These theses will meet objection, particularly from those who are accustomed to quantity theory reasoning, and who look upon the volume of credit as something independent of the volume of trade. On the logic of the quantity theory there is no reason why prices might not mount indefinitely, if only credit could increase indefinitely. The causes controlling the volume of credit are, on this view, quite independent of the volume of trade. I have given this line of thought sufficient criticism, perhaps, in Part II, but shall find occasion to recur to it at a later point in this chapter. However, writers not bound by quantity theory ideas, may still find reason to question these theses, and it is necessary that I should take account of various complications, and make what may well be called substantial qualifications and modifications, before the theses are acceptable.
First, objection will be offered to the doctrine that all credit is merely rights to wealth, that credit rests on wealth. It will be urged that many loans are made without collateral, or mortgage security, that the "personal credit" of the borrower is the only security, and the only basis of the loan. This objection is not serious. There are, doubtless, loans which are disguised benevolences, where the lender gets nothing good in return for his loan. I abstract from such cases. Quantitatively they are not important, and qualitatively they are not really commercial transactions. In general, when a good merchant borrows at the bank on his personal note, the bank knows very well what goods he has in stock, what prospects he has for marketing them, what other debts he has, what his "net worth" is. And the bank knows that it has legal claims, even though not preferred claims, on his wealth. When a young business man borrows capital from a neighbor, giving no security because he has no marketable wealth which would serve as security, he is, none the less, exchanging a valuable right for the loan. He is giving the lender a right to a preferential share in his future income. The lender has considered the young man's abilities as sources of income, in conjunction with the capital lent. Incidentally, the lender retains rights, preferential rights as against the young man himself, in the quantum of value he has turned over to him. If a young man borrows the resources with which he buys a farm, the lender takes a mortgage on the farm itself. Transactions of this sort frequently have in them the element of benevolence, and the considerations are not always strictly commercial. In the case of a young man of unusual ability, however, who insures his life for the benefit of the lender, such transactions may be perfectly good commercial transactions, value balancing value in the exchange. The thing traded is commonly present money (or its equivalent) for rights to future money income.
Public loans present no exception to our rule. They represent the transfer of present wealth for the future income which the government, by virtue of its public domain, or, more commonly, its taxing power, may expect to receive. With a strong government, this future income may be a very substantial part of the total income of the people. Public loans may often be for commercial purposes, as when municipalities borrow to build or extend municipal enterprises. In cases of this sort, the market frequently will consider the prospects of commercial success of the enterprises in fixing the value of the municipal bonds. Where the proceeds of the loan are for non-commercial purposes, as war, the question of the future income of the government will still, ordinarily, be a dominant factor in determining the value of the securities. Often, however, there is the direct action of patriotic fervor, etc., enhancing the values of government securities. We have seen this in the case of government money. It is no part of our theory to maintain that men's calculations are always rational, or that the whole of the value of a long-time income-bearer rests on the anticipated income. But this is no peculiarity of credit phenomena. The same thing is true of lands, for example. Capital values often get independent in part of their "presuppositions," as we have seen in the chapter, supra, on "Economic Value." War security issues often represent the effort of the government—as at the present time—to bring into the present every possible bit of future values, as a means of increasing their power in a desperate struggle. The high prices of goods in such a situation represent the concentration of future values into the present, an increase in the motivating power which stimulates the people to unwonted exertions. In war time, moreover, many ideal values,—those whose fate is dependent on the outcome of the war—enter into and increase the values of those goods which are needed for carrying on the war. This leads to larger sacrifices of future income than would ordinarily be tolerated. It is not so much a case of present goods rising because of extra credit, as of extra credit because present goods are more valuable.
A second objection would be raised that in many cases, the values pledged by the borrower could not exist if the lender did not make the loan. This would be particularly the case with credit granted for the starting of a new or novel enterprise, which as yet exists only in idea. The established merchant, with goods on his shelves, or with a bill of lading for goods which he has sold, has a very tangible, concrete basis for a loan, whose value is independent of the decision of any given banker. If my doctrine is to be taken as holding that all credit rests on concrete physical goods, very many exceptions indeed could be found. But this is not my doctrine. It is that credit rests on valuable rights. These rights may be rights to existing concrete goods; they may be rights to future incomes. In any case, it is the values, rather than the physical quantities, that are significant. Witness cotton before and after the outbreak of the World War. Ultimately, in general,[510] economic values come from the "primary values" or "first order" values of consumption goods and services. These values are reflected back, by the imputation processes, to the various "factors of production" which have made the existence of the goods and services possible, in accordance with well-known laws which need not be here elaborated. But the category of "factors of production" is far from exhausted when we have named land, labor, and produced instruments of production! Some writers have rejected the notion of "factors of production" largely or altogether, and prefer such a term as "agents of acquisition."[511] I certainly have no intention to give to the term, factor of production, any ethical connotation. Even though a factor of production be, like land or labor, a sine qua non of production, it does not follow that the owner of that factor gets his proper, or ethically just share, under the laws of economic imputation. Many of the "factors of production," in the sense of factor which derives a value from the economic laws of imputation, may well be parasitic from the angle of ultimate social welfare. The only test is as to whether, under existing social arrangements, a portion of the income of a given establishment would cease to exist if that factor should disappear, or be reduced. From the angle of this test, monopoly power, trade-marks, established trade connections, the big idea of an entrepreneur, a dynamic personality, capacity for winning other men's confidence and good will, and sometimes that brutal selfishness which makes other men shrink from conflict, or the reputation of being a dangerous and vindictive man, may be equally "factors of production" with land, labor, and produced instruments of production. In Part IV of this book, "The Reconciliation of Statics and Dynamics," we have discussed the "intangible capital items" of this class, and have indicated that many of them perform really important and necessary social functions. Others are doubtless pernicious. Production involves leadership, organization, the making and maintaining of "interstitial connections," as well as the technology of muscle and machine. But credit is based on values, rather than on concrete goods as such, and if these "intangibles" have value, they may have credits based upon them.[512]
That some of these values exist only by virtue of the fact that credit is granted is no marked peculiarity. The granting of credit is an exchange of the rights of the creditor for rights to the future income of the borrower. If the exchange were not made, in certain cases, the borrower would have no future income to which he could give rights. The entrepreneur with a big idea cannot actualize that big idea unless he can bring it into conjunction with land, labor, capital, and a market for the products. The exchange of rights to the value of the products for the banker's deposit-currency, or the private lender's money is merely one of many necessary exchanges required to bring about the combination which will create the products. If there were no possibility of marketing the products, he would be equally helpless, and his idea be equally valueless. The general range of values, under our present system of division of labor, private property, private enterprise, etc., depend on the possibility of exchange. Men produce for the market, rather than for their own consumption, or for the consumption of a communist society. Without exchange, many values would persist, but most values would at least be diminished. Exchange is part of the productive process. The only peculiarity in the case under discussion is that the man getting credit for the exploitation of a big new idea commonly has a very limited market—is dependent on the decision of one bank or lender, or at most of one out of a few possibilities. The narrower the market, the more dependent are the values of things that must be exchanged upon the decisions of a few men. Wheat is free, virtually, from individual caprices, though even there a big operator may organize a pool and temporarily affect the value very greatly. But the immediate power of a few men on values is increasingly great as we get closer to those things which are unique, which are capable of only specialized employment, and which call for the coöperation of elaborate and expensive systems. And, of course, the influence of individual caprice, or individual decisions, on all values grows greater as wealth and power are concentrated. Economic social value is an institutional value, specially weighted and controlled by individuals, classes and institutions.[513]
Joseph Schumpeter, in his Theorie der wirtschaftlichen Entwicklung, has made much of the rôle of the banker in economic evolution. He sees in the banker a creator of "Kaufkraft," by means of which an entrepreneur, a dynamic man who has a new idea which he wishes to actualize, is able to wrest from the unwilling "static economic subjects" their land, labor and instrumental goods for the purpose of putting his new plan through. This new Kaufkraft is the true Kapital which the new enterprise requires. Capital, thus defined, is not an accumulation of goods, is not embodied in goods. It is an agent, a power, which the banker creates. It makes dynamic change possible. Schumpeter is particularly anxious, in clearing the way for his new theory of interest, to get rid of all the notions of saving, accumulations of stocks of goods, etc., which have commonly been made prominent in the discussion of capital and interest. We need not here discuss his theory of interest.[514] He maintains that the new dynamic credit, credit granted by a banker for a really new enterprise, as yet not concretely in existence, represents something new in the world, anomolous from the angle of static values, and static credit. Indeed, he regards credit as unessential for the static analysis, and banishes it from the "Wesen" of his static state. But this new credit is different from such credit as there may be in the static state, because, he holds, the new credit does not rest on goods, and has no Deckung. Schumpeter himself calls these doctrines "heresies." They become less dangerous, however, when we learn that by "saving" Schumpeter means mere trenching upon accustomed expenditure, so that the entrepreneur who saves part of unusual profits is really not saving at all, and when one discovers that his contention that there need be no accumulation of goods prior to the starting of a new enterprise means merely that there need be no special accumulation of goods ad hoc. Of course if saving means trenching upon accustomed expenditure, it is banished by hypothesis from the static state, but there may still be plenty of capital (in the ordinary sense of accumulated produced means of production) for Schumpeter's entrepreneur to get hold of by means of his new Kapital. His contentions that the new credit does not rest on goods, that it has no Deckung, and that we have a new thing in the world since in dynamic credit we have a case of temporal discrepancy between the making of obligations and the ability to pay them, calls for further analysis.
It is true that there is a time during which the new credit has no basis in concrete goods. Very speedily, however, the new credit is exchanged for concrete goods, and the enterprise is started. Further, the banker commonly insists on a margin at the start. Further, the claims of the borrower on the banker are themselves, prior to their expenditure for the things needed in the enterprise, assets to which the banker may look as a basis for his confidence in the goodness of the entrepreneur's promise to pay him. There is never a moment when the new credit does not rest on values. The loan by the banker to the borrower is, essentially, like the case of the purchase of any bearer of future incomes, say a machine, or a factory. The machine is, after all, in economic nature, merely a "promise" of future goods and future values, as an Austrian economist should be quick to recognize, and machines are almost as frequently poor performers as borrowers—indeed, most commonly, the borrower's inability to repay comes from the failure in the value of the goods which his physical equipment produces. The raison d'être of the new credit is the new values which have come into existence: the new plan of the entrepreneur, validated by the banker, attains a value equal to the present worth of the extra products which it promises. I repeat that it is values which are significant as the basis of loans, that values are not all embodied in physical goods, and that value is essentially a psychological thing.
The banker's validation of the plan may be an essential factor in its value. Belief is often an essential factor in values. The new value, and the new credit, have a large element of belief in them. The value of the new plan rests proximately in the belief of the banker, manifested by his granting of credit. But the value of the bank-credit rests ultimately in the prestige of the banker, which is a fact of social psychology, resting in a massing of belief on the part of the public in him, in the validity of his bank-notes and deposit-currency, coupled with support from legal and other institutions. But this is to anticipate the discussion of the nature of bank-credit. The point involved is sufficiently illustrated by the case where a man who is not a banker lends his money to an entrepreneur of a new undertaking. Here again the enterprise is impossible without the loan. Here the loan is made on the basis of an anticipated income. Here again the anticipated income is made possible only by the loan; one of the values that enters into the exchange exists only because the exchange is possible. None the less, the credit rests on value. It is a right to an anticipated income. The man who has made the loan has his security in the value which he has lent, plus the present worth of the extra income which the new idea is expected to create.
Now a great practical difference is made in the course of economic life by the decisions of lenders to lend to men who plan new things, instead of to men who plan old things. It makes an enormous difference whether or not new plans appeal to the imaginations of those who control the economic resources of society. It makes a great difference whether static values (the capital values of incomes to be created in familiar ways) or dynamic values (capital values of incomes to be created in novel ways) win out in the competition for loans from those who have loans to make. But as values, the two are of the same psychological stuff and substance: futurity and belief are essential elements in both of them.
Stable belief, and strong belief, are easier to evoke in the case of the established and the familiar. New ways of creating wealth must promise larger returns, and make more dramatic appeals to the imagination, than old ways. Schumpeter indicates that it is the essential function of the banker to give preference to the new ways, that the mass of men are "static" in their attitude, and that, for some reason which he does not clearly indicate, the banker is not. This has not been our American experience, on the whole. The contrast which Schumpeter makes between the timid, static masses, and the few highly important dynamic entrepreneurs, holds very much less true in America than in Continental Europe. There it is doubtless true that new industrial enterprises have had their main encouragement from bankers. Here, such enterprises have appealed largely to the mass of men, to the investing and speculative public. Our commercial banks have lent largely upon stock exchange collateral, which means that, indirectly, bank-loans have gone to finance industry. The extent of this is enormous, as will later appear. However, the banks, as banks, have not been large buyers of stocks. They have guarded themselves by requiring "margins" from those to whom they have lent on such collateral. Seasoned bonds have been bought in great volume by our commercial banks, but few stocks. Even the underwriters and investment bankers have been primarily intermediaries, expecting to pass on to private buyers the securities they hold temporarily. My point here is, merely, that there is nothing in the distinction between static and dynamic credit, when by that is meant the distinction between credit for new enterprises and credit for old enterprises, to mark off a peculiar or essential province for bank-credit. The need for bank-credit does arise out of dynamic conditions, primarily, but it is not the need for credit to start dynamic changes, even though bank-credit may do, and does do, that. The chief reason for bank-credit is to enable economic society to readjust itself quickly and readily to dynamic changes, by putting through without friction the necessary exchanges that such readjustment requires, and by holding in liquid form a fund of rights which can meet the emergencies and unexpected occurrences which dynamic conditions involve. To this we now turn.