phenomena of business, of prices and capitalization, an explanation of their appearance and disappearance, and of their bearing upon the common welfare, may be sought by harking back to those business principles that underlie modern capitalistic enterprise. An analysis of the current, common-sense business views of price and investment should indicate the genesis and manner of growth of these mass movements of the business community, as well as the character of those circumstances which may further or inhibit such movements. Business depression and exaltation are, at least in their first incidence, of the nature of psychological fact, just as price movements are a psychological phenomenon.
The everyday circumstances which condition the modern business management of industry are sufficiently well known, and they have already been reviewed in some detail in earlier chapters; but they may perhaps advantageously be outlined again in so far as they bear immediately on the question in hand.
(1) Industry is carried on by means of investment, which is made with a view to pecuniary gain (the earnings). The business man's endeavors in managing the affairs of the concern in which investment has been made look to the same end. The gains are kept account of as a percentage on the investment, and both they and the industrial plant or process through the management of which they are procured are counted in terms of money, and, indeed, in no other terms. The plant or process (or the investment, whatever form it takes) is capitalized on the basis of the gains which accrue from it, and this capitalization proceeds on the ground afforded by the current rate of interest, weighted by consideration of any prospective change in the earning-capacity of the concern. The management of the concern is effected by a more or less intricate and multifarious sequence of bargains. The decisive consideration at every point in this traffic of investment and administration is the consideration of price in one relation or another.
(2) The industry to which the business men in this way resort as the ways and means of gain is of the nature of a mechanical process, or it is some employment (as commerce or banking) that is closely bound up with the mechanical industries. Broadly, it is such industry as lies under the dominion of the machine, in that it is involved in that comprehensive quasi-mechanical process of modern industrial life that has been discussed in an earlier chapter. This implication of each industry in a comprehensive system, or this articulation with other branches of industry, is of such a nature as to place each industrial concern in dependence on one or more other branches of industry, from which it draws its materials, appliances, etc., and to which it disposes of its output; and these relations of dependence and articulation form an endless sequence. That is to say, the interindustrial relations into which any branch of industry necessarily enters do not run to a final term in any direction; within the process of industry at large there is no member that stands in the relation of an initial term to any sequence of processes. The ramification of industrial dependence is without limits. The method of these relations of one concern to another, or of one branch of industry to another, is that of bargaining, contracts of purchase and sale. It is a pecuniary relation, in the last resort a price relation, and the balance of this system of interstitial relations is a price balance.
(3) These interstitial pecuniary relations, between the several concerns or branches of industry that make up the comprehensive industrial system at large, involve credit relations of greater or less duration. The bargaining, by means of which industry is managed and the interstitial relations adjusted, takes the form of contracts for future performance. All industrial concerns of appreciable size are constantly involved in such contracts, which are, on an average, of considerable magnitude and duration, and commonly extend in several directions. These contracts may be of the nature of loans, advances, outstanding accounts, engagements for future delivery or future acceptance, but in the nature of the case they involve credit obligations. Credit, whether under that name or under the name of orders, contracts, accounts, and the like, is inseparable from the management of modern industry in all that concerns the working relations between businesses that are not under one ownership, or between which the relations resting on separate ownership have not been placed in abeyance by some such expedient as lease, pool, syndicate, trust agreement, and the like. Credit relations of one kind and another are also found expedient and profitable at many points where their employment is not precisely unavoidable. These extended credit relations are requisite to the most expeditious and profitable conduct of business, and so to the highest degree of success of the business. Under the regime of the machine industry and modern business methods it is probably fair to say that the use of credit, apart from loan capital and leases, unavoidably goes to the extent required to cover all goods in process of elaboration, from the raw material to the finished goods, in so far as the goods change hands (in point of ownership) during the process.
(4) The conduct of industry by competing business concerns involves an extensive use of loan credit, as spoken of in Chapter V above.
The four conditions recited are characteristic features of that recent past during which brisk times, crises, and depressions followed one another with some regularity as incidents of the normal course of business.113 Certain qualifications of this characterization are necessary to fit the immediate present. These will be indicated presently.
In brisk times the use of credit is large; it may be as a cause or an effect of the acceleration of business; most commonly it seems to be both a cause and an effect. No appreciable business acceleration takes place without an extension of credit, at least in the form of contracts of purchase and sale for future performance, if not also in the form of loans. In times of protracted depression the use of credit seems on the whole to be somewhat restricted, at least such is the current apprehension of the case among business men. Still, it cannot confidently be said that seasons of protracted depression are due solely to an absence of credit relations or to an unwillingness to enter into credit relations. A comparison of the course of interest rates, e.g., does not warrant the generalization that the readiness with which loans can be negotiated need be appreciably different in brisk and in dull times.114 The readiness with which contracts of purchase and sale are negotiated is appreciably greater in brisk times than in times of depression; that, indeed, is the obvious difference between the two.
Of the three phases of business activity, depression, exaltation, and crisis, the last named has claimed the larger and livelier attention from students, as it is also the more picturesque phenomenon. An industrial crisis is a period of liquidation, cancelment of credits, high discount rates, falling prices and "forced sales," and shrinkage of values. It has as a sequel, both severe and lasting, a shrinkage of capitalization throughout the field affected by it. It leaves the business men collectively poorer, in terms of money value; but the property which they hold between them may not be appreciably smaller in point of physical magnitude or of mechanical efficiency than it was before the liquidation set in. It commonly also involves an appreciable curtailment of industry, more severe than lasting; but the effects which a crisis has in industry proper are commonly not commensurate with its consequences in business or with the importance attached to a crisis by the business community. It does not commonly involve an appreciable destruction of property or a large waste of the material articles of wealth. It leaves the community at large poorer in point of market values, but not necessarily in terms of the material means of life. The shrinkage incident to a crisis is chiefly a pecuniary, not a material, shrinkage; it takes place primarily in the intangible items of wealth, secondarily in the price rating of the tangible items. Apart from such rerating of wealth, the most substantial immediate effect of a crisis is an extensive redistribution of the ownership of the industrial equipment, as noted in speaking of the use of credit.
The play of business exigencies which lead to such a period of liquidation seems to run somewhat as follows: Many firms have large bills payable falling due at near dates, at the same time that they hold bills receivable also in large amounts. To meet the demand of their creditors they call upon their debtors, who may in their turn have bills receivable or may hold loans on collateral. The initial move in the sequence of liquidation may be the calling in of a call loan, or a call for additional collateral on a call loan. At some point, earlier or later, in the sequence of liabilities the demand falls upon the holder of a loan on
