We have already shown that money, bank deposits, bonds, and various other forms of negotiable paper are all generically the same, namely, debt.  While in 1933 the total long and short-term debts of the United States were estimated to have been 238 billion dollars, only about 9 billion dollars of this was represented by actual money in the form of gold, coins of various metals, U.S.  currency, and various kinds of bank notes.  Consequently, in what follows we shall use the term ‘money’ merely to signify a circulating medium indiscriminately as to whether this medium be coin, currency, bank checks, or any other form of negotiable paper.

For our purposes, the significant thing about money in this broader sense is that while it has the property of being created out of nothing or contracted into nothing in a manner quite unlike the physical operation of our industrial apparatus, it constitutes the mechanism of control over the latter.  The first aspect of money, or debt, we have already discussed; it remains now to consider the manner in which it operates as an industrial control device.

The Flow of Goods.  This latter aspect can be seen very simply when one considers the manner in which goods are made to move from the productive processes into consumption.  All consumable goods have their original source in the earth.  From the earth matter is moved by mining, by agriculture, or by some other process into some form of manufacture.  From the factory the finished product moves to the wholesaler, thence to the retailer, and finally to the consumer.

After consumption, the matter of which the ‘consumed’ goods are composed is returned in part to the earth in the form of garbage, ash, and other waste products; and, in some cases it is salvaged and returned to the factory as scrap metal, rags, and wastepaper, to be used over again.

The Mechanism.  Consider how these finished products move from the retailer to the consumer.  This is where money enters the picture.  The consumer hands the retailer, say, a five-dollar bill, and receives from the retailer a pair of shoes.  This illustrates the process.  In every form of consumable goods and services the consumer hands money to the retailer, and goods and services, dollar for dollar, move to or are placed at the service of the consumer.

If the consumers spend in this manner 1 billion dollars per day, then 1 billion dollars’ worth of goods and services are moved to the consumers, and if this rate be maintained the factories must produce goods at this rate, and industry booms.  If, on the other hand, the consumers only spend 100 million dollars per week, or one-tenth of the previous amount, assuming prices to be the same in both cases, industrial production will be only one-tenth of what it was before, or by comparison, almost a complete shut-down.

This simple mechanism under a Price System method of industrial control, determines completely what industry shall do.  If the money flows freely from the hands of the consumer to the hands of the retailer, goods flow freely in the opposite direction, and industry operates; if the money merely trickles from the hands of the consumer to the hands of the retailer, goods move in the opposite direction at a correspondingly small rate and industry shuts down.  It remains to be seen what, determines this rate of monetary flow.

The Process.  First, let us consider what happens to the money after the retailer gets it.  The retailer must pay his help and a part of the money is used for this.  He must also pay his rent, and a part goes for this.  He has, besides, his light bill, telephone bill, and various other miscellaneous charges.  He may have borrowed money from the bank or sold some bonds to obtain the capital with which to conduct his business, in which case a part of what he receives would have to be used to pay the interest.  Finally, he must buy goods from the wholesaler to replace those he sold, and a greater part of the money which he receives goes for this.  If, after these bills are paid, any money is left over this constitutes profit, and goes to augment his personal income, if the retailer be an individual; or, if the retailer be a corporation, these profits may be disbursed as dividends to the stockholders.

Exactly the same relationship that we have described between the consumer and the retailer exists between the retailer and the wholesaler, and between the wholesaler and the manufacturer.  In each of these cases goods move from the wholesaler to the retailer when, and only when, money in the broader sense that we have defined, moves from the retailer to the wholesaler, and from the wholesaler to the manufacturer.  Like the retailer, the wholesaler must pay his help, his landlord, his interest, light, telephone, and miscellaneous bills.  Any surplus above these can be disbursed as profits.  The manufacturer does an exactly similar thing, for he must pay all these bills, as well as purchase his raw materials.  The raw materials, as we have pointed out, are derived originally from the earth, so that the last payment made in this series is that which goes to the farmer for his produce, or, as royalties, to the owners of mineral resources.

Now, let us review this whole process.  Goods move in one direction, from the earth to the consumer, and back to the earth again; money moves from the consumer to the retailer, the wholesaler, the manufacturer, and finally the landowner.  But this monetary stream is being tapped at each section of its length, and being fed back as wages, rent, interest, profits, etc., and becomes the income of various individuals, who are themselves consumers.

By the time this monetary stream reaches the ultimate landowner, who is the last person in the physical flow line, every cent that was originally paid to the retailer has been in this manner accounted for.  Thus, if a million dollars passes from the consumer to the retailer, a million dollars’ worth of goods will be produced and consumed, and this same million dollars in the form of wages and salaries, rent, interest, profits, royalties, etc., will be paid out to individuals who are consumers, and will accordingly augment their incomes by the amount of one million dollars.  Thus, the sale of one million dollars’ worth of goods in this manner ultimately provides consumers with one million dollars, with which to buy another million dollars’ worth of goods.  That is, provided that none of the million dollars originally spent is retained in any manner.

Saving.  Let us suppose, however, that somewhere along the route a part of this money passes into the hands of corporations, and that these corporations are making a profit, only part of which they pay out as dividends, the remainder being held as corporation surplus.  If, in this manner, out of each million dollars paid in by the consumer, 100,000 dollars was held out by the corporation as surplus, then only 900,000 dollars would be returned to the consumer.  Consequently, the second time around the consumer would only be able to buy nine tenths as much goods as he bought the first time.  Industrial operations would, accordingly, only be nine-tenths as great.  This process would continue with industry shutting down one-tenth of its previous production for each time the money made its complete circuit until ultimately complete industrial paralysis would result.  This, of course, assumes that the money which was saved by corporations was locked up in a vault or hoarded.

The same result would occur if individuals, thinking that they might need some money for illness or old age, instead of spending all they received, should decide to lock a part of it up and keep it.  To the extent that this was done goods would not be bought, and industry would not operate.  Thus, we conclude that if prices remain the same, and if either corporations or individuals save by withholding from circulation a part of the money which they receive, the ultimate result will be industrial paralysis.

We must consider, however, the fact that there are various ways other than hoarding by which corporations and individuals can save.  If a corporation wishes to manufacture and sell more goods than the current purchasing power is able to buy, they may do so by extending credit to their purchasers or selling on the installment plan.  In this manner they may pay out all the money in the form of cash which they receive and still show a book profit in the form of accounts receivable.

Investment.  Another way a corporation can save without hoarding is to take the profits which are not disbursed as dividends and build a new plant.  In this manner all the money otherwise withheld is fed back through the various channels of wages, salaries, etc., and the corporation is the possessor of a new plant.

In an exactly similar manner individuals may invest their savings in corporate stock, and thus help build new plants, or they may put them in savings banks or take out life insurance, in which case these latter agencies invest the funds in new productive equipment.  Thus, we see that if savings, whether corporate or individual, are reinvested in physical equipment they ultimately return to become the purchasing power of individuals, but in the process the country’s capacity to produce has been increased.

That this is an endless process can be seen when it is considered that in the following year the new equipment will begin to produce, and then the purchasing power which heretofore has been sufficient to buy only the products of the existing plant will be inadequate to purchase the combined output of the old plus the new plant if prices remain the same.  This difficulty can only be met (provided prices are not lowered) if the savings continue to be reinvested in the new equipment—so that at all times the money which is being paid out to consumers through the construction of new plants is sufficient to make up the deficit in consumer purchasing power caused by money being held out by individual and corporate savings.

Results of the Process.  This, it will readily be seen, is a compound interest type of thing.  Under the hazards that exist in a Price System it is imperative that both individuals and corporations save.  If they save by hoarding, they shut the existing plant down; if they save by building new plants, they have a process which can only work provided the plant be continuously expanded and at an accelerating rate.  That the latter policy is impossible to continue indefinitely simple physical considerations will show.  As we have pointed out previously, no physical process can continue to grow at a compound interest rate for more than a limited period of time.  The limitations of our natural resources on one hand and of our physical ability to consume on the other both require that this be so.


  • Theory of Business Enterprise, Veblen.
  • Profits, Foster and Catchings (Out of print).