who still adhere to the doctrine of natural rights with something of the eighteenth-century naivete. But whatever may be accepted as the ulterior grounds of that cultural movement which culminated in the system of Natural Liberty, it is plain that the industrial and commercial experience of western Europe, and primarily of England, from the fifteenth to the eighteenth century, had much to do with the outcome of the movement in so far as natural liberty touches economic matters. It is as an outcome of this recently past phase of economic development that we have incorporated in the law, equity, and common sense of to-day, these peculiarly free and final property rights and obligations, that is to say, those peculiar principles that control current business and industry. We owe to the eighteenth century a very full discretIon and free swing in all pecunIary matters. It has given freedom of contract, together with security and ease of credit engagements, whereby the competitive order of business has been definitively installed.46
The subject-matter about which this modern pecuniary discretion turns, with all its freedom and inviolability of contract, is money values. Accordingly there underlies all pecuniary contracts. an assumption that the unIt of money value does not vary. Inviolability of contracts involves this assumption. It is accepted unquestioningly as a point of departure in all business transactions. In the making and enforcement of contracts it is a fundamental point of law and usage that money does not vary.47 Capitalization as well as contracts are made in its terms, and the plans of the business men who control industry look to the money unit as the stable ground of all their transactions. Notoriously, business men are jealous of any attempt to change the value or lessen the stability of the money unit, which goes to show how essential a principle in business traffic is the putative invariability of the money unit.48
Usage fortified by law decides that when prices vary the variation is held to occur in the value of the vendible commodities, not in the value of the money unit, since money is the standard of value. There is, of course, no intention here to question the position, familiar to all economists, that fluctuations in the course of prices may as well be due to variation on the part of the money metals as to a variation on the part of the articles whose prices fluctuate. In so far as the distinction so made between variations in the one or the other member of a value ratio has a meaning - which it is not always clear that it has - it does not touch the argument. It is a matter of common notoriety, which has also had the benefit of reiterated statistical proof, that, as measured, for instance, in terms of livelihood or of labor, the value of money has varied incontinently throughout the course of history.
But in the routine of business throughout the nineteenth century the assumed stability of the money unit has served as an axiomatic principle, in spite of facts which have from time to time shown the falsity of that assumption.49
The all-dominating issue in business is the question of gain and loss. Gain and loss is a question of accounting, and the accounts are kept in terms of the money unit, not in terms of livelihood, nor in terms of the serviceability of the goods, nor in terms of the mechanical efficiency of the industrial or commercial plant. For business purposes, and so far as the business man habitually looks into the matter, the last term of all transactions is their outcome in money values. The base line of every enterprise is a line of capitalization in money values. In current business practice, variations from this base line are necessarily rated as variations on the part of the other factors in the case, not as variations of the base line. The business man judges of events from the standpoint of ownership, and ownership runs in terms of money.50
Investments are made for profit, and industrial plants and processes are capitalized on the basis of their profit-yielding capacity. In the accepted scheme of things among business men, profits are included as intrinsic to the conduct of business. So that, in place of the presumption in favor of a simple pecuniary stability of wealth, such as prevails in the rating of possessions outside of business traffic, there prevails within the range of business traffic the presumption that there must in the natural course of things be a stable and orderly increase of the property invested. Under no economic system earlier than the advent of the machine industry does profit on investment seem to have been accounted a normal or unquestionably legitimate source of gain. Under the agrarian-manorial regime of the Middle Ages it was not felt that the wealth of the large owners must, as a matter of course, increase by virtue of the continued employment of what they already had in hand - whatever may be the historical fact as regards the increase of wealth in their hands. Particularly, it was not the sense of the men of that time that wealth so employed must increase at any stated, "ordinary" rate per time unit. Similarly as regards other traffic in those days, even as regards mercantile ventures. Gain from investment was felt to be a fortuitous 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
