due to the previous one. Let us now introduce credit into the system as outlined above.

It is evident that the farmer who buys the farm machinery is the ultimate demander of the raw materials purchased by the manufacturer, and of course of the finished machines handled by the wholesaler and retailer respectively. In final analysis the farmer's cash pays for the labor of the workers in the mines of iron and coal. Or, traveling around the circuit in the opposite direction, it is the laborer's cash that really pays for crops of the farmer that have been produced by the farm machinery. Without credit, however, it is impossible for the precise cash paid by the farmer to the retailer to be used by the latter in paying the wholesaler and so on up to the producer of the raw materials. In introducing credit into this system it will be necessary to assume for the moment a situation that does not represent the actual state of affairs. The corrective will be given in the paragraph following.

Let us assume that the producer of raw materials possesses enough to produce $10,000 worth of raw materials, paying his laborers in advance. Now let us assume he sells these materials to the manufacturer on twelve months' time, that is, he agrees to wait twelve months for his pay. The manufacturer in the course of three months converts these raw materials into finished machinery and sells the machines on nine months' time to the wholesaler. In a month the wholesaler disposes of the machinery, letting the retailer have eight months in which to pay. In another month the retailer sells the machines to a farmer, agreeing to wait seven months. Four months later the farmer sells his crops on three months' time to a local dealer, who sells them in a month to a commission merchant on two months' time; the commission merchant in turn selling on one month's time to a retail store; and the retailer disposes of them within a month to the laborers who work in the mines for cash received by them for producing raw materials. Cash would thus be paid to the retailer of farm produce just twelve months from the date of the first sale of the raw materials; and if this cash should be passed on promptly through the hands of the commission merchant, local dealer, farmer, retailer, wholesaler and manufacturer to the original producer, it can liquidate all the obligations as per schedule.

In actual practice, however, twelve months would be a long time for the producer to wait for his payment. Similarly the periods of nine, eight and seven months would be too long for the others to wait; for further production would be more or less halted meanwhile. In practice, therefore, credit extensions are for much shorter periods, usually from one to four months, whether it be the pro

ducer of raw materials, the manufacturer, or the middlemen. How is this made possible?

The manufacturer, for instance, may give his note to the producer for three months, and pay as soon as he sells to the wholesaler. The question now is, where does the wholesaler get the funds with which to pay; does he not have to wait until the retailer has disposed of the goods? This is where the banks come to the assistance of commerce. The wholesaler sells to the retailer on time, but instead of delaying his payment to the manufacturer, he procures a loan from his bank, giving as security therefor the notes received from the retailer. With this loan the wholesaler may pay the manufacturer at once. The loan from the bank is repaid when the retailer settles with the wholesaler. The bank therefore undertakes the waiting instead of the dealer.

In the foregoing illustration it was the wholesaler who procured the loan from the bank. It may in fact, however, be any one or several in the chain of buyers and sellers. The manufacturer, for instance, instead of asking the wholesaler to pay cash could accept a promissory note, and then sell this note to a bank for cash, that is, have it discounted. Or the retailer might borrow from a bank and pay cash to the wholesaler. Similarly, on the other side of the circle, the commission merchant may pay cash to the local dealer, borrowing from a bank for the purpose; and the retailer of the foodstuffs may sell to his customers on credit, and borrow from a bank while waiting for his returns. It is quite immaterial which party procures the assistance of the banks; though in practice it usually becomes the custom for only certain ones in the chain to do so. In this country it is usually the manufacturers and the commission merchants who pay cash.

The commercial structure which we have thus outlined is seen to be very closely interrelated; and it is because of this interdependence of factors that a "credit breakdown" has such far-reaching consequences. The credit circle cannot be disrupted at any point without more or less seriously disrupting the entire system. Suppose, for instance, that a long drouth or heavy rains ruin the agricultural produce and render it impossible for the farmer to pay the retailer as promised. This affects the retailer's ability to pay the wholesaler, and in turn the wholesaler's ability to pay the manufacturer, or his bank, and so on around the entire circle. Or suppose a strike in the manufacturing establishment should prevent the manufacturer from filling his selling orders. It becomes impossible for him to pay the producer on time; and the latter in turn becomes unable to meet his obligations as they become due. The halting of the manufacturing process may compel the producer to restrict his

output of raw materials, and hence discharge laborers. This affects the sales of the retailer of the farm produce, and hence his ability to pay the commission merchant, and so on around the circle. Numerous other examples of this sort might obviously be given.

Whenever there is a break in the delicate structure at any point, there is always an attempt to stop the gap by calling upon the banks for assistance. Whoever finds himself unable to pay on time rushes to his banker for a loan. Indeed if there is but a well-grounded fear that difficulties are likely to come, dealers often go at once to the banks for loans in anticipation of trouble to come. Without going into an analysis of the responsibility thus placed upon the banking institutions, it should be emphasized that the success with which a community may pass through a period of disrupted credit operations depends upon the ability of the banks to expand their own credit. sufficiently to tide the commercial world over the emergency.

99. The "Planlessness" of Production*

BY WESLEY C. MITCHELL

With technical experts to guide the making of goods, business experts to guide the making of money, lenders to review all plans requiring large investments, and government to care for the public welfare, it may seem that the money economy provides a staff and a procedure adequate to the task of directing economic activity, vast and difficult though that task may be. This impression is strengthened by observing that each class of business leaders is spurred to efficiency and deterred from recklessness by danger of pecuniary loss. The engineer who blunders is discharged, the enterpriser who blunders goes into bankruptcy, the lender who blunders loses his money. Thus the guides who misdirect the industrial army are always being eliminated. On the other hand, those who succeed are. constantly being promoted to posts of wider power.

With this powerful stimulus of individual efficiency, the money economy unites an opportunity for co-operation on a grand scale. By paying money prices, the leaders can enlist the aid of laborers. who contribute work of all kinds, of expert advisers who contribute special knowledge, of landlords who contribute the uses of their property, and of investors who contribute the uses of their funds. And all these classes can be made to work in disciplined order toward the execution of a single plan.

The union between encouragement of individual efficiency and opportunity for wide co-operation is the great merit of the money

'Adapted from Business Cycles, 37-40. Copyright by the author (1913). Published by the University of California Press.

economy. It provides a basis for what is unquestionably the best system for directing economic activity which men have yet practiced. Nevertheless, the system has serious limitations.

1. The money economy provides for effective co-ordination of effort within each business enterprise, but not for effective co-ordination of effort among independent enterprises.

The two schemes differ in almost all respects. Co-ordination within the enterprise is the result of careful planning by experts; co-ordination among independent enterprises cannot be said to be planned at all; rather is it the unplanned result of natural selection in a struggle for business survival. Co-ordination within an enterprise has a definite end-the making of profits; co-ordination among independent enterprises has no definite end, aside from the conflicting aims of the several units. Co-ordination within an enterprise is maintained by a single authority possessed of power to carry its plans into effect; co-ordination among independent enterprises depends upon many different authorities contending with each other, and without power to enforce a common program except so far as one can persuade or coerce others. As a result of these conditions co-ordination within an enterprise is characterized by economy of effort; co-ordination among independent enterprises by waste.

In detail, then, economic activity is planned and directed with skill; but in the large there is neither general plan nor general direction. The charge that "capitalistic production is planless" therefore contains both an important element of truth and a large element of error. Civilized nations have not yet developed sufficient intelligence to make systematic plans for the sustenance of their populations; they continue to rely upon the badly co-ordinated efforts of private initiative. Marked progress has been made, however, in the skill with which the latter efforts are directed.

2. But the managerial skill of business enterprises is devoted to money-making. If the test of efficiency in the direction of economic activity be that of determining what needs are most important for the common welfare and then satisfying them in the most economical manner, the present system is subject to a further criticism. For, in nations where a few have incomes sufficient to gratify trifling whims and where many cannot buy things necessary to maintain their own efficiency, it can hardly be argued that the goods which pay best are most needed. It is no fault of business leaders that they take prospective profits as their guide. They are compelled to do so; for the men who mix too much philanthropy with business soon cease to be leaders. But a system of economic organization which forces men to accept so artificial an aim as

pecuniary profit cannot guide their efforts with certainty toward their own ideals of public welfare.

3. Even from the point of view of business, prospective profit is an uncertain flickering light. Profits depend upon two variables, on margins between selling and buying prices, and on the volume of trade. These are related to each other in unstable fashion and each subject to perturbations from a multitude of unpredictable causes. That the system of prices has its own order is clear; but it is not less clear that the order fails to afford certainty of business success. Men of long experience and proved sagacity often find their calculations upset by conjunctures which they could not anticipate. Thus the money economy confuses the guidance of economic activity by interjecting a large element of chance into every business venture.

4. The hazards to be assumed grow greater with the extent of the market and with the time that elapses between the initiation and the fruition of an enterprise. But the progress of industrial technique is steadily widening markets, and requiring heavier investments of capital for future production. Hence the share in economic leadership that falls to lenders, that of receiving the various chances offered them for investment, presents increasing difficulties. And a large proportion of these investors, particularly the lenders on long time, lack the capacity and the training for the successful performance of such work.

These defects in the system of guiding economic activity and the bewildering complexity of the task itself allow the processes of economic life to fall into those recurrent disorders which constitute crises and depressions.

B. THE ECONOMIC CYCLE

100. The Periodicity of Commercial Crises"

BY J. S. NICHOLSON

Attention has often been called to the periodicity of crisis. After the occurrence of a crisis, there is, in general, a period of depression with restricted confidence and want of enterprise. That the depression is real, in the sense of affecting the producing and consuming powers of the people, is shown by various kinds of statistics. There is, in general, a falling off in the employment of labor and an increase in pauperism; as regards capital, falling profits are shown by the income tax returns, and the contraction of enterprise

"Adapted from Principles of Political Economy, II, 211-214 (1893).