed in the line of industry in which he is engaged, he gains more than the current rate of profits in that line of business, other things equal; whereas he loses if the turnover takes more than the normal time. This fact is forcibly expressed in the maxim, "Small profits and quick returns." There are two chief means of shortening the interval of the turnover, currently resorted to in industrial business. The first is the adoption of more efficient,
