price disturbance, and (2) to the greater range and value of "outlying" industries which are very tardily if at all drawn into the exuberant movement of prosperity. In this connection it is worth noting that during this earlier period of the nineteenth century the production of specifically productive goods had not been carried to the point afterward attained, either in the differentiation and specialization of industries occupied with this class of goods or in the relative volume of this class of industries.
120The several phases of this sequence of exaltation and depression for any given business concern, may be stated as follows: -
Let ea = earnings; pr = sale price of output; exp = expenses of production of output; mar = margin of gain on output = pr - exp; cap = intitial effective capitalization; yp = year's purchase at (current rates = int) = 1/int, disregarding risk; cr = normal credit extension on given cap = cap/n = f(cap/int).
Then at the initial phase,
ea = (mar = pr -exp)outp,
cap = ea x yp = ea/int,
cr = cap/n,
At the subsequent phase, of exaltation,
ea' = ea + delta ea = mar' x outp
= [(pr' = pr + delta pr) - exp] outp
=(mar + delta mar) outp > ea,
cap' = ea'/int = (ea + delta ea)/int > cap,
cr' = cap'/n = (cap + delta cap)/n > cr.
At the concluding phase, of depression,
ea`` = ea' - delta ea' = mar`` x outp
= [pr' - (exp' = exp + delta exp)] outp < ea'
cap`` = ca``/int = (ea'- delta ea')/int < cap',
cr`` = cap``/n = (cap' - delta cap')/n < cr'.
For simplicity of statement, in all this no account is taken of the element of risk, nor of the fluctuations of discount rates or the variations of volume of output. If these be included in the calculation as variables, the result is much the same. They are functions of the variables already included, and their inclusion would, on the whole, accentuate the oscillations shown by the computation as it stands.
121A crisis may take its rise from credit extension in other than properly industrial business. Such, e.g., was in great measure the American crisis in l837, when the most obvious and disastrous inflation was in speculative land values and the credits based on them. But it is no stretch of the concept to say that in that case the situation out of which the crisis arose was an overcapitalization of the land values in question. Capitalized land is, of course, "capital" for business purposes as truly as any other body of values that are capitalized and drawn into the money market.
122It is, in great part, through or by force of fluctuations of this base line of money values that large accumulations of wealth are made. One might almost say that this is the "normal" method by which saving are made and capitalized in later modern times. Fluctuations in the stock market, of course, are of this character, as are commonly also large variations of the course of prices outside the stock market, as well as fluctuations of the money market. The great gains of successful promoters of corporations and the like come in this manner usually. They are due to enlargement of the money value of a given block of industrial equipment independently of any change in the physical character of the equipment which comes near saying that the large fortunes originate in such changes of the base line, - from which it follows that the larger accretions to the volume of capital are of this origin. The large profits are made in the form of capital, which is acquired by virtue of a price variation. See foot-note, pp. 168-170.
123A substantial move in this direction would be that advocated by Mr F.S. Stetson before the New York Bar Association, and reiterated before the United States Industrial Commission: "To permit the formation of a distinct class of business stock corporations whose capital stock may be issued as representing proportional parts of the whole capital without any nominal or money value." The market value of such shares would be the only value assigned them, and little of a base line in the way of a legally imputed value would remain. The de jure value would no longer hinder a free recognition of the facts. - Report of the Industrial Commission, vol. I. p. 976.
124Cf. Hobson, Problem of the Unemployed, ch. V., Vialles, La consommation et les crises economiques, especially "Introduction" and ch. III.
125Something that might bear such a construction occurs, e.g., locally, when a run of fish exceeds the ability of the workmen to take care of them. The fatuity of appealing to such an example is plain.
126Cf. Smart, Studies in Economics, ch. VII.
127For the present purpose a concern which passes through a liquidation and reappears with a rerated and reorganized capitalization and body of liabilities also has much of the character of a new investment.
128Cf. L. Pohle, Bevolkerungsbewegung, Kapitalbildung und periodische Wirtschaftskrisen, who concludes that depression is due to a scarcity of capital as compared with population; the rate of increase of capital is conceived to fall short of the rate of increase of population, hence periodical depression. Cf., on the other hand, Macrosty, Trusts and the State, p. 133, who finds, by recourse to the testimony before the Royal Commission on the Depression of Trade and Industry, that there is at such times capital constantly seeking investment and entering into competition with what is already invested. Cf. Final Report of the Royal Commission on Depression of Trade and Industry (1886). "The replies received from Chambers of Commerce to the inquiries we addressed to them confirm the statements made by the witnesses who appeared before us. Those replies testify to the general maintenance or increase of the volume of trade, accompanied in many cases by a shrinkage in its value, and in all cases by a serious diminution of profit. They also show how general is the belief in commercial circles that overproduction, the fall of prices, and more effective foreign competition, assisted by high tariffs, go far to account for the existing position of trade and industry in this country." (pp. ix-x). Cf. also pp. xi-xv of the Report.
129Cf., e.g., Burton, Crises and Depressions, ch. IV, especially pp 113-115.
130More in detail, what happens in connection with interest-bearing securities carried over an interval of high interest rates and business activity may be formulated as follows: When current interest rates advance, securities bearing a fixed rate (of dividends or interest) decline on the market. That is to say, the effective capitalized value of the claim to these fixed rates of income, as shown by the market quotations, shrinks. At the same time, since the period during which this readjustment occurs is a period of acceleration in business, the earning-capacity (actual or putative) of the property on which these securities rest has increased over what it was at the time the securities were floated. Hence this property (industrial equipment) is also recapitalized, in the market quotations, at a higher value than it had when the securities were floated. The effective recapitalization carried out by the market quotations acts, for the present purpose, to the
