54This, of course, has nothing to say to Bohm-Bawerk's theory of the enhancement of production through lengthening the processes of industry. His theory of the "roundabout method" applies to the technical, material efficiency of the mechanical process; whereas the point in question here is the interval occupied in the turning over of a given business capital. Bohm-Bawerk's position may be questionable, however, on other grounds.
55Cf., e.g., Werner Sombart, "Der Stil des modernen Wirthschaftslebens." Achiv fur soz. Gestzg. u. Statistik, vol. XVII, pp. 1-20, especially pp. 4-15. Reprinted as ch. IV, vol. II of Der moderne Kapitalismus (Leipzig, 1902).
56Cf., e.g., Marshall, Principles of Economics (3d ed.), bk VI, ch. VII, secs. 3 and 4.
57Cf. Laughlin, Principles of Money, p. 86.
58The turnover will count for more in gross earnings at current rates if instead of his own capital alone the business man also engages whatever funds he can borrow by using his capital as collateral. The turnover counted on capital (value of the industrial equipment) plus credit, at current rates, will be greater than that counted on the capital aaone used without credit extension. The turnover may be expressed as the product of the mass of values employed multiplied by the velocity. Hence, if credit be taken as an indeterminate fraction (capital/n) of the capital used as collateral, we may say that Turnover = (1/time)(capital + capital/n), i.e. T = (1/t)(c + c/n) = (c + c/n)/t; t = (c + c/n)/T The algebraic statement serves to bring out the equivalence between an acceleration of the rate of turnover and an increase of the volume of business capital. Cf. Jevons, Theory of Political Economy, pp. 249-258. Sombart is mistaken in saying (Kapitalismus, vol. II. ch. VI, p. 74) that the use of credit lengthens the time of turnover of capital. Credit shortens the time relatively to the magnitude of the turnover; i.e. a given initial capital by the help of credit turns over a larger pecuniary magnitude in a given time: (c + c/n)/t > c/t.
59Marshall, as above.
60Cf. Laughlin, Principles of Money, ch. IV.
61Property convertible into cash at will.
62The legally obligatory reserve for the National Banks, for instance, is 25 per cent of combined note circulation and deposits in central reserve banks, 15 per cent in others. -- Revised Statutes, 5191.
63This takes accountof advance made by other lenders than the regular banking houses who exclude mortgages on real estate from their collateral; such, e.g., as the long time advances (investments in securities) made by saving banks, insurance companies, minor private and mortgage banks, private lenders, etc.
64This truism is frequently overlooked in theoretical discussions; hence, as the present argument requires its recognition, it is here stated in this explicit way.
65The cash loans made by depositors to savings banks in the form of deposits.
66Cf. Twelfth Census of the United States, vol. VII, p. c.
67Few, perhaps, would in set terms maintain an argument that the value of money does not vary, but still fewer would, in a credit transaction, proceed on a supposition at variance with that position. As the economists are accustomed to say, money is the standard of deferred payments. It is also, in the unreflecting apprehension of those who have practically to deal with wealth phenomena, felt to be the standard and inflexible measure of wealth. The fact that this convertional usage is embodied in law acts acts greatly to fortify the naive acceptance of money and price as the definitive terms of wealth. See pp. 82-86 above.
68Cf. Knies, Geld and Credit, vol. II, ch. VI, sec. C, especially pp. 303 et seq.
69The enhancement of the market value of the output does not, in fact, keep pace with the inflation of business capital during a period of speculative advance. In order that it should do so, and afford nominal earnings proportionate to the inflated capital, it would be necessary that incomes should increase proportionately to the inflation of capital; but, even if this happened, the expenses of production would thereby be so increased (through the advance of wages and the like) as to offset the entire of values for all consumptive goods and leave only the advance in the values of productive goods as a net margin from which to draw an increase of earnings. The discrepancy under discussion, however, is not due entirely to the presence of credit, and a fully detailed analysis of the causes out of which it arises can, therefore, not properly be presented in this place.
70So long as the rating of the capitalized property remains undisturbed, the formual which expresses the creditors' claim maintain the form given above. It then signifies nothing more than that the creditors hold a claim on such a proportion of the aggregate capitalized property involved as their advances bear to the aggreage capitalization. But so soon as a rerating of the capitalized property enters the problem the formula becomes loans/(capitalization + delta capitalization) or loans/(capitalization - delta capitalization), according as the rerating of capitalization is in the direction of enhancement or depreciation: 1/(cap + delta cap) or 1/(cap - delta cap). During brisk times, when capitalization advances,the claim represented by a given loan covers a decreasing proportion of the aggregate capitalized property involved 1/(cap + delta cap); the denominator increases and teh quotient consequently decreases. Whereas, in a period of liquidation the ratio of the creditors' claim to the aggregate capitalization increases by force of the lowered rating of the capitalized property 1/(cap - deltal cap).
71All those who, at a period of liquidation, are holders of fluent funds or of claims to fixed sums of money are, for the present purpose, in the position of creditors.
72This disregards the indirect effects of a speculative advance in the way of heightened intensity of application and fuller employment of the industrial plant.
73See chapter VI.
74The question of "stock watering" "overcapitalization" and the like is scarcely pertinent in the case of a large industrial corporation financed as the modern situation demands. Under modern circumstances the common stock can scarcely fail to be all "water", unless in a small concern or under incompetent management. Nothing but "water" - under the name of good-will - belongs in the common stock; whereas the preferred stock, which represents material equipment, is a debenture. "Overcapitalization," on the other hand, if it means anything under modern business conditions, must mean overcapitalization as compared with earning-capacity, for there is nothing else pertinent