Thomas Tooke

How to measure the accumulated commercial capital?

In Uncategorized on January 6, 2013 at 7:32 pm

In his essay “An Enquiry into the nature and effects of paper credit of Great Britain”, Henry Thornton lays some important concepts about how paper credit functions and to “exposure some popular errors which related chiefly to the suspension of the cash payments of the Bank of England, and to the influence of our paper currency on the price of provisions. ”

“It may conduce to the prevention of error, in the subsequent discussions, to define, in this place, what is meant by commercial capital. This consists, first, in the goods (part of them in the course of manufacture) which are in the hands of our manufacturers and dealers, and are in their way to consumption. The amount of these is necessarily larger or smaller in proportion as the general expenditure is more or less considerable, and in proportion, also,as commodities pass more or less quickly into the hands of the consumer. It further consists in the ships, buildings, machinery, and other dead stock maintained for the purpose of carrying on our manufactures and commerce, under which head maybe included the gold found necessary for the purposes poses of commerce, but at all times forming a very small item in this great account. It comprehends also the debts due to our traders for goods sold and
delivered by them on credit ; debts finally to be discharged by articles of value given in return.”

COMMENT: It might be understood that we are talking about the asset side of the balance sheet of corporations, however in order to measure the wealth of a country the assets held by domestic corporations outside of the country should not be counted. Henry Thornton talks first about the current assets such as inventories, but also about the long term assets which include the buildings, machinery and other “dead stock” or fixed assets in today´s parlance.  Finally the accounts receivable against merchandise are part of the identifiable capital. At the time the intellectual capital of patents was not a determining factor, but it would be essentially fall in the same category.

Continuing with Henry Thornton…

“Commercial capital, let it then be understood, consists not in paper, and is not augmented by the multiplication of this medium of payment. In one sense, indeed, it may be encreased by paper. I mean, that the nominal value of the existing goods may be enlarged through a reduction which is caused by paper in the value of that standard by which all property is estimated. The paper itself forms no part of the estimate.”

COMMENT: I guess it removes a bit of the argument of the “wealth effect” touted by Mr Greenspan recently. If you alter the circulation medium, you might increase the nominal value of the assets, by manipulating the yardstick. The money illusion is an old trick which Ivring Fisher and John Maynard Keynes wrote about extensively.

Continuing with Henry Thorton

“This mode of computing the amount of the national capital engaged in commerce, is substantially the same with that in which each commercial man estimates the value of his own property. Paper constitutes, it is true, an article on the credit side of the books of some men; but it forms an exactly equal item on the debit side of the books of others.” It constitutes, therefore, on the whole,
neither a debit nor a credit. The banker who issues twenty thousand pounds in notes, and lends in consequence twenty thousand pounds to the merchants on the security of bills accepted by them, states himself in his books to be debtor to the various holders of his notes to the extent of the sum in question ; and states himself to be the creditor of the accepters of the bills in his possession to the same amount. His valuation, therefore, of his own property, is the same as if neither the bills nor the bank notes had any existence. Again ; the merchants, in making their estimate of property, deduct the bills payable by themselves which are in the drawer of the banker, and add to their estimate the notes of the banker which are in their own drawer ; so that the valuation, likewise, of the capital of the merchants is the same as if the paper had no existence. ”

COMMENT: Here we have a few interesting concepts explained and the process of netting exposed. The cash on the balance sheet of a corporation since offset by a liability from the bank, while representing a financial asset for the corporation is a financial liability from the standpoint of the bank. The merchant when computing the property looks at all assets minus liability. If the merchant has a net cash position, this net cash position is in the end a liability from the standpoint of the bank so at a collective level, what is left is just the productive capacity of the farms, the manufacturing plants, the software code etc…etc… However it would only for the subsidiaries a given country, and would not count for the subsidiaries overseas.

Continuing with Henry Thornton

“The case of gold, on the other hand, differs from that of paper inasmuch as the possessor of gold takes credit for that for which no man debits himself. The several commercial capitals of traders, as estimated in their books, would, unquestionably, be found, if deducted from their other property and added together, to correspond, in amount, with a general estimate of the commercial stock of the country, calculated under the several heads already stated. It is true, that men, in estimating their share in the public funds of the country, add to their estimate a debt due to them which no individual deducts from his valuation. On this head, it may be observed, that the nation is the debtor. But the commercial capital, which has been described, exists independently of capital in the public funds. The man in trade has property in trade. If he has property in the stocks, he has the property in trade in addition to it. In speaking, therefore, of the commercial capital, whether of the nation or of an individual, the idea that any part of it is composed either of the paper credit or of the stocks of the country, is to be totally excluded.”

COMMENT: A country which has little net unencumbered commercial capital from domestic subsidiaries only in relation to its GDP has little wealth under this definition.

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