50,000 yards of cloth per year, of which 30,000 yards are of grade A, 10,000 yards of grade B, and 10,000 yards of grade C. Without a means of measuring all these units in terms of a common denominator of value, it is apparent that it would be impossible for Mr. X to ascertain from his books whether his business is successful or unsuccessful. It is also obvious that the chances of failure would be very great.

The choice of a business is determined by analysis of pecuniary accounts. Let us now inquire how Mr. X came to choose this particular line of business. Having capital at his disposal, he naturally would wish to employ it in that line of industry which would yield him the largest income. Let us assume that at the period when Mr. X must decide where to invest, the typical establishment is receiving a return of 5 per cent on the capital invested in line A; 10 per cent in line B; 15 per cent in line C; and 20 per cent in line D. If other things were equal, Mr. X would as a matter of course choose line D. But other things are not usually exactly equal. There may be more risk involved in line D, and hence a greater chance of failure in the event of untoward developments. It may well be, however, that the risks in line D are not proportionately greater in line A and line B. The demand for the produce of line A may have been declining, or perhaps D is at present enjoying an extraordinary demand. In either event, a larger margin of profit can for the time be secured in line D than in line A. Since Mr. X is looking for employment of his funds in the most profitable branch of industry, he will therefore be likely to choose line D, providing of course there are no personal reasons which might prevent his success in that line.

The question now arises, how can the business man ascertain the rate of profits in different industries? In brief, by a study of the general market conditions in the different industries and of the financial returns actually received by existing plants in the various lines of industry. The quotations of securities on the stock exchange serve, as we shall later see, as a fairly reliable index to the relative profits of different industries. In case, however, one is thinking of venturing as a pioneer into a new

line of industry, he can of course rely only upon a study of general market conditions. But in any case the estimated relative costs of production in this and other lines will serve as an important index to the probabilities of success.

It should be noted at this point that the decision of the business man is more or less controlled by financiers who advance the funds required to finance the industry. The typical business is nowadays organized on a corporate basis, and the fixed capital is largely raised by the sale of bonds and stock through the intermediation of investment bankers, whose support is necessary to the success of the enterprise. Investors also study, with the aid of pecuniary accounts, the prospective value of the securities, and since investors hold the purse strings, they have the power to veto the judgment of both the financiers and the corporate managers.'

After the fixed capital has been raised and the plant constructed and equipped, it is usually necessary to borrow some of the working capital required to operate the business. Financial aid must now be sought from commercial banks; and the commercial banker thus in turn passes judgment on the feasibility of the enterprise. And once more the financial standing of the business, as shown by accounts that are expressed in pecuniary terms, affords the criterion for reliable judgment.

Managerial decisions are rendered on the basis of pecuniary data. In connection with the construction of the plant, there are numerous decisions which must be rendered. In the building of the manufacturing establishment there is, for instance, a question of the types of materials to be used in the construction. Shall it be of wood, of steel, or of concrete? The cost of each, the varying rates of fire insurance with the respective types of materials, the relative durability for the purposes in hand of the different materials, all must be taken into consideration. And in every case the decision revolves around the question of costs, computed in terms of dollars.

Similarly in equipping the establishment, there is the choice between machine A and machine B. Machine A costs $1,000; 1 See chaps. xiii and xiv below.

machine B costs $1,200. Machine A, however, would turn out only three-quarters as much product as machine B. On the other hand, machine A would require $50 more per year for maintenance; while machine B would last five years longer. The problem of deciding which type of machine to use under these conditions is not a simple one at best. But it is much simpler by virtue of the dollars and cents computation that is possible than it would be in the absence of any such guide.

Let us suppose that the decision is for the purchase of machine B. Two years later a new machine is put upon the market, which can perform the same work at one-half the cost per unit of product. Machine B has, however, ten years of wear remaining in it. Should it be discarded now as obsolete, or should it be used until worn out? There is here involved a delicate balancing of costs; and a decision necessarily carries with it a certain element of risk. But again it is clear that the pecuniary basis of reckoning greatly lessens the chances of error and thereby increases the probability of business success.

This factory employs a large number of laborers. The management finds that there is a possibility of a considerable substitution of machinery for labor. The question arises, When is it wise to substitute machinery for labor, or vice versa, as the case may be? The decision is made, as in the other cases, on the basis of pecuniary calculations.

Or it may be that the question is not one of machinery versus labor, but one of methods. Shall a new system of office management be installed? Shall trained technical men be employed to work out new processes in the various parts of the industry? The business man attempts to compare the costs of such technological aids with the returns from the improvements that accrue. There is again some risk of loss involved, but by and large the cost computation points the certain way to improvements in methods and efficiency.

Instances of this sort might be multiplied indefinitely. In fact, virtually every decision that is made by the business manager today involves a careful consideration of costs and returns; practically all of modern business is organized on the

basis of pecuniary computations. The enormous size of the business unit nowadays, together with the complex relationships that obtain between the business man and those from whom he buys his materials, on the one hand, and, on the other, those to whom he sells, requires not merely the keeping of records of transactions that are entered into; it necessitates the development of elaborate financial accounting systems from which cost and profit data may be obtained. It should be repeated here that without the monetary unit accounting records would be lifeless; while with the dollar unit the business man may use his accounts both as an indication of past business achievement and as a guide to future courses of action.

In the preceding paragraphs we have been considering the relation of the monetary unit to the problems that arise in connection with the administration of any given business. Let us now assume that, owing to the stress of competition or to a declining demand for the products of a given industry, the manager decides that he should leave this industry and go into something else.

The manager is now confronted with the task of making the transfer with a minimum of loss. It should be borne in mind that since the industry as a whole is in a declining state, the establishment cannot readily be sold to someone else. He must either (a) convert an establishment that manufactures commodity X into an establishment that manufactures commodity Y, or (b) completely dismantle the existing establishment and erect an entirely new plant, adapted to the production of commodity Y. In case he is forced to choose the latter alternative the problem arises, should the plant be dismantled at once and, the large amount of fixed capital in the form of building and equipment be scrapped at a heavy loss, or should it continue to be used in this line of production until worn out? In the latter event the yearly profits would be set aside with a view to the subsequent erection of a plant for the manufacture of commodity Y. With this problem before him, the business man must compare the losses involved in scrapping his present fixed capital with the added profits that might be gained from

an earlier development of the plant for the manufacture of commodity Y. Relative costs expressed in terms of the dollar unit again serve as the guide to action; although, as before, such guidance does not enable the decision to be rendered with absolute precision.

In case the plant is of such a nature that it does not require complete dismantling, if it is one which can be rehabilitated for the purpose, the process of shifting industrial production is somewhat simpler, though it still involves questions of technical engineering, construction, and administration. As before, however, the decision concerning the best method of making the necessary changes and the rapidity with which they should be accomplished rest on cost computations expressed in terms of money.

III. THE PECUNIARY UNIT AND THE APPORTIONMENT OF FAMILY EXPENDITURES

Not only does the pecuniary unit lie at the basis of business. organization; it is also the basis for an intelligent apportionment of income. When family incomes, which in a pecuniary society are initially received in the form of money rather than in the form of goods, are carefully considered, a formal budget is prepared by means of which the income is apportioned in such a way as to bring the largest satisfaction of family wants.

Let us assume, first, a family income of $150 per month, an income sufficient to buy only the ordinary necessities of life. This $150 must provide for food, clothing, shelter, light, heat, and miscellaneous expenses. Since this income should be so apportioned among these various needs that the family will enjoy the largest measure of comfort, the expenditure in each direction must be considered in comparison with the expenditures in every other direction. Will $50 for rent and $100 for the remaining necessities give as large a measure of satisfaction as $25 for rent and $125 for the remaining items? Should $75 be spent for food and $20 for clothing, or should it be $85 for food and $10 for clothing? The arrangement of a family budget in this fashion is difficult enough at best and precision in measurement