Sofarasthishappens，thecreditoperationsinquestionandtheuseoftheborrowedfundsmayincreaseordiminishtheoutputofindustryatlarge，andsomayaffecttheaggregateearningsofthebusinesscommunity。But，apartfromsuchincidentalshiftingofthemanagementofindustrytomorecompetentorlesscompetenthands，thiscompetitiveuseofborrowedfundshasnoaggregateeffectuponearningsorupontheindustrialoutput。
Thecurrentorreasonablerateofprofitsis，roughly，therateofprofitsatwhichbusinessmenarecontenttoemploytheactualcapitalwhichtheyhaveinhand。6*Ageneralresorttocreditextensionasanauxiliarytothecapitalinhandresults，onthewhole，inacompetitiveloweringoftherateofprofits，computedoncapitalpluscredit，tosuchapointaswouldnotbeattractivetoabusinessmanwhomustconfinehimselftotheemploymentofcapitalwithoutcreditextension。Onanaverage，itmaybesaid，theaggregateearningsoftheaggregatecapitalwithcreditextensionarebutslightlygreaterthantheaggregateearningsofthesamecapitalwithoutcreditextensionwouldbeintheabsenceofacompetitiveuseofcreditextension。Butundermodernconditionsbusinesscannotprofitablybedonebyanyoneofthecompetitorswithoutthecustomaryresorttocredit。
Withoutthecustomaryresorttocredita“reasonable“returncouldnotbeobtainedontheinvestment。
Totheextenttowhichthecompetitiverecoursetocreditisofthecharacterhereindicated-totheextenttowhichitisacompetitivebiddingforfundsbetweencompetentmanagers-itmaybesaidthat，takenintheaggregate，thefundssoaddedtobusinesscapitalrepresentnomaterialcapitalor“productiongoods。“Theyarebusinesscapital，only。theyswellthevolumeofbusiness，ascountedintermsofprice，etc。，buttheydonotdirectlyswellthevolumeofindustry，sincetheydonotaddtotheaggregatematerialapparatusofindustry，oralterthecharacteroftheprocessesemployed，orenhancethedegreeofefficiencywithwhichindustryismanaged。
The“buoyancy“whichaspeculativeinflationofvaluesgivestoindustrialbusinessmayindirectlyincreasethematerialoutputofindustrybyenhancingtheintensitywithwhichtheindustrialprocessiscarriedonundertheaddedstimulus；butapartfromthispsychologicaleffecttheexpansionofbusinesscapitalthroughcreditextensionhasnoaggregateindustrialeffect。Thissecondaryeffectofcreditinflationmaybeveryconsiderableandisalwayspresentinbrisktimes。Itiscommonlyobviousenoughtobeaccountedthechiefcharacteristicofaperiodof“prosperity。“Foratheoryofindustrythisindirecteffectofcreditinflationwouldbeitsmaincharacteristic，butforatheoryofbusinessitoccupiestheplaceofacorollaryonly。
Totheviewsetforthabove，-thatborrowedfundsdonotincreasetheaggregateindustrialequipment，-theobjectionmaypresentitselfthatallfundsborrowedrepresentpropertyownedbysomeonethelenderorhiscreditors，andtransferred，inusufruct，bytheloantransactiontotheborrower；andthatthesefundscan，therefore，beconvertedtoproductiveuses，likeanyotherfunds，bydrawingintotheindustrialprocess，directlyorindirectly，thematerialitemsofwealthwhosefluentformthesefundsare。7*Theobjectionfailsattwopoints:awhiletheloansmaybecoveredbypropertyheldbythelender，theyarenotfullycoveredbypropertywhichisnotalreadyotherwiseengaged；
andevenifsuchwerethecase，itwouldbnotfollowthattheuseofthesefundswouldincreasethetechnicalmaterialoutfitofindustry。
Astothefirstpointa:Loansmadebythefinancialhousesinthewayofdepositsorotheradvancesoncollateralareonlytoafractionalextentcoveredbyliquidassets；8*andanythingbutliquidassetsisevidentlybesidethepointofthepresentquestion。Aninconsiderablefractionoftheseloansisrepresentedbyliquidassets。Thegreaterpartoftheadvancesmadebybankinghouses，forinstance，restonthelender’spresumptiveabilitytopayeventually，ondemandoratmaturity，anyclaimsthatmayinthecourseofbusinessbepresentedagainstthelenderonaccountoftheadvancesmadebyhim。Itisabusinesstruismthatnobankinghousecouldatamomentmeetallitsoutstandingobligations。9*Anecessarysourceofbankingprofits，e。g。，isalargeexcessofthevolumeofbusinessoverreserves。
Astob:Anothergreatpartofthebasisofsuchloansismadeupofinvestedfundsandcollateralheldbythelender。
Theseatthesametimearemuchofthebasisonwhichreststhelender’spresumptiveabilitytopayclaimspresented。Buttheseinvestments，inindustryorrealestate，ininterest-bearingsecuritiesandcollateralofwhateverdescription，representfutureincomeofthelender’sdebtorsas，e。g。，governmentandmunicipalsecurities，orpropertywhichisalreadyeitherengagedintheindustrialprocessortiedupinformsofwealthas，e。g。，realestatewhichdonotlendthemselvestoindustrialuses。Loansobtainedonpropertywhichhasnopresentindustrialuse，whichcannotinitspresentformorunderexistingcircumstancesbeemployedintheprocessesofindustryas，e。g。，speculativerealestate，orloansonpropertywhichisalreadyengagedintheindustrialprocessas，e。g。，stocks，industrialplant，goodsonhand，realestateinuse，10*
represent，forthepurposeinhand，nothingmoresubstantialthanafictitiousduplicationofmaterialitemsthatcannotbedrawnintotheindustrialprocess。Thereforesuchloanscannot，atleastnotdirectly，swelltheaggregateindustrialequipmentorenhancetheaggregateproductivityofindustry；fortheitemswhichhereserveascollateralarealreadypreviouslyinuseinindustrytotheextenttowhichtheycanbeused。Propertyofthesekinds-whatisalreadyinuseinindustryandwhatisnotofuseforindustrialpurposes-maybe“coinedintomeansofpayment，“andsomaybemadetoserveasadditionalpecuniarybusinesscapital，butsuchpropertyismechanicallyincapableofservingasadditionalmaterialindustrialcapital。Toaveryconsiderableextentthefundsinvolvedintheseloans，therefore，haveonlyapecuniarybusinessexistence，notamaterialindustrialone；and，sofarasthatistrue，theyrepresent，intheaggregate，onlyfictitiousindustrialequipment。Evensuchinconsiderableportionofthem，however，asrepresentsmetallicreservesalsoaddsnothingtotheeffectivematerialapparatusofindustry；sincemoneyassuch，whethermetallicorpromissory，isofnodirectindustrialeffect；asisevidentfromthewell-knownfactthattheabsolutequantityofthepreciousmetalsinuseisamatterofnoconsequencetotheconductofeitherbusinessorindustry，solongasthequantityneitherincreasesnordecreasesbyanappreciableamount。Nummusnummumnonparit。
Sothatalladvancesmadebybankinghousesorbyothercreditorsinalikecase，-whethertheadvancesaremadeonmortgage，collateralorpersonalnotes，intheformofdeposits，noteissues，Or。whatnot；whethertheyaretakentorepresenttheitemsofpropertycoveredbythecollateral，thecashreservesofthebanks，orthegeneralsolvencyofthecreditorordebtor，-allthese“advances“gotoincreasethe“capital“ofwhichbusinessmenhavethedisposal；butforthematerialpurposesofindustry，takenintheaggregate，theyarepurelyfictitiousitems。11*Cashloanssuchassavings-bankdeposits12*andthelikebelonginthesamecategory。Alltheseadvancesaffordtheborroweradifferentialadvantageinbiddingagainstotherbusinessmenforthecontrolanduseofindustrialprocessesandmaterials，theyaffordhimadifferentialadvantageinthedistributionofthematerialmeansofindustry；buttheyconstitutenoaggregateadditiontothematerialmeansofindustryatlarge。Fundsofwhatevercharacterareapecuniaryfact，notanindustrialone；theyservethedistributionofthecontrolofindustryonly，notitsmateriallyproductivework。
Loancreditinexcessofwhatmayservetotransferthemanagementofindustrialmaterialsfromtheownertoamorecompetentuser-thatistosay，insofarasitisnot，ineffect，ofthenatureofaleaseofindustrialplant-serves，onthewhole，nottoincreasethequantityofthematerialmeansofindustrynor，directly，toenhancetheeffectivenessoftheiruse；but，takenintheaggregate，itservesonlytowidenthediscrepancybetweenbusinesscapitalandindustrialequipment。Solongastimesarebriskthisdiscrepancyordinarilygoesonwideningthroughaprogressiveextensionofcredit。Fundsobtainedoncreditareappliedtoextendthebusiness；competingbusinessmenbidupthematerialitemsofindustrialequipmentbytheuseoffundssoobtained；thevalueofthematerialitemsemployedinindustryadvances；theaggregateofvaluesemployedinagivenundertakingincreases，withorwithoutaphysicalincreaseoftheindustrialmaterialengaged；butsinceanadvanceofcreditrestsonthecollateralasexpressedintermsofvalue，anenhancedvalueofthepropertyaffordsabasisforafurtherextensionofcredit，andsoon。
Now，thebaselineofbusinesstransactionsisthemoneyvaluemarketorexchangevalue，priceoftheitemsinvolved，nottheirmaterialefficiency。Thevalueofthemoneyunitisbyconventionalusageheldtobeinvariable，andthelendersperforceproceedonthisassumption，solongastheyproceedatall。14*Consequently，anyincreaseoftheaggregatemoneyvaluesinvolvedinthecurrentindustrialbusinessenterpriseswillaffordabasisforanextensionofloans，indistinguishablefromanyotherblockofcapitalizedvalues，eveniftheincreaseofcapitalizedvaluesisduetocreditadvancespreviouslymadeonthefullcashvalueofthepropertyhypothecated，Theextensionofloansoncollateral，suchasstockandsimilarvaluesinvolvedinindustrialbusiness，hasthereforeinthenatureofthingsacumulativecharacter。Thiscumulativeextensionofcreditthroughtheenhancementofpricesgoeson，ifotherwiseundisturbed，solongasnoadversepricephenomenonobtrudesitselfwithsufficientforcetoconvictthiscumulativeenhancementofcapitalizedvaluesofimbecility。Theextensionofcreditproceedsontheputativestabilityofthemoneyvalueofthecapitalizedindustrialmaterial，whosemoneyvalueiscumulativelyaugmentedbythisextensionitself。Butthemoneyvalueofthecollateralisatthesametimethecapitalizedvalueoftheproperty，computedonthebasisofitspresumptiveearning-capacity。Thesetwomethodsofratingthevalueofcollateralmustapproximatelycoincide，ifthecapitalizationistoaffordastablebasisforcredit；andwhenanobviousdiscrepancyarisesbetweentheoutcomegivenbythetworatings，thenareratingwillbehadinwhichtheratingonthebasisofearning-capacitymustbeacceptedasdefinitive，sinceearningsarethegroundfactaboutwhichallbusinesstransactionsturnandtowhichallbusinessenterpriseconverges。Amanifestdiscrepancypresentlyarisesinthiswaybetweentheaggregatenominalcapitalcapitalplusloansengagedinbusiness，ontheonehand，andtheactualrateofearning-capacityofthisbusinesscapital，ontheotherhand；andwhenthisdiscrepancyhasbecomepatentaperiodofliquidationbegins。
Togiveareadierviewofthepartplayedbyloancreditinthisdiscrepancybetweenthebusinesscapitalandtheearning-capacityofindustrialconcerns，itwillbeinplacetoindicatemoresummarilywhatarethefactorsatplay。
Theearningsofthebusinesscommunity，takenasawhole，arederivedfromthemarketableoutputofgoodsandservicesturnedoutbytheindustrialprocess-disregardingsuchearningsasaccruetooneconcernmerelyatthecostofanother。Theeffectiveindustrialcapital，fromtheuseofwhichthisoutput，andthereforetheseearnings，arise，istheaggregateofcapitalizedmaterialitemsactuallyengagedinindustry。Thebusinesscapital，ontheotherhand，ismadeupofthiscapitalizedindustrialmaterialtakenasafundofvalues，plusgood-will，pluswhateverfundsareobtainedoncreditbyusingthiscapitalizedindustrialmaterialascollateral，plusfundsobtainedonother，non-industrial，propertyusedascollateral。
Throughthecompetitiveuseoffundsobtainedoncredit，asspokenofabove，thenominalvalueofthecapitalizedindustrialmaterialiscumulativelyaugmentedsoastomakeitapproximatelyequaltoitsoriginalcapitalizationpluswhateverfundsareobtainedoncreditofallkinds。Onthisbasisofanexpandedcollateralafurtherextensionofcredittakesplace，andthefundssoobtainedareincorporatedinthebusinesscapitalandturnedtothelikecompetitiveuse，andsoon。15*Capitalandearningsarecountedintermsofthemoneyunit。Countedintheseterms，theearningsindustrialoutputarealsoincreasedbytheprocessofiflationthoughcredit，sincethecompetitiveUseoffundsspokenofactstobiduppricesofwhateverproductsareusedinindustry，andofwhateverspeculativepropertyispresumedtohavesomeeventualindustrialuse。Butthenominalmagnitudevalueoftheearningsisnotincreasedinaslargearatioasthatofthebusinesscapital；sincethedemandwherebythevaluesoftheoutputareregulatedisnotaltogetherabusinessdemandforproductivegoods，butisingreatpart，andindeedinthelastresortmainly，reducibletoaconsumptivedemandforfinishedgoods。16*
Lookingatcreditextensionanditsuseforpurposesofcapitalasawhole，theoutcomewhichpresentsitselfmoststrikinglyataperiodofliquidationistheredistributionoftheownershipofindustrialpropertyincidenttotheliquidation。