"Now we are ready to run through a typical economic cycle. Call it one eon in length and let it be the time from the building of the factory until it is depreciated in value to zero and is obsolete. Something around twenty years if you must think in definite terms, but it isn't necessary to do so. Suppose you identify yourself with the entrepreneur, Perry, and I'll play the other pieces. You see a demand for playing cards and determine to manufacture them. You have your eye on a suitable site which you can lease at a reasonable price, and you know of a new process that you can buy up. But you haven't the working capital, all of your wealth being tied up in tangible property which you don't want to liquidate. So you go to the banker and ask for a loan of a hundred shekels. You explain your idea and offer security worth quite a bit more than a hundred shekels. From where we sit we see that the bank contains only twenty shekels, the capital reserve required by law. One might think that the banker would say, 'Sorry, Old man. You've got a sound proposition and I'd like to accommodate you, but there isn't that much money in the bank.' But he says nothing of the sort; he lends you the money. How does he do it? You give him a promissory note saying:
Dear Banker,
I.O.U. 100 shekels at 10% per eon.
Signed, Entrepreneur
He enters that on the books as a bank asset, credits your account with one hundred shekels, gives you a bank book, and some blank checks, and you thank him for the money, which is new money, monetized by your security and existing only as bookkeeping entries. To symbolize this I hand you these hundred chips, which you must think of as bank credit, or check book money, not as greenbacks, nor metal coin. But you may use them as money in every respect for the banker will cash a few of them from time to time out of the small stock of cash he keeps on hand. He can afford to do this because only on rare occasions will all holders of bank credit ask for cash all at once, placing a run on the bank. Usually cash money paid out by the bank comes back the next day and is re-deposited.
"You have your hundred shekels now and can commence operations. You lease a site for four shekels for the eon. Put four chips by the black bishop. You build your factory, eight shekels for raw materials, eight shekels for labor. Pay out your chips. Now pay the inventor four shekels for the use of his process. Your wages for labor during the eon amount to forty-four shekels. Pay it out. And for raw materials thirty shekels. You will have taxes of ten shekels during the eon."
"I can't pay them. I've only two chips left."
"Never mind. You'll be selling some playing cards soon, and can pay them as you go along. You now manufacture during the eon sixty-three playing cards. Stack them there by the factory. You need eight shekels profit in the course of the eon to support yourself and your family. You figure out what your market price must be for playing cards in order to accomplish this. What would it be?"
Perry set down his expenses and added them up as follows:
Land rent 4 shekels
Factory (labor) 8 shekels
——"—— (material) 8 shekels
Production (labor) 44 shekels
———"———-(material) 30 shekels
Royalty to Inventor 4 shekels
Taxes 10 shekels
Profit 8 shekels
Interest on loan 10 shekels
126 shekels to be recovered as price.
63 produced units to be sold; therefore price must be 2 shekels each.
Perry looked up. "I get two shekels per card."
"Correct. As you can see, I arranged the figures to give round numbers."
"But I can't possibly sell sixty-three cards at that price. There are only ninety-eight shekels out there to buy my product."
"Don't be in a hurry. Start selling and see what happens. We will assume this time that all these people that received money from you need all the consumption goods they can afford. Sell to them."
Perry dealt out cards to 'Labor', 'Land owner', 'Inventor', and 'Owners of raw materials', and collected two chips for each card.
"How many cards do you have left?"
"Fourteen."
"You have a lot of money on hand. Better pay your taxes."
"Okay." Perry placed ten chips on 'US'.
"Now I'll act for Uncle Sam and pay the public servants four shekels, buy raw materials for four shekels, and use two shekels to buy consumption goods from you."
"Here you are." Perry handed Davis a playing card who placed it on 'US' and gave Perry the remaining two chips.
"Now sell goods to 'Public servants' and 'Owners of raw materials'."
Perry did so, handing out four cards and receiving back eight shekels.
"Now pay the interest on your loan. You'll be doing so in the course of the time period."
"Okay, here's ten shekels."
Davis placed them in the bank. "The banker, with his family, clerks, and so forth, needs some consumption goods. Here are two shekels." Perry solemnly received them and proffered one card to Davis.
"Now pay yourself your profit of eight shekels. Turn it over to your wife. She handles the money in your household. She takes it and spends it for consumption goods." Perry took eight shekels, placed it by the black queen, then picked it up again and placed it by the black king, and placed four cards under the black queen. Davis added a comment. "That operation is symbolic of thousands of wives of entrepreneurs spending their husbands incomes on all manners of goods produced in thousands of factories.
"The eon is over. The cycle is finished. Your factory has depreciated to no value at all. I must remind you that your note is due at the bank."
"Wait a minute. Why do you assume that the factory is now worthless?"
"It isn't necessary. Had you figured for a shorter period, the cost item labeled 'Factory' would have been just the percentage of depreciation during the shorter period. There would have been a smaller number of articles manufactured, smaller items in all respects. The final cost per unit would have been the same, but we decided to run through a full cycle, from the beginning to the end of a producing unit. But come, come, you are stalling for time. What about my note? You owe me one hundred shekels."
Perry counted up his chips and grinned at him. "You'll have to whistle for it. I have only ninety-two shekels. I have four playing cards you can have for the balance."
"I've no use for playing cards. I'm a banker and I have your promise to pay."
Perry shrugged his shoulders and did not reply.
Davis continued. "Very well let's get on with the next stage of the game. You have four units of 'over-production' and can't quite pay your note at the bank. But your banker respects your ability. Your original security is still good, and the banker says that conditions are essentially 'sound'. He re-finances you to go into production again. You sign a new note, this time for one hundred and eight shekels and now have one hundred shekels to your account. But your banker cautions you not to be guilty of 'over-production'. You go away, feeling somewhat confused as you don't see where you made your mistake, but the banker must be right for you certainly were left with four playing cards that you could not sell. You decide that the market only requires fifty-nine cards instead of the sixty-three you produced. So you do it all over again, producing only fifty-five cards which with your carry over of four gives you fifty-nine to sell. What is the result?"
"Why, I come out even I suppose."
"Do you? Last time you spent forty-four shekels on wages and thirty shekels on materials to build sixty-three playing cards. How much do you spend this time?"
"Let me see. Forty-four and thirty is seventy-four. The labor and materials cost per unit is one sixty-third of that." Perry set it up on his slide rule. "It comes to one point one one seven five (1.1175) shekels per card. I'm producing fifty-five cards this time. Fifty-five times one point one seven five is sixty-four and seven-tenths shekels."