competitive rate of earnings is brought to correspond with this basis of operation; the consequence being that under such competitive employment of credit the aggregate earnings of an enterprise resting on a given initial capital will be but slightly larger than it might have been if such a general recourse to credit to swell the volume of business did not prevail. But since such use of credit prevails generally, a further consequence is that any concern involved in the open business competition, which cannot or does not take recourse to credit to swell its volume of business, will be unable to earn a "reasonable" rate of profits. So that the general practice drives all competitors to the use of the same expedient; but since the advantage to be derived from this expedient is a competitive advantage only, the universality of the practice results in but a slight, if any, increase of the aggregate earnings of the business community. Borrowed funds afford any given business concern a differential advantage as against other competitors; but it is, in the main, a differential advantage only. The competitive use of such funds in extending business operations may, incidentally, throw the management of some portion of the industrial process into more competent or less competent hands. So far as this happens, the credit operations in question and the use of the borrowed funds may increase or diminish the output of industry at large, and so may affect the aggregate earnings of the business community. But, apart from such incidental shifting of the management of industry to more competent (or less competent) hands, this competitive use of borrowed funds has no aggregate effect upon earnings or upon the industrial output.
The current or reasonable rate of profits is, roughly, the rate of profits at which business men are content to employ the actual capital which they have in hand.59 A general resort to credit extension as an auxiliary to the capital in hand results, on the whole, in a competitive lowering of the rate of profits, computed on capital plus credit, to such a point as would not be attractive to a business man who must confine himself to the employment of capital without credit extension. On an average, it may be said, the aggregate earnings of the aggregate capital with credit extension are but slightly greater than the aggregate earnings of the same capital without credit extension would be in the absence of a competitive use of credit extension. But under modern conditions business cannot profitably be done by any one of the competitors without the customary resort to credit. Without the customary resort to credit a "reasonable" return could not be obtained on the investment.
To the extent to which the competitive recourse to credit is of the character here indicated - to the extent to which it is a competitive bidding for funds between competent managers - it may be said that, taken in the aggregate, the funds so added to business capital represent no material capital or "production goods." They are business capital, only. they swell the volume of business, as counted in terms of price, etc., but they do not directly swell the volume of industry, since they do not add to the aggregate material apparatus of industry, or alter the character of the processes employed, or enhance the degree of efficiency with which industry is managed.
The "buoyancy" which a speculative inflation of values gives to industrial business may indirectly increase the material output of industry by enhancing the intensity with which the industrial process is carried on under the added stimulus; but apart from this psychological effect the expansion of business capital through credit extension has no aggregate industrial effect. This secondary effect of credit inflation may be very considerable and is always present in brisk times. It is commonly obvious enough to be accounted the chief characteristic of a period of "prosperity." For a theory of industry this indirect effect of credit inflation would be its main characteristic, but for a theory of business it occupies the place of a corollary only.
To the view set forth above, - that borrowed funds do not increase the aggregate industrial equipment, - the objection may present itself that all funds borrowed represent property owned by some one (the lender or his creditors), and transferred, in usufruct, by the loan transaction to the borrower; and that these funds can, therefore, be converted to productive uses, like any other funds, by drawing into the industrial process, directly or indirectly, the material items of wealth whose fluent form these funds are.60 The objection fails at two points: (a) while the loans may be covered by property held by the lender, they are not fully covered by property which is not already otherwise engaged; and even if such were the case, it would (b) not follow that the use of these funds would increase the technical (material) outfit of industry.
As to the first point (a): Loans made by the financial houses in the way of deposits or other advances on collateral are only to a fractional extent covered by liquid assets;61 and anything but liquid assets is evidently beside the point of the present question. An inconsiderable fraction of these loans is represented by liquid assets. The greater part of the advances made by banking houses, for instance, rest on the lender's presumptive ability to pay eventually, on demand or at maturity, any claims that may in the course of business be presented against the lender on account of the advances made by him. It is a business truism that no banking house could at a moment meet all its outstanding obligations.62 A necessary source of banking profits, e.g., is a large excess of the volume of business over reserves.
As to (b): Another great part of the basis of such loans is made up of invested funds and collateral held by the lender. These at the same time are much of the basis on which rests the lender's presumptive ability to pay claims presented. But these investments, in industry or real estate, in interest-bearing securities and collateral of whatever description, represent future income of the lender's debtors (as, e.g., government and municipal securities), or property which is already either engaged in the industrial process or tied up in forms of wealth (as, e.g., real estate) which do not lend themselves to industrial uses. Loans obtained on property which has no present industrial use, which cannot in its present form or under existing circumstances be employed in the processes of industry (as, e.g., speculative real estate), or loans on property which is already engaged in the industrial process (as, e.g., stocks, industrial plant, goods on hand, real estate in use),63 represent, for the purpose in hand, nothing more substantial than a fictitious duplication of material items that cannot be drawn into the industrial process. Therefore such loans cannot, at least not directly, swell the aggregate industrial equipment or enhance the aggregate productivity of industry; for the items which here serve as collateral are already previously in use in industry to the extent to which they can be used. Property of these kinds - what is already in use in industry and what is not of use for industrial purposes - may be "coined into means of payment," and so may be made to serve as additional pecuniary (business) capital, but such property is mechanically incapable of serving as additional material (industrial) capital. To a very considerable extent the funds involved in these loans, therefore, have only a pecuniary (business) existence, not a material (industrial) one; and, so far as that is true, they represent, in the aggregate, only fictitious industrial equipment. Even such inconsiderable portion of them, however, as represents metallic reserves also adds nothing to the effective material apparatus of industry; since money as such, whether metallic or promissory, is of no direct industrial effect; as is evident from the well-known fact that the absolute quantity of the precious metals in use is a matter of no consequence to the conduct of either business or industry, so long as the quantity neither increases nor decreases by an appreciable amount. Nummus nummum non parit.
So that all advances made by banking houses or by other creditors in a like case, - whether the advances are made on mortgage, collateral or personal notes, in the form of deposits, note issues, Or. what not; whether they are taken to represent the items of property covered by the collateral, the cash reserves of the banks, or the general solvency of the creditor or debtor, - all these "advances" go to increase the "capital" of which business men have the disposal; but for the material purposes of industry, taken in the aggregate, they are purely fictitious items.64 Cash loans (such as
