The Use of Loan Credit
Credit serves two main uses in the regular course of such
business as is occupied with the conduct of industry. - (a) that
of deferred payments in the purchase and sale of goods - book
accounts, bills, checks, and the like belong chiefly under this
head; and (b) loans or debts - notes, stock shares, interest-bearing securities, deposits, call loans, etc., belong chiefly here. These two categories of credit extension are by no means clearly distinct. Forms of credit which commonly serve the one purpose may be turned to the other use; but the two uses of credit are, after all, broadly distinguishable. For many purposes of economic theory such a distinction might not be serviceable, or even practicable; it is here made merely for present use. It is chiefly with credit of the latter class, or rather with credit in so far as it is turned to use for the latter purpose, that this inquiry is concerned.
Suppose due credit arrangements have already been made - in
the way of investments in stocks, interest-bearing securities and
the like - such as to place the management of the industrial
equipment in competent hands. This supposition is not a violent
one, since a condition roughly approximating to this prevails in
any quiescent period of industry when there is no appreciable
depression. Under these "normal" conditions, the capital invested
in any given industrial venture is turned over within a certain, approximately definite, length of time. The length of time occupied by the turnover may vary from one establishment to another, but in any given case the length of the turnover is one of the important factors that determine the chances of gain for the business concern in question. Indeed, if the general conditions of the trade and of the market are given, the two factors which determine the status and value of a given sound concern, as seen from the business man's standpoint, are the magnitude of the turnover and the length of time it occupies.
The business man's object is to get the largest aggregate
gain from his business. It is manifestly for his interest, as far
as may be, to shorten the process out of which his earnings are
drawn,(1*) or, in other words, to shorten the period in which he
turns over his capital. If the turnover consumes less than the
time ordinarily allowed in the line of industry in which he is
engaged, he gains more than the current rate of profits in that
line of business, other things equal; whereas he loses if the
turnover takes more than the normal time. This fact is forcibly
expressed in the maxim, "Small profits and quick returns." There
are two chief means of shortening the interval of the turnover, currently resorted to in industrial business. The first is the adoption of more efficient, time-saving industrial processes. Improvements of industrial plant and industrial processes having this in view are gaining in importance in the later developments of business, since a closer attention is now given to the time element in investments, and great advances have been made in this direction.(2*) A second expedient for accelerating the rate of turnover is the competitive pushing of sales, through larger and more urgent advertising and the like. It is needless to say that this means of accelerating business also receives due attention at the hands of modern business men.
But the magnitude of the turnover, "the volume of business," is of no less consequence than its rapidity. It is, of course, a trite commonplace that the earnings of any industrial business are a joint function of the rate of turnover and the volume of business.(3*) The business man may reach his end of increased earnings by either the one or the other expedient, and he commonly has resource to both if he can. His means of increasing the magnitude of the turnover is a resort to credit and a close husbanding of his assets. He is under a constant incentive to increase his liabilities and to discount his bills receivable. Indebtedness in this way comes to serve much the same purpose, as regards the rate of earnings, as does a time-saving improvement in the processes of industry.(4*) The effect of the use of credit on the part of a business man so placed is much the same as if his capital had been turned over a greater number of times in the year. It is accordingly to his interest to extend his credit as far as his standing and the state of the market will admit.(5*)