CHAPTER XII
The Larger Use of Credit

THE pivotal factor in the business enterprise of this new era is the larger use of credit which has come into action during the last few decades ; larger in absolute scale and volume as well as in the ratio which it bears to those underlying tangible assets on which it is conceived to rest. This volume of credit is more widely detached from all material objects and operations, and increasingly so.

The business men of the nineteenth century, too, habitually conducted their affairs on a basis of credit, with slight, infrequent and inconsequential recourse to transactions in cash or in kind ; increasingly so as the century advanced and as the credit system progressively matured into something like that stability and self-sufficiency which it now has attained. Prices ran on a credit basis, as a workday matter of course and of convenience, and virtually no payments of any consequence were made or expected to be made in any other medium than credit-instruments; so that the price-system had already in the nineteenth century become, in effect, a system of credit-prices. The banknote currency employed was a volume of credit-instruments, to which the underlying specie-reserve stood in the relation of a contingent emergency fund and a base-line of inflation. The “deposit currency” which served as the chief medium of exchange and method of payment was somewhat more widely out of touch with any cash basis, being related to the underlying speciereserve at the second remove only. At no time would the price-level decline to or near its cash base-line, except in a convulsive way in times of commercial crisis. At such times the familiar credit-instruments by use of which business was carried on would fall somewhat under suspicion, transiently, and the margin of price-inflation would then be greatly narrowed.¹

So soon as business picked up again and brisk times returned after these periods of partial deflation, the habitual credit-inflation would regain any lost ground and would then ordinarily run to a slightly higher level than before. Through all this fluctuating price-inflation that so made hard times or prosperity there runs a certain air of irresponsibility or fortuity, particularly through the earlier half or three quarters of the century. The business community was still unable to control its necessary credit relations at all effectually. The country’s credit relations were not ready to be organised on a reasonably compact and inclusive plan, such as would combine stability with a sufficiently flexible administration of details. They were therefore subject to ungoverned seasonal and local contingencies, which upset the balance between credits and debits from time to time and so spread derangement and consternation abroad through the business community.

The precise point of the difficulty appears to have been that there was no effectual concert or collusion governing the use of credit at large in that earlier time. The debits and credits on which business was kept afloat were not subject to effectual joint control; there was no effectual pooling of assets and liabilities. So that debtors and creditors, even those of the larger sort, were still somewhat at cross purposes; with no effectual teamwork between those massive creditors and debtors, who, between them, make up the substantial core of the business community. The large debtors were not identified with their creditors in point of management and control, at least not in a degree sufficient to maintain a reasonably stable balance of things on a basis of community interest. In more concrete terms, the general run of the key industries had not been tied up with the larger banks.

This difficulty has since been obviated, at least in a great degree if not altogether. The larger lines of ownership, both in the industries of the country and in its credit institutions, have been drawn together on somewhat common ground, with such effect that those massive debits and credits which are of decisive consequence for the stability of the credit system, in the large, are now owned, or can be managed, in a collective fashion and to a common end. Therefore the level of credit-prices is now quite reasonably under control, at the hands of the parties most largely interested in its maintenance. So much so that there should no longer be any serious apprehension that the credit system may break down at an inopportune moment or that the price-level will suffer any material decline. A break might, of course, come on advisedly, by concert among those massive credit concerns which have, in effect, taken over the administration of the general body of credit. But such an eventuality need scarcely be contemplated; or if so, it may be contemplated with equanimity, inasmuch as it could be brought on only by deliberate action of the chief parties in interest, and therefore presumably only for their common good.²

Such has been the outcome in the large and in substantial effect. It has brought a new and more stable order of things in business, as well as a new and more precarious order of things in industry. The outcome takes effect in a large and sweeping fashion; but it has come into action by way of a multiplicity of shifting details, as is necessarily the case where a new order of things arises by a process of habituation to new circumstances. It is the upshot of many minor changes which have converged—or are converging—to this effect, by drift of circumstance rather than by reasoned design, perhaps even without any degree of effectual prevision on the part of those who have been the chief actors in the case. It is also worth noting that the resulting state of things, in the respect which is in question here, has not been formally acknowledged or recognised by the parties concerned,— unless the need of occasionally denying its existence be accepted as amounting to an admission of it; and more particularly it has no legal existence. Indeed, the actual state of things in this respect is doubtless quite impossible de jure; which will of course mean only that it is something new, newer than the traditions of the law.

Its roots run through the economic tissues of the nineteenth century, and the historical date of its beginnings would have to be assigned on grounds of taste and preconception by any historian who might deal with this matter, and it would accordingly differ greatly according to his point of view and his point of attention. But since the argument here is concerned with the business situation as it has been taking shape during the past two decades, it should answer the present purpose to strike into the run of things in the nineties for a point of departure, and give attention chiefly to the changes which have come on since that period ; letting that which has already been said in earlier chapters serve by way of orientation; particularly what has been said on the rise of corporation finance and on the increasing resort to credit during the century.³

A convenient point of departure for the rise of the new era in business enterprise may be found in the late nineties; and the new departure may be said to have been set afoot in the financiering of mergers and holding-companies during those years by the late J. Pierpont Morgan and those others who presently followed his lead.

In that time the holding-company came to stand as the advanced and perfected type-form of corporate ownership and control as employed in the conduct of industrial business. It was a well-considered advance over the earlier methods of absentee ownership and absentee management. In point of form, the holding-company is of a more perfect order of absenteeism, in that by this device the lawful owner draws back farther by one remove from any personal relation with the property which he owns and from which he derives an income; whether the property in question be tangible assets or a vested usufruct. At the same time the owner’s claim on and control over his property shifts to a more impersonal or statistical footing, if possible; to a footing of standardised quantitative allotment in terms of percentual units. His relation to the property and its use thereby comes to carry a slighter effectual responsibility for any action taken, or for any tangible outcome of such action taken by the corporate management to which he has in effect delegated his rights and powers. In the holding-company, even more obviously than in the ordinary corporation, the owner delegates the powers of ownership, and retains only its rights and immunities. So also it leaves him a correspondingly slighter chance of personally influencing any action taken by the management.

The holding-company has commonly been of a large size; and that fact has likewise had the effect of submerging the individual owner and his personal bias and initiative. The result is a pronounced degree of impersonality and standardised routine. So also, in the practical conduct of its affairs by the holding-company, the effectual control and management of any corporate business has passed into the hands of a relatively smaller minority of the ultimate owners, and at the same time the effectual control exercised by this relatively small minority of the owners has taken on a more unequivocally statistical character. So much so, indeed, that their effectual oversight and control will ordinarily touch nothing more tangible or more personal than certain figures supplied by the corporation’s accountants; commonly numbers running to some half-a-dozen digits, having to do with certain price-totals.

The holding-company is no longer viewed with apprehension, as it once was; nor does it hold that dominant place in the business of credit and capitalisation which it held about the turn of the century. Not that it has gone out of use or out of mind. It has been proven and found good and has become a part of the standard apparatus of business, a commonplace formality of the routine. But at the outset, when the holding-company was coming into use, it was the effectual means of reorganising the business of the key industries on an enlarged, more elaborate and more manageable plan. It served to bring these industrial business concerns together into larger agglomerations than had been practicable up to that time, and it served also to detach the ownership of these concerns from their management more widely and effectually than before. By this move the whole apparatus and management of industrial business was placed on a foundation of credit in a more unqualified fashion than before, and thereby the management of the business was enabled to “trade on a thinner equity”⁴ than had been practicable in the past. Corporation finance was enabled to take on still more of the character of standardised routine. So that the holding-company has been an instrument and an exemplar of that drift of things in the conduct of business which has brought on the current state of things, and which has made the difference between the situation of the nineties and that of the present.

Much of the use which the holding-company has served has been that of standardising the routine of “big business” and familiarising the business community with that larger scale and wider detachment that is characteristic of the ordinary use of credit and the ordinary duties of ownership in this later time. In a very passable fashion men have learned all that now, so that it is no longer beset with the distrust of the unknown,—which is said to be a nearly universal infirmity of sound business men. What the use of the holding-company once served to drive them to has now become a familiar matter of course.

Something to much the same effect is to be said for the use of “interlocking directorates,” which also once loomed up in popular apprehension as a formidable, if not a menacing, innovation in the conduct of business. The interlocking directorate has also not passed out of use. It, too, is still a convenient arrangement for purposes of mutual understanding and support. But these purposes for which these devices were once resorted to as a means of constraint, have now become habitual matters of routine ; and the devices therefore have ceased to claim that degree of attention which they were once presumed to merit. They are no longer of the essence of the case.

The late J. Pierpont Morgan saw an opportunity and turned it to account. It is not likely, and it does not appear, that he rated himself as a path-finder or in any sense as the pioneer of a new era in business enterprise, or that he harbored any ambition or design to change the face of the business community. For all his large initiative and his large powers and responsibilities, he was a notably unassuming person; being apparently driven by nothing more spectacular than the habitual incentives of safe and sane business of the larger sort ;⁵ although his larger initiative led him beyond his contemporaries and associates, and at times, indeed, led him close to the frontiers of sound business practice.

The undertakings which are associated with his memory at this point, and which played a typical part in leading over to the new era, may be described in general terms somewhat as follows. At that time (late nineties) there were a large number and variety of established business concerns doing business primarily in certain of the key industries, notably steel, ore, coal, and railways. Many of these concerns were in a moderately bad way financially, for one reason and another. They were, not uncommonly, unable to command such a volume of credit as was needed in the conduct of their business. They were commonly over-capitalised—in excess of their market value as going concerns and notably in excess of the value of their tangible assets. So they were carrying overhead charges somewhat in excess of what their current earnings would warrant ; and their earnings were declining rather than otherwise.

This state of their affairs was due in some measure to a more or less pronounced obsolescence. It was in part an obsolescence of their industrial plant, but with more critical effect these concerns also suffered from a rapidly growing obsolescence of locality, particularly as related to the means of transportation on which they depended for their supply of raw materials and for the delivery of their marketable output. In some instances their business facilities were also going out of date; their markets were in process of obsolescence, through a shifting of the population, through changes of custom and usage, through being cut under by other concerns doing business in the same market. There had been ceaseless change in the technique of these industries during the life-time of these business concerns; and more particularly during the lifetime of the “underlying companies” and industrial plants on which these industrial business concerns were based ; for the greater number of those concerns that are in question here were composite organisations, built up out of previously existing corporations and firms, by merger, purchase, and consolidation. And throughout this period of industrial growth, changes in the processes of industry and in the localisation of the various industries had been going forward; due in great part to the growth and redistribution of the population and to continued extensions and enlargement of the transportation systems. New natural resources also continued to be drawn into the industrial system and to be engrossed by certain of the larger owners. All of which conspired to put these business concerns out of date and out of joint with the conditions of the market. Perhaps the gravest of the factors which contributed to this obsolescence and perplexity of these industrial business concerns was the competitive character of their market, both for raw materials and labor and for disposal of the output; and this competitive market was all the more precarious because the productive capacity of the existing plants was already greater than the market would carry off at a profitable price, even within the shelter of a high protective tariff. The most embarrassing appears to have been the inconsiderate competitive position taken by those Carnegie properties which presently came to play so magisterial a rôle in precipitating the formation of the U. S. Steel Corporation.⁶

Not infrequently the management of these previously established industrial business concerns was in the hands of elderly and opinionated owners, who had an old-fashioned sentimental interest each in his own corporation, as being his own creation, and whose occupation would be gone in case their own concern were to be merged with others or sunk in an inclusive holding-company. These survivers of an earlier business régime were by way of being “captains of industry” of the obsolete sort, in that they commonly combined some degree of technical training, experience, and aspiration, with a customary knowledge of the markets and of corporation finance. And they were commonly out of date in both respects, by force of what may be called obsolescence by displacement in technical practice and in financial usage. They were patriarchal holdovers, with much of the intolerance that will commonly invest the self-made patriarch. Things had been moving forward in matters of knowledge and practice during the lifetime of these elderly captains and their establishments, and among the forward changes were such as made imperatively for a larger scale and a more far-reaching team-work in the processes of production, a larger use of credit, and for a more carefully guarded competition in the markets. And none of this fell in readily with the settled habits of these elderly captains or with the standing business relations among their several concerns.

These industrial business concerns, and their underlying companies and plants, had in their time been projected with a view to the traffic of a fairly open competitive market, and they had expanded by successive extensions and accretions, and so had grown to maturity under conditions which that traffic had created. With the progressive filling-out and closing-in of this market they found themselves, progressively, in the position of competitive producers for a closed market of variable volume. They were consequently somewhat overstocked with industrial plants of a fair productive capacity, which not unusually duplicated one another, and which had been placed somewhat hastily by rule of thumb in somewhat haphazard locations, and had grown from relatively small beginnings by a process of patchwork and extension. And all the while their combined productive capacity rather exceeded the capacity of their market—at any such price as would afford them a “reasonable profit” on their output. In this sense the market was closing in. It was becoming too narrow for a free run of output at the price-level at which these enterprises had been projected. The period of competitive business in the key industries was closing. So that continued open competition among them became “cutthroat competition” ; such as to entail present and prospective decline of their earning-capacity. As one consequence of this situation, they were greatly in need of additional credits for use in their business, at a time when their credit capacity was falling off and their liabilities were already becoming distressingly burdensome.

When the affairs of the corporations in the key industries had reached this pass, the dean of the banking community saw his own occasion in the present needs and the dubious prospects of these industrial business concerns. Of course there were others, too, and not a few, who were ready to see the same opportunity and to profit by it so soon as it had been placed before them in an object-lesson. The conjuncture was essentially that of a sweeping transition and realignment, incident to the passing of the common run of the key industries from a footing of competitive business in an ample market to a footing of collusive traffic in a closed market too narrow for unguarded competitive production.⁷

As the event has taught, the executive use of the country’s credit resources in a large way and on a reasoned plan was the appointed means by which the due reconstruction of the business was to be worked out, and also the means by which the needful running collusion in the further conduct of the business was to be enforced and regulated. The holding-company and the merger, together with the interlocking directorates, and presently the voting trust, were the ways and means by which the banking community took over the strategic regulation of the key industries, and by way of that avenue also the control of the industrial system at large. By this move the effectual discretion in all that concerns the business management of the key industries was taken out of the hands of corporation managers working in severalty and at cross purposes, and has been lodged in the hands of that group of investment bankers who constitute in effect a General Staff of financial strategy and who between them command the general body of the country’s credit resources. This general staff, or inner group, command the credit resources of the country at large; although it would presumably not do to say, at least not just yet, that they—the large business financiers and their banking-houses—own or comprise or constitute the credit resources of the country.

Out of this drift of things the “Investment Banker” has emerged, to serve as a powerful instrumental factor in working out the new alignment of ownership and industrial business, and presently to take his place as one of the essential workday institutions of the business community. It should perhaps be remarked that he is not yet in existence de jure, but only de facto. Just yet he is still in process of standardisation as regards his precise nature and uses; so that no sharply defined description of him and his work can be drawn, just yet, although there is some thing to be said of him and his functions.⁸ He is the source or the channel, as the case may be, of capitalisation and of corporation credit at large,—a source if he amounts to a banking-house of the first magnitude, a channel if his place in the economy of Nature is that of a subordinate. At the same time and in his appropriate degree he is the standard container of such credit and the standard repository, original or vicarious, of the larger intelligence and discretion in these fiscal matters. He initiates movement or pressure in the conduct of business, or he transmits initiative and pressure. In point of pedigree, considered as an institution, his formal line of descent out of the past traces back to the business of underwriting, as it ran in the time before the banking community had taken over the general initiative and foresight in the conduct of industrial business. But he is also rooted in the business of commercial banking and banks of issue, as well as in the trust-companies that have come up and grown great in his own time ; and then there is about him, too, a broad hint of the bill-broker of earlier times. In point of form, he is affiliated with his client-corporations as creditor, underwriter, sponsor, banker, broker. In effect, he is the comptroller of their fiscal affairs and, within reason, the master of their solvency ; being custodian of their absentee owners’ interests at large. Hitherto, and in so far as it has touched the larger contingencies of business, this work of initiative, discretion, foresight, and control, which has become incumbent on the country’s investment bankers, has habitually taken effect by way of collusion or concerted action. This concert of action is of the essence of the case. It is by virtue of such concert among the larger and more responsible ones that they constitute in effect the General Staff of the business community—what may be called the One Big Union of the Interests. Under the surveillance of this general staff, it has become incumbent on the investment bankers as an organized body to deal with the run of business as an organic moving equilibrium. This highly responsible task enjoins a collusive sobriety, a collective and concerted moderation, such as is intended in the colloquial phrase, “sitting tight.” The investment bankers collectively are the community custodians of absentee ownership at large, the general staff in charge of the pursuit of business. And since the conduct of industry is incidental to the pursuit of business, the state of industry and the rate, volume and balance of production also are dependent on their sagacity and goodwill. So that it is here, if anywhere, that responsibility for the country’s material welfare may be said to rest.

In his time, the great pioneering creator of mergers and holding-companies came to stand as the chief of investment bankers and the dean of the congregation of corporation finance. And from that time on, the investment bankers have progressively taken over the control of industrial business in the large. Investment-banking as it is conducted now, owes its rise and character to the circumstances of that time, and it has continued to work out along much the same lines to which it was then brought by the experience of Morgan and his associates. This financial enterprise may therefore be said to have arisen out of the mobilisation of those banking resources which were already employed in underwriting corporate capitalisations, and to have arisen as an enterprise in mergers, recapitalisations, and bonuses; but it presently fell into settled lines as a standardised routine of investing funds and allocating credits. This standardised routine of investment and allocation is what engrosses the energies of the community of investment bankers. It is also the ways and means by which they, working together as a general stafif of financial strategy, govern the country’s business at large and so regulate the ordinary rate and volume of productive industry. In all this, the continued merging of old concerns and creation of new ones goes forward as a routine matter of administration incident to the allocation of credits. And the credits are —also as a routine matter-of-course—allocated with an eye single to the greater gain of the investment bankers who see to the allocation of them.

In its beginnings, in the nineties, this enterprise in mergers and recapitalisation was primarily concerned with bringing certain elderly units of the industrial business community to terms, by a persuasive use of financial pressure ; to prevail upon them to surrender their several corporate powers and enter into some arrangement in the way of a merger, commonly under the form of a holding-company. By this means these concerns ceased to govern their own affairs individually, were drawn in under a centralised management, and so ceased to be effectual competitors in the market. In the main this reorganisation had to do with business concerns which were in the position of holdovers in the key industries, and more particularly such of them as were in financial straits, as a good proportion of them were.

In this connection it has also been believed, on circumstantial evidence, that the great financier, and after him also the lesser ones, would now and again take pains to manoeuvre such an embarrassed concern into financial extremities ; such as would incline its management to surrender the controlling interest and to allow a suitable “bonus” to the captains of finance who managed the reorganisation.

During the early years of the period it was this bonus that was the immediate object sought by the reorganising financier, and the chief incentive to the reorganisation. The bonus commonly took the form of a block of securities issued in the name of the new incorporation. And it was commonly quite a substantial bonus, so as to take up a very appreciable percentage of the new capitalisation. This bonus which the underwriter of the new corporation securities came in for appears to have been the valuable consideration sought by these financiers in undertaking these early mergers and recapitalisations. It does not appear that these financiers commonly set out with the purpose of taking over the management of the incorporations which they created. But the transactions which they entered into in their pursuit of the bonus entailed commitments and obligations which stood over after the initial transactions had been concluded. The recapitalisation and its endorsement at the hands of the financier, or investment banker, together with the practice of taking over his bonus in the form of a block of securities issued by the new incorporation, entailed a continued community of interest between the investment banker and the new incorporations which he had created. A community interest of a special sort, in that it committed the investment banker—the financier and his banking-house—to a continued responsibility for the success of the new incorporation ; which in turn vested the banker with power to act, and lodged in his hands a virtually plenary discretion in the oversight and management of the new incorporation. The outcome has been that the banking-houses which have engaged in this enterprise have come in for an effectual controlling interest in the corporations whose financial affairs they administer. And it is this outcome that has proved to be the enduring and decisive factor in the new business situation created by this recourse to mergers and recapitalisations under the auspices of the investment bankers.

At least in some very consequential instances, the further course of events and the further manoeuvres and commitments in the way of recapitalisation and credit extensions, were also governed by the pressure of necessity bearing on the investment bankers in the case. The financiering bankers were involved in the affairs of their client corporations in such a critical fashion as to require a further move of coalition and recapitalisation, as a measure of safety. That consolidation of interests which resulted in the U. S. Steel Corporation, e. g., was precipitated by pressure of this kind. At the same time it is worth noting that the financier who, under pressure, carried out this consolidation of the steel interests came in for a bonus in the form of a block of the new corporation’s securities bearing a face value of $50,000,000; in which sum the new corporation formally became indebted to its sponsor, as payment for his services.⁹ This bonus was in the nature of an addition to the corporation’s capitalisation. And it may be added that in the end, after some further financial manoeuvres, the securities which made up this bonus came to be worth fully their face value.

The bonus which so lay at the root of these early reorganisations of industrial business habitually took the shape of a block of corporation securities representing new capital values added to the total capitalisation in the operation of recapitalising the underlying properties; the capitalised value—face value, book value—of these properties being thereby augmented by that much. Such has been the standard usage. It is in effect a matter of routine. The bonus which so entered into the total capitalisation represented no acquisition of new capital ; in the sense that it added no new funds and no new tangible assets to the total ; but only new liabilities, added to the total of the corporation securities that resulted from recapitalisation. That is to say, according to the standard routine in the matter, the total outstanding securities, representing the previous capitalisation of the underlying companies, were increased by that much without any corresponding increase of the underlying assets. It was a transaction in credit pure and simple, a creation of new credit values ; or it was a redistribution of the old values under cover of a make-believe creation of new assets.

Also habitually, apart from any underwriter’s bonus, in any such reorganisation the total capitalisation of the resulting collective holding-company is made somewhat larger than the sum of the outstanding capital securities of the underlying companies, and very appreciably larger than the aggregate market value of the underlying tangible assets. Habitually, as a matter of standard usage, the recapitalisation of industrial properties in this way has resulted in an increased volume of outstanding corporation securities, with or without, but commonly without, any increase in the underlying material assets. This addition to the volume of outstanding capital securities arising out of any such reincorporation may run to fifty per cent., of the total previous capitalisation of the underlying companies, or to some such figure, more or less.

The outcome of successive reorganisations has accordingly been a series of successive recapitalisations at a successively higher figure, resulting in a progressively increased volume of outstanding credit instruments and involving a corresponding progressive revaluation of the underlying assets at a progressively enhanced figure. As a rule rather than as an exception, in the key industries, the operation has been repeated in several successive recapitalisations of the same properties into successively larger coalitions. In effect it has been a creation of new values by an extension of credit. And in the main this progressively increased valuation of these corporate assets has been justified by the event. Indeed, the assets of the larger coalitions which have been created in this way have habitually increased in value even apart from and in excess of any such credit operations designed to add something to the face value of the outstanding securities.¹⁰

Such transactions in corporation finance were the outstanding feature of the business situation during the ten or a dozen years which overlapped the turn of the century, and the like transactions have continued to be an active factor in the conduct of industrial business since then; most notably and with the gravest consequences in the key industries. There has been a continued run of consolidations with recapitalisation at a higher figure, and new incorporations with flotations of new securities. The visible purpose of them, as seen from the side of the investment bankers, and the presumptive aim of the transactions, as transactions in corporation finance, has been the creation of new capitalised wealth by new extensions of credit. The benefit of the newly created capitalisations has, in the main, inured to the investment-banking houses which have carried on this work. In great part, the gains which accrue from investment banking still are derived from transactions of this class.¹¹

Recapitalisation at an increased figure has been the standard practice in reorganising and merging industrial business concerns during this period. New incorporations on any reasonably large scale have followed the same general principle, in that the capitalisation has commonly exceeded the value of the underlying assets. And with a very fair degree of generality this inflation of the capital-values of corporations and their assets has proved to be sound; in the sense that the inflated corporations have presently, if not from the outset, approached or reached such an earning-capacity as to justify their inflated capitalisation. The assets so created by a transaction in credit have proved to be sound assets, good property.

The increased earning-capacity of such inflated recapitalisations has been conditioned on an advance of the price-level for the sales from which the earnings are drawn, or on keeping up the established price-level in the face of declining production-costs. To maintain or advance the level of prices in this way requires an effectual freedom from unguarded competition in the market, among the business concerns engaged in the traffic ; and the most advantageous arrangement for the purpose will be a virtual absence of competition ; such as has been the rule, e. g., in the steel business, and such as has come near being the rule in coal. This can be accomplished by a reasonable degree of collusion and concerted action. By this means the margin of earnings is enlarged, at the same time that the hazards of the business are greatly reduced or virtually eliminated.¹²

The required degree of concerted action, or the needful reasonably collusive regulation of things, has not called for a close-knit organisation of the banking community in set form, or, indeed, for anything like a formally defined compact of joint action among the ruling captains of solvency and their underlying banking-houses. These latterday transactions in credit and capitalisation are of so transparently gainful a nature as to enjoin on all the parties in interest what amounts in effect to a collusive regulation of things, even in the absence of any provision for a formally concerted plan of action. The transactions which make the outcome are large, particularly such of them as are patently worth-while and worth bearing a hand in, and the business procedure in the case has already fallen into something of a standard routine, in pursuance of which this manner of large and lucrative transactions recur in a somewhat orderly succession; and the operations are of such a character as to make it plain to the meanest understanding that they will be carried through to a safe and lucrative conclusion only by such team-work among the several investment-concerns as will obviate all cross purposes, and will at the same time provide a broad collective reserve of credit resources and eliminate all hazard of unforeseen contingencies. And bankers are imbued with a reasonably conservative spirit, such as will conduce to safe and sane business of this kind.

Any member of the banking community who might so far exceed the limits of conventionally blameless cupidity as to be led into cross purposes and fall short of reasonable team-work at a critical juncture, would expect to be counted out of the game at the next turn. He would lose that most essential item among his own intangible assets, the goodwill of his fellow bankers, deprived of which he would no longer come in for that steady run of workday business that makes the broad foundation of his earnings. At the same time he would, in effect, cease to be an investment banker. Such is the turn which things have taken. In effect, whether it runs to commercial banking or in the field of investment, banking is essentially not now a competitive business, except collectively as against the underlying population. And investment banking in an eminent degree is a line of enterprise in which it is incumbent on all the parties in interest to take hands and help, in which one good turn deserves another, and in which there can be no tolerance for men who wantonly disregard the rules of the game. Any flotation of securities, but more particularly any major operation of such a character as to promise large and easy gains, is in practical effect an occasion for mutual support among the makers of credit, and for faithful teamwork throughout an extensive network of banking-concerns, who are bound in an orderly system of correspondence and through whose hands the credit instruments that are to be marketed will have to pass on their way to those investors who may be called the ultimate consumers of this product. For any bank or banker it is the part of wisdom faithfully to “stand in” and in all sobriety to take an equitable share in the margin of profit that is to be derived from these sales of credit.

This bond of union and concert that so holds the investment bankers to a profitable routine of team-work in disposing of this running output of credit instruments is greatly strengthened by the fact that the country’s commercial banking is already established on the same lines of team-work and joint interest; it is taken care of by the same community of bankers, governed by a like routine of equitable give and take, in pursuance of which also all excesses and delinquencies are penalised with automatic punctuality. In the business of commercial banking, too, the superior discretion and initiative are perforce vested in the massive financial concerns that inhabit the country’s financial metropolis, and whose massive resources enable them to create credit somewhat at will, and to regulate its expansion and allocation. By force of circumstances these banking concerns of the first magnitude make up the living nucleus of the banking community, and by force of circumstances it is the part of wisdom as well as of professional ethics for the lesser and outlying members of the craft to wait faithfully on the motions of these masters of solvency, who by force of circumstances constitute the General Staff of the banking community.¹³ The investment banker, severally and collectively, is custodian of the credit-interests of his own banking-house and of his clients. He is a custodian with plenary discretion, de facto; the exigencies of absentee ownership make him so. In the nature of the case these interests are the interests of absentee ownership, like other credit interests, and in the nature of the case their custody takes effect in the way of an absentee control over that business and industry out of which the gains of these absentee owners arise. In effect, absentee ownership is a claim on free income to be drawn from the property owned; so that the property is necessarily of the nature of assets, in so far as it is held in absentee ownership ; and “assets” is a financial category. Also in the nature of the case, the resulting absentee government of current business and industry, which so is vested in these custodians of credit, is in the nature of a fiscal administration, a strategic regimentation of assets, essentially a running allocation of credit allowances; which can take effect only by way of withholding needed credit extensions from doubtful and undesirable enterprises,—doubtful or undesirable in their bearing on the “income stream” that goes to the bankers and their clients. So that the powers and sanctions commanded by these custodians are of a permissive sort. That is to say, their strategy and administration are necessarily of a negative, quiescent, sedative character, something in the way of a provisional veto power, a contingent check on untoward undertakings and excursions, a fiscal disallowance of such projects in business and industry as do not manifestly promote the advantage of those absentee interests that are taken care of by the given investment banker or group of bankers, in effect a species of fiscal sabotage.

Crudely and in general terms the working-out of this absentee government of business and industry by this general staff of solvency may be described as follows. It works by way of an allocation of credit allowances among the clients of these custodians of solvency, preferentially and particularly among those corporate concerns that are clients of those larger captains of solvency who are effective members of the general staff,—concerns which are bound to these captains by a community interest of a businesslike sort. The credit resources of the country, the main body and dominant mass of whicb are under the hands of this general staff of solvency, may be, and by pressure of ordinary businesslike cupidity they will be, employed productively in the creation of new wealth, in the way of intangible assets, after the fashion already explained in an earlier passage. In ordinary times this expansive creation of intangible wealth goes forward in a cumulative fashion, by routine; it is part of the ordinary day’s work of the banking community. This newly, progressively, created wealth is in the nature of capitalised overhead charges on current business and industry.

In practical effect, the rate at which such new assets will be created is determined by two main factors: (a) the volume of credit obligations already outstanding and assimilated into the routine of business ratings and transactions, and (b) what may be called the tensile strength of the business community’s temper as regards new commitments in the way of liabilities and capitalisation. The latter is often spoken of loosely as “public confidence.” Neither of these two factors which condition the rate of output of intangible wealth is a constant quantity ; as one might say, neither has a constant coefficient of efficiency. And neither can be measured and reduced to a quite satisfactory statistical statement in objective terms. They are, therefore, not fully amenable to control by statistical computation or by an apparatus of bookkeeping. Accordingly the rate of production of intangibles and overhead charges is not a constant one, nor can it or its fluctuations be quite safely calculated beforehand. There is still in all this traffic a substantial margin of contingencies, which leaves a certain elbowroom for the personal equation of the captains, for sagacity and rule-of-thumb. The personal equation of these captains runs to “safety first” ; at least so they say. Accordingly that element of uncertainty and hazard which still enters into the case will greatly further a faithful collusion among the sound captains of solvency.

When all due allowance has been made, therefore, the rate of production of intangibles will still be a rate which may be estimated with a very fair degree of approximation by those persons who are conversant with the credit business and its resources. And barring accident, this ordinary rate of production of intangibles should evidently rise progressively higher as the outstanding and “digested” mass of obligations on which it is conditioned grows progressively larger ; so that under ordinary circumstances the rate of output of these capitalised liabilities will be subject to a cumulative acceleration, although no definite coefficient of acceleration can be assigned.¹⁴

Credit is extended by the keepers of the credit resources in the form of current credit-accounts—typically “deposits”—as well as in the flotation of new securities ; it is extended to such business concerns of a sizable magnitude as prove themselves worthy. Those are eligible who can be depended on duly to pay over to their creditors such fixed charges as are borne by the credit instruments so created. They are worthy, of course, because and in the measure in which they continue to yield a secure net income to the dispensers of credit and to the absentee owners whose guardians the dispensers are. Directly or indirectly, the resulting credit instruments go to swell the volume of collateral on which the fabric of credit is erected and on which further extensions are negotiated. These credit extensions in this way enable the concerns in question to trade on a thinner equity. That is to say, such business concerns are thereby enabled to enter into larger commitments and undertake outlays that are more largely in excess of their tangible assets than before; to go into the market with a purchasing-power expanded by that much—or a little something more—beyond their available possessions, tangible and intangible. Which goes to enlarge the effective purchasing-power in the market without enlarging the supply of vendible goods in the market; which will act to raise or maintain the level of prices, and will therefore enlarge the total of the community’s wealth as rated in money-values, independently of any increase of tangible possessions; all of which is “good for trade.”

Any business concern which is in this way enabled to trade on a thinner equity will, by so much, be placed at an advantage as against the rest, provided that the rest do not come in for a similar advantage by a similar recourse to credit. Any advantage so gained is of a competitive or differential character, in that it presupposes that the rest will not make use of the same expedient, and it will immediately be offset and neutralised if and in so far as the like recourse to credit is adopted by the rest. From which it follows that all those who are to be saved, in the business sense, will go and do likewise. The practical outcome, as all men know, has been that the generality of such business concerns will habitually make such use of their borrowing capacity as they can, on pain of failure, From which it follows that such recourse to credit brings no net advantage to them, either as a differential or in the aggregate.

But it also follows that by this competitive recourse to credit these business concerns, commercial and industrial, all and several become clients of the dispensers of credit, and are loaded approximately to capacity with suitable overhead charges payable to the absentee holders of their paper, whether in the form of commercial credits or of corporation debentures. Whereby the business community at large, being made up of such business concerns doing business on such a credit basis, comes to be dependent on these dispensers of credit for the means of commercial subsistence and salvation,—in the degree in which this “credit economy” prevails.¹⁵

To commercial and industrial business as a whole no net aggregate gain accrues from this traffic in credits. But to the lenders there accrues a differential gain which is offset by a corresponding loss to the rest of the community ; a net aggregate gain equal to the aggregate overhead charges borne by the resulting obligations, less the cost of carrying on the traffic in credits.¹⁶ Therefore, the fuller the utilisation of credit and the greater its stability, the thinner will be the equity on which business is carried on; the larger will be the aggregate of overhead charges to be paid over to the trustees and owners of the credit resources; and the closer will the conduct of business and industry be bound up with the measures taken, for their own profit, by those captains of solvency who command the credit resources of the country.

Such would be the upshot of the matter, “other things remaining the same.” And if such were the whole of the case the futility of it should presently become patent even to the business men who are immersed in this expansive credit and who (proximately) pay the cost. But other things do not remain the same, and among these other things is the price-level; which rises and continues to rise to meet the rising volume of purchasing-power that is thrown loose on the market at large by the current ubiquitous recourse to credit.

And like other persons, the business men are creatures of habit. By unbroken habit, prices are the substance of things in the working conceptions of the business men. Therefore their habitual frame of mind enables them to believe, or effectually to make believe, that they are gainers by as much as the prices advance; because they are enabled to foot up their assets and their net receipts in so much larger a number of smaller units of value. Such is the force of habit. The business man faithfully views the dollar sub specie œternitatis, even when he knows better. In extenuation of this businesslike imbecility it should also be noted that the men who do business are kept from reflecting on this state of the case by the fact that the cost of it all does not fall on them, finally and visibly, but on that underlying population with whom they deal, also called “the ultimate consumer.”

As a further consequence, which is more immediately to the point here, by force of this endless network of credit that ties up the business concerns of the country in an interdependence of fiscal give and take, they are at the same time, each in his degree, large and small, tied in under the paramount fiscal jurisdiction of these keepers of the country’s credit resources, as clients whose fortunes are forever in the balance and whose continued good fortune is conditioned on their continuing to be lucrative clients.

The key industries, it is true, occupy a special position in this regard, and the argument will return to their case presently. Smaller and outlying industrial and commercial concerns may be touched only at the second remove, by the outer ramifications of the fiscal organisation, but they are all caught in the network of credit which serves the workday needs of all those who do business. And inasmuch as the country’s industry is in the hands of the business men and is carried on as a business enterprise, it follows also that any question of industrial employment and of the rate and volume of production is likewise and perforce referred back to the same fiscal grounds and incentives, at any point that involves a question of initiative or eventual control. So that the industrial system, too, the productive use of the country’s man-power and industrial plant, likewise waits on the collusive fiscal strategy of the same custodians of absentee credit. Whereby the livelihood of the underlying population becomes, in the language of mathematics, a function of the state of mind of the investment bankers, whose abiding precept is : When in doubt, don’t.

Progressively, indeed at a cumulative rate, as the credit resources have been drawn together under a wide-reaching routine of profitable give and take, under the responsible surveillance of half-a-dozen massive credit institutions at the financial metropolis, the whole business of making credits and regulating them has gained in expedition and security; so that it has now reached an admirable footing of stability and swift execution. Stability, greater security from unforeseen or undesigned contingencies, will enable trading in credits and capitalisation on a thinner equity; which signifies a larger volume of fixed charges payable to the makers of credit, on the resultant increased volume of outstanding obligations; which means that the custodians of credit are enabled to take over the assets of the business community with increasingly greater expedition; which in turn will increase the stability of the business as well as the measure of control exercised by the keepers of credit over the conduct of business and industry at large. Eventually, therefore, the country’s assets should, at a progressively accelerated rate, gravitate into the ownership, or at least into the control, of the banking community at large; and within the banking community ownership and control should gravitate into the hands of the massive credit institution that stand at the fiscal center of all things.

The stability of this fabric of credit, as well as the facility and effect with which its control of business and industry will be brought to bear, is greatly promoted by the inner concatenations of the system; particularly by the working arrangements and the bonds of common interest that gather about the nucleus of credit institutions at the fiscal center. These concatenations are of such a nature that, in great part, the chief banking-houses and their chief clients are now identical in point of their business interest; to a very appreciable extent identical in point of ownership. So that the same “Interest”—that is to say the same group of absentee owners working together as a team in pursuit of gain—will not infrequently be found to be the dominant owners on both the debit and the credit side of a given account; both within a given financial banking-house or group of affiliated banks and in the greater ones of the corporations whose credit and securities are taken care of by the given banking-house and its affiliated banks.¹⁷

Such an arrangement will conduce in a marked degree to the stability of all suitable credit-extensions, capitalisations, and flotations; suitable, i.e., for the purposes of those who make up the general staff of solvency. At the same time it affords a ready means of discountenancing or disallowing ill-advised and adventurous projects, such as do not lend themselves to profitable capitalisation under the same auspices. Such, in effect, is the lie of the land in the domain of credit.

Any given one of these massive Interests will be the dominant factor in a number of corporate enterprises of the larger sort, each of which will do a large credit business with several of the greater banking-houses and their affiliated banks. It is a matter of common notoriety, if not of record, that the great Interests have been gaining ground of this sort at a progressively accelerated rate; gaining both in point of mass and financial consequence and in the reach and variety of the ramifications of their ownership throughout the business community. And it is fairly to be expected that their progress will continue unabated on somewhat the same lines in the calculable future. There results an intimate linking-up of client and custodian, a community interest between creditor and debtor, such as should virtually preclude any consequential derangement of the equilibrium of debits and credits except by mutual consent. In practical effect, the outcome is a pooling of credits and debits, within the financial sweep of the Interests. In practical effect, therefore, the preponderant mass of outstanding obligations and intangibles has come to rest in stable equilibrium, not to be upset except by choice of the interested parties, in pursuit of their joint gain, at the cost of the rest of the business community.¹⁸

This assured stability of the general fabric of credit serves greatly to augment the tensile strength of the business men’s endurance in the face of new commitments. So that their goodwill and tolerance becomes available for capitalisation in behalf of the investment bankers at a higher coefficient than before. Whereby the output of new credit extensions and new capitalisations is enabled safely to expand at an unexampled rate.

So far, the argument has run to the effect that this American “credit economy,” ¹⁹ organised in this way, will work unremittingly to draw the assets of the business community in under the ownership of those massive Interests whose captains constitute the general staff of solvency, in the manner already described. Such is doubtless the main drift of the forces engaged. But if the proposition were left standing in this unqualified form it would be too bald to serve as a sufficient description of what is actually taking place or of what is immediately in prospect. The main drift and its convolutions do not make so simple a tableau. It is necessary to note that the Interests and their captains and custodians do not appear to drive at all consistently and with a single mind toward such an undivided ownership of the assets engaged; nor does such an outcome habitually follow from their management of affairs, as a formal outcome, de jure.

It appears that, at least for the present and in great part, what is actually sought and obtained by their manoeuvres is an effectual usufruct of these resources, rather than a formal acquisition and tenure of them in strict ownership. For many of the purposes of continued gain, such an effectual usufruct of the country’s resources will serve as well as their formal ownership, at the same time that it can be administered quite as readily and profitably under the existing forms of law, and is less likely to irritate the public sensibilities. In effect, through the due working of this traffic in credit and capitalisation, the Interests and their custodians come in for the formal ownership of a progressively increasing share of these assets; and at the same time and by force of the same traffic they also come in for a progressively larger and more secure usufruct in the assets which still continue formally in the ownership of those concerns that have become their clients and that are dependent on their continued good will for indispensable credits by means of which to do business.

The case of the common run of these business concerns—that is to say, of the business community at large —as it is taking shape during these last years under the perfected credit economy, has a notable and instructive parallel and analogue in the plight of the prairie farmers, who have fallen into a state of something like effectual clientship and usufruct at the call of the implement makers, commission men, warehouse men, millers, packers, and railways. De facto, by drift of circumstances and sound business methods, these large business concerns which deal with the farmers and deal in their produce and their supplies have now come in for a reasonably secure and inclusive usufruct in the work and output of this farm population. The country bankers and country merchants, of course, also come in for their equitable share. Throughout this farming community there is a fairly steady drift of ownership into the hands of these business concerns with which the farm population does business; which takes effect in great part through the use of credit in the way of book accounts and deferred payments. But apart from absentee ownership of tenant farms and a certain, quite appreciable, volume of farm indebtedness, there is habitually no formal title of ownership, actual or contingent, covering the farmers or their work and output and vesting in the usufructuaries. The more substantial and more profitable source of gain to these concerns and Interests that make up the farmer’s markets is doubtless their de facto vested right to do business with the farm population on their own terms.²⁰

The current relation of usufruct between the packers, millers, warehouse men, and railroads, on the one side, e. g., and their underlying farm population on the other side, has no existence de jure, of course; the principles of jurisprudence which touch these matters being of an earlier date and not covering these features. It is only that as a practical matter of fact these Interests are in a position to make the terms on which the prairie farmers will go on with their work, if any; all the while that the farmers are left quite free to take or leave the terms offered, but with the reservation that their livelihood is contingent on their taking them. By this businesslike arrangement the farm population comes in for a very tolerable subsistence, to be had for steady work; while the railroads, packers, millers, etc., come in for a capitalised usufruct of the farm population and its work and for a steady run of earnings,—such a run of earnings as the traffic will bear.

In much the same fashion those major Interests on the financial plane, whose custodians are in command of the credit resources of the country at large, are enabled, informally and by a standard routine of management, to take over a reasonably complete usufruct in the run of business carried on by the business community at large. All the while this arrangement need involve no formal tenure of ownership of the underlying business traffic on their part. It may quite practically be done, as it is being done and as the circumstances entail that it must be done, by informal concert of action among those major Interests which are massive enough to make their pretensions good, and by a disciplinary “rationing” of the lesser business units in the allowance of credits with which to carry on their business. The packers, millers, etc., who do business with the farm population on a footing of usufruct may be entitled to rank among these major Interests that serve as custodians of the country’s solvency, or they may belong among the lesser order of clients through whom the income-stream runs;—all that is a question of detail and personalities, which does not materially touch the general sweep and balance of the credit system and its appointed work.

Its appointed work, appointed by the drift of circumstances, is the due tutelage of the’ business concerns of the country and the governance of their conduct of the country’s business and industry, with an eye single to the largest procurable net gains for those aggregations of absentee ownership that are spoken of as the Interests.

The procurable net gain in which the Interests are interested is counted in terms of the money-unit, of course ; and it is invariably rated, received, accumulated, carried forward, disbursed, and accounted for, by way of a credit-instrument of some sort, book-account or transferable paper. Material wealth, metallic money, does not pass from hand to hand in this business traffic, except in transactions so small as to call for the use of what the economists call “token-money”; which is, in effect, another form of credit-instrument. The nearest approach to the material realities in the handling of these elements of income and disbursement is the use of banknotes ; which is in the main confined to minor transactions. In ordinary times banknotes are presumed to outrun their specie basis by something over 500 per cent. ; of late years they have fluctuated within an interval of perhaps twice that amplitude. It is in units of this fiduciary currency that the gains of business are valued and accounted for, and that the earning-capacity of any given business concern will be capitalised.

The increasing centralisation and cooperative spirit of the banking community, helped out by the good offices of the Federal Reserve, have been adding materially to the security of the outstanding note-issues. So that this increased volume of paper money commands an increased measure of public confidence. That is to say, the paper-money business is enabled to trade on a thinner equity. The note-issues have been enabled to depart somewhat more widely from the specie basis on which they are, at least ostensibly, hypothecated. In effect, these credit-instruments which serve as the habitual measure of values are less exposed to the hazard of being called to account, at the same time that they are more widely detached from any material base.

It is this fiduciary currency that serves as the workday ground of reality in the pursuit of business, transactions being concluded in its terms and gains being “realised” in its units. Evidently, this fiduciary currency is of the nature of certified make-believe, in the main; being a volume of intangibles hypothecated on the sound sense of the banking community and the Federal Reserve Board. The tutelage and governance exercised by these custodians of solvency over the conduct of business, therefore, has come to rest on this groundwork of outstanding liabilities which so are shielded from any ordinary hazard of liquidation, and their manoeuvres of guidance and management are confined to a give and take between credit-instruments of one description and another. The work is carried on by a systematic rationing of credit allowances.

The purpose and end of the traffic so carried on by the keepers of solvency is the up-keep and enlargement of the run of gains that will be credited to the party of the first part. As has already been noted in an earlier passage, the gains which so are to be credited to the creditors are drawn from the receipts of the underlying business traffic, as an overhead charge on the working assets engaged in business. To enable such an augmented overhead charge to be carried by the underlying business traffic—and to be carried at a net profit—the gross receipts of this business traffic must also be enlarged by the same move and in a corresponding measure. The safe and sane procedure by which to bring receipts up to a practical maximum in any business enterprise is to limit the supply of vendible goods or services out of the sale-price of which the receipts arise, and thereby to advance the price per unit of supply up to the limit of what the traffic will bear, as has also been explained already. In ordinary times the supply and the sale-price will already have been adjusted, within reason, to what the traffic will bear, regard being had to the current level of prices and the available volume of purchasing-power. Therefore, to enlarge the receipts of the underlying business traffic and so enable it to carry an enlarged overhead charge, it will be necessary to raise the limit of what the traffic will bear; which is accomplished automatically by the increase of purchasing-power that is thrown on the market in the creation of the new credits which impose this new overhead charge, in that the new purchasing-power granted in these credits will go to raise the price per unit of vendible things and so will go to swell the aggregate price-receipts of the traffic by that much.

As a proposition in business and accountancy the outcome of these manœuvres is quite admirable ; as a proposition in industry and livelihood it will stand somewhat different. It brings an increase of aggregate wealth and income as counted in money-values, independently of any increase of tangible possessions. But as a business proposition that is just as good, if not better. Such creation of new credits has much the same effect as the production of new gold used to have under the old dispensation ;²¹ but with the difference that the expansion of prices created by credit rests on the tensile strength of the popular credulity instead of the output of gold. Yet this later ground of price-inflation is presumably quite as secure as the earlier, more particularly by grace of the Federal Reserve Board’s vigilant stabilisation of note-issues and commercial rediscounts.

It will be seen that the argument on this head runs on a progressive, automatic, and presumably interminable inflation of money-values ; or on a continued depreciation of the effectual money-unit; according as one may choose to view it. Under the old dispensation of unconcerted banking, in so far as the money-unit was eventually accountable to an impersonal specie basis, such an inflation would be riding for an eventual fall, whereof there were repeated demonstrations. But under the new dispensation, since and so far as the price-level has become accountable to the sound business sense of the Federal Reserve Board and the keepers of the credit resources, no such sinister eventuality need be apprehended. The general staff of solvency have the situation in hand, and their interest in its maintenance may be counted on to endure.

The secure upward trend of the price-level, and its buoyant endurance under difficulties during the last few years, should sufficiently demonstrate the superior stability of a price-inflation which rests on constituted authority and businesslike common sense. Provided that the price-level continues to rise at a reasonable rate, such a temperate rate as will not greatly jar the popular credulity and such as the sound business principles of its guardians may reasonably be counted on to dictate, then chere should be no reason to apprehend that this price-level may not safely be advanced indefinitely, to the continued gain of those who stand to gain by it.

To any footloose observer it will be evident that the general price-level has been rising, without serious break or abatement, during the past quarter-century. The new gold has had something to do with this movement, more particularly during the earlier part of this period, and the new credit facilities have had more to do with it, particularly in later years. In a very appreciable degree this movement of price-inflation has been masked by the continued advance in the industrial arts, which has run along without abatement over the same period and has greatly increased the productive capacity of the country’s industry, and which so has acted powerfully and unremittingly to lower the cost of production of the output, and thereby to depress prices of vendible goods and services.

In the face of a steadfast resistance from the side of safe and sane business, particularly from the financial section of the business community, the continued new growth of the technology of physics and chemistry has continued to insinuate a progressively heightened productive efficiency into the industrial system, cumulatively and ubiquitously, and with a particularly stubborn drive along the lines of quantity production; such as to depress the costs and enlarge the scope and rate in the quantity production of vendible goods and services. If these improvements in the ways and means of industry had been given a free run through this period, and if prices had not at the same time been inflated by use of credit, the higher potential of production at which these technological improvements have enabled the industrial system to do its work should in the course of this period have lowered production-costs at large to such a level as would have brought general prices down to an inconspicuous fraction of the current figures.

But such a free run of production, such as the technicians would be ready to set afoot if they were given a free hand, would mean a full employment of the available forces of industry, regardless of what the traffic would bear in point of net profit from sales ; it would bring on such an inordinate output of vendible goods and services as to glut the market and precipitate an irretrievable decline of the price-level, and consequently also a fatal decline of earnings and a default and liquidation of capitalised earning-capacity,—a disastrous liquidation of capitalised intangibles. Therefore such a free run of production has not been had nor aimed at; nor is it at all expedient, as a business proposition, that anything of the kind should be allowed.

Still, under all that handicap of cautious businesslike retardation which sound business principles have entailed, the continued growth of the mechanical technology has taken effect in cheapened production in so large a measure as to have greatly masked that progressive inflation of prices which the larger use of credit has brought on and carried forward during the same interval. With the partial exception of the crude products of the soil, there is no one of the major lines of production that has not been gravely affected by it. From time to time the technological advance has even been able to give the progressive inflation of prices the appearance of being no more than a stabilisation and maintenance of the price-level ; although in the long run the cumulative expansion of credit, reënforced with a resolute businesslike restriction of output all along the line, has proved to be the stronger, and has proved to be the determining factor in that parallelogram of economic forces the resultant of which has been a sustained upward trend of general prices and a cumulative capitalisation of intangibles.

Apart from scattered speculative gains which may come to shrewd outsiders here and there, those who stand to gain by this long run of expansion in money-values are the constituent members of the One Big Union of financial Interests. Between them they make up the party of the first part in that advancing press of credit transactions by which the expansion is made and maintained.²² This One Big Union is not precisely a trade-union of bankers ; although it is on the ground of investment banking and by use of transactions in credit and capitalisation that the One Big Union’s tutelage and regulation of business and industry goes into effect. It is essentially a union of Interests, not of persons; at least not in a personal bearing; although it is through measures taken by those persons who are the appointed custodians of these Interests that those business principles by which they live have come to regulate these large matters, in point of tactics, scope and policy, not in point of detail manoeuvres. There has been, hitherto, no such degree of organised responsibility and control as would permit this General Staff of custodians to dictate specific manoeuvres to their clients, except it be at a critical juncture, when the common good of the Interests is in the balance or when the fabric of credit and capitalisations is exposed to some imminent hazard. If the name be employed in such a loosely descriptive fashion, the One Big Union of the Interests will come to much the same thing as what is covered by the colloquial phrase, “Big Business,” but with a particular reference to that community-interest and that solidarity of principles which is entailed by the common responsibilities and the common benefits of the larger absentee ownership.

These Interests which so are drawn together, by force of circumstances, into this inchoate One Big Union of absentee ownership are many and various ; but they have at least one distinctive trait in common, viz. large absentee ownership. It is also a characteristic fact that the Interests, or their assets, are quite generally if not invariably engaged in two or more lines of business at the same time, and that each of these distinct lines of business engages these assets to their full amount. Two such lines of business carried on in this way simultaneously for the same Interest and by the use of the same assets will touch and mutually reënforce one another in respect of their solvency, although they will be quite distinct in respect of their corporate identity and the technical character of the business traffic carried on by each.

The one line will be financial, in the nature of investment banking, occupied with the creative use of credit resources, capitalisations and flotations; while the other line will be commercial or industrial business of the corporate sort, perhaps more frequently the latter, occupied with the output and sale of vendible goods or services. Few if any of these Interests, or blocks of absentee ownership, are not to be counted with in both of these bearings ; particularly such of them as rise into a position of dominance in the business community. The type-form would be that which is shown by those well-known dominating Interests whose force of ownership is to be counted with equally in the banking community at the fiscal metropolis and in one or another of the key industries, as, e. g., steel, coal, oil, or railways. But of much the same value and effect, for the purpose of the present argument, are those other notable Interests which combine a metropolitan enterprise in solvency and capitalisations with large industrial undertakings that are not commonly classed as key industries ; as, e. g., sugar-refining, meat-packing, flour-milling, the manufacture of explosives, or trolley lines. Illustrative instances will readily come to mind.

This characteristic bifurcation, or spread, of the Interests, or, if one prefers the expression, this conjugation of industrial and fiscal enterprises under the same block of absentee ownership, is by no means a casual or fortuitous occurrence. It is of the essence of the case and lies at the root of the current situation. It is not in any conclusive sense an effect of personal choice and inclination, for it is contained in that drift of circumstances out of which the whole situation arises, and which no personal bias or caprice can turn aside or defeat. The underlying and conclusive fact of the matter is that such procedure is profitable ; which is conclusive for the pursuit of business.

Such double use of the available assets will yield double earnings ; indeed, ordinarily something more. Sufficiently large assets engaged as corporate capital, say in one of the key industries, will at the same time and to their full amount, and without prejudice to their earning-capac-ity as corporation assets serve also to their full amount as assets of solvency in the fiscal enterprise of the metropolitan investment banking, provided always that the assets are held in sufficiently large blocks. Indeed, the more fully and profitably such assets are employed in such industrial business, especially if they are engaged on a large and dominant scale, the better will be their rating in the business community and the more securely and fully will they serve as the substance of that solvency on which the traffic in credit extensions and capitalisations is carried on. The larger the success, in point of earnings, and the more assured the prospective earning-ca-pacity of any such block of assets, the larger and more assured will be its solvency and its funded carrying-power as a factor in the business of investment banking, and the more effectually, therefore, can it be mobilised for the creation of new credit extensions and new intangibles. Its effectual capital-value is enlarged by so much.²³ For what they are worth, industrial assets of the larger sort have, therefore, such a secondary—or perhaps rather a primary—service to render their owners, or their constituted custodians, under the conditions inaugurated by this new order of business enterprise that runs on funded credits. The whole fabric of business is built on and about this double use of asserts, and its movements are regulated by the circumstances which.govern this double use.

Sound business principles—the principles of the main chance—will not allow the benefits of such double service of assets to be overlooked, nor will they let this fruitful duplication of earning-capacity go to waste. To lend itself most profitably to such double service, the parcel of assets in question should be of reasonably massive proportions, such as to place its owner or manager on a footing of some strategic independence and initiative among those large absentee owners on whose assets the country’s credit system is erected and with whom he will have to negotiate for whatever share is coming to him out of the proceeds of that business. All the while it is also true, and it lies in the collusive nature of the fiscal system and its work, that many businesslike owners who command only relatively small and inconsequential parcels of assets will elbow their way into participation in the traffic, to come in for whatever margin of supernumerary profits they can touch while serving as outliers of the system and subsidiaries of the larger captains of duplication.

This is one of the prime considerations on the strength of which their banking operations are carried on by that multitude of minor and outlying banking concerns that do business as branches, subsidiaries, and correspondents, immediately or remotely dependent on the favorable attitude of the major concerns at the metropolitan center of solvency. These outliers are bound into the working systern of credit by a bond of profitable compliance with the tactical dispositions made by its masters. On this ground do the ramifications of the system run. Without this faithful docility which characterises these outlying correspondents, the efficiency of the system as a generator of intangibles and incomes would be greatly curtailed, if indeed it could come to anything substantially lucrative at all in that case. By this double use of assets, and by help of this all-pervading give and take of profitable margins and commissions, the assets which are so employed are made to pay their way both going and coming, as one might say. The organisation is in the nature of a contrivance for killing two birds with one stone, or for making two overhead charges grow where one grew before, if one should prefer that form of the adage.

In the nature of the case, those massive aggregations of absentee ownership that are elected by circumstance to make up the One Big Union of the Interests, and to share in its counsels, revenues and perquisites, will necessarily take on such a duplex working formation; whatever may have been the underlying sources from which their assets have once been derived, or the employments in which they may once have been engaged during their growth and maturation. The earning-capacities which enter into their composition as assets, and the personnel which administers them as Interests, may be of one derivation or another ; they may, e. g., have come out of oil or out of commercial banking. But whether a given Interest has in its initial phase been identified with industrial business or with financial undertakings, its destiny under the circumstances which establish and regulate the new order of things in business will be to throw the full weight of its assets and prestige into both lines alike, so soon as it reaches the due measure of maturity in mass and in years of discretion.²⁴

In respect of their financial commitments and their share in the guidance of the country’s financial policy at large, these several Interests and their several custodians stand together on reasonably common ground ; but the like is not to be said of their strategy and tactics as concerns engaged in industrial business. As financial Interests they are drawn together in team-work for their common good and are able to take measures in common, looking to their joint advantage and particularly to their mutual security, to the security of their several commitments and the maintenance of the level of capitalisation. Whereas in their capacity of industrial business Interests they are habitually somewhat at odds, if not at cross purposes; being in the position of rival salesmen in a limited market. As industrial Interests, that is to say as business concerns which do business in an output of vendible products, they all are in some degree in the position of rivals in trade, sellers of alternative goods in a closed market, in which one tradesman misses what another takes of the available purchasing-power. In this bearing the most amicable contact which the circumstances of the case and the ethics of trade will admit among them is the watchful courtesy of a negotiated peace,—a peace negotiated for their mutual relief from “cutthroat competition” and for the common gain of the same Interests in their capacity of credit-brokers, investment bankers, creators of capitalised intangibles. It is, therefore, as massive parcels of funded solvency and formidable strategists in capitalisation that they come together as constituents of the One Big Union of the Interests ; and it is as such that they safeguard that peace of moderation and mutual concessions that broods over the traffic of industrial business.

All the while, of course, it is the same Interests, the same parcels of assets and administered by the same responsible personnel, moved by the same incentive of net aggregate gain in terms of price, that do business in both connections. It is incumbent on these custodians and strategists of the Interests, collectively and severally, to regulate and administer affairs in a large way both in the traffic of industrial business and in the marketplace of credit and capital. But the seat of executive power as well as the high court of judicature, touching all the major issues of business traffic of whatever complexion, under this new order, are to be found on the financial ground, in the bailiwick of the high magistrates of solvency. Circumstances have taken such a turn.²⁵

Chief among the circumstances which have given this turn to the pursuit of business, and which so have given rise to the new order of things and the sovereign powers of the larger credit, has been the circumstance that a businesslike competition in production and marketing was running loose among the major industries in the late nineties, at such an unguarded rate as to be a menace to the traffic; such as threatened to entail a grievous retrenchment of the outstanding capitalisations and jeopardise the fixed charges payable on outstanding debentures. The discord in the industrial business was rising to an intolerable pitch and volume, such as to threaten the continued earn-ing-capacity of the business corporations that were caught in it. The new order of things has emerged from the remedial measures which that state of affairs invited, as has been explained in an earlier passage in describing the rise of the investment bankers. It lies in the nature of this industrial business, as conducted in a closed market by competitive business concerns, to breed dissension, distrust and cross purposes among the Interests engaged in the traffic.²⁶

In due time, so soon as the corporate interests that were contending for the traffic had grown to formidable proportions and their market was closing in, this unhappy state of affairs became intolerable. So, under the spur of desperation, there has presently emerged the new order of collusive moderation under the administrative guidance of the One Big Union of the Interests. Concert and mutual accommodation in the conduct of this industrial business is effectually dictated not by the technical requirements of industry but by considerations of finance, with a view to mutual financial ‘benefits, by financial concessions and alliances, under pressure of financial necessity. Financial peace and stability is a matter of the first consequence to the Interests, and to all those who are concerned in the business of capitalised credits. The fabric of credit and capitalisation is essentially a fabric of concerted make-believe resting on the routine credulity of the business community at large. It is therefore conditioned on the continued preservation of this prevalent credulity in a state of unimpaired tensile strength, which calls for eternal vigilance on the part of its keepers. The fabric, therefore, is always in a state of unstable equilibrium, liable to derangement and extensive disintegration in case of an appreciable disturbance at any critical point, with unhappy consequences for the business of capitalisation and overhead charges. Hence the eminently wise and unremitting exhortation to retain or restore confidence, and to return to “normalcy” in case the popular credulity has suffered a lapse. This care is incumbent on the Interests of the One Big Union. So that it is incumbent on them to stand united and play safe, to avoid shock, to promote moderation and tranquillity throughout the world of credit and capitalisation; for it is after all a confidence game—in the blameless sense of the phrase—and is to be played according to the rules governing games of that psychological nature. To this end these major Interests, which in their financial entity make up the One Big Union, will use a reasonable degree of neighborly accommodation in pursuing their several advantages as special interests in the traffic of industrial and commercial business. And to the same salutary end the minor participants, subsidiaries, outliers and interlopers in the industrial business will be rationed in respect of their needful credit extensions, according to the same reasoned plan looking to the stability of price-levels and outstanding capitalisations.

The outcome of this régime of financial peace and stability is not that rivalry and sharp practice are eliminated from current industrial and commercial business, not even from industrial business of that larger sort which will generate a “Special Interest” ; but only that the rivalry and competitive manoeuvring runs within reasonable and salutary bounds; that is to say, reasonable and salutary for the purposes of profitable financiering, as touches outstanding credits and the level of capitalisation. Reason and security in this bearing have to do with the maintenance and enlargement of earnings, of income in terms of money, and of possessions in terms of price; not with the maintenance and enlargement of productive output or of livelihood. Competitive manoeuvres in industrial business under this régime, therefore, may without hazard run free in so far as they will not tend to impair the price-level. It is on the price-level that the level of capitalisation rests, at the same time that the volume of capitalisation determines the price-level, in the main and in the long run.

Competitive manoeuvres which will leave the price-level intact, or which will tend to raise it, will be manoeuvres of competitive salesmanship, not of competitive production, of course. Now and again such manoeuvres or salesmanship will involve an increased output of the line of goods or services to be sold, in case the manoeuvres enlarge the volume of sales. As an incident of the business, in such a case efficient salesmanship may provoke an increased production of the given line of goods. In a closed market, that is to say in a market which runs on a provisionally fixed volume of purchasing-power, such increased production and sale in any one given line of goods will be balanced (approximately) by an equivalent curtailment of output and sales in other lines which come in competition, directly or indirectly; or otherwise the price-level will be deranged. In effect and in the main it is a question of alternative purchases.²⁷

This state of the case leaves a fairly large scope for initiative and enterprise in salesmanship. And as is well known a very large and steadily increasing expenditure of talents, funds, and apparatus, has gone into this work in salesmanship in recent years. Even those major industrial Interests which would seem to be in a position to make their own terms, the terms on which they will buy their materials and on which they will dispose of their marketable output, have been going strong on this rivalry in salesmanship, as, e. g., the packers or the millers. They too are driving hard against these pliable but resilient barriers of competitive salesmanship in a closed market. The only ones among these industrial business enterprises which are passably exempt from the cares of salesmanlike rivalry are those which have to do immediately with one or another of the key industries. And even they are not wholly exempt, as may be seen, e. g., in the case of the oil business, whose sign-boards, advertisements, and decorated sales-booths are to be met at every turn ; while their very reputable spokesmen continue to solicit the popular good-will with the most assiduously devout and humanitarian verbiage.

It is after all in the Key Industries—in coal, steel, oil, lumber, railways, waterpower—that the administrative center of this system of industrial business traffic lies ; just as its executive center lies outside the industrial system proper, in the massive credit institutions of the fiscal metropolis. And it is on these key industries, in the main and primarily, that the dominant Interests of the One Big Union rest their weight of absentee ownership and pivot the sweep of their industrial dominion. The Key Industries are so called because the rest of the industrial system waits on their operations ; so that they set the pace and govern the practicable rate and volume of employment and output for the industrial system at large,— practicable, that is, in point of business expediency.

The management of the key industries works out, in effect, as an administrative control of the industrial system at large ; immediately in and through the mechanical industries, and indirectly also throughout the underlying industrial system. But all the while the management of the key industries is neither prompted nor guided by any such far-reaching administrative purpose, nor is it biassed by any sentiment of administrative responsibility in that connection. This guidance of industrial affairs is all, in a way, an undesigned and fortuitous by-product of the steadfast pursuit of their own advantage by those Interests that do business in the key industries. The measures taken by the Interests are directed to no such end. But such is the exacting balance and concatenation of the work and of its ways and means, under this mechanistic state of the industrial arts and under the price-system, that the operations of these key industries which turn out the primary output of coal, steel, oil, and transport, will unavoidably make the pace for the rest of the mechanical industries, whether by design or not.

As a matter of common sense and a fact of common notoriety, the key industries are managed on the businesslike principle of charging what the traffic will bear; that is to say, what will bring the largest net gain to their owners and managers. It is a simple, though sometimes delicate, question of restricting the rate and volume of their output to such a figure as will yield the largest net return in terms of price, when the price is determined by this restriction of the output.²⁸

Those other massive industrial undertakings that come into the same class with the key industries in respect of their dominant mass and reach and in the respect that they are concerned immediately with the prime necessities of life, stand on much the same footing in this matter as the key industries proper ; as, e. g., meat-packing, flour-milling, or sugar-refining. The management of these has the initiative in industrial business; that is to say, the initiative rests finally with the financial management of these concerns. Therefore, the Interests which have the financial custody and direction of these key industries are in a position to make the terms on which industrial production will be carried on, and it is for the management of the underlying industries in the system to take or leave the terms which are offered them.

The business men in charge of these key industries are able to use this discretion with a passably free hand, inasmuch as these industries stand at the apex of the industrial system,—the apex of growth and of industrial strategy. Their management is vested with the initiative in industrial matters. Their administrative policy consequently falls into relatively simple lines, in its general application. In its elements, it comes to the broad question of how large an output of these prime ways and means of industry will yield the largest net aggregate price-return to the business men in charge and to their absentee owners. In its practical application this will foot up to a question of how far production had best be allowed to go, or how nearly full an employment of the available equipment and man-power will yield the largest net income, for the time being, to these owners and their managers ; which may be restated as a question of how large a running margin of unemployment will best serve this purpose.

In ordinary times there is always such a running margin of unemployment, both in the key industries and in those underlying industries which depend on them for their necessary ways and means. And even in busy times few if any of these industries will ever come up to anything like the volume of production that would result from a free use of the same man-power and material resources under competent technical management with an eye single to production. Sound business considerations will not permit it. The businesslike duties of management turn constantly on a sagacious restriction of output at the point of “balanced return,” and on the many exacting details of speeding-up and slowing-down, of laying-off and tak-ing-on, of hiring and firing, which arise out of this necessary strategy of balanced unemployment. Balanced Return involves Balanced Unemployment.

The gains of business enterprise, whether in the key industries or in the underlying industries of the system, are money-values and they are derived from the margin of sales-price over the cost of the output. The aim of business is to widen this margin and to come in for as large a share of it as may be. The margin may be widened by raising the sales-price or by lowering the cost of the output. And any given business concern may increase its share in this margin by more efficient salesmanship. These are the points to be covered by the strategy of industrial business management.

As has already been explained above, the price-level at large will rise progressively in response to that progressively enlarged volume of purchasing-power which arises out of the progressive creation of credits in the ordinary course of investment, merchandising, and corporation finance. This expansion is self-propagating. Each successive advance of the price-level calls for a corresponding increment of the working-capital of all those concerns,that do business within its scope; which includes virtually all of the business community. The needful increase of working-capital is got by a creation of new credits ; which goes to increase the volume of purchasing-power; which goes to raise the general level of prices, etc. It is a matter of workday routine, and is, in effect, to be broken into only by such a general liquidation of credits as is no longer to be apprehended, since the Federal Reserve and the One Big Union of the Interests have taken over the stabilisation of credits on a reasoned plan. The major financial transactions of investment-banking work out to the same effect, these being also in the nature of a creation of credits, capitalisations, and overhead charges. So that the progressive rise of the price-level goes forward in an orderly, and conservative, way, as a secondary but unavoidable outcome of business-as-usual. By so much, industrial business enterprise at large is assured of a reasonable and progressively widening margin of money-values over the cost of its merchantable output, provided always that the (money) cost of the output does not also advance in like measure.²⁹

As has been explained in an earlier chapter, the business concerns of the underlying industrial system, the concerns that do business in commerce and manufactures, as these words are commonly understood, are engaged in competition among themselves for a share in the run of the market,—competitive management designed to increase each concern’s share in the distribution of the available purchasing-power. Their market is a closed one, in a large way, in that the volume of purchasing-power available for distribution among them at any given time is a fixed quantity. Under current conditions the volume of purchasing-power will expand by a more or less orderly progression in the course of time and with the continued expansion of the outstanding volume of credit. But for the time being it is limited within fairly definite though not inflexible bounds. Salesmanship may divert given items and fractions of this outstanding volume of purchasing-power from one line of sales to another, but it does not in any appreciable degree enlarge the total volume of sales at any given time.³⁰ Expenditure on sales-cost, taken as a whole, will therefore count as a deduction from the available margin of sales-price over cost of output. Yet continued and progressively increasing attention to salesmanship, and a continued and progressively increasing expenditure on sales-cost, are primary and essential to any reasonably large success in this field of business enterprise under the current conditions.³¹

Again, inasmuch as the gains of business, the earnings of enterprise and invested capital, are always eventually to be drawn from the margin of sales-price over production-cost, it is incumbent on all business management to curtail production-cost so far as may be. The earnings of invested capital are of the nature of overhead charges, for the sake of which the business is carried on, and any curtailment of which will therefore foot up to so much of a defeat of the purpose for which business is carried on. It follows that any curtailment of production-cost which shall be reasonable, within the logic of business enterprise, must be a curtailment in expenditures on those factors of production which are not capitalised or included among the rateable assets of the business community. Which comes to saying that the curtailment, if any, must take effect in those expenditures which go to the industrial man-power and the outlying farm population ; these factors of the industrial system being not capitalised and, for the time being, not capitalisable, and so being not carried on the books as assets to which the business is bound over in the way of fixed charges.

In respect of their business interests, therefore, there results a division or cleavage of the people who live under this system of industrial business, whereby the business community, heading up in the Interests of the One

Big Union, comes to stand over against the underlying population, which is taking articulate shape in the labor organisations and the sentimental swarming gyrations of the farmers. Quite generally these organisations and projected movements among the underlying population run true to the “action-pattern” of business-as-usual, in that their consistent aim is to come in for an increasing share in the margin of sales-price over production-cost. This they endeavor to accomplish by bargain and sale, enforced by a well-considered limitation of their marketable supply, quite in the spirit of that larger financial business enterprise that administers the affairs of the capitalised manufactures, and that governs the rate and volume of the industrial output by a conscientious withdrawal of efficiency, as dictated by the law of balanced return. In these endeavours the fortunes of the underlying population are subject to ebb and flow ; but in the nature of the case it is mostly ebb. The underlying population, it is true, is caught in the business system; but it is after all not an executive factor in the system; only a creative factor, which is quite another matter. It comes into the strategy of business enterprise at large in a more passive way, as man-power to be employed at discretion in the pursuit of earnings on capitalised industry, according to the law of balanced return, and as a body of ultimate consumers to be supplied at discretion in the pursuit of commercial gains, according to the principle of what the traffic will bear.

As organised industrial man-power, particularly as mobilised in the shape of standard labor-unions, these elements of the underlying population are consistently endeavoring, with a fluctuating measure of success, to enforce an indefinitely extensible claim in the way of better pay. But in the nature of the case these endeavours if successful will ordinarily come to nothing more than a running process of catching up. The better pay is better in terms of price. But in the nature of the case the general level of prices continues to rise under current conditions of credit, capitalisation, and salesmanship. And since these progressively better-paid workmen are at the same time ultimate consumers of the goods whose prices continue progressively to advance, they continue to lose in the higher cost of living whatever they gain in the advance of wages. With a change of phrase the same proposition applies to the farm population. And it should be noted in the same connection, as applying without much distinction to all classes and conditions of ultimate consumers, that all the while the ever-increasing personnel and proficiency employed in salesmanship continues to convert additional articles of superfluous consumption into items of morally necessary use ; at the same time that the increasing expenditure on sales-costs goes unremittingly to raise the price of living.

The organised industrial man-power endeavours, with a fluctuating measure of success, to make good its claim to an enlarged allowance of livelihood. The ways and means employed in these endeavours foot up, invariably, to a standardised conscientious withdrawal of efficiency, designed to bring the Interests to terms by a punitive restriction of the industrial output. In effect, this is the sole purpose for which the industrial man-power has been organised. So also the farmers are aspiring to make head against the Interests and to reinstate themselves as “Independent Farmers” after the good old fashion of the day before yesterday. The Independent Farmer is one of the lost arts of the nineteenth century. They are hoping to contrive some sort of a businesslike plan of concerted action by which to put themselves collectively in line as a practicable Interest that shall be able to make terms and reshape the scheme of things nearer to the bucolic heart’s desire. By and large, the remedial aspirations of these farmers appear to fall under three several heads: restriction of output; restraint of trade; and expansion of credits. Their great hope appears to center on an inflation of prices by a conscientious withdrawal of productive efficiency and an inflation of purchasing-power. By this means they hope to cover their outstanding liabilities and procure their needed working-capital. Their aspirations, at least, are businesslike.

Meantime the Interests, the One Big Union of the Major Interests and the network of minor concerns through which the business of credit and capitalisation runs, are engaged on a loosely collusive plan for bringing the industrial man-power to reasonable—that is to say profitable—terms by the punitive use of unemployment. At the same time the volume of outstanding capitalisation is being continuously augmented by a continued flow of securities, in great part representing recapitalisations of existing assets, and working-capital to be applied toward increased sales-costs. By and large, or “in principle,” the Interests and the Federal Reserve take a position of prudent conservatism; in practical effect the drift of businesslike exigencies decides that, as a matter of transactions in detail, the continued issue of new capital-securities runs well up in the hundreds of millions weekly ; while the physical aggregate of the capitalised assets appears on the whole to be declining in a moderate way, through uncovered wear and tear. More particularly will it be seen that the physical ways and means are falling short when it is considered that both the numbers of the population and the requirements per capita go on increasing, with no sensible net addition to the ways and means of life and production, while an increasing proportion of the available ways and means is spent on sales-costs.

1: The ordinary width of this margin of inflation is a matter for conjecture rather than computation. It varied appreciably-even in ordinary times, and it grew gradually wider on the whole as the century advanced. Toward the close of the century a reasonable estimate would perhaps make it something between 500 per cent, and 1000 per cent, of what the price level might conceivably have been in the absence of bank credit. But since substantially no business was conducted on any other than a credit basis there are no data on which to base a secure opinion.

2: The run of things in these respects since the War should be sufficiently reassuring to anyone who might be apprehensive. An inflated capitalisation has been kept intact as a whole and has steadily been increased, and inflated market prices have been maintained without substantial abatement during these years, at the cost of persistent inaction in industry; in the face of extreme provocation to go to work and a very appreciable run of popular hardship and discontent due to continued unemployment and restriction of output. Whereas, if those concerns which control the financial end of things had kept their hands off and let the inflated credit situation come to a head, a drastic liquidation of the country’s business affairs would doubtless have gone into effect in due course and brought on an effectual retrenchment in capitalisation and prices; whereupon the country’s industries would shortly have got under way and would speedily have made good the wastes of the War, and supplied all ordinary needs. Indeed, there is no reason to doubt that the resulting industrial production, if it had been allowed to run free, would by this time (1923) have added as much to the tangible wealth of the country as would equal all the book-values of those inflated assets which their financial guardians have been safeguarding with unemployment and commercial paper through these years of privation and unrest.

3: Many excellent manuals and monographs have dealt with the conduct of business in the late nineteenth century; so many and so well as to make any selective citation difficult as well as invidious. But because the argument leans on these two in a peculiar degree, special reference is made to the analysis of the business situation at the close of the century as contained in W. C Mitchell’s Business Cycles, and in the chapters on Credit and Capitalisation in The Theory of Business Enterprises.

4: The expression, “trading on the equity,” as employed in this connection, is borrowed from W. H. Lyon, Capitalisation, where a very competent discussion of this principle is to be found in chapter ii.

5: As is related of Jakob Fugger, “Er wollte verdienen dieweil er könte.”

6: For descriptions and argument on this movement in the nineties and after, Cf. the testimony of various witnesses before the U. S. Industrial Commission, in the Commission’s Report, vols. I, IX and XIII. So also W. Z. Ripley, Trusts, Pools and Corporations; E. S. Meade, Trust Finance, and Corporation Finance; W. S. Stevens, Industrial Combinations and Trusts; C. W. Gerstenberg, Materials of Corporation Finance; A. S. Dewing, Corporate Promotions and Reorganisation.

7: There is, of course, no sharp date-line to be drawn in such a case, but 1897 will serve to mark this turn of affairs as well as any.

8: Cf. A. S. Dewing. The Financial Policy of Corporations, vol. II, ch. ii and vii. In the same connection see also The Same, vol. Ill, ch. ix, on the Voting Trust. Also Hastings Lyon, Corporation. Finance, Part II, ch. ii and iii.

9: There was also a block of 6 per cent, gold bonds, secured by a Hen on the tangible assets of the Carnegie properties, payable to Andrew Carnegie for having brought the required pressure to bear on the great financiers, and for allowing the Carnegie steel properties to go into the coalition at an inflated valuation.

10: So, e. g., the market value of the securities of the U. S. Steel Corporation, or of the various Standard Oil subsidiaries, has persistently gone over par, even when large issues of stock-dividends have been set afloat.

11: It has not been customary to describe transactions of this class in precisely these terms. It is even doubtful if writers on corporation finance and investment banking would accept what has been said above as a faithful description of the relevant facts. Habitually, the point of view of such writers, and more particularly their point of attention, has been some what different from the perspective which governs the present argument. It has been customary to discuss transactions in corporation finance from the side of the tangible assets and their use, rather than from the side of investment and valuation. The argument here is concerned with the workday uses of credit in transactions of capitalisation.

When new incorporations or reorganisations, involving new and larger flotations of securities, are here spoken of as transactions looking to the creation of capitalised wealth by new extensions of credit, it is not intended to say that such new extensions of credit will enlarge the existing volume of “productive goods.” It is not intended to say that such addition to the outstanding credit obligations will create material assets, or will in any way directly add to or augment the country’s tangible possessions, or enhance the tangible performance of the country’s productive industry. As a matter of tradition, it has been customary to believe that some such effect will commonly follow indirectly from such new and increased capitalisation, but that is a question with which the argument is not concerned at this point. Immediately and traceably, the creative effect which these transactions have is altogether in the nature of a creation of intangible assets. Indirectly and presumptively, by what may be called a repercussion of optimism, there may also result something in the way of increased industrial activity and an enlargement of industrial plant; but all that lies outside the immediate operations of investment banking or corporation finance. Such tangible facts are not of the same order of things as an issue of fiduciary paper.

Intangible assets may be created by a suitable extension of credit embodied in corporation securities, as has been abundantly shown by the run of things during the past quarter-century. To their owners these intangible assets will be an effectual item of capitalised wealth, as is likewise shown by the experience of the same years. It is true, such intangible assets constitute no part of the country’s material possessions and have no creative part in the tangible performance of the country’s industrial forces. They are wholly in the nature of an absentee claim to a share in the country’s income; in the last analysis, of course, a claim on the product of industry, to which all the while they have contributed nothing By and large, intangible assets constitute a valid claim to get something for nothing ; and such a claim may be created by an extension of credit; and to its owner it is wealth to the amount of what it is worth. It is also a marketable commodity, and it may be employed as collateral by means of which to procure a further extension of credit, which may be turned to account in the same way and with the like ulterior effect.

These intangible assets, capitalisations of usufruct, which so are created and added to the existing book-values of the country’s wealth, constitute a new claim on the existing volume of income; therefore they constitute a substraction from the body of income which would otherwise go to other, earlier claimants. The owners of these newly created intangibles, therefore, come in for the effectual value of their newly acquired assets at the cost of a corresponding loss to the general body of owners. By force of these transactions, in credit and capitalisation, the existing property owners and workmen lose as much as the owners of the new assets gain, plus the cost of the operations. The loss which so falls on the general body of owners (and workmen) is a loss only in the material respect, by weight and tale of the things which their incomes will purchase, not a loss in respect of the book-values of their assets. The credit extension which goes to the creation of these new assets will mask the confisca-tory character of the transaction by adding the face value of the new assets—and ordinarily something more—to the outstanding volume of market values. The new credits go into the market as an addition to the current volume of purchasing-power; thereby correspondingly lowering the purchasing-power of the money unit. It foots up to an inflation of the total volume of wealth in hand as rated in terms of price, with no corresponding increase of tangible possessions; whereby the investment bankers and their clients come in for an increased share of the wealth in hand, at the cost of the general body of owners and workmen. —Cf. also Theory of Business Enterprise, ch. iii, pp. 99-132, ch. iv, pp. 148-168, 174-176.

12: By “sound business management,” proceeding on such a reasonable understanding among themselves, the investment bankers who command the credit resources of the country are enabled to trade on a progressively thinner equity; so that they are able safely to enlarge the volume of outstanding credit, indefinitely, by means of a progressive creation of intangible assets on which to base a further extension of credit, etc.

13: In due time this force of circumstances, which so has drawn the banking community together in a centralised ramification of equitable give and take under the collusive surveillance of the great credit houses of the metropolis, has been given a local habitation and a name, by act of a businesslike Congress, in the installation of the Federal Reserve Board. The working-out of this measure appears to have been wholly salutary and to have fallen quite neatly in with the drift of circumstances that has shaped the men and structure of Big Business. It is true, the surveillance and disciplinary powers formally vested in the Board neither derive from nor devolve upon the massive banking-houses of the metropolis ; nor, on the other hand, do they extend by specification to anything beyond commercial banking and the issuance of fiduciary currency. But it is the same concatenation of banking concerns, bound in the same inclusive system of financial correspondence, by which the commercial paper and the paper currency are taken care of, that also takes care of the country’s credit resources and their allocation and distribution through the channels of investment banking; and the work is carried on by the same personnel, at the same time, through the same channels, and by use of a solvency resting on the same assets. The creative use of credit in generating and floating corporation securities is, after all, no more than another branch of that business of issuing, endorsing, and transferring fiduciary paper, that has to do with bank-notes and commercial banking. The transactions are of the same general kind. The banker’s incentive in both cases is also the same margin of gain to be got for letting someone else go to work, whether it takes the form of a bonus or commission for the flotation of corporation securities, or a rediscount, or an excess of note-issues over the legal reserve; the method of earning this margin of profits is the same trading on the confidence of clients and customers; and the ulterior effect of the traffic is the same expansion of money-values through depreciation of the unit of purchasing-power.— Cf. H. L. Reed, The Development of Federal Reserve Policy.

14: The standard manuals of economic theory make no reference to any such cumulative acceleration in the ordinary rate of output of capitalisation of liabilities, as a factor in the economic system with which their speculations are occupied, although writers on corporation finance have called attention to the practice from time to time. Economists habitully have seen the whole matter in another light. Economic theories have habitually been standardised in forms which would meet the requirements of that earlier “cash economy” that has been falling out of the scheme of things in recent times. Under the old order the use of credit was a matter of “deferred payments,” rather than an instrumentality of absentee ownership. So economists have not been in the habit of looking to the volume of outstanding obligation and intangibles—capitalised overhead charges—as a creative factor in the continued expansion of liabilities and capitalisation; particularly not the certified economists of the ancient line. (Cf., e. g., J. Laurence Lâughlin, The Principles of Money, chapters on Credit and on the Refined System of Barter). Their perspective has been somewhat faithfully foreshortened to fit the legal formalities of incorporation and the stipulations of economic doctrine as drawn up in the middle nineteenth century ; at a time when it was still passably true in practice, or at least in the established tradition, that any extension of credit would be presumed to be secured by tangible assets available as collateral, in the case of negotiable securities, or by an available reserve of specie in the case of paper money. That was under the old order of business practice and the still older order of legal and theoretical conceptions. There is no call to take exception, or to call ungraceful attention to that ever-widening fringe of intangibles which was by that time progressively enveloping the nineteenth-century fabric of cash assets, and which eventually has overrun and surmounted it.

All that was under the old order, or under the rigorous tradition of it ; while the slow-dying presumption still held its ground, that “assets” means “tangible property”; that corporate capital is measured by the initial cash cost of the corporation’s plant; and that intangibles can be capitalised only by subreption, by making believe that they are transferable objects of use and have a ratable cost of production—as, e. g., patented processes and contrivances—and so entering them on the books along with the tangible properties and writing them into the capitalised assets at a make-believe purchase price. Except de jure, all that has changed and passed, progressively with the passage of time and the accumulation of new usages and conceptions. In effect, assets are now capitalised on their earning-capacity regardless of cost or tangibility; the corporation is rated and capitalised at its value as a business concern, and among its valued and ratable possessions is its ability to borrow. An industrial corporation is necessarily rated on the sales-capacity of its industrial plant; that is to say, the prime factor in capitalisation is now in the nature of an intangible. Things have taken such a turn.

In the further course of capitalisation the capitalised intangibles, duly covered with negotiable securities, serve as collateral on which to secure an extension of credit, to be capitalised and covered with securities, which will be acceptable collateral so soon as they are “digested,” etc. There is no question of the main fact; it is only a question of the rate of cumulative progression. It should also be noted that such liabilities may also serve as a creative factor in the progressive expansion of credit values without being formally capitalised in the shape of corporation securities conveying title to alleged assets. This is well shown by the case of government bonds or treasury notes and certificates, which are quite unexceptionable collateral at the same time that they neither represent tangible assets nor enter into the capital account of a corporation.

15: This outcome follows in so far as business comes to be conducted on a credit basis. It is the working-out of a progressively improved stability of credits and improved facilities for their expeditious negotiation. The greater the ease with which credit extensions are negotiated, and the greater the security of outstanding obligations, the more will the use of credit become an everyday necessity and the more urgent will be the inducement to make full use of one’s borrowing capacity; and the larger will be the volume of outstanding obligations and the resultant aggregate of overhead charges falling on business and industry. And evidently no net gain accrues from this traffic, except what goes to the dispensers of credit; which is evidently of the nature of a differential gain at the cost of the business community at large.

16: What amount is to be deducted as net eventual loss on the score of this cost of operation may be estimated, with a degree of approximation, from the total cost of carrying on the country’s banking business, which is chiefly occupied with just this work; a reasonable allowance being made for other services rendered by the banks. What then remains of the sum of the cost of the traffic may be set down as paid to the bankers and their creditor clients for having enabled the country’s business concerns, one with another, to inflate the figures of their receipts and disbursements.

17: So, e. g., the same “Interest” which dominates the corporate business and industry in oil will at the same time dominate the leading banking establishment with which this oil business has to do, as well as its extensive retinue of affiliated banks. Among those business men who do business in oil it is a matter of course that the very extensive network of affiliated banks that are dominated by the Standard Oil Interest will faithfully serve that Interest in its endeavours to engross the oil resources of the country. Much the same disposition of forces is to be found in steel and railroads, of course. It is in no way obnoxious, either to the law or to business ethics.

18: It is always conceivable, of course, that this American pool of solvency, or some one or more of the major Interests comprised in it, may under urgent pressure enter into hazardously extensive commitments toward the outside,—e. g., toward in solvent European clients. This may give rise to contingencies of so grave a nature as would eventually leave the pool at loose ends, derange the team-work of the Interests, and precipitate an unadvised and unmanaged liquidation. In view of the known European commitments of certain American Interests, it has been believed by apprehensive persons that the current situation in Europe is likely to contain the elements of such an eventuality. It is known that there is such an element of hazard for the American Interests in the case, but no person outside the American General Staff of Solvency, as already spoken of before, is in a position to hold a reasoned opinion on the complexion and magnitude of that hazard; and those persons who so are in a position to speak are maintaining a large and salutary reticence.

19: As students will recognise, this term is borrowed from Knies and Hildebrand, who brought it into use in a somewhat wider application.

20: To avoid dispute and exception, it may be as well to admit and note that such rights of usufruct have doubtless been capitalised in the capitalisation of these concerns that do business with the farm population, and that so they have been covered with corporation securities and incorporated in the assets of the corporations in question. In this way they doubtless make a very substantial mass of capitalised intangibles in the aggregate, and constitute a valuable body of assets; in the case of many such business coficerns presumably these are the chief elements in their capitalisation. In so far, of course, this relation of usufruct has been given a formally legal existence, being capitalised and covered with negotiable corporation securities.

21: See chapter vii, Section iv.

22: De jure there is no such One Big Union of the Interests, of course. It is perhaps needless to say so. This descriptive phrase applies only de facto. And even de facto the One Big Union of the Interests appears, hitherto, scarcely to have had a settled local habitation and a name. Only in respect of the One Big Union’s surveillance of note issues and rediscounts can it be said the Federal Reserve has given its membership a “Centrar” —if one may take a metaphor from the usage of the telephone. The One Big Union, hitherto, has no corporate existence. It foots up to a concert of action and policy enforced by the drift of circumstances, rather than by deliberation and a reasoned plan looking to the long run. But by drift of circumstances—the drift of sound business principles and a common solicitude—their several movements result, in effect, in such a convergence of forces and such a concert of policy and action as to merit the name.

23: Such enlargement of effectual capital-value of given assets by the proven earning-capacity of an industrial business concern is well shown, e. g., in the case of the Standard Oil securities that were outstanding some years ago; when the market value, and the consequent value as collateral, of the common stock advanced by steady growth of earnings till it reached some 700 per cent, over its face value. As an element of solvency and a credit-bearing asset that parcel of securities then counted at their market value, of course, not at their face value; as was also seen and turned to account presently in the issuance of stock dividends of some 700 per cent. Substantially the same operation has been repeated by the various Standard Oil properties during the past year (1922).

24: Consider, e. g., two such typical credit institutions of the first rank as J. Pierpont Morgan & Co. and the National City-Bank, which have come into the business from widely different beginnings and antecedents, but which now count at their full weight both in industrial enterprise and as banking houses.

It is also interesting to note that the dates from which the two take their departure as prime-movers in this twofold pursuit of gain, coincide in a loose way with the period out of which the new order of credit and capitalisation took its rise.

25: There is a singular, but presumably idle, coincidence of dates and characteristics between this de facto magistracy of solvency, its scope and powers, on the one side, and the rise and scope of the Injunction as applied in American court practice on the other side. Both are unprecedented, both have grown out of inconspicuous beginnings and have come to their present sovereign powers within the same general period of time ; the same period during which the large-scale industrial business and the free capitalisation of credits have also come into bearing, and have in time come to dominate the country’s industrial system and its scheme of life. Both serve the ends of the larger absentee ownership, in the main and de facto. Both combine judiciary with executive powers, and the powers of both are of an inhibitory sort; essentially powers of retardation and inertia, powers which take effect by way of penalising activities that are not otherwise obnoxious to law or morals. It appears also that, in practical effect, the two mutually befriend and sustain one another.

26: This description of the case, as necessarily running to distrust, cross purposes, and sharp practice, applies to the conduct of the business, not to the mechanics of production. It is a proposition concerning business principles and practice, not concerning the technique of industry. It remains true all the while, of course, that in point of workmanship, in point of efficient tangible performance, as contrasted with the strategy of salesmanship, the industries are always and everywhere best served by a cordial and calculated cooperation between the various industrial units that make up the industrial system. The maximum net production is to be reached only along that line. But business enterprise is a pursuit of maximum net gain in terms of price, not of maximum production in terms of goods. It is an enterprise in salesmanship, whether the trading is done in material goods or in the credit instruments.

In the technological respect, as a proposition in workmanship and tangible performance, the industries of the country are bound together in an orderly network of interlocking processes of production; but in respect of the business interests engaged, as a proposition in salesmanship and sales-profits, in their capacity of business concerns, these many parcels of industrial property are at cross purposes, being in the position of competing bidders for custom. The strategy of salesmanship and net gain brings with it into the industrial system the defects of its own qualities, and among these defects is an inveterate bias of distrust and sharp practice.

27: So, e. g., increased sales of yeast-cakes, cosmetics, Red Cross doles, furs, or rubber tires—wares which have of late been selling in very notably increased quantities as a result of large and persistent advertising—will be offset by a shrinkage of sales in other, alternative lines, as, e. g., fruits, flannels, alcoholic beverages, savings-bank accounts, or butcher’s-meats.

The current situation of this business community at large, which so does business in commercial and industrial traffic within the bounds appointed by the massive Interests of the One Big Union, is a situation of much the same complexion as that which has prevailed in the country towns of the Middle West, as already explained in an earlier chapter. The traffic runs on the same general lines of reserved and evasive rivalry within and of sturdy solidarity toward the outside, toward the underlying population ; very much as the local community of retailers carries on the business traffic of a typical country town. Except for its larger dimensions it is much the same thing over again, both as regards the manner and the degree in which the cost of it all falls on the underlying population. In both cases it is an enterprise in usufruct carried on under a loosely defined code of Live and Let Live, designed to safeguard the joint advantage of the usufructuaries.

28: The net aggregate price-return is a product of two variaDles ; one of which—the output—varies at the discretion of the businesslike management, and the second of which—the price per unit—is a function of the first. “What the traffic will bear” is that volume of output which will give the largest product when multiplied into the price per unit. Hence the need of a vigilant restraint on production.

The principle of restraint which so comes to govern the business of what the traffic will bear has been spoken of as the “law of balanced return”; as being a principle which determines the expedient maximum of output in any given case, and which therefore also determines what will be the expedient size of an industrial business unit in any given line of production and sale. —Cf. A. S. Dewing, The Financial Policy of Corporations, vol. iv, ch. ii.

29: It will be seen that the current situation in this respect has much in common with the interval of prosperity, inflation, or speculative advance, that makes up the rising segment of such a business cycle as the experience of the nineteenth century and the discussions of the nineteenth-century economists have made familiar; but with a difference. There is in the current situation an element of sobriety and a factor of salutary reserve that were lacking in the nineteenth century. Prosperity ran somewhat headlong in those days, and came, in the ordinary course, to a headlong liquidation, ending in panic, crisis and depression. Under the conservative surveillance of the Federal Reserve and the One Big Union of the Interests in the twentieth century the prosperity of business—that is to say the inflation of capital and prices—does not run riot. It is an orderly advance, in the course of which the progressive creations of credit and capital are duly stabilised and ‘‘digested,” distributed and consolidated under the aegis of the Interests, with such effect as to make them a secure ground on which to hypothecate further creations of the same character, in indefinite progression. And no undesigned liquidation need be apprehended in this case, since the major debits and credits are pooled, in effect, by being drawn in under the custody of these major Interests thai. informally make up the One Big Union. Both the need of credits and the progressive creation of them are indefinitely extensible.

30: The “market” as here used is the volume of effective demand for things to be bought at the current level of prices, and it may be taken to mean the national market or the international market at large, according to the context of the argument. In either case it is a “closed market,” in the sense that the available purchasing-power which constitutes the demand in this market falls short of the productive capacity of the industrial system, at the ruling level of prices. Hence attention and expenditure in this field of business enterprise has been converging on sales manship rather than on increased production, with the result that total sales-costs have gained largely and progressively, at the same time that the rate and volume of output have remained relatively stationary on the whole.

31: One of the secondary consequences of this imperative recourse to salesmanship and enhanced sales-cost is to be noted in this connection. In great part salesmanship takes effect by way of establishing a conventional need for articles which have previously been superfluities, shifting given articles of consumption from the footing of superfluities to that of necessary articles of livelihood, necessities by conviction of morals and decency rather than by requirement of subsistence or physical comfort By so much the necessities of life for the consumers will be enlarged, and by so much the (moral) subsistence minimum to be provided for out of wages will be raised, without a corresponding increase in the workmanlike efficiency of the wage-earners; which acts in its degree tc increase the labor-cost per unit of the marketable output of industry, and therefore also to narrow the margin of sales-price over production-cost. E. g., the moral necessity of consuming furs, cosmetics, or high heels.