capitalization is to afford a stable basis for credit; and when an obvious discrepancy arises between the outcome given by the two ratings, then a rerating will be had in which the rating on the basis of eaming-capacity must be accepted as definitive, since earnings are the ground fact about which all business transactions turn and to which all business enterprise converges. A manifest discrepancy, presently arises in this way between the aggregate nominal capital (capital plus loans) engaged in business, on the one hand, and the actual rate of eaming-capacity of this business capital, on the other hand ; and when this discrepancy has become patent a period of liquidation
To give a readier view of the part played by loan credit in this discrepancy between the business capital and the earning-capacity of industrial concerns, it will be in place to indicate more summarCy what are the factors at play.
The earnings of the business community, taken as a whole, are derived from the marketable output of goods and services turned out by the industrial process — disregarding such earnings as accrue to one concern merely at the cost of another. The effective industrial capital, from the use of which this output, and therefore these earnings, arise, is the aggregate of capitalized material items ^tually engaged in industry. The business
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