The Use of Loan Credit in Modern Business
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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 readily conceivable that the period of acute liquidation and its attenda...nt shrinkage of values need not super- vene. 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 like, need scarcely be taken up here, although it may be well to keep in mind that these secondary effects are commonly very considerable and far-reaching, and that they may in specific instances very materially affect the outcome.
The theoretical result of this summary sketch of loan credit in modern business, so far, seems to be: (a) an extension of loan credit beyond that involved in the transference of productive goods from their owners to more competent users is unavoidable under the regime of competitive business ; (6) such a use of credit does not add to the aggregate of industrially productive equipment nor increase its material output of product, and therefore it does not add materially to the aggregate gross earnings obtained by the body of business-men engaged in industry, as counted in terms of material wealth or of permanent values;^" (c) it diminishes the aggregate net profits obtained by the business-men engaged in industry as counted in such terms, in that it requires them to pay interest, to creditors outside the industrial process proper, on funds which, taken as an aggregate, represent no productive goods and have no aggregate productive effect; (d) there results an overrating of the aggregate capital engaged in industry, compared with the value of the industrial equipment at the start- ing-point, by approximately the amount of the aggregate deposits and loans on col- lateral; (e) the overrating swells the business capital, thereby raises the valuation of collateral, and gives rise to a further extension of credit, with further results of a like nature; (/) commonly beginning at some point where the extension of credit is excep- tionally large in proportion to the material substratum of productive goods, or where the discrepancy between nominal capital and earning capacity is exceptionally wide, 19 All those who, at a period of liquidation, are holders 20 This disregards the indirect effects of a speculative of fluent funds or of claims to fixed sums of money are, for advance in the way of heightened intensity of application the present purpose, in the position of creditors.
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To quickly assess the difficulty of the text, read a short excerpt:
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 readily conceivable that the period of acute liquidation and its attenda...nt shrinkage of values need not super- vene. 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 like, need scarcely be taken up here, although it may be well to keep in mind that these secondary effects are commonly very considerable and far-reaching, and that they may in specific instances very materially affect the outcome.
The theoretical result of this summary sketch of loan credit in modern business, so far, seems to be: (a) an extension of loan credit beyond that involved in the transference of productive goods from their owners to more competent users is unavoidable under the regime of competitive business ; (6) such a use of credit does not add to the aggregate of industrially productive equipment nor increase its material output of product, and therefore it does not add materially to the aggregate gross earnings obtained by the body of business-men engaged in industry, as counted in terms of material wealth or of permanent values;^" (c) it diminishes the aggregate net profits obtained by the business-men engaged in industry as counted in such terms, in that it requires them to pay interest, to creditors outside the industrial process proper, on funds which, taken as an aggregate, represent no productive goods and have no aggregate productive effect; (d) there results an overrating of the aggregate capital engaged in industry, compared with the value of the industrial equipment at the start- ing-point, by approximately the amount of the aggregate deposits and loans on col- lateral; (e) the overrating swells the business capital, thereby raises the valuation of collateral, and gives rise to a further extension of credit, with further results of a like nature; (/) commonly beginning at some point where the extension of credit is excep- tionally large in proportion to the material substratum of productive goods, or where the discrepancy between nominal capital and earning capacity is exceptionally wide, 19 All those who, at a period of liquidation, are holders 20 This disregards the indirect effects of a speculative of fluent funds or of claims to fixed sums of money are, for advance in the way of heightened intensity of application the present purpose, in the position of creditors.
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