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 collateral which is, in the apprehension of his creditor, insufficient to secure ready liquidation, either by a shifting of the loan or by a sale of the collateral. The collateral is commonly a block of securities representing capitalized wealth, and the apprehension of the creator may be formulated as a doubt of the conservative character of the effective capitalization on which it rests. In other words, there is an apprehension that the property represented by the collateral is over-capitalized, as tested by the current quotations, or by the apprehended future quotations, of the securities in question. The market capitalization of the collateral has taken place on the basis of high prices and brisk trade which prevail in such a period of business exaltation as always precedes an acute crisis. When such a call comes upon a given debtor, the call is passed along to the debtors farther along in the sequence of liabilities, and the sequence of liquidations thereby gets under way, with the effect, notorious through unbroken experience, that the collateral all along the line declines in the market. The crisis is thereby in action, and the further consequences follow as a wellknown matter of course. All this is familiar matter, known to business men and students by common notoriety.
The immediate occasion of such a crisis, then, is that there arises a practical discrepancy between the earlier effective capitalization on which the collateral has been accepted by the creditors, and the subsequent effective capitalization of the same collateral shown by quotations and sales of the securities on the market. But since the earlier capitalization commonly, in the normal case, comes out of a period of business prosperity, the point of inquiry is as to the ground and method of this effective capitalization of collateral during the period of prosperity that goes before a crisis, and this, in turn, involves the question of the nature and causes of a period of prosperity.
The manner in which the capitalization of collateral, and thereby the discrepancy between the putative and actual earning-capacity of capital, is increased by loan credit during an era of prosperity has been indicated in some detail in Chapter V above. But it may serve to enforce the view there taken, if it can be shown on similar lines that a period of prosperity will bring on a like discrepancy between putative and actual earning-capacity, and therefore between putative and eventual capitalization of collateral, even independently of the expansion effected by loan credit.
A period of prosperity is no more a matter of course than a crisis. It has its beginning in some specific combination of circumstances. It takes its rise from some traceable favorable disturbance of the course of business. In such a period the potent fact which serves as incentive to the acceleration of business is a rise of prices. This rise of prices presently becomes general as prosperity progresses and becomes an habitual fact, but it takes its start from some specific initial disturbance of prices. That is to say, prices rise first in some one industry or line of industries.115
By new investments, as well as by extending the operations of the plants already employed, business men forthwith endeavor to take advantage of such a rise. The endeavor to market an increased supply of the things for which there is an enlarged demand, brings on an increased demand and an advance of prices in those lines of industry from which the concerns that had the initial advantage draw their supplies. In part by actual increase of demand and in part through a lively anticipation of an advanced demand, aggressive business enterprise extends its ventures and pushes up prices in remoter lines of industry. This transmission of the favorable
