THE THEORY OF MODERN WELFARE 223
What gives effect to this drawback for the business enterprises which have such fixed interest
OQCOTerod »ad »vftil&ble aa collateral on which ta float S new extensioii of credit. In the form of moitgage loan or intereBt-bearlng aecurity. Id the commoQ nia of bosiDus procedure tbis a?ai)able margin, between the current (higher) cftpitalised ^alue of tbe property (collateial) and the current (loner) capitalized value of the aecurlties resting upon It te promptly covered b; a fresb credit extenalon ; whether thb extension takes the set form of loan, bonds, preferred stock, and the like, or the less patent form of a larger volume of obligations in the way of contracts and the tike, — the result, as touches the securities and their basis, being that tbe same nominal volume of securities with tbe same aggregate interest charge rests on a (materially) smaller block ol the industrial equipment after this readjustment of capitalization la had than it did when the securities were placed. When depreasloD ensues, and the rate of earnings and Interest declines, the edective capitalization of the securities with a dxed rate of income is increased (U tbe securities are lelt to be secure) to correspond with the lower rate of interest ; whereas the capitalized value of the block of industrial equipment on which these securities (plia whatever may have been added in the interval) rest shrinks to correspond with the same facts. A discrepancy, such as was adjusted by a recapitalization during the interval of high rates, reappeaiB, but in the inverse sense. And this discrepancy cannot be corrected, since the margin on which tbe previous adjustment was made bas disappeared, and no corresponding margin on the other side emerges. Business accounts do not deal in negative quantities, except under stress of a necessity that violates the premises on whlcb business accountancy proceeds.
Recurring to the notation employed on page 153, and letting I ^ par value of securities with fixed cbaiges, r = rate per annum of fixed ctia^ies, 1' = market value (effective capitalization) of these ieouritles,