第12章

Sofarasthishappens，thecreditoperationsinquestionandtheuseoftheborrowedfundsmayincreaseordiminishtheoutputofindustryatlarge，andsomayaffecttheaggregateearningsofthebusinesscommunity。But，apartfromsuchincidentalshiftingofthemanagementofindustrytomorecompetent(orlesscompetent)hands，thiscompetitiveuseofborrowedfundshasnoaggregateeffectuponearningsorupontheindustrialoutput。

Thecurrentorreasonablerateofprofitsis，roughly，therateofprofitsatwhichbusinessmenarecontenttoemploytheactualcapitalwhichtheyhaveinhand。(6*)Ageneralresorttocreditextensionasanauxiliarytothecapitalinhandresults，onthewhole，inacompetitiveloweringoftherateofprofits，computedoncapitalpluscredit，tosuchapointaswouldnotbeattractivetoabusinessmanwhomustconfinehimselftotheemploymentofcapitalwithoutcreditextension。Onanaverage，itmaybesaid，theaggregateearningsoftheaggregatecapitalwithcreditextensionarebutslightlygreaterthantheaggregateearningsofthesamecapitalwithoutcreditextensionwouldbeintheabsenceofacompetitiveuseofcreditextension。Butundermodernconditionsbusinesscannotprofitablybedonebyanyoneofthecompetitorswithoutthecustomaryresorttocredit。

Withoutthecustomaryresorttocredita“reasonable“returncouldnotbeobtainedontheinvestment。

Totheextenttowhichthecompetitiverecoursetocreditisofthecharacterhereindicated-totheextenttowhichitisacompetitivebiddingforfundsbetweencompetentmanagers-itmaybesaidthat，takenintheaggregate，thefundssoaddedtobusinesscapitalrepresentnomaterialcapitalor“productiongoods。“Theyarebusinesscapital，only。theyswellthevolumeofbusiness，ascountedintermsofprice，etc。，buttheydonotdirectlyswellthevolumeofindustry，sincetheydonotaddtotheaggregatematerialapparatusofindustry，oralterthecharacteroftheprocessesemployed，orenhancethedegreeofefficiencywithwhichindustryismanaged。

The“buoyancy“whichaspeculativeinflationofvaluesgivestoindustrialbusinessmayindirectlyincreasethematerialoutputofindustrybyenhancingtheintensitywithwhichtheindustrialprocessiscarriedonundertheaddedstimulus；butapartfromthispsychologicaleffecttheexpansionofbusinesscapitalthroughcreditextensionhasnoaggregateindustrialeffect。Thissecondaryeffectofcreditinflationmaybeveryconsiderableandisalwayspresentinbrisktimes。Itiscommonlyobviousenoughtobeaccountedthechiefcharacteristicofaperiodof“prosperity。“Foratheoryofindustrythisindirecteffectofcreditinflationwouldbeitsmaincharacteristic，butforatheoryofbusinessitoccupiestheplaceofacorollaryonly。

Totheviewsetforthabove，-thatborrowedfundsdonotincreasetheaggregateindustrialequipment，-theobjectionmaypresentitselfthatallfundsborrowedrepresentpropertyownedbysomeone(thelenderorhiscreditors)，andtransferred，inusufruct，bytheloantransactiontotheborrower；andthatthesefundscan，therefore，beconvertedtoproductiveuses，likeanyotherfunds，bydrawingintotheindustrialprocess，directlyorindirectly，thematerialitemsofwealthwhosefluentformthesefundsare。(7*)Theobjectionfailsattwopoints:(a)whiletheloansmaybecoveredbypropertyheldbythelender，theyarenotfullycoveredbypropertywhichisnotalreadyotherwiseengaged；

andevenifsuchwerethecase，itwould(b)notfollowthattheuseofthesefundswouldincreasethetechnical(material)outfitofindustry。

Astothefirstpoint(a):Loansmadebythefinancialhousesinthewayofdepositsorotheradvancesoncollateralareonlytoafractionalextentcoveredbyliquidassets；(8*)andanythingbutliquidassetsisevidentlybesidethepointofthepresentquestion。Aninconsiderablefractionoftheseloansisrepresentedbyliquidassets。Thegreaterpartoftheadvancesmadebybankinghouses，forinstance，restonthelender’spresumptiveabilitytopayeventually，ondemandoratmaturity，anyclaimsthatmayinthecourseofbusinessbepresentedagainstthelenderonaccountoftheadvancesmadebyhim。Itisabusinesstruismthatnobankinghousecouldatamomentmeetallitsoutstandingobligations。(9*)Anecessarysourceofbankingprofits，e。g。，isalargeexcessofthevolumeofbusinessoverreserves。

Asto(b):Anothergreatpartofthebasisofsuchloansismadeupofinvestedfundsandcollateralheldbythelender。

Theseatthesametimearemuchofthebasisonwhichreststhelender’spresumptiveabilitytopayclaimspresented。Buttheseinvestments，inindustryorrealestate，ininterest-bearingsecuritiesandcollateralofwhateverdescription，representfutureincomeofthelender’sdebtors(as，e。g。，governmentandmunicipalsecurities)，orpropertywhichisalreadyeitherengagedintheindustrialprocessortiedupinformsofwealth(as，e。g。，realestate)whichdonotlendthemselvestoindustrialuses。Loansobtainedonpropertywhichhasnopresentindustrialuse，whichcannotinitspresentformorunderexistingcircumstancesbeemployedintheprocessesofindustry(as，e。g。，speculativerealestate)，orloansonpropertywhichisalreadyengagedintheindustrialprocess(as，e。g。，stocks，industrialplant，goodsonhand，realestateinuse)，(10*)

represent，forthepurposeinhand，nothingmoresubstantialthanafictitiousduplicationofmaterialitemsthatcannotbedrawnintotheindustrialprocess。Thereforesuchloanscannot，atleastnotdirectly，swelltheaggregateindustrialequipmentorenhancetheaggregateproductivityofindustry；fortheitemswhichhereserveascollateralarealreadypreviouslyinuseinindustrytotheextenttowhichtheycanbeused。Propertyofthesekinds-whatisalreadyinuseinindustryandwhatisnotofuseforindustrialpurposes-maybe“coinedintomeansofpayment，“andsomaybemadetoserveasadditionalpecuniary(business)capital，butsuchpropertyismechanicallyincapableofservingasadditionalmaterial(industrial)capital。Toaveryconsiderableextentthefundsinvolvedintheseloans，therefore，haveonlyapecuniary(business)existence，notamaterial(industrial)one；and，sofarasthatistrue，theyrepresent，intheaggregate，onlyfictitiousindustrialequipment。Evensuchinconsiderableportionofthem，however，asrepresentsmetallicreservesalsoaddsnothingtotheeffectivematerialapparatusofindustry；sincemoneyassuch，whethermetallicorpromissory，isofnodirectindustrialeffect；asisevidentfromthewell-knownfactthattheabsolutequantityofthepreciousmetalsinuseisamatterofnoconsequencetotheconductofeitherbusinessorindustry，solongasthequantityneitherincreasesnordecreasesbyanappreciableamount。Nummusnummumnonparit。

Sothatalladvancesmadebybankinghousesorbyothercreditorsinalikecase，-whethertheadvancesaremadeonmortgage，collateralorpersonalnotes，intheformofdeposits，noteissues，Or。whatnot；whethertheyaretakentorepresenttheitemsofpropertycoveredbythecollateral，thecashreservesofthebanks，orthegeneralsolvencyofthecreditorordebtor，-allthese“advances“gotoincreasethe“capital“ofwhichbusinessmenhavethedisposal；butforthematerialpurposesofindustry，takenintheaggregate，theyarepurelyfictitiousitems。(11*)Cashloans(suchassavings-bankdeposits(12*)andthelike)belonginthesamecategory。Alltheseadvancesaffordtheborroweradifferentialadvantageinbiddingagainstotherbusinessmenforthecontrolanduseofindustrialprocessesandmaterials，theyaffordhimadifferentialadvantageinthedistributionofthematerialmeansofindustry；buttheyconstitutenoaggregateadditiontothematerialmeansofindustryatlarge。Fundsofwhatevercharacterareapecuniaryfact，notanindustrialone；theyservethedistributionofthecontrolofindustryonly，notitsmateriallyproductivework。

Loancreditinexcessofwhatmayservetotransferthemanagementofindustrialmaterialsfromtheownertoamorecompetentuser-thatistosay，insofarasitisnot，ineffect，ofthenatureofaleaseofindustrialplant-serves，onthewhole，nottoincreasethequantityofthematerialmeansofindustrynor，directly，toenhancetheeffectivenessoftheiruse；but，takenintheaggregate，itservesonlytowidenthediscrepancybetweenbusinesscapitalandindustrialequipment。Solongastimesarebriskthisdiscrepancyordinarilygoesonwideningthroughaprogressiveextensionofcredit。Fundsobtainedoncreditareappliedtoextendthebusiness；competingbusinessmenbidupthematerialitemsofindustrialequipmentbytheuseoffundssoobtained；thevalueofthematerialitemsemployedinindustryadvances；theaggregateofvaluesemployedinagivenundertakingincreases，withorwithoutaphysicalincreaseoftheindustrialmaterialengaged；butsinceanadvanceofcreditrestsonthecollateralasexpressedintermsofvalue，anenhancedvalueofthepropertyaffordsabasisforafurtherextensionofcredit，andsoon。

Now，thebaselineofbusinesstransactionsisthemoneyvalue(marketorexchangevalue，price)oftheitemsinvolved，nottheirmaterialefficiency。Thevalueofthemoneyunitisbyconventionalusageheldtobeinvariable，andthelendersperforceproceedonthisassumption，solongastheyproceedatall。(14*)Consequently，anyincreaseoftheaggregatemoneyvaluesinvolvedinthecurrentindustrialbusinessenterpriseswillaffordabasisforanextensionofloans，indistinguishablefromanyotherblockofcapitalizedvalues，eveniftheincreaseofcapitalizedvaluesisduetocreditadvancespreviouslymadeonthefullcashvalueofthepropertyhypothecated，Theextensionofloansoncollateral，suchasstockandsimilarvaluesinvolvedinindustrialbusiness，hasthereforeinthenatureofthingsacumulativecharacter。Thiscumulativeextensionofcreditthroughtheenhancementofpricesgoeson，ifotherwiseundisturbed，solongasnoadversepricephenomenonobtrudesitselfwithsufficientforcetoconvictthiscumulativeenhancementofcapitalizedvaluesofimbecility。Theextensionofcreditproceedsontheputativestabilityofthemoneyvalueofthecapitalizedindustrialmaterial，whosemoneyvalueiscumulativelyaugmentedbythisextensionitself。Butthemoneyvalueofthecollateralisatthesametimethecapitalizedvalueoftheproperty，computedonthebasisofitspresumptiveearning-capacity。Thesetwomethodsofratingthevalueofcollateralmustapproximatelycoincide，ifthecapitalizationistoaffordastablebasisforcredit；andwhenanobviousdiscrepancyarisesbetweentheoutcomegivenbythetworatings，thenareratingwillbehadinwhichtheratingonthebasisofearning-capacitymustbeacceptedasdefinitive，sinceearningsarethegroundfactaboutwhichallbusinesstransactionsturnandtowhichallbusinessenterpriseconverges。Amanifestdiscrepancypresentlyarisesinthiswaybetweentheaggregatenominalcapital(capitalplusloans)engagedinbusiness，ontheonehand，andtheactualrateofearning-capacityofthisbusinesscapital，ontheotherhand；andwhenthisdiscrepancyhasbecomepatentaperiodofliquidationbegins。

Togiveareadierviewofthepartplayedbyloancreditinthisdiscrepancybetweenthebusinesscapitalandtheearning-capacityofindustrialconcerns，itwillbeinplacetoindicatemoresummarilywhatarethefactorsatplay。

Theearningsofthebusinesscommunity，takenasawhole，arederivedfromthemarketableoutputofgoodsandservicesturnedoutbytheindustrialprocess-disregardingsuchearningsasaccruetooneconcernmerelyatthecostofanother。Theeffectiveindustrialcapital，fromtheuseofwhichthisoutput，andthereforetheseearnings，arise，istheaggregateofcapitalizedmaterialitemsactuallyengagedinindustry。Thebusinesscapital，ontheotherhand，ismadeupofthiscapitalizedindustrialmaterialtakenasafundofvalues，plusgood-will，pluswhateverfundsareobtainedoncreditbyusingthiscapitalizedindustrialmaterialascollateral，plusfundsobtainedonother，non-industrial，propertyusedascollateral。

Throughthecompetitiveuseoffundsobtainedoncredit，asspokenofabove，thenominalvalueofthecapitalizedindustrialmaterialiscumulativelyaugmentedsoastomakeitapproximatelyequaltoitsoriginalcapitalizationpluswhateverfundsareobtainedoncreditofallkinds。Onthisbasisofanexpandedcollateralafurtherextensionofcredittakesplace，andthefundssoobtainedareincorporatedinthebusinesscapitalandturnedtothelikecompetitiveuse，andsoon。(15*)Capitalandearningsarecountedintermsofthemoneyunit。Countedintheseterms，theearnings(industrialoutput)arealsoincreasedbytheprocessofiflationthoughcredit，sincethecompetitiveUseoffundsspokenofactstobiduppricesofwhateverproductsareusedinindustry，andofwhateverspeculativepropertyispresumedtohavesomeeventualindustrialuse。Butthenominalmagnitude(value)oftheearningsisnotincreasedinaslargearatioasthatofthebusinesscapital；sincethedemandwherebythevaluesoftheoutputareregulatedisnotaltogetherabusinessdemand(forproductivegoods)，butisingreatpart，andindeedinthelastresortmainly，reducibletoaconsumptivedemandforfinishedgoods。(16*)

Lookingatcreditextensionanditsuseforpurposesofcapitalasawhole，theoutcomewhichpresentsitselfmoststrikinglyataperiodofliquidationistheredistributionoftheownershipofindustrialpropertyincidenttotheliquidation。