savings-bank deposits 65 and the like) belong in the same category. All these advances afford the borrower a differential advantage in bidding against other business men for the control and use of industrial processes and materials, they afford him a differential advantage in the distribution of the material means of industry; but they constitute no aggregate addition to the material means of industry at large. Funds of whatever character are a pecuniary fact, not an industrial one; they serve the distribution of the control of industry only, not its materially productive work.
Loan credit in excess of what may serve to transfer the management of industrial materials from the owner to a more competent user - that is to say, in so far as it is not, in effect, of the nature of a lease of industrial plant - serves, on the whole, not to increase the quantity of the material means of industry nor, directly, to enhance the effectiveness of their use; but, taken in the aggregate, it serves only to widen the discrepancy between business capital and industrial equipment. So long as times are brisk this discrepancy ordinarily goes on widening through a progressive extension of credit. Funds obtained on credit are applied to extend the business; competing business men bid up the material items of industrial equipment by the use of funds so obtained; the value of the material items employed in industry advances; the aggregate of values employed in a given undertaking increases, with or without a physical increase of the industrial material engaged; but since an advance of credit rests on the collateral as expressed in terms of value, an enhanced value of the property affords a basis for a further extension of credit, and so on.66
Now, the base line of business transactions is the money value (market or exchange value, price) of the items involved, not their material efficiency. The value of the money unit is by conventional usage held to be invariable, and the lenders perforce proceed on this assumption, so long as they proceed at all.67 Consequently, any increase of the aggregate money values involved in the current industrial business enterprises will afford a basis for an extension of loans, indistinguishable from any other block of capitalized values, even if the increase of capitalized values is due to credit advances previously made on the full cash value of the property hypothecated, The extension of loans on collateral, such as stock and similar values involved in industrial business, has therefore in the nature of things a cumulative character. This cumulative extension of credit through the enhancement of prices goes on, if otherwise undisturbed, so long as no adverse price phenomenon obtrudes itself with sufficient force to convict this cumulative enhancement of capitalized values of imbecility. The extension of credit proceeds on the putative stability of the money value of the capitalized industrial material, whose money value is cumulatively augmented by this extension itself. But the money value of the collateral is at the same time the capitalized value of the property, computed on the basis of its presumptive earning-capacity. These two methods of rating the value of collateral must approximately coincide, if the capitalization is to afford a stable basis for credit; and when an obvious discrepancy arises between the outcome given by the two ratings, then a rerating will be had in which the rating on the basis of earning-capacity must be accepted as definitive, since earnings are the ground fact about which all business transactions turn and to which all business enterprise converges. A manifest discrepancy presently arises in this way between the aggregate nominal capital (capital plus loans) engaged in business, on the one hand, and the actual rate of earning-capacity of this business capital, on the other hand; and when this discrepancy has become patent a period of liquidation begins.
To give a readier view of the part played by loan credit in this discrepancy between the business capital and the earning-capacity of industrial concerns, it will be in place to indicate more summarily what are the factors at play.
The earnings of the business community, taken as a whole, are derived from the marketable output of goods and services turned out by the industrial process - disregarding such earnings as accrue to one concern merely at the cost of another. The effective industrial capital, from the use of which this output, and therefore these earnings, arise, is the aggregate of capitalized material items actually engaged in industry. The business capital, on the other hand, is made up of this capitalized industrial material taken as a fund of values, plus good-will, plus whatever funds are obtained on credit by using this capitalized industrial material as collateral, plus funds obtained on other, non-industrial, property used as collateral. Through the competitive use of funds obtained on credit, as spoken of above, the nominal value of the capitalized industrial material is cumulatively augmented so as to make it approximately equal to its original capitalization plus whatever funds are obtained on credit of all kinds. On this basis of an expanded collateral a further extension of credit takes place, and the funds so obtained are incorporated in the business capital and turned to the like competitive use, and so on.68 Capital and earnings are counted in terms of the money unit. Counted in these terms, the earnings (industrial output) are also increased by the process of iflation though credit, since the competitive Use of funds spoken of acts to bid up prices of whatever products are used in industry, and of whatever speculative property is presumed to have some eventual industrial use. But the nominal magnitude (value) of the earnings is not increased in as large a ratio as that of the business capital; since the demand whereby the values of the output are regulated is not altogether a business demand (for productive goods), but is in great part, and indeed in the last resort mainly, reducible to a consumptive demand for finished goods.69
Looking at credit extension and its use for purposes of capital as a whole, the outcome which presents itself most strikingly at a period of liquidation is the redistribution of the ownership of industrial property incident to the liquidation. The funds obtained on credit are in great measure invested competitively in the same aggregate of material items that is already employed in industry apart from the use of loan credit, with the result that the same range of items of wealth are rated at a larger number of money units. In these items of wealth - which, apart from the use of credit, are owned by their nominal owners - the creditors, by virtue of the credit extension, come to own an undivided interest proportioned to the advances which they have made. The aggregate of these items of property comes hereby to be potentially owned by the creditors in approximately the proportion which the loans bear to the collatcral plus the loans. The outcome of credit extension, in this respect, is a situation in which the creditors have become potential owners of such a fraction of the industrial equipment as would be represented by the formula: 70
loans/capitalization (=collateral + loans)
In a period of liquidation this potential ownership on the part of the creditors takes effect to the extent to which the liquidation is carried through.71
The precise measure and proportion in which the industrial property of the business community passes into the hands of the creditors in a period of liquidation can, of course, not be specified; it depends on the degree of shrinkage in values, as well as on the degree of thoroughness with which the liquidation is carried out, and perhaps on other still less ascertainable causes, among which is the degree of closeness of organization of the business community. It is, however, through the shrinkage of market values of the output and the industrial plant that the transfer of ownership to the creditor class takes place. In case no shrinkage of values took place, no such general transfer of ownership to the creditors as a class would become evident.
In point of fact, the shrinkage commonly supervenes, in the course of modern business, when a general liquidation comes; although it is conceivable that the period of acute liquidation and its attendant shrinkage of values need not supervene. Such would probably be the case in the absence of competitive investment in industrial material on a large scale. Secondary effects, such as perturbations of the rate of interest, insolvency, forced sales, and the
