tive ability to meet financial obligations. Profits are made by connected series of purchases and sales. Accordingly the margins between the prices at which goods can be bought and sold are the fundamental condition of business prosperity. Just as the everrecurring changes within the system of prices affect business prosperity and through it national welfare, so do changes in national welfare and business prosperity react upon prices. A period of business expansion causes an interminable series of readjustments in the prices of various goods. These readjustments in turn alter the pecuniary prospects of the business enterprisers which buy or sell the commodities affected, and thereby start new changes in business prosperity. With the latter changes the process begins anew. Prices once more undergo an uneven readjustment, prospects of profit become brighter or darker, business prosperity waxes or wanes, prices feel the reflex influence of the new business situation---and so on without end.

97. The Interdependence of Prices2

BY WESLEY C. MITCHELL

The prices ruling at any given time for an infinite variety of commodities, services, and rights which are being bought and sold constitute a system.

The prices which retail merchants charge for consumers' commodities afford the best starting-point for a survey of this system. These prices are loosely connected with each other; for an advance in the price of any commodity usually creates an increased demand for other commodities which can be used as substitutes, and thus favors an advance in the price of the substitutes. They are, however, more closely related to the prices for the same goods which shopkeepers pay to wholesale merchants, and the latter to manufacturers. There is, of course, wide diversity between the number of members and in the margins between the successive prices in the series. These margins are usually wider in retail than in wholesale trade; wider on perishable goods than on durable staples; wider when the manufacturer sells directly to the consumer than when merchants intervene; wider when a monopolist can fix prices in his own favor, etc. But these diversities are themselves measurably regular, so that the margins between the successive prices in the series for each kind of commodities form a tolerable business basis

2Adapted from Business Cycles, 27-32. Copyright by the author (1913). Published by the University of California Press.

for making profits out of the process of supplying the community with goods.

The business men engaged in squeezing money profits out of these price-margins are seldom able to keep the whole difference between buying and selling prices. From retailers to manufacturers they require various commodities, services, and rights for the efficient control of their operations. For such producers' goods they have to pay out prices which eat into the profit-margins of the goods in which they deal. The most important classes of producers' goods are raw materials, buildings and machinery, labor, loans, leases, transportation, insurance, and advertising. It is difficult in many of these cases to connect directly the prices which figure as costs with the margins upon which particular commodities change hands. For the cost prices are usually paid for the pecuniary advantage of the enterprise as a whole, and the accruing benefits extend to many transactions and cover a long time. The like is true of manufac

turers.

With the exception of labor, producers' goods are provided, like consumers' goods, by business enterprises operating on the basis of margins between buying and selling prices. Hence the price of a given goods is related not only to the prices of the consumers' goods in the production of which it is used, but also to the prices of the various other producers' goods employed in its own manufacture. Thus the prices of producers' goods form the beginnings of new series of relationships which run backward with countless ramifications and never reach definite stopping-points. Even the prices of raw materials in the hands of the ultimate producers are related intimately to the prices of the labor, current supplies, machinery, buildings, land, loans, etc., which the farmers, miners, etc., employ.

The price of labor may seem to bring the series to a definite stop at least at one point. For in most cases the laborer does not have a business attitude toward the production of his own energy. But the price which the laborer can command is connected with the prices of the consumers' goods which established habit has made into a standard of living. At this point, therefore, analysis of the interrelations between prices brings us, not to a full stop, but back to our starting-point, the prices of consumers' goods.

We must also take account of the prices of business enterprises themselves. Occasionally established business enterprises are sold outright. But the most important transactions of this class are stock-exchange dealings. That the prices of whole business enterprises or of shares in them are intimately related to the prices which have been discussed is clear; for these prices depend primarily upon

present and prospective profits, and the latter upon price-margins and the volume of business transacted.

There remains for consideration the prices paid for heterogeneous personal services. These include domestic service, medical attendance, instruction, many forms of amusement, etc. The furnishing of such services contrasts with business traffic in consumers' goods, loans, transportation, etc. For systematic organization has not been developed to so high a point, business motives do not have such unrestricted scope, and the wares are not standardized in equal measure. Moreover, the prices people are willing to pay are based rather on personal needs and income than on calculated chances of profit. The prices of these services therefore form the most loosely organized and irregular division of the system of prices.

This classification of prices assists in seeing the relations which bind all prices together and make them a system. Many price relations are already sufficiently clear, but several lines of relationship should be indicated more definitely.

On the side of demand almost every good has its possible substitutes. Through the continual shifting of demand changes in the price of one commodity are often communicated to the prices. of its substitutes, from the latter to the prices of their substitutes, and so on. An initial change, however, usually becomes smaller as it spreads out in widening circles.

2. Similarily, on the side of supply, almost every good has genetic relationships with other goods, made of the same materials, or supplied by the same set of enterprisers. Particularly important are the genetic relationships based upon the use of the same producers' goods in many lines of trade. Floating capital, transportation, labor, machinery, etc., enter into the cost of most commodities. Accordingly a changed price established for one of these common producers' goods in any important use may extend to a great diversity of other uses, and produce further price disturbances.

3. Closely connected with this genetic relationship through common producers' goods is the relationship through business competition, both actual and potential. In so far as effective competition exists, a state of price-margins which makes any one trade more or less profitable than other trades in the same market cannot long maintain itself.

4. Present prices are affected by prices of the recent past and the anticipated prices of the near future. Indeed, present prices are largely determined by past bargains, with established time contracts. Thus the price system has no definable limits in time. No analysis

can get back to the ultimate term in the endless series of bargains which helped to make the prices of the present.

5. Nor has the series of prices any logical beginning or end. At whatever point analysis may start to follow the interlocking links, to that point analysis will come if it proceeds far enough. The system of prices is an endless chain.

Prices, then form a highly complex system of many parts connected with each other in diverse ways, a system infinitely flexible in detail, yet stable in the essential balance of its interrelations, a system like a living organism in its ability to recover from the serious disorders into which it periodically falls.

The most significant thing about it is the function it performs in the economic life of nations. It serves as a social mechanism for carrying on the processes of providing goods. For prices are the means which make possible the elaborate exchanges, and the consequent specialization which characterizes the modern world. They are the source from which family income is derived, and the means by which goods are obtained for family consumption; for both income and cost of living-the two jaws of the vise in which the modern family is squeezed-are aggregates of prices. Prices also render possible the rational direction of economic activity by accounting, for accounting is based upon the principle of representing all the heterogeneous commodities, services, and rights with which a business enterprise is concerned in terms of money price. Most important of all, the margins between different prices within the system hold out that hope of pecuniary profit which is the motive power that drives our business world.

98. The Sensitive Mechanism of Credit3

BY HAROLD G. MOULTON

It has become almost a trite saying that credit is the very lifeblood of commerce and that without its wonderful assistance the enormous business of the modern world would be quite impossible. It is a commonplace, also, that the credit structure is a very uncertain mechanism, one that periodically expands to a breaking-point and involves hundreds of businesses in financial ruin, and indirectly demoralizes the commerce of an entire country. The precise manner in which this credit structure is built up, however, with its intricate and complicated interrelations, is not usually clearly understood. It is the purpose of the following analysis to trace these intricate

Adapted from an article with the foregoing caption in a volume as yet unpublished.

relations, and show the complicated interdependences in the fabric of commercial credit.

Commerce relates to the movement of goods from the hands of those who perform the first operation in production to their final resting-place with the ultimate consumers. Commercial credit connects itself, therefore, with the various purchases and sales that are made in the slow process of marketing commodities. The nature and place of credit in the marketing process may perhaps best be made clear by assuming first a society that does business on a cash. basis only.

To illustrate the process let us begin with some raw materials in the form of iron ore and coal which are to be manufactured into farm machinery for sale to farmers. These raw materials normally pass through the hands of the following classes of business men: (1) the manufacturer of machinery; (2) the wholesale dealer; (3) the retail merchant from whom they are purchased by the farmer. In the absence of credit the producer of raw materials would have to possess enough capital to defray the cost of producing these materials. He would sell them for cash to the manufacturer, who pays for them with ready money. In turn, the manufacturer, after having converted the materials into finished machines, sells them in a new form to the wholesale dealer, who pays for them out of funds accumulated for the purpose. The wholesaler next passes them on to the retailer for cash; and the retailer disposes of them to the farmer for cash. In each case cash accumulated and in hand ready for payment is the significant feature. We have thus far, however, but half completed the commercial circle.

The farmer does not purchase the machinery as an end in itself. With it he produces crops for sale. He sells his annual produce to a local dealer for cash; the local dealer sells these products to the commission merchant for cash; the commission merchant passes them on for cash to a retail store; and the storekeeper sells them for cash to his customers, who happen to be, let us assume, the laborers in the mines of iron and coal who were the original producers of the raw materials that went to the making of farm machinery. Thus we have the complete round of production.

In the foregoing analysis we have assumed each sale to be for cash; no one waits for his payments, and all keep the slate clear as they go. With such a method there is little danger of a general breakdown. If a purchaser has not the cash with which to pay for goods, he is refused the sale. Hence the seller is never dependent upon the future solvency of his purchaser. Sales may be restricted by a slackening of the industrial process; but there are never maturing obligations to meet, and there is never a chain of failures each