The tendencies we are to consider which slow down or temporarily reverse a change of spending obviously give no security against a gradual attrition of the dollar and no final security against panicky inflation. Nor do they guarantee that we shall not have a decline in demand to the point of disaster. But they do increase the latitude within which monetary policy can operate without producing results that are too obviously objectionable.
The average person in a healthy economy believes that, basically, economic conditions will not change sufficiently to warrant a radical alteration in his standards of business judgment in the immediate future. If he is thinking of buying certain shares, he will not buy them quite regardless of price. When the cost of building rises, some people go ahead and build anyhow, but some drop out. Most business firms in the market for additional labor and raw materials do not stubbornly insist on buying their planned quota without regard to cost; they may postpone their purchases, or they may use substitutes. If there were not a great deal of give and take and flexibility of plans, it would be hard to see how we could have a well-integrated cost-price structure or a reasonably stable general level of prices. Changes in demand in particular sectors would break up workable price relationships, and a general increase of demand would be self-aggravating and explosive.
The increase of production that generally occurs during a period of increased spending also serves as a stabilizing factor. During the period 1940-43 industrial production more than doubled. Even after the slack has been taken up in the labor supply, the rapid increase of new plant and equipment applying the latest scientific and engineering developments makes possible a further rapid growth of output. Traditionally, new investment has been held to such a low yearly average level that we are just beginning to grasp what a continued high level of investment in industrial research and equipment can do.
A Change in the Attractiveness of Debt Instruments Relative to Other Assets
The monetary authorities by varying the conditions of liquidity can determine the level of rates in the short-term money market and gradually have an important impact on rates in all sectors of the debt structure. Rates on particular classes of debts reflect a great variety of factors. For instance, they reflect the supposed risk involved, special tax considerations, the portfolio preferences of the public in relation to the volume of debts in the various sectors, the degree of competition in the area concerned, the cost of making the loan, and the like. Some debts are especially attractive because they serve as good substitutes for money, and their yields ordinarily reflect that fact in an obvious way. Long-term rates reflect a forecast of future conditions in the money market rather than conditions existing at the moment.
The monetary authorities do not necessarily have some definite level of money rates or bond yields they are trying to make effective, but they generally have limits of tolerance for short rates at least. At a given time there is usually a range of rates which they would regard as consistent with their economic goals, even though they have not decided in advance what the limits of the range would be. Although they largely reject rates as gauges of the monetary pressure they are exerting, they nevertheless have a dominating influence on rates through setting the terms and conditions under which money may be created. For instance, they may have as an immediate goal a net borrowed reserve position for the banks of 600 millions; but the rate level which results from that position at that time is attributable to monetary administration just as truly as though the authorities had deliberately sought that level.
The monetary authorities do not necessarily have some definite level of money rates or bond yields they are trying to make effective, but they generally have limits of tolerance for short rates at least. At a given time there is usually a range of rates which they would regard as consistent with their economic goals, even though they have not decided in advance what the limits of the range would be. Although they largely reject rates as gauges of the monetary pressure they are exerting, they nevertheless have a dominating influence on rates through setting the terms and conditions under which money may be created. For instance, they may have as an immediate goal a net borrowed reserve position for the banks of 600 millions; but the rate level which results from that position at that time is attributable to monetary administration just as truly as though the authorities had deliberately sought that level.
How Money Influences the Rate of Spending
The level of spending and the cost-price structure are not determined statically by certain specifiable magnitudes existing at a moment. An economy is a living thing. What it does is current history and largely a product of recent history, though the impact of events may skip over time in an uneven way. In dealing with practical situations we are well aware of this continuity. We know that people go to work in the morning, spending money to get there, because they have a job. They buy food, clothes, and things for the house, see the doctor, engage to make payments for a house and a car, and the like on the basis of the income they have been getting and expect to get. They make financial investments on this basis too, and sometimes direct investments in buildings, improvements, or equipment. Receiving and spending money in a particular pattern is literally a mode of life with them.
Those who run businesses also have a routine. They have established trade and financial connections and a regular working force. They take for granted that certain basic conditions in the economy will remain very much the same in the immediate future--for instance, consumer spending behavior, the pattern of price relationships, and the general state of business. The sales they expect to make are the main reason for their outlay. Money that is coming in and expected to come in serves both as a profit motive and as a means of making further outlay. As is well known, outlay for capital expansion by business corporations is strongly influenced by their cash flow. This is true also of the capital outlay of small businesses and farmers. The rate of spending is influenced both by the prospect of profits and by the desire to maintain a workable relationship between money receipts and outlay. In deciding what to do on both counts, people are guided by recent experience, and so they make the immediate future somewhat of a reflection, though not an exact image, of the recent past.
Those who run businesses also have a routine. They have established trade and financial connections and a regular working force. They take for granted that certain basic conditions in the economy will remain very much the same in the immediate future--for instance, consumer spending behavior, the pattern of price relationships, and the general state of business. The sales they expect to make are the main reason for their outlay. Money that is coming in and expected to come in serves both as a profit motive and as a means of making further outlay. As is well known, outlay for capital expansion by business corporations is strongly influenced by their cash flow. This is true also of the capital outlay of small businesses and farmers. The rate of spending is influenced both by the prospect of profits and by the desire to maintain a workable relationship between money receipts and outlay. In deciding what to do on both counts, people are guided by recent experience, and so they make the immediate future somewhat of a reflection, though not an exact image, of the recent past.
Findings of the Business Advisory Council
In 1952, the Secretary of Commerce announced the findings of the Business Advisory Council that had studied the antitrust laws to determine the relationship between existing statutes and administrative procedures and public interest. Some of the key points of this report as they relate to competition are summarized below.
To uphold competition was presented as the primary concern of antitrust policy. The Council agreed with the principle of economic freedom as expressed in the Sherman Act, but suggested room for improvement in antitrust policy, interpretation, and administration. The basic problem centered around the inconsistencies between various antitrust statutes themselves and around their various interpretations. Judicial opinions have been widely divergent. The inconsistencies, in turn, create a great deal of confusion for the businessman who cannot be certain whether he is abiding by, or violating, the laws.
The realm of the kind of competition creates uncertainties. Some of the interpretations require "hard" competition so that any easing or lessening of price competition, regardless of the consequences in the industry, is forbidden. Yet, other statutes, such as the Robinson-Patman Act, call for the "soft" competition which rules out price reductions if they injure competitors, although they may otherwise be acceptable to consumer welfare. A potentially unifying force in interpreting the antitrust laws is the Rule of Reason, which is applied where questionable practices are deemed to be reasonable and, consequently, acceptable. Even here problems arise because there are few explicit standards that determine what is or is not reasonable. In fact, some statutes specifically bar the application of the Rule of Reason. Because of the Rule's greater flexibility and opportunity for a "caseby-case" approach, its application is generally favored by businessmen.
To uphold competition was presented as the primary concern of antitrust policy. The Council agreed with the principle of economic freedom as expressed in the Sherman Act, but suggested room for improvement in antitrust policy, interpretation, and administration. The basic problem centered around the inconsistencies between various antitrust statutes themselves and around their various interpretations. Judicial opinions have been widely divergent. The inconsistencies, in turn, create a great deal of confusion for the businessman who cannot be certain whether he is abiding by, or violating, the laws.
The realm of the kind of competition creates uncertainties. Some of the interpretations require "hard" competition so that any easing or lessening of price competition, regardless of the consequences in the industry, is forbidden. Yet, other statutes, such as the Robinson-Patman Act, call for the "soft" competition which rules out price reductions if they injure competitors, although they may otherwise be acceptable to consumer welfare. A potentially unifying force in interpreting the antitrust laws is the Rule of Reason, which is applied where questionable practices are deemed to be reasonable and, consequently, acceptable. Even here problems arise because there are few explicit standards that determine what is or is not reasonable. In fact, some statutes specifically bar the application of the Rule of Reason. Because of the Rule's greater flexibility and opportunity for a "caseby-case" approach, its application is generally favored by businessmen.
Kinds and Degrees of Competition
At this point, a word of caution is essential: although pure competition generally is referred to as the ultimate in competition, this does not mean that the intensity of rivalry among sellers in any other type of market is less. In fact, when there are a few dominant producers, as there are in cigarettes or automobiles, the interfirm rivalry may be considerably more severe than the rivalry between two wheat farmers in a more purely competitive market. It is important, accordingly, to keep in mind the distinction between kinds of competition and degrees of competition, and that the kind does not determine the degree.
Failure to make this distinction has caused a great deal of argument and misunderstanding between economists and businessmen to arise. It has been customary for the former to explain competition in such a way as to mean only pure competition. Any departures from this model are considered to be noncompetitive. The implication is clear: monopoly elements are present and rivalry between producers is nonexistent. The business world, faced by intense interfirm rivalry, reacts by describing the economist as living in an "ivory tower," and by pointing out that there is a significant amount of rivalry between oligopolistic and otherwise imperfectly competitive firms. Now, if it would be more generally recognized that there are different kinds of competition, that the degree of rivalry is not related to the kind, and that pure competition is only one kind of competition, there would be much less ground for controversy between entrepreneurs, economists, legislators, and jurists--especially when public policies toward competition are to be determined.
Failure to make this distinction has caused a great deal of argument and misunderstanding between economists and businessmen to arise. It has been customary for the former to explain competition in such a way as to mean only pure competition. Any departures from this model are considered to be noncompetitive. The implication is clear: monopoly elements are present and rivalry between producers is nonexistent. The business world, faced by intense interfirm rivalry, reacts by describing the economist as living in an "ivory tower," and by pointing out that there is a significant amount of rivalry between oligopolistic and otherwise imperfectly competitive firms. Now, if it would be more generally recognized that there are different kinds of competition, that the degree of rivalry is not related to the kind, and that pure competition is only one kind of competition, there would be much less ground for controversy between entrepreneurs, economists, legislators, and jurists--especially when public policies toward competition are to be determined.
Workable Competition - Economic and Legal Approaches to Competition
The basic reason for considering the economic and legal definitions of competition is to clarify economic concepts that may be of use in establishing legal control of market forces. As a first approximation, a concept of competition must be developed that is workable or effective, even though it may not be exactly pure. Since the underlying philosophy of the free enterprise system recognizes that competition is desirable in order to assure efficiency, lower prices, and increased production, the idea behind workable or effective competition is to set up a model that will give the public the benefit of industrial rivalry even though there may be deviations from the norm of pure competition. In a sense, this amounts to an "economic Rule of Reason"--reasonable competition that is effective or workable.
Workable or effective competition still would not allow any one seller or group acting in concert to have the power to choose a level of profits by manipulating output and subsequent prices. The influence of rival sellers or potential entrants will operate as a check on his actions if he should attempt to exert price jurisdiction. Rivals must be free to compete for the custom of the buyers through price and nonprice competition; no seller may have the power to limit the freedom of his rivals, nor may he hamper freedom of entry into the industry.
Workable or effective competition still would not allow any one seller or group acting in concert to have the power to choose a level of profits by manipulating output and subsequent prices. The influence of rival sellers or potential entrants will operate as a check on his actions if he should attempt to exert price jurisdiction. Rivals must be free to compete for the custom of the buyers through price and nonprice competition; no seller may have the power to limit the freedom of his rivals, nor may he hamper freedom of entry into the industry.
Relationships Between Market Competition and Market Price
Market price, regardless of the kind of competition present, is a price determined by balancing the forces of demand and supply. The kind of competition will exert its influence as it affects demand and/or supply and the relative weight of each of these components in the pricing equation. The balancing may reflect the relative power of one, few, or many sellers. The possible combinations are many, and the resulting prices will reflect them.
Although there are certain pricing characteristics in each kind of competitive market, we start with the basic assumption that each seller is seeking to maximize his net revenue. In markets of pure or perfect competition, there is little that a given producer can do by way of setting market prices since, by definition, he has no price jurisdiction. The market price will be determined by the interaction of market demand and market supply, of which the given firm under question constitutes only an insignificant force. His problem then is this: in face of a given market price, what should be his output? Since the firm can sell any amount, either in large or small outputs, at the same per unit price, how much should be offered will rest on production costs. The important price-determining decisions under these circumstances are industry-wide, as reflected in the industry supply conditions.
Circumstances are quite different in monopoly markets. Here the firm has more or less complete power to set its supply price and needs only to be concerned with market demand. The firm may then vary both its price and output to maximize net revenue. The monopolist must consider both of these at all times, since he is not able to sell any amount of his goods at a predetermined market price. Since his supply curve interacts with the market demand curve, he finds that he can sell more only at lower prices.
Although there are certain pricing characteristics in each kind of competitive market, we start with the basic assumption that each seller is seeking to maximize his net revenue. In markets of pure or perfect competition, there is little that a given producer can do by way of setting market prices since, by definition, he has no price jurisdiction. The market price will be determined by the interaction of market demand and market supply, of which the given firm under question constitutes only an insignificant force. His problem then is this: in face of a given market price, what should be his output? Since the firm can sell any amount, either in large or small outputs, at the same per unit price, how much should be offered will rest on production costs. The important price-determining decisions under these circumstances are industry-wide, as reflected in the industry supply conditions.
Circumstances are quite different in monopoly markets. Here the firm has more or less complete power to set its supply price and needs only to be concerned with market demand. The firm may then vary both its price and output to maximize net revenue. The monopolist must consider both of these at all times, since he is not able to sell any amount of his goods at a predetermined market price. Since his supply curve interacts with the market demand curve, he finds that he can sell more only at lower prices.
Types of Markets
We may begin with a purely competitive market. Such a market is characterized by large numbers, homogeneous products, and freedom of entry. By large numbers we mean that the number of producers is so large that no one producer--or group acting as one--is in a position to exert any (reasonable) influence over price by manipulating output. What may be large in one instance may not be considered such in another. The test is market influence. The products in question must be identical, that is, there are no identifying characteristics which demarcate one producer's goods from another.
This applies to the techniques of selling and the patronage appeals of the seller as well as to the product itself. Hence, price variations will be the only reason to cause buyers to shift from one seller to another. Finally, there must be the freedom to enter into and withdraw from the industry. In the actual markets of today there are few, if any, examples of such a situation, although some agricultural markets and organized security exchanges may be somewhat of an approximation. The foregoing are the prerequisites on the seller's side.
This applies to the techniques of selling and the patronage appeals of the seller as well as to the product itself. Hence, price variations will be the only reason to cause buyers to shift from one seller to another. Finally, there must be the freedom to enter into and withdraw from the industry. In the actual markets of today there are few, if any, examples of such a situation, although some agricultural markets and organized security exchanges may be somewhat of an approximation. The foregoing are the prerequisites on the seller's side.
The Economics of Market Behavior - Markets
A market is that sphere of competitive rivalry within which buyers and sellers meet to effect exchanges. Exactly what constitutes a given market often is uncertain and controversial. Traditional markets outlined by such geographical boundaries as the Pacific Coast or by such classifications of products as wrapping materials do not always serve as adequate guides. A market should include all the firms that have a sufficient and immediate effect on each other so that the actions of each will have direct repercussions on the welfare of the others in a direct manner. This obviously should cover all products that are direct substitutes for each other; the real problem relates to the products that are only indirect substitutes. When should these be lumped into one market or when should they be divided into separate ones?
Both the amount of anything that is offered for sale and the amount that buyers stand ready to buy depend upon price as the ultimate regulator. It is within the general confines of price determination to state that more will be offered for sale as prices rise and that less will be offered as prices fall. Conversely, the amount demanded will vary inversely with price. Since changes in price affect in opposite directions the amounts offered and taken, it follows that at some price these two quantities will be equated. The basic function of price changes is to equate the quantities supplied and demanded, and thereby to clear the market. So long as there is a single price on the market, at a given time for a given commodity, the price that clears the market is called an equilibrium price. Now there are several ways in which the forces of demand and supply may manifest themselves in a market to determine price. Thus markets are characterized and classified by varying degrees of competition among sellers, among buyers, and between sellers and buyers.
Both the amount of anything that is offered for sale and the amount that buyers stand ready to buy depend upon price as the ultimate regulator. It is within the general confines of price determination to state that more will be offered for sale as prices rise and that less will be offered as prices fall. Conversely, the amount demanded will vary inversely with price. Since changes in price affect in opposite directions the amounts offered and taken, it follows that at some price these two quantities will be equated. The basic function of price changes is to equate the quantities supplied and demanded, and thereby to clear the market. So long as there is a single price on the market, at a given time for a given commodity, the price that clears the market is called an equilibrium price. Now there are several ways in which the forces of demand and supply may manifest themselves in a market to determine price. Thus markets are characterized and classified by varying degrees of competition among sellers, among buyers, and between sellers and buyers.
The Economics of Market Behavior What Are Prices?
Probably there is no subject to which the businessman gives more attention than that of prices and their determination and behavior. It is through the price mechanism that the various market forces that determine the nature of transactions are brought together. The successful entrepreneur must adjust his activities to changing market relationships so that a margin will exist between the prices of the things he sells (revenue) and the items he buys (costs). In order to make the managerial decisions that will enhance the success of his enterprise, it is essential that the businessman understand the forces that determine prices. Likewise, it is of equal importance for Government officials and judges to understand the nature of prices, since so many laws are concerned with price behavior.
As a starting point, 'we may state the simple proposition that the price of anything is determined by the interaction of the laws of demand and supply. This proposal immediately suggests that there is a system for determining prices and that arbitrary action alone is an inadequate explanation of price-setting and price movements. The simplicity of the demand-and-supply approach should not mislead one into believing that the price mechanism is a very simple one. There are numerous, complicated and interrelated forces with all sorts of ramifications underlying demand and supply. Neither of these components of price is self-determining; there are a multitude of dynamic forces in constant operation. It is essential, then, to go beyond the proposition of demand and supply and seek out the forces that affect these determinants.
As a starting point, 'we may state the simple proposition that the price of anything is determined by the interaction of the laws of demand and supply. This proposal immediately suggests that there is a system for determining prices and that arbitrary action alone is an inadequate explanation of price-setting and price movements. The simplicity of the demand-and-supply approach should not mislead one into believing that the price mechanism is a very simple one. There are numerous, complicated and interrelated forces with all sorts of ramifications underlying demand and supply. Neither of these components of price is self-determining; there are a multitude of dynamic forces in constant operation. It is essential, then, to go beyond the proposition of demand and supply and seek out the forces that affect these determinants.
The Affective Pull of Mores
The concept of economic institutions developed so far is cold and impersonal; to be fruitful for the study of persons, there is need to consider the warmth, the vitality, the personal meaning of institutions. A great deal of help to this end is offered by the way of thinking. We shall make full use of their suggestions, but shall feel free to offer some modifications.
The life of society is expressed through a group of interrelated social institutions. The institutions have a psychological basis, but it is not enough to say that society has habits. Habit is a convenience, but it has no necessary continuity; it can be made or broken. Institutions are a convenience to those who use them. But most social institutions take on a moral hue; one lives by and swears by them. It is right to spend less than one earns, wrong to dress solely with reference to keeping warm. If one has a fancy for idols it is correct to exploit them as works of art, and wrong to prostrate oneself before them. To maintain one's place in society one must do certain things and love to do them; one must not do other things, which are prohibited, and must not want to do them. The mores, the affectively toned rules of social living, have become axiomatic among all who pretend to share fully in the life of the group. It is characteristic of social institutions in their moral form (their form as mores) that they cannot be frontally attacked or directly questioned. They are right; that is all there is to it. The rightness of the mores, according to Sumner and Keller, springs from the fact that the prosperity of the group is conceived to depend upon observing them.
Our emphasis here will be upon the interrelations between four fundamental groups of mores. The first are the self-maintenance mores, the mores that sustain and preserve the group and enable it to carry on in the face of obstacles. The term comprises a much broader field than is covered by the word "economic." It includes not only hunting, fishing, mining, forestry, agriculture, manufacturing, and transportation, but also science and the art of war; for these are a primary means of enabling the group to survive against obstacles. The self-maintenance mores likewise constitute a "prosperity policy"; they represent the core of the customs that act as bulwarks against danger. Things like stealing, forgery, and ideological attack upon the group's way of living are therefore all in the same general category, and are responded to affectively in similar fashion. The introduction of new ways of earning a living involves grave moral questions because the prevailing ways are morally right.
The self-perpetuation mores comprise courtship, marriage, family, sex relations generally, and the early training of children. These mores, like all the others, have to do with society as a whole, not simply with the biological aspects of self-perpetuation. The self-perpetuation mores take care of the capacity of the social group to perpetuate itself as a social group, not simply as a biological stock; therefore courtship can be morally right or wrong, and the early rearing of children can be right or wrong. The problem of society is whether the early rearing of children does provide continuity in the mores. If it does not, it is immoral. The educator who wishes to give the individual child "freedom" may easily scandalize the group. The self-perpetuation mores, however, agree with our hypothesis about a certain type of "economic determinism," for they tend to change as self-maintenance changes; they must fit with the "prosperity policy." The status of women and the pattern of the family must conform to definite economic meanings.
The self-gratification mores have to do with the deriving of satisfaction from all the surpluses of energy and time. This may seem casual and unorganized, but it is not. The use of fire to cook food not only saved energy in digestion; it introduced culinary amenities, substituted postprandial reflection for stupor. In the caves of Spain and France, men painted not only for ulterior purposes but for their own gratification; the stone ornaments and monoliths of Switzerland and Brittany lead us to infer that the people were interested in order and beauty, as well as in utility. The arts and sciences have always been intellectual and emotional satisfiers. But these, too, have their moral value; it would be a grave error to infer that in his leisure time a person may develop the arts and sciences as freely as he wishes. Many a creative artist has been denounced because he used his freedom to rhyme, paint, or compose solely in accordance with a creative impulse that was contrary to the mores of society. It is not only that the arts must not challenge the mores; if the impulse takes a strange form, it is perverse. But the dependence of the arts on the self-maintenance mores is direct and obvious; they use the techniques and the subject matter provided by the economic, arts, the ways of the dominant military, religious, or political group, and they must gratify first of all those who sit in high places. The arts have always reflected he way in which society maintains itself. Modern art, for example, moves in the functional direction, rejoicing in its close articulation with the general self-maintenance pattern; in particular, the characteristically modern forms of architecture, interior decorating, and photography take delight in our modern technological culture.
Finally, there are the self-regulation mores, for even the rather rigid system of mores based on self-maintenance does not provide complete safety. It has always been necessary to have men-at-arms, policemen, laws, penalties. There is always a system of coercion, and this system naturally expresses what supports it.
Some of the mores do not fit easily into this fourfold scheme. Religion, for example, falls into several categories: it has much to do with marriage and the family, with the arts, and with the self-regulation mores. And of course some of us may prefer to group social institutions in terms of six areas of life, as do the Lynds, or nine, as does Wissler. All these "areas" or "categories" of activity involve abstraction from the flowing interdependence of behavior, and it must be granted that many acts supported by strong moral feelings --like maintaining personal honor--are not objectively classifiable. But the rough crude generalization remains: the mores prescribing how life is maintained affect the form of the other mores.
But since the mores are affectively laden, and since we know that perception and thought are anchored in terms of the fundamental values, it may be reasonable to suspect that the figure in the figure-ground pattern of life will tend to consist of the self-maintenance mores of the group. Our task is to demonstrate that ultimately the individual personality is in a broad way guided and controlled by these mores. Obviously, the only possible validation lies in the study of simple and straightforward examples. First, however, by way of clarifying the hypothesis, let us take a composite example, ridiculously abstract like a composite photograph; we shall use a hypothetical tribe of primitive woodsmen which from time immemorial has used a stone axhead for chopping down trees. Men need wood for barricades, stockades, agricultural instruments, household tools; they sell timber to their neighbors. This group constitutes a relatively simple patriarchal society, for it takes a boy many years to acquire enough of the axman's prowess to achieve power and status in competition with the older males, and women cannot compete at all. We find polygamy, a polytheistic religion, a crude art form--in general, a very primitive society whose life is, in Thomas Hobbes' words, "dull, nasty, brutish, and short." Now into this community come white men with steel axheads. This is a mystery; these instruments are at first nefarious and diabolical. But the white man shows how the steel axhead can in a few minutes bring down a tree that a strong man would require hours to cut down with the stone axhead. Some hearty soul tries the new thing himself. The tree actually comes down without benefit of any further magic, and he who has felled it does not suddenly die, but rejoices in the fact that he has accomplished far more than his fellows in the same amount of time. Before very long it comes about that the people have rationalized or excused the new process; those whose eyes have witnessed such a demonstration will soon be chopping down trees with steel axheads.
The consequences upon the whole institutional pattern are terrific. The first effect is that the energy of the group is enormously extended; a large part of their activity can go into other things than chopping down trees. They have time and energy for other economic exploits; for the beautiful as well as for the practical arts; for the invention of better carpentry, as well as for conversation, the amenities, philosophy; time and opportunity to enlarge their sphere and travel farther into the jungle, making roads and going where they never went before.
The life of society is expressed through a group of interrelated social institutions. The institutions have a psychological basis, but it is not enough to say that society has habits. Habit is a convenience, but it has no necessary continuity; it can be made or broken. Institutions are a convenience to those who use them. But most social institutions take on a moral hue; one lives by and swears by them. It is right to spend less than one earns, wrong to dress solely with reference to keeping warm. If one has a fancy for idols it is correct to exploit them as works of art, and wrong to prostrate oneself before them. To maintain one's place in society one must do certain things and love to do them; one must not do other things, which are prohibited, and must not want to do them. The mores, the affectively toned rules of social living, have become axiomatic among all who pretend to share fully in the life of the group. It is characteristic of social institutions in their moral form (their form as mores) that they cannot be frontally attacked or directly questioned. They are right; that is all there is to it. The rightness of the mores, according to Sumner and Keller, springs from the fact that the prosperity of the group is conceived to depend upon observing them.
Our emphasis here will be upon the interrelations between four fundamental groups of mores. The first are the self-maintenance mores, the mores that sustain and preserve the group and enable it to carry on in the face of obstacles. The term comprises a much broader field than is covered by the word "economic." It includes not only hunting, fishing, mining, forestry, agriculture, manufacturing, and transportation, but also science and the art of war; for these are a primary means of enabling the group to survive against obstacles. The self-maintenance mores likewise constitute a "prosperity policy"; they represent the core of the customs that act as bulwarks against danger. Things like stealing, forgery, and ideological attack upon the group's way of living are therefore all in the same general category, and are responded to affectively in similar fashion. The introduction of new ways of earning a living involves grave moral questions because the prevailing ways are morally right.
The self-perpetuation mores comprise courtship, marriage, family, sex relations generally, and the early training of children. These mores, like all the others, have to do with society as a whole, not simply with the biological aspects of self-perpetuation. The self-perpetuation mores take care of the capacity of the social group to perpetuate itself as a social group, not simply as a biological stock; therefore courtship can be morally right or wrong, and the early rearing of children can be right or wrong. The problem of society is whether the early rearing of children does provide continuity in the mores. If it does not, it is immoral. The educator who wishes to give the individual child "freedom" may easily scandalize the group. The self-perpetuation mores, however, agree with our hypothesis about a certain type of "economic determinism," for they tend to change as self-maintenance changes; they must fit with the "prosperity policy." The status of women and the pattern of the family must conform to definite economic meanings.
The self-gratification mores have to do with the deriving of satisfaction from all the surpluses of energy and time. This may seem casual and unorganized, but it is not. The use of fire to cook food not only saved energy in digestion; it introduced culinary amenities, substituted postprandial reflection for stupor. In the caves of Spain and France, men painted not only for ulterior purposes but for their own gratification; the stone ornaments and monoliths of Switzerland and Brittany lead us to infer that the people were interested in order and beauty, as well as in utility. The arts and sciences have always been intellectual and emotional satisfiers. But these, too, have their moral value; it would be a grave error to infer that in his leisure time a person may develop the arts and sciences as freely as he wishes. Many a creative artist has been denounced because he used his freedom to rhyme, paint, or compose solely in accordance with a creative impulse that was contrary to the mores of society. It is not only that the arts must not challenge the mores; if the impulse takes a strange form, it is perverse. But the dependence of the arts on the self-maintenance mores is direct and obvious; they use the techniques and the subject matter provided by the economic, arts, the ways of the dominant military, religious, or political group, and they must gratify first of all those who sit in high places. The arts have always reflected he way in which society maintains itself. Modern art, for example, moves in the functional direction, rejoicing in its close articulation with the general self-maintenance pattern; in particular, the characteristically modern forms of architecture, interior decorating, and photography take delight in our modern technological culture.
Finally, there are the self-regulation mores, for even the rather rigid system of mores based on self-maintenance does not provide complete safety. It has always been necessary to have men-at-arms, policemen, laws, penalties. There is always a system of coercion, and this system naturally expresses what supports it.
Some of the mores do not fit easily into this fourfold scheme. Religion, for example, falls into several categories: it has much to do with marriage and the family, with the arts, and with the self-regulation mores. And of course some of us may prefer to group social institutions in terms of six areas of life, as do the Lynds, or nine, as does Wissler. All these "areas" or "categories" of activity involve abstraction from the flowing interdependence of behavior, and it must be granted that many acts supported by strong moral feelings --like maintaining personal honor--are not objectively classifiable. But the rough crude generalization remains: the mores prescribing how life is maintained affect the form of the other mores.
But since the mores are affectively laden, and since we know that perception and thought are anchored in terms of the fundamental values, it may be reasonable to suspect that the figure in the figure-ground pattern of life will tend to consist of the self-maintenance mores of the group. Our task is to demonstrate that ultimately the individual personality is in a broad way guided and controlled by these mores. Obviously, the only possible validation lies in the study of simple and straightforward examples. First, however, by way of clarifying the hypothesis, let us take a composite example, ridiculously abstract like a composite photograph; we shall use a hypothetical tribe of primitive woodsmen which from time immemorial has used a stone axhead for chopping down trees. Men need wood for barricades, stockades, agricultural instruments, household tools; they sell timber to their neighbors. This group constitutes a relatively simple patriarchal society, for it takes a boy many years to acquire enough of the axman's prowess to achieve power and status in competition with the older males, and women cannot compete at all. We find polygamy, a polytheistic religion, a crude art form--in general, a very primitive society whose life is, in Thomas Hobbes' words, "dull, nasty, brutish, and short." Now into this community come white men with steel axheads. This is a mystery; these instruments are at first nefarious and diabolical. But the white man shows how the steel axhead can in a few minutes bring down a tree that a strong man would require hours to cut down with the stone axhead. Some hearty soul tries the new thing himself. The tree actually comes down without benefit of any further magic, and he who has felled it does not suddenly die, but rejoices in the fact that he has accomplished far more than his fellows in the same amount of time. Before very long it comes about that the people have rationalized or excused the new process; those whose eyes have witnessed such a demonstration will soon be chopping down trees with steel axheads.
The consequences upon the whole institutional pattern are terrific. The first effect is that the energy of the group is enormously extended; a large part of their activity can go into other things than chopping down trees. They have time and energy for other economic exploits; for the beautiful as well as for the practical arts; for the invention of better carpentry, as well as for conversation, the amenities, philosophy; time and opportunity to enlarge their sphere and travel farther into the jungle, making roads and going where they never went before.
Economic Determinism
IN STUDYING the way in which the raw material of human nature undergoes socialization, we have to begin at some one definite point. There may be a value in looking first at the most obvious feature of a society, namely, its economic base; and we may proceed to define two hypotheses: (1) that the economic problem confronting a society shapes all the phases of its group life, and (2) that individual personality is shaped by this group life. This would give us a simple economic determinism for personality. These hypotheses, we shall find, will need much modification; we begin with them for the sake of their simplicity. But it must be made clear that there is no attempt to define the origins of any cultural pattern, or to find, in the course of ceaseless social interaction, something that "comes first" and is uncaused. Rather, the question is whether a radical alteration in economic activities does clearly lead to radical alterations in other aspects of society, and whether, as a result of this, personality is transformed--whether directly, as through new kinds of work, or indirectly, as through alteration of the mother-child relationships. It is emphasized that while we gratefully use, in the next few chapters, a number of studies of primitive peoples, no ethnologist is to be held accountable for the interpretations offered here.
One example is only a starter, however; we must proceed to a more cautious analysis of what is involved. In the Madagascar group we saw that the economic situation itself--the availability of an area for wet-rice cultivation--seemed to offer an explanation for new economic institutions; institutions responded to physical realities. We must examine a broader collection of data to see whether this simple causal relation can be confirmed; we must at the same time consider whether other institutional patterns must perforce yield to the oneway action of economic behavior; and finally, we must determine whether personality can be viewed as the end result of such a causal sequence.
Let us get our terminology clear, and make the distinctions which are imperative if an analysis is to be carried through. By "economic determinism" we mean any system of thought in which the main outlines of social life are derived from the economic organization of the group. A prominent but by no means the only version of the thesis is the conception of Marx and Engels that social life is a reflection of the way in which the dominant social group, at a given stage in the productive arts, maintains its economic status; social change, for example, is forced upon the entire social group as a result of technological changes and inventions which enhance or challenge the power of the ruling class. It is generally conceded, as Marx maintained, that a changing economic pattern causes changes in other aspects of the life pattern; science, the fine arts, philosophy, and religion are transformed as a result of a change in the productive arts. At the same time it is important to emphasize, as did Marx and Engels, that these other "derived" institutions have their own effect upon the productive arts. There is constant interaction (suggested by the Hegelian concept of dialectic), the economic forces being primary but being constantly modified by the influence of the derived institutions.This defines roughly in what sense economic determinism is valuable as an avenue of approach to personality. Three points must be stressed:
1. The economic situation can limit the possibilities of personality growth in particular directions. If life is a constant struggle against cold and scarcity of food, as it is for the Central Eskimo, the situation is unfavorable for the rise of the philosophies and sciences of a leisure class, or a theology based upon the concept of universal goodness, the "cup runneth over" idea of life. In relation to the subsistence problem which the Eskimo faces, these concepts would be functionally meaningless. Similarly, there can only be certain kinds of personalities when there are such economic limitations.
2. We may go beyond this purely negative statement and say that the economic situation will indicate the likely directions in which the various social patterns will evolve. When, for example, we consider that the Indians of the western part of the Great Plains, such as the Dakota and Sioux, were a buffalo-hunting people, and that during the short period of his adult life the male had great prestige as a buffalo hunter and warrior against other buffalo-hunters, we see why the old man and the boy, the woman and the girl are secondary, why there is a forced habit of honoring the qualities which only a few of the people can have. We therefore expect to find an aristocratic society based upon the appropriate hunting and war-making arts. Since surplus wealth is possible, there can be a genuine leisure-class philosophy, as witness the beautiful and intricate philosophy and theology developed by the Dakotas.
3. In defining the role of the economic arts, we shall use a principle: the same geographic problems may take entirely different forms by virtue of different social attitudes, different ways of "phrasing the situation." Suppose, for example, that great schools of fish appear offshore. Among some primitive peoples the right procedure, if a person sees a school of fish, is to run quietly home and tell his closest relatives, who promply make a big catch. Among other tribes with the same food problem, anyone who notices a school of fish noises the fact abroad like a town crier, and the whole community go out with their nets; the fish are corporately caught and corporately devoured. In the first group we are dealing with competitive personalities, and in the second with cooperative personalities; in each generation such personalities result from the pattern of life in childhood. If, then, we look closely at economic determinism, we find that it is not a question of the economic situation, but a question of the economic behavior of the group. Economic behavior does not result solely from the economic situation, but from a complex which includes non-economic factors. It would consequently be meaningless to say that the economic situation alone determines the personality pattern; the economic situation is one of several factors that shape the personalities who express and are expressed in the culture. But we must be clear as to what these other factors are; we shall pursue them through several chapters.
With the above qualifications, we find, then, much value in the concept of economic determinism. But by this phrase is meant determinism not through the economic situation, but through the economic institutions--the social inventions shared by the group in dealing with an economic situation. The economic situation--including climate, soil, forests, fish, game, etc.--constitutes a vital stimulus but does not forecast the response. Social change does not follow directly from changes in the food supply or from disaster or war; it follows from the way in which such a crisis articulates with the prevailing pattern of needs and attitudes.
We may ask how economic institutions originate if they do not derive directly from the economic situation. Their origin is legion. In addition to the economic situation there are many biological, cultural, and personal factors. An example of a biological factor is the fact that a physically diminutive people who can live on a very limited caloric intake will not develop quite the same institutions as a people large in stature who need half again as much food; another biological example is the fact that a people with a long life span will have proportions of old and young differing from those of a people with a shorter span. An example of a cultural factor operating to define the role of the economic situation is the fact that when groups with different traditions are brought into a common area and faced with common problems, they understand their economic predicament in the light of their own traditions. Under such conditions, there will be a deep unconscious residue of attitude from an earlier period. The personal factor is seen in the fact that, within each group, biological variability and the varying impress of different institutions will have yielded differences in personality, and these will lead to various individual ways of coping with each economic problem.
Though we cannot begin with the economic situation and proceed, as through a funnel, to a final description of personality, we shall often have to give the economic situation the place of figure in the figure-ground pattern of all situations; it will tend to become the anchorage point in a world of problems. In the same way, economic institutions will often be the figure as we confront institutional life as a whole. In consequence, so far as personality is anchored upon a response to social institutions, it will tend to be anchored upon attitudes related to economic goals--goals reached through economic behavior.
One example is only a starter, however; we must proceed to a more cautious analysis of what is involved. In the Madagascar group we saw that the economic situation itself--the availability of an area for wet-rice cultivation--seemed to offer an explanation for new economic institutions; institutions responded to physical realities. We must examine a broader collection of data to see whether this simple causal relation can be confirmed; we must at the same time consider whether other institutional patterns must perforce yield to the oneway action of economic behavior; and finally, we must determine whether personality can be viewed as the end result of such a causal sequence.
Let us get our terminology clear, and make the distinctions which are imperative if an analysis is to be carried through. By "economic determinism" we mean any system of thought in which the main outlines of social life are derived from the economic organization of the group. A prominent but by no means the only version of the thesis is the conception of Marx and Engels that social life is a reflection of the way in which the dominant social group, at a given stage in the productive arts, maintains its economic status; social change, for example, is forced upon the entire social group as a result of technological changes and inventions which enhance or challenge the power of the ruling class. It is generally conceded, as Marx maintained, that a changing economic pattern causes changes in other aspects of the life pattern; science, the fine arts, philosophy, and religion are transformed as a result of a change in the productive arts. At the same time it is important to emphasize, as did Marx and Engels, that these other "derived" institutions have their own effect upon the productive arts. There is constant interaction (suggested by the Hegelian concept of dialectic), the economic forces being primary but being constantly modified by the influence of the derived institutions.This defines roughly in what sense economic determinism is valuable as an avenue of approach to personality. Three points must be stressed:
1. The economic situation can limit the possibilities of personality growth in particular directions. If life is a constant struggle against cold and scarcity of food, as it is for the Central Eskimo, the situation is unfavorable for the rise of the philosophies and sciences of a leisure class, or a theology based upon the concept of universal goodness, the "cup runneth over" idea of life. In relation to the subsistence problem which the Eskimo faces, these concepts would be functionally meaningless. Similarly, there can only be certain kinds of personalities when there are such economic limitations.
2. We may go beyond this purely negative statement and say that the economic situation will indicate the likely directions in which the various social patterns will evolve. When, for example, we consider that the Indians of the western part of the Great Plains, such as the Dakota and Sioux, were a buffalo-hunting people, and that during the short period of his adult life the male had great prestige as a buffalo hunter and warrior against other buffalo-hunters, we see why the old man and the boy, the woman and the girl are secondary, why there is a forced habit of honoring the qualities which only a few of the people can have. We therefore expect to find an aristocratic society based upon the appropriate hunting and war-making arts. Since surplus wealth is possible, there can be a genuine leisure-class philosophy, as witness the beautiful and intricate philosophy and theology developed by the Dakotas.
3. In defining the role of the economic arts, we shall use a principle: the same geographic problems may take entirely different forms by virtue of different social attitudes, different ways of "phrasing the situation." Suppose, for example, that great schools of fish appear offshore. Among some primitive peoples the right procedure, if a person sees a school of fish, is to run quietly home and tell his closest relatives, who promply make a big catch. Among other tribes with the same food problem, anyone who notices a school of fish noises the fact abroad like a town crier, and the whole community go out with their nets; the fish are corporately caught and corporately devoured. In the first group we are dealing with competitive personalities, and in the second with cooperative personalities; in each generation such personalities result from the pattern of life in childhood. If, then, we look closely at economic determinism, we find that it is not a question of the economic situation, but a question of the economic behavior of the group. Economic behavior does not result solely from the economic situation, but from a complex which includes non-economic factors. It would consequently be meaningless to say that the economic situation alone determines the personality pattern; the economic situation is one of several factors that shape the personalities who express and are expressed in the culture. But we must be clear as to what these other factors are; we shall pursue them through several chapters.
With the above qualifications, we find, then, much value in the concept of economic determinism. But by this phrase is meant determinism not through the economic situation, but through the economic institutions--the social inventions shared by the group in dealing with an economic situation. The economic situation--including climate, soil, forests, fish, game, etc.--constitutes a vital stimulus but does not forecast the response. Social change does not follow directly from changes in the food supply or from disaster or war; it follows from the way in which such a crisis articulates with the prevailing pattern of needs and attitudes.
We may ask how economic institutions originate if they do not derive directly from the economic situation. Their origin is legion. In addition to the economic situation there are many biological, cultural, and personal factors. An example of a biological factor is the fact that a physically diminutive people who can live on a very limited caloric intake will not develop quite the same institutions as a people large in stature who need half again as much food; another biological example is the fact that a people with a long life span will have proportions of old and young differing from those of a people with a shorter span. An example of a cultural factor operating to define the role of the economic situation is the fact that when groups with different traditions are brought into a common area and faced with common problems, they understand their economic predicament in the light of their own traditions. Under such conditions, there will be a deep unconscious residue of attitude from an earlier period. The personal factor is seen in the fact that, within each group, biological variability and the varying impress of different institutions will have yielded differences in personality, and these will lead to various individual ways of coping with each economic problem.
Though we cannot begin with the economic situation and proceed, as through a funnel, to a final description of personality, we shall often have to give the economic situation the place of figure in the figure-ground pattern of all situations; it will tend to become the anchorage point in a world of problems. In the same way, economic institutions will often be the figure as we confront institutional life as a whole. In consequence, so far as personality is anchored upon a response to social institutions, it will tend to be anchored upon attitudes related to economic goals--goals reached through economic behavior.
Sea Power and National Power - Commerce History
In its narrowest sense, sea power means military power at sea, in other words, navies. But no one can study the history of nations in relation to the sea without realizing that the nations that have been maritime forces have usually not depended on naval power alone -- a condition that Admiral Mahan recognized when he pointed out, in 1890, that sea power consisted of merchant ships, naval vessels, plus bases from which they could be serviced. As a matter of fact, one condition recognized as fundamental to a nation's being a sea power has been that a great and powerful navy is dependent for its financial support on a large and active merchant marine engaged in a flourishing commerce. The only great nation that has attempted to support a navy without a corresponding merchant marine has been the United States.
For a nation to emerge as a sea power and to retain that status, however, more than ships and bases to serve those ships is involved. A nation's strength on the sea is conditioned by its "national" status and by its ability to absorb imports and to produce for export. The Dutch attained commercial supremacy at sea at a time when their country was little more than a loose federation of seven provinces, and the rich burghers who sat in the provincial legislative bodies were so fearful of central power that they failed to provide for the protection of their commerce. In addition to the Dutch, the early trading nations were the Portuguese, Spanish, English, and French -- all of whom emerged as nations before the other peoples of western Europe. Germany, Italy, and Japan did not assume importance on the sea until late in the nineteenth century. It is not surprising that one of the first peoples to evolve as a nation -- the British, with their commercial policy, their fleets, and their ability to absorb imports and to produce for export -- should have developed as the great maritime and great national power. For almost a century, her navy policed the seas, keeping the sea lanes open not only for her own merchant ships but also for the ships of any nation that were, in the words of His Majesty's Navy, pursuing "their lawful occupations."
National powers may be defined as nations whose policies dominate world affairs economically and politically. Throughout history, world powers have almost always been sea powers. This was true of the ancient world. In more recent times, the only countries not powerful on the sea that could be termed world powers were Austria-Hungary and Imperial Russia, although the "Russo-Japanese War...revealed Russia as far less formidable than her size and the multitude of her peoples had caused men to suppose." 10
Immediately before World War I, the national powers were AustriaHungary, France, Germany, Great Britain, Italy, Japan, Russia, and the United States. The peace of Europe between 1815 and 1914, or rather the absence of a major war, had rested on a balance of power
...which presupposed the existence of France, Germany, Austria-Hungary, and Russia as dominant elements -- and all of this flanked by an England instinctively conscious of her stake in the preservation of the balance among them and prepared to hover vigilantly about the fringes of the Continent, tending its equilibrium as one might tend a garden, yet always with due regard for the preservation of her own maritime supremacy and the protection of her overseas empire. In this complicated structure lay concealed not only the peace of Europe but also the security of the United States. Whatever affected it was bound to affect us. And all through the latter part of the nineteenth century things were happening which were bound to affect it: primarily the gradual shift of power from Austria-Hungary to Germany. This was particularly important because Austria-Hungary had not had much chance of becoming a naval and commercial rival to England, whereas Germany definitely did have such a chance and was foolish enough to exploit it aggressively...
For a nation to emerge as a sea power and to retain that status, however, more than ships and bases to serve those ships is involved. A nation's strength on the sea is conditioned by its "national" status and by its ability to absorb imports and to produce for export. The Dutch attained commercial supremacy at sea at a time when their country was little more than a loose federation of seven provinces, and the rich burghers who sat in the provincial legislative bodies were so fearful of central power that they failed to provide for the protection of their commerce. In addition to the Dutch, the early trading nations were the Portuguese, Spanish, English, and French -- all of whom emerged as nations before the other peoples of western Europe. Germany, Italy, and Japan did not assume importance on the sea until late in the nineteenth century. It is not surprising that one of the first peoples to evolve as a nation -- the British, with their commercial policy, their fleets, and their ability to absorb imports and to produce for export -- should have developed as the great maritime and great national power. For almost a century, her navy policed the seas, keeping the sea lanes open not only for her own merchant ships but also for the ships of any nation that were, in the words of His Majesty's Navy, pursuing "their lawful occupations."
National powers may be defined as nations whose policies dominate world affairs economically and politically. Throughout history, world powers have almost always been sea powers. This was true of the ancient world. In more recent times, the only countries not powerful on the sea that could be termed world powers were Austria-Hungary and Imperial Russia, although the "Russo-Japanese War...revealed Russia as far less formidable than her size and the multitude of her peoples had caused men to suppose." 10
Immediately before World War I, the national powers were AustriaHungary, France, Germany, Great Britain, Italy, Japan, Russia, and the United States. The peace of Europe between 1815 and 1914, or rather the absence of a major war, had rested on a balance of power
...which presupposed the existence of France, Germany, Austria-Hungary, and Russia as dominant elements -- and all of this flanked by an England instinctively conscious of her stake in the preservation of the balance among them and prepared to hover vigilantly about the fringes of the Continent, tending its equilibrium as one might tend a garden, yet always with due regard for the preservation of her own maritime supremacy and the protection of her overseas empire. In this complicated structure lay concealed not only the peace of Europe but also the security of the United States. Whatever affected it was bound to affect us. And all through the latter part of the nineteenth century things were happening which were bound to affect it: primarily the gradual shift of power from Austria-Hungary to Germany. This was particularly important because Austria-Hungary had not had much chance of becoming a naval and commercial rival to England, whereas Germany definitely did have such a chance and was foolish enough to exploit it aggressively...
Earliest steamships to cross the Atlantic
The Great Britain, launched in England in 1844 for the Great Western Lines, represents a landmark in the history of the ship, for she was the first iron-hulled, double-bottomed, screw-propelled Atlantic liner. As everyone knows, the wooden-hulled paddle-wheeler, the Clermont, which steamed up the Hudson River on Aug. 17, 1807, was the first steamship to engage in commercially successful operations. The wooden, paddle-wheel steamboat, ideal for navigation on rivers and protected waters of sounds and bays, had been an American invention; the oceangoing steamship was born in the tempestuous seas around the British Isles.
After several experimental voyages, effective steamship service was begun between Europe and North America in 1838, the year in which the Great Western (1,340 gross tons) and the British Queen (1,862 tons) were launched. The British soon added subsidized lines to carry the mails, including Cunard, the Peninsula and Oriental Steam Navigation Company, and the Royal Mail Steam Packet Company. During the 1850's, an American, E. K. Collins, also offered transatlantic service with his steamships, the Arctic, Atlantic, Baltic, and Pacific.
Although good shipbuilding timber had been in short supply in the British Isles for generations, the iron hull made rather slow progress. The admiralty was ready to accept steam (the Royal Navy had acquired three steamships, the Comet, the Meteor, and the Lightning, between 1820 and 1823), but regarded iron-hulled ships with skepticism, because officials considered them more vulnerable to solid shot than wooden vessels. This stand of the admiralty limited experimentation with iron ships to nonsubsidized operators, or at least to nonsubsidized operations, for the Peninsula and Oriental urged the use of iron for ship construction as early as the 1840's. The leaders, however, were such free operators as the Great Western Railway Lines. Iron gained over wood rapidly after 1846, when the Great Britain was stranded off the coast of Ireland and remained on the beach all winter with little damage. Furthermore, the screw propeller had been invented. It was recognized as much more suitable for the rough-and-tumble workaday trade of oceangoing traffic than the cumbersome yet delicate paddle wheels, but its vibrations made wooden hulls leak. In 1854, Lloyd's organized a special committee to draw up rules for the classification of iron ships, both sailers and steamships.
The screw propeller was soon followed by the compound engine, with a great saving of fuel. Next came the surface condenser, which made it unnecessary to carry large quantities of fresh water for the boilers. These changes increased the cruising range of ships, or perhaps it would be more accurate to say their carrying capacity. To save on the coal for bunkers, all early steamships carried auxiliary sails, a practice that was continued up to the 1880's. One of the earliest steamships to cross the Atlantic was the Sirius, which loaded 95 passengers and 450 tons of coal at Cork in 1848 and arrived in New York eighteen and a half days later, after having scraped the coalbins and supplemented her coal bunkers with the ship's fittings and furniture. By the 1870's, the British were producing iron steamships of 2,000 gross tons, capable of 7 knots and requiring 40 tons of coal per day.
By the 1860's, the iron steamship had come into its own, and though British shipyards were turning them out as fast as possible, they could not keep up with the demand. By then, approximately 30 percent of the British ships were iron, and 50 percent of those being constructed were iron, many of them iron sailers. This was due in part to limitations of manpower, for a man who had sailed before the mast was not necessarily equipped to serve as a crewman on a steamship, and the navy, by then building only iron steamships, had first call on the services of trained personnel. To meet the demand for vessel tonnage to carry an everexpanding overseas commerce, British shipyards turned out thousands of iron sailers. The first of these was the bark Ironsides, launched in 1838 for trade with Brazil, and the last big year was 1892. British steamships were naturally used on the busiest routes such as the North Atlantic, into the Mediterranean, and to South America, while the iron sailers were used in the Australian wool trade, the grain trade, and so forth. As soon as British yards could furnish replacements, the iron sailing ships were sold abroad -- to Germany, the Scandinavian countries, and others then building up their merchant marines.
Prior to 1880, very little steel was used in vessel construction because of the cost. In fact, after the Bessemer process for producing steel plate was perfected, Germany led with the steel ship for a time, but by the 1890's, Britain had turned from iron to steel. At the beginning of that decade, the world's merchant fleet was composed as follows: iron, 10 million gross tons; wood, 7 million tons; and steel, 4 million tons.
The decline of the American merchant marine is contemporary with the development of the steamship. From the vantage point of the 1950's, it is apparent that American shipowners, the American public, and the government had little understanding of the revolutionary changes taking place in the shipping industry. Although the Federal government had subsidized steamships to the extent of 14 million dollars by 1858 only ships that had been making money were the nonsubsidized transatlantic sailing packets and the California clippers. Present profits blinded shipping men to future prospects and to warnings that they might have heeded. On Mar. 31, 1860, they could have read in the Scientific American:
Three years ago we directed attention to the great increase of foreign screw steamers, and showed clearly how they were rapidly taking away the trade that has been formerly carried by American ships.... To-day nearly all the mail and passenger, besides a great deal of the goods, traffic, is carried by foreign ships, the great majority of which are iron screw steamers.... We have not a single new Atlantic steamship on the stocks, while in Great Britain, there are 16,000 tons of new iron steamers building for the American trade.
From about 1800 to 1840, the United States, a new nation, had been able to challenge Britain's commercial supremacy. (An American steamship, the Savannah, which sailed from Savannah, Georgia, on May 22,1819, was the first ship to use steam in an Atlantic crossing.) As Morison points out, England won it back "in fair competition by the skill of her engineers and the sturdy courage of her shipbuilders. Civil war turned the Yankee mind to other objects; the World War revived the ancient challenge."
After several experimental voyages, effective steamship service was begun between Europe and North America in 1838, the year in which the Great Western (1,340 gross tons) and the British Queen (1,862 tons) were launched. The British soon added subsidized lines to carry the mails, including Cunard, the Peninsula and Oriental Steam Navigation Company, and the Royal Mail Steam Packet Company. During the 1850's, an American, E. K. Collins, also offered transatlantic service with his steamships, the Arctic, Atlantic, Baltic, and Pacific.
Although good shipbuilding timber had been in short supply in the British Isles for generations, the iron hull made rather slow progress. The admiralty was ready to accept steam (the Royal Navy had acquired three steamships, the Comet, the Meteor, and the Lightning, between 1820 and 1823), but regarded iron-hulled ships with skepticism, because officials considered them more vulnerable to solid shot than wooden vessels. This stand of the admiralty limited experimentation with iron ships to nonsubsidized operators, or at least to nonsubsidized operations, for the Peninsula and Oriental urged the use of iron for ship construction as early as the 1840's. The leaders, however, were such free operators as the Great Western Railway Lines. Iron gained over wood rapidly after 1846, when the Great Britain was stranded off the coast of Ireland and remained on the beach all winter with little damage. Furthermore, the screw propeller had been invented. It was recognized as much more suitable for the rough-and-tumble workaday trade of oceangoing traffic than the cumbersome yet delicate paddle wheels, but its vibrations made wooden hulls leak. In 1854, Lloyd's organized a special committee to draw up rules for the classification of iron ships, both sailers and steamships.
The screw propeller was soon followed by the compound engine, with a great saving of fuel. Next came the surface condenser, which made it unnecessary to carry large quantities of fresh water for the boilers. These changes increased the cruising range of ships, or perhaps it would be more accurate to say their carrying capacity. To save on the coal for bunkers, all early steamships carried auxiliary sails, a practice that was continued up to the 1880's. One of the earliest steamships to cross the Atlantic was the Sirius, which loaded 95 passengers and 450 tons of coal at Cork in 1848 and arrived in New York eighteen and a half days later, after having scraped the coalbins and supplemented her coal bunkers with the ship's fittings and furniture. By the 1870's, the British were producing iron steamships of 2,000 gross tons, capable of 7 knots and requiring 40 tons of coal per day.
By the 1860's, the iron steamship had come into its own, and though British shipyards were turning them out as fast as possible, they could not keep up with the demand. By then, approximately 30 percent of the British ships were iron, and 50 percent of those being constructed were iron, many of them iron sailers. This was due in part to limitations of manpower, for a man who had sailed before the mast was not necessarily equipped to serve as a crewman on a steamship, and the navy, by then building only iron steamships, had first call on the services of trained personnel. To meet the demand for vessel tonnage to carry an everexpanding overseas commerce, British shipyards turned out thousands of iron sailers. The first of these was the bark Ironsides, launched in 1838 for trade with Brazil, and the last big year was 1892. British steamships were naturally used on the busiest routes such as the North Atlantic, into the Mediterranean, and to South America, while the iron sailers were used in the Australian wool trade, the grain trade, and so forth. As soon as British yards could furnish replacements, the iron sailing ships were sold abroad -- to Germany, the Scandinavian countries, and others then building up their merchant marines.
Prior to 1880, very little steel was used in vessel construction because of the cost. In fact, after the Bessemer process for producing steel plate was perfected, Germany led with the steel ship for a time, but by the 1890's, Britain had turned from iron to steel. At the beginning of that decade, the world's merchant fleet was composed as follows: iron, 10 million gross tons; wood, 7 million tons; and steel, 4 million tons.
The decline of the American merchant marine is contemporary with the development of the steamship. From the vantage point of the 1950's, it is apparent that American shipowners, the American public, and the government had little understanding of the revolutionary changes taking place in the shipping industry. Although the Federal government had subsidized steamships to the extent of 14 million dollars by 1858 only ships that had been making money were the nonsubsidized transatlantic sailing packets and the California clippers. Present profits blinded shipping men to future prospects and to warnings that they might have heeded. On Mar. 31, 1860, they could have read in the Scientific American:
Three years ago we directed attention to the great increase of foreign screw steamers, and showed clearly how they were rapidly taking away the trade that has been formerly carried by American ships.... To-day nearly all the mail and passenger, besides a great deal of the goods, traffic, is carried by foreign ships, the great majority of which are iron screw steamers.... We have not a single new Atlantic steamship on the stocks, while in Great Britain, there are 16,000 tons of new iron steamers building for the American trade.
From about 1800 to 1840, the United States, a new nation, had been able to challenge Britain's commercial supremacy. (An American steamship, the Savannah, which sailed from Savannah, Georgia, on May 22,1819, was the first ship to use steam in an Atlantic crossing.) As Morison points out, England won it back "in fair competition by the skill of her engineers and the sturdy courage of her shipbuilders. Civil war turned the Yankee mind to other objects; the World War revived the ancient challenge."
The nineteenth century Communications
The nineteenth century witnessed other changes, which, though not caused primarily by British instigation, assisted in the growth of the commerce that Britain was dedicated to promoting. Transportation by land and water and communication between widely separated areas became speedy and cheap. In 1869, the two coasts of the United States were linked by a transcontinental railroad, and railway construction in Argentina, Australia, and India soon proceeded at a rapid pace. Agricultural surpluses produced hundreds of miles inland could be moved to seaboard rapidly and cheaply. Between 1866 and 1895, the first transatlantic submarine cable was laid and the telephone and wireless introduced. International correspondence became inexpensive and reliable when the Universal Postal Union was founded in 1874.
Such communications greatly assisted the growth of trade and naturally that of the country whose overseas commerce was already the largest. Britain's commercial supremacy, however, was completed with the introduction of the steamship.
Such communications greatly assisted the growth of trade and naturally that of the country whose overseas commerce was already the largest. Britain's commercial supremacy, however, was completed with the introduction of the steamship.
Commerce History Peace and Security
Peace and security are great promoters of commerce among nations and also of the productivity which makes that commerce possible. Between 1815 and 1914, the English people were not engaged in any great war. Both the Crimean and Boer wars were localized conflicts in which hostilities were far removed from the British Isles. Free of the fear of invasion, the British devoted themselves to social, economic, and political changes and reforms in which they far surpassed the rest of the world. In 1815, no country in Europe was in a position to work out such reforms.
At the conference table where the peace of 1815 was formulated, the geographical boundaries of three European countries were extended in recognition of their part in helping to defeat Napoleon -- Russia, Prussia, and Austria-Hungary. None of these was then even a minor influence on the sea, though the way was prepared for Prussia later to force her will on surrounding Germanic provinces, to seize France's Alsace-Lorraine district, and as Imperial Germany to challenge Britain's mastery of the sea. France was left an empire with minor adjustments of her boundaries to reduce them in general to pre-Napoleonic dimensions, and her sugar islands of Martinique and Guadeloupe, Pondichéry, and the old French factories were restored to her.
Lying between or around these powers or potential powers of Russia, Germany, Austria-Hungary, and France were the small countries of Europe. Because Castlereagh, whose voice was the deciding one on British policy, thought a strong Dutch kingdom would be a bulwark against French ambitions, the Kingdom of the Netherlands was created to include Belgium, and to the Dutch were restored their rich islands in the Far East and Surinam and a few West Indies islands in America. Denmark, Sweden, and Norway were free, though Norway was joined to Sweden in a voluntary union. To the south, Italy remained as she had been since the end of the Roman Empire -- a country disunited.
To complete the trading map of the world in 1815, Africa was the Dark Continent, as yet little noticed by the countries of Europe except as a source for slaves. The Near or Middle East, still a part of the Turkish Empire, had lost all importance as a link between East and West, waiting for the Suez Canal and petroleum to plunge it back into the vortex of world affairs. India was still governed by the British East India Company; China, a slumbering giant, was yet to be torn by the opium wars; and Japan, a hermit nation, permitted extremely limited trade through the port of Nagasaki to the Dutch. In America, the United States was free, developing a flourishing trade that complemented more than it rivaled Britain's commerce, while Canada remained secure as a British colony. To the south, the vast regions of Central and South America were on the verge of revolt.
Such was the trading world at the beginning of the nineteenth century. History certainly favored the British in their bid for commercial supremacy.
At the conference table where the peace of 1815 was formulated, the geographical boundaries of three European countries were extended in recognition of their part in helping to defeat Napoleon -- Russia, Prussia, and Austria-Hungary. None of these was then even a minor influence on the sea, though the way was prepared for Prussia later to force her will on surrounding Germanic provinces, to seize France's Alsace-Lorraine district, and as Imperial Germany to challenge Britain's mastery of the sea. France was left an empire with minor adjustments of her boundaries to reduce them in general to pre-Napoleonic dimensions, and her sugar islands of Martinique and Guadeloupe, Pondichéry, and the old French factories were restored to her.
Lying between or around these powers or potential powers of Russia, Germany, Austria-Hungary, and France were the small countries of Europe. Because Castlereagh, whose voice was the deciding one on British policy, thought a strong Dutch kingdom would be a bulwark against French ambitions, the Kingdom of the Netherlands was created to include Belgium, and to the Dutch were restored their rich islands in the Far East and Surinam and a few West Indies islands in America. Denmark, Sweden, and Norway were free, though Norway was joined to Sweden in a voluntary union. To the south, Italy remained as she had been since the end of the Roman Empire -- a country disunited.
To complete the trading map of the world in 1815, Africa was the Dark Continent, as yet little noticed by the countries of Europe except as a source for slaves. The Near or Middle East, still a part of the Turkish Empire, had lost all importance as a link between East and West, waiting for the Suez Canal and petroleum to plunge it back into the vortex of world affairs. India was still governed by the British East India Company; China, a slumbering giant, was yet to be torn by the opium wars; and Japan, a hermit nation, permitted extremely limited trade through the port of Nagasaki to the Dutch. In America, the United States was free, developing a flourishing trade that complemented more than it rivaled Britain's commerce, while Canada remained secure as a British colony. To the south, the vast regions of Central and South America were on the verge of revolt.
Such was the trading world at the beginning of the nineteenth century. History certainly favored the British in their bid for commercial supremacy.
History of the Market and Surpluses
By 1800, the Industrial Revolution was well under way in the British Isles, and from the very beginning of the industrial era, Britain needed certain imports. Her industrial development was founded on abundant supplies of cheap coal, good coke, and iron ore; on a large and efficient body of laborers; and on large numbers of skilled artisans. To produce the machines, engines, locomotives, and steamships that the British manufactured at relatively low cost, the heavy industries imported high-grade ores from Sweden to mix with their low-grade ores. The wool-textile industry early outstripped domestic supplies, and its growth depended on imports. The entire cotton industry of Lancashire was developed because supplies of cotton were available, chiefly from the United States.
Over the years, the only basic commodity in which the British have been self-sufficient is coal. All of her cotton and petroleum are now and have always been imported from overseas. By the 1930's, nine-tenths of the wool and timber and one-third of the iron ores used by British industry arrived by ship. Ships also brought to the United Kingdom four-fifths of her wheat, two-fifths of her meat, and all of her rice, tea, coffee, bananas, and citrus fruits.
The basic foodstuffs to feed Europe's industrial workers and the raw materials for the factories came primarily from the United States, Canada, Argentina, Australia, and New Zealand. These countries were, for the most part, closely tied to Britain economically, culturally, and politically. The largest stream of overseas trade was fed into world commerce not by the regions of colonial exploitation but from areas of settled government and efficient economic production. Trade with Europe developed these areas, for agricultural exports provided an excellent way of paying interest on and eventually amortizing debts to Europe.
Over the years, the only basic commodity in which the British have been self-sufficient is coal. All of her cotton and petroleum are now and have always been imported from overseas. By the 1930's, nine-tenths of the wool and timber and one-third of the iron ores used by British industry arrived by ship. Ships also brought to the United Kingdom four-fifths of her wheat, two-fifths of her meat, and all of her rice, tea, coffee, bananas, and citrus fruits.
The basic foodstuffs to feed Europe's industrial workers and the raw materials for the factories came primarily from the United States, Canada, Argentina, Australia, and New Zealand. These countries were, for the most part, closely tied to Britain economically, culturally, and politically. The largest stream of overseas trade was fed into world commerce not by the regions of colonial exploitation but from areas of settled government and efficient economic production. Trade with Europe developed these areas, for agricultural exports provided an excellent way of paying interest on and eventually amortizing debts to Europe.
In thinking about competition we tend to be retrospectively oriented. We often have past or previous models of competition and competitive situations
What do such changes mean for the firm? They imply a need to create differential advantage on other than a price basis. 3 They support the creation of preferences through aggressive, integrated marketing programs; by adjusting the goods and service mix, the communications mix, and the distribution mix of the firm to bring them into line with consumer wants and needs and so assure a market niche and satisfactory profit position. They stress the pivotal role of innovation in the management of corporate resources.These changes also indicate that in reality management's attempt to create advantage does not stem from a drive to develop a monopoly, as critics have suggested. Rather, it is rooted in the desire to compete successfully. In using marketing strategies to create differential advantage, management is concerned with competitors and their activities and not the establishment of a monopoly. For each innovation they expect counter-innovations. Management expects that differential advantage will eventually be eroded by counter-moves of competitors.Gaining consumer acceptance of new products or services, especially radically new ones, is a difficult challenge confronting marketing managers in creating differential advantage. It requires: 1. that consumers be so motivated that they will acquire new patterns of thought, new habits, even new skills, that are necessary for the acceptance and use of the new product in a favorable manner.
2. that the assistance in developing the attitudes and skills will be furnished by the members of the marketing system including manufacturers, wholesalers, retailers, and advertising and other facilitating agencies.
3. that in some cases attempts be made to alter cues in the consumers' environment which elicit the types of consumer behavior that are unfavorable to the product.
4. that consumers' reward systems must be understood so that changes are encouraged by rewarding the consumer for adopting new patterns.
Companies today are competing for much different types of markets than they have in the past. They are no longer competing to provide ample food, shelter, and clothing. Ours is an economy of plenty which has, in great measure, met the demands of basic physical needs. As a result, competition, market expansion, and the creation of differential advantage, to a large extent, become vertical in nature rather than horizontal. New markets must be found in terms of types of food, types of clothing, types of shelter, and types of recreation. An opportunity exists, therefore, for upgrading the tastes, the desires, and acts of consumers. Marketing through programmed innovation on a vertical plane can become a significant cultural, and civilizing force.
It has been suggested that the next competitive frontier facing business is an inner one. It is the market of the mind and the personal development of consumers. Competition and innovation may be geared to filling the needs of this inner frontier. One of the roles of marketing in the future may be that of encouraging increasing expenditures, of both dollars and time, to develop consumers intellectually, socially, and morally. Hence, during a period of increasing leisure, and abundance, competition, through marketing, may well become a significant cultural stimulus. It may provide the impetus for the improvement of consumer tastes. It may afford an increase in consumer cognizance and appreciation of aesthetic values. Competition, then, may be pursued on a cultural plane. If this occurs, marketing, innovation, and competition may become driving forces for the cultural development of society.
2. that the assistance in developing the attitudes and skills will be furnished by the members of the marketing system including manufacturers, wholesalers, retailers, and advertising and other facilitating agencies.
3. that in some cases attempts be made to alter cues in the consumers' environment which elicit the types of consumer behavior that are unfavorable to the product.
4. that consumers' reward systems must be understood so that changes are encouraged by rewarding the consumer for adopting new patterns.
Companies today are competing for much different types of markets than they have in the past. They are no longer competing to provide ample food, shelter, and clothing. Ours is an economy of plenty which has, in great measure, met the demands of basic physical needs. As a result, competition, market expansion, and the creation of differential advantage, to a large extent, become vertical in nature rather than horizontal. New markets must be found in terms of types of food, types of clothing, types of shelter, and types of recreation. An opportunity exists, therefore, for upgrading the tastes, the desires, and acts of consumers. Marketing through programmed innovation on a vertical plane can become a significant cultural, and civilizing force.
It has been suggested that the next competitive frontier facing business is an inner one. It is the market of the mind and the personal development of consumers. Competition and innovation may be geared to filling the needs of this inner frontier. One of the roles of marketing in the future may be that of encouraging increasing expenditures, of both dollars and time, to develop consumers intellectually, socially, and morally. Hence, during a period of increasing leisure, and abundance, competition, through marketing, may well become a significant cultural stimulus. It may provide the impetus for the improvement of consumer tastes. It may afford an increase in consumer cognizance and appreciation of aesthetic values. Competition, then, may be pursued on a cultural plane. If this occurs, marketing, innovation, and competition may become driving forces for the cultural development of society.
Dimensions of competition
Competition has many dimensions. There are legal considerations, political aspects, ethical perspectives, psychological and social dimensions. Essentially competition can be defined only in terms of the culture and nature of the people that surround it. Competition has its fullest meaning in the marketing environment of a consumeristic economy rather than in the cartelized, planned, or cooperative environments existing in many countries.
From a marketing perspective what does competition connote? It emphasizes changing profit opportunities that are available for perceptive firms because of the existence of a dynamic marketing environment. It stresses the necessity of striving for the creation of differential advantage in the market place. It underscores the primacy of planning and programming innovation on a continuing basis to adjust company offerings to a changing competitive scene.
Competition, in marketing terms, refers to the effective management of innovation to meet changing marketing opportunities. Innovation is an instrument by means of which companies compete vigorously in the market place. Programmed innovation is the corporate method of achieving continuous market adjustment; competition is its stimulus. Keenly competitive situations manifest themselves in new products, new processes, new services, new ideas, and new techniques as well as in price adjustments. We should be aware, however, not only of the degree of competition suggested by quantitative measures of newness, and number of competitors, but also the kind of competition suggested by qualitative considerations.
In thinking about competition we tend to be retrospectively oriented. We often have past or previous models of competition and competitive situations in mind. We often conceptualize competition in terms of an emerging industrial society rather than a maturing industrial society, in terms of price competition rather than convenience and service competition, in terms of an economy of scarcity with relatively low consumer purchasing power rather than an abundant economy with widespread discretionary purchasing power, in terms of manufacturers and sellers completely controlling and dominating the market place rather than an economy governed to a considerable extent by consumer sovereignty, and in terms of intra-industry competition rather than interindustry competition. Sometimes we even conceive of competition in terms of an agrarian economy where only imperfectly competitive situations exist.
In particular the emphasis on price, that stems from past economic situations, is today often misplaced. This does not mean that price competition is no longer important. It does mean, however, that ours is often a competitive situation in which price obscurity and not price clarity is the rule. The general situation where consumers face competitive price offerings in the market place, and must exercise rational economic judgment by becoming human calculators is not the norm. In its stead we find the use of fictitious list prices, trade-ins, coupons, allowances, special discount prices, service variations, packaging differences and a multitude of brands. They tend to obliterate price information, to reduce the emphasis on rational price behavior, and to alter our concepts of competition.
Competitors must be viewed as both instigators and receptors of competition. As instigators, they must perceive of their environments accurately, assemble marketing intelligence, and draw inferences about competitive reality. As receptors, they must be prepared to launch counter strategies.
The normal competitive cycle becomes one of programmed innovation and counter-innovation. The stimulus for innovation at any time, however, may be curtailed because of two types of resistance: external and internal. Internal resistance may stem from inertia, lack of capital, fear of counter-competitive consequences, or a host of real or imagined obstacles on the part of a company. External resistance, which raises the most substantial barriers, includes consumers' resistance in the market place.
To an extent, a company may have some effect in altering consumer resistance by communicating with markets, developing products so they better meet consumers wants and needs, and by helping consumers overcome resistance to change. Limits exist, however, beyond which corporate action will have relatively little impact. Quite often, for example, when a product is totally new, consumer resistance will be great and extensive marketing effort is required to overcome resistance to change.
Other external factors which place a limit on competition and innovation include various types of governmental regulation, accepted industry practices and agreements, and the social and cultural environment. As factors limit or restrict innovative opportunity, they affect competition directly.
From a marketing perspective what does competition connote? It emphasizes changing profit opportunities that are available for perceptive firms because of the existence of a dynamic marketing environment. It stresses the necessity of striving for the creation of differential advantage in the market place. It underscores the primacy of planning and programming innovation on a continuing basis to adjust company offerings to a changing competitive scene.
Competition, in marketing terms, refers to the effective management of innovation to meet changing marketing opportunities. Innovation is an instrument by means of which companies compete vigorously in the market place. Programmed innovation is the corporate method of achieving continuous market adjustment; competition is its stimulus. Keenly competitive situations manifest themselves in new products, new processes, new services, new ideas, and new techniques as well as in price adjustments. We should be aware, however, not only of the degree of competition suggested by quantitative measures of newness, and number of competitors, but also the kind of competition suggested by qualitative considerations.
In thinking about competition we tend to be retrospectively oriented. We often have past or previous models of competition and competitive situations in mind. We often conceptualize competition in terms of an emerging industrial society rather than a maturing industrial society, in terms of price competition rather than convenience and service competition, in terms of an economy of scarcity with relatively low consumer purchasing power rather than an abundant economy with widespread discretionary purchasing power, in terms of manufacturers and sellers completely controlling and dominating the market place rather than an economy governed to a considerable extent by consumer sovereignty, and in terms of intra-industry competition rather than interindustry competition. Sometimes we even conceive of competition in terms of an agrarian economy where only imperfectly competitive situations exist.
In particular the emphasis on price, that stems from past economic situations, is today often misplaced. This does not mean that price competition is no longer important. It does mean, however, that ours is often a competitive situation in which price obscurity and not price clarity is the rule. The general situation where consumers face competitive price offerings in the market place, and must exercise rational economic judgment by becoming human calculators is not the norm. In its stead we find the use of fictitious list prices, trade-ins, coupons, allowances, special discount prices, service variations, packaging differences and a multitude of brands. They tend to obliterate price information, to reduce the emphasis on rational price behavior, and to alter our concepts of competition.
Competitors must be viewed as both instigators and receptors of competition. As instigators, they must perceive of their environments accurately, assemble marketing intelligence, and draw inferences about competitive reality. As receptors, they must be prepared to launch counter strategies.
The normal competitive cycle becomes one of programmed innovation and counter-innovation. The stimulus for innovation at any time, however, may be curtailed because of two types of resistance: external and internal. Internal resistance may stem from inertia, lack of capital, fear of counter-competitive consequences, or a host of real or imagined obstacles on the part of a company. External resistance, which raises the most substantial barriers, includes consumers' resistance in the market place.
To an extent, a company may have some effect in altering consumer resistance by communicating with markets, developing products so they better meet consumers wants and needs, and by helping consumers overcome resistance to change. Limits exist, however, beyond which corporate action will have relatively little impact. Quite often, for example, when a product is totally new, consumer resistance will be great and extensive marketing effort is required to overcome resistance to change.
Other external factors which place a limit on competition and innovation include various types of governmental regulation, accepted industry practices and agreements, and the social and cultural environment. As factors limit or restrict innovative opportunity, they affect competition directly.
Marketing as an intervening variable
Marketing managers are always concerned with the changing relationships between a business and its external environment. Marketing must have its primary focus in company adjustments to meet the wants, needs, and opportunities of the market place in a better manner. Marketing, therefore, is an intervening variable between two environments.
The first is an enabling environment, or a larger system, within which a business operates and which is affected by sociological, psychological, technological and economic forces. The second is a precipitating environment, an internal system, which helps precipitate innovation, the creation of differential advantage, and the implementation of aggressive competition on the part of the individual firm. It is the latter environment which stimulates corporations to program innovation.
Marketing as an intervening variable links the enabling environment with the precipitating environment. It becomes a means of fulfillment for a business enterprise. In this role marketing becomes directly concerned with change and innovation. Most immediately, innovation is perceived as a means of providing for the growth and survival of business. In reality, however, it is more than a tool for corporate prosperity. Innovation is among the significant stimuli of social change. As a result it creates problems -- problems that stem from social change. It has an impact on value systems, on cultures, and on economic and social orders.
The first is an enabling environment, or a larger system, within which a business operates and which is affected by sociological, psychological, technological and economic forces. The second is a precipitating environment, an internal system, which helps precipitate innovation, the creation of differential advantage, and the implementation of aggressive competition on the part of the individual firm. It is the latter environment which stimulates corporations to program innovation.
Marketing as an intervening variable links the enabling environment with the precipitating environment. It becomes a means of fulfillment for a business enterprise. In this role marketing becomes directly concerned with change and innovation. Most immediately, innovation is perceived as a means of providing for the growth and survival of business. In reality, however, it is more than a tool for corporate prosperity. Innovation is among the significant stimuli of social change. As a result it creates problems -- problems that stem from social change. It has an impact on value systems, on cultures, and on economic and social orders.
Competition and innovation
A competitive system assumes the willingness of management to accept risks and to adopt new perspectives and methods of business operations. Hence, it is inextricably intertwined with innovation. Competition is manifested through company innovations. Innovations which stem from change in turn result in further change. Since change begets change at an ever increasing rate, a major management responsibility becomes that of recognizing and adapting to a more dynamic business scene.
To date technological changes have had the greatest effect on management thinking. Change, however, is not limited to technology and the physical sciences. Changing methods of marketing are having tremendous impact on competition and our way of life. Consider the competitive implications of the supermarket, self service, discount houses, shopping centers, automatic vending machines, and credit plans. Such process and service innovations will have an even greater impact in the future.
The challenge of innovation in marketing is the unused productive capacity of the firm and the economy. Unused capabilities are among our greatest social and economic wastes. Producing innovations which will result in greater utilization of the capacity is an urgent corporate and national need. It is worthy of the attention of thoughtful executives.
Two aspects of innovation should be distinguished. They are the perception, and the implementation. Innovation refers essentially to a qualitatively different thought perception. The focus of innovistic attention may be a process, a product, or even another idea. Competition, however, is affected largely by the implementation of innovations.
The corporate environment has a great influence on competition and the implementation of innovation. For instance, when there is a corporate climate in which change is anticipated, then competition flourishes and innovations tend to occur freely. In our society there is a rich tradition of expecting change [2]. This anticipation of change results from a conscious belief that changes are useful, helpful, good, and that they will occur. Such an attitude is one of the foundations of aggressive marketing. It is one of the reasons why the American economy has produced the marketing technology which today is being emulated in other parts of the world.
In the United States, then, we have an expectation of competition, in terms of price, products, brands, packages, services, and qualities. Each year we anticipate changes in automobiles, refrigerators, clothing, housing, recreation. We know that there is keen cross-competition among unlike products for consumer dollars. By contrast, however, there are other cultures which are restrictive in their anticipations. They do not expect, hope for, or plan for any changes in any part of their environment. They strive to maintain the status quo. In these cultures, which are resolute against the suggestion of new ideas, new products, and new processes, marketing plays but a minor role. Economic competition becomes devoid of meaning.
To date technological changes have had the greatest effect on management thinking. Change, however, is not limited to technology and the physical sciences. Changing methods of marketing are having tremendous impact on competition and our way of life. Consider the competitive implications of the supermarket, self service, discount houses, shopping centers, automatic vending machines, and credit plans. Such process and service innovations will have an even greater impact in the future.
The challenge of innovation in marketing is the unused productive capacity of the firm and the economy. Unused capabilities are among our greatest social and economic wastes. Producing innovations which will result in greater utilization of the capacity is an urgent corporate and national need. It is worthy of the attention of thoughtful executives.
Two aspects of innovation should be distinguished. They are the perception, and the implementation. Innovation refers essentially to a qualitatively different thought perception. The focus of innovistic attention may be a process, a product, or even another idea. Competition, however, is affected largely by the implementation of innovations.
The corporate environment has a great influence on competition and the implementation of innovation. For instance, when there is a corporate climate in which change is anticipated, then competition flourishes and innovations tend to occur freely. In our society there is a rich tradition of expecting change [2]. This anticipation of change results from a conscious belief that changes are useful, helpful, good, and that they will occur. Such an attitude is one of the foundations of aggressive marketing. It is one of the reasons why the American economy has produced the marketing technology which today is being emulated in other parts of the world.
In the United States, then, we have an expectation of competition, in terms of price, products, brands, packages, services, and qualities. Each year we anticipate changes in automobiles, refrigerators, clothing, housing, recreation. We know that there is keen cross-competition among unlike products for consumer dollars. By contrast, however, there are other cultures which are restrictive in their anticipations. They do not expect, hope for, or plan for any changes in any part of their environment. They strive to maintain the status quo. In these cultures, which are resolute against the suggestion of new ideas, new products, and new processes, marketing plays but a minor role. Economic competition becomes devoid of meaning.
Competition and management action
Competition in our economy takes place within a dynamic framework largely beyond the control of any individual management. Among the changing elements that will provide a backdrop for future competitive situations are: (1) continued economic growth, and accelerating rates of scientific and technological development, (2) an increasing availability of leisure time and greater mobility on a very broad base, (3) a great increase in discretionary buying power and hence postponable purchases, (4) a population explosion which is resulting not only in more consumers but greater proportions of the population at both ends of the age spectrum, (5) a revolution in information and information handling, including an explosion of knowledge that is useful in business administration, marketing, and related fields, (6) increasingly vigorous domestic and foreign competition brought about by the creation of such markets as the European Common Market.
Such factors stimulate the appearance of new marketing forms, the break down of traditional product lines, and the revision of institutional and organizational classifications. They encourage an accelerated rate of product development. They foster changing concepts of transportation, warehousing, communications, and commercial intelligence, all of which result in more aggressive competition and planned innovation. They will have a great impact upon the business system of the future.
The society that we live in is most accurately described by its changing parameters. However, businessmen who are confronted with these dynamic elements, for many reasons often resist change. In fact one approach to change in the past was the philosophy that whatever was good enough for previous consumers is good enough for present and future consumers. Change was viewed with suspicion. As a result, competition was not as dynamic, as keen, as aggressive, and as vigorous as it is now. Likewise, market opportunities which result from change remained unrecognized and unsatisfied.
Today, however, management cannot ignore change and the accompanying opportunities. They cannot plot inflexible courses of action for long periods of time. Management must be fluid and viable. It must be prepared to deal with new problems and processes. It must continuously chart new directions.
In such a dynamic atmosphere, managers must recognize that change is the constant in planning, organizing, and controlling activities. Management's responsibility becomes that of anticipation, of adaptation, and of innovation
under conditions of accelerating rates of change. In fact the emphasis, in many enterprises in the near future, is not likely to be on operations. "It is going to be on change -- change to give business new roles, new clientele, new products and new processes. Indeed, in many ways we are entering a future in which the management of business is going to change and become very much like the management of a total research process -- a carefully planned learning effort in which knowledge itself is the scarcest resource being allocated." Marketing knowledge will govern the future competitive effectiveness of a firm. A greater emphasis on research, knowledge, and innovation, will also result in more intelligent approaches to competition.
Such factors stimulate the appearance of new marketing forms, the break down of traditional product lines, and the revision of institutional and organizational classifications. They encourage an accelerated rate of product development. They foster changing concepts of transportation, warehousing, communications, and commercial intelligence, all of which result in more aggressive competition and planned innovation. They will have a great impact upon the business system of the future.
The society that we live in is most accurately described by its changing parameters. However, businessmen who are confronted with these dynamic elements, for many reasons often resist change. In fact one approach to change in the past was the philosophy that whatever was good enough for previous consumers is good enough for present and future consumers. Change was viewed with suspicion. As a result, competition was not as dynamic, as keen, as aggressive, and as vigorous as it is now. Likewise, market opportunities which result from change remained unrecognized and unsatisfied.
Today, however, management cannot ignore change and the accompanying opportunities. They cannot plot inflexible courses of action for long periods of time. Management must be fluid and viable. It must be prepared to deal with new problems and processes. It must continuously chart new directions.
In such a dynamic atmosphere, managers must recognize that change is the constant in planning, organizing, and controlling activities. Management's responsibility becomes that of anticipation, of adaptation, and of innovation
under conditions of accelerating rates of change. In fact the emphasis, in many enterprises in the near future, is not likely to be on operations. "It is going to be on change -- change to give business new roles, new clientele, new products and new processes. Indeed, in many ways we are entering a future in which the management of business is going to change and become very much like the management of a total research process -- a carefully planned learning effort in which knowledge itself is the scarcest resource being allocated." Marketing knowledge will govern the future competitive effectiveness of a firm. A greater emphasis on research, knowledge, and innovation, will also result in more intelligent approaches to competition.
Competition, innovation and marketing management
A consideration of competition, innovation and marketing management is both crucial and timely. It has implications for the development of effective systems of business action, for each of the functional areas of business administration, and for our position in world affairs. For those interested in marketing it has special significance and meaning. Competition and innovation are at the core of marketing activity.
Management today is forced to assess activities continuously in an economic environment characterized by keen competition, an explosive development of usable knowledge, and rapid and wide-spread change. In particular, students and practitioners concerned with the marketing aspects of business are confronted with the major responsibility of understanding and managing change. Marketing is the dynamic area of business which is perhaps most directly confronted with change. It is the area most immediately concerned with competition and competitive strategies. It is the area which reflects the vitality of business organizations as they attempt to deal with shifting external market parameters.
Our economy has been termed a capitalistic, a free enterprise, and a mixed economy. An economy in which the consumer is the focal point of economic effort, and in which marketing is the essential motive power. In such an economy, companies compete for customer and consumer favor and the resulting market stature. Consumers occupy a pivotal position. As a result, even non-marketing executives are becoming more concerned with the market-related activities of their own functions. Similarly, various social and political observers are investigating competition and competitive practices, and they are questioning the moral, social, legal, psychological, and ethical bases of marketing actions.
In a competitive society, marketing becomes more than a functional field of business. It is a philosophy of business operation -- a way of business life. Decisions made concerning marketing activities extend well beyond the functional boundaries of marketing in any organization. They establish parameters for the total operations of the business system. They have an impact on research and development, on production, on finance, on purchasing, and on personnel. In fact, it is marketing which distinguishes business organizations from other forms of organization and that in essence there are only two top management functions: innovation and marketing.
Management today is forced to assess activities continuously in an economic environment characterized by keen competition, an explosive development of usable knowledge, and rapid and wide-spread change. In particular, students and practitioners concerned with the marketing aspects of business are confronted with the major responsibility of understanding and managing change. Marketing is the dynamic area of business which is perhaps most directly confronted with change. It is the area most immediately concerned with competition and competitive strategies. It is the area which reflects the vitality of business organizations as they attempt to deal with shifting external market parameters.
Our economy has been termed a capitalistic, a free enterprise, and a mixed economy. An economy in which the consumer is the focal point of economic effort, and in which marketing is the essential motive power. In such an economy, companies compete for customer and consumer favor and the resulting market stature. Consumers occupy a pivotal position. As a result, even non-marketing executives are becoming more concerned with the market-related activities of their own functions. Similarly, various social and political observers are investigating competition and competitive practices, and they are questioning the moral, social, legal, psychological, and ethical bases of marketing actions.
In a competitive society, marketing becomes more than a functional field of business. It is a philosophy of business operation -- a way of business life. Decisions made concerning marketing activities extend well beyond the functional boundaries of marketing in any organization. They establish parameters for the total operations of the business system. They have an impact on research and development, on production, on finance, on purchasing, and on personnel. In fact, it is marketing which distinguishes business organizations from other forms of organization and that in essence there are only two top management functions: innovation and marketing.
Nature of Futures Trading
Contracts calling for the future delivery of products are common in all lines of business. The term futures trading is, however, ordinarily applied only to a special type of contract, bought and sold according to the rules of organized commodity exchanges.
A futures contract is an agreement between two parties—one who agrees to sell and deliver and one who agrees to buy and receive (1) a certain kind and quantity of a commodity, (2) at some specified future time, (3) at a specified price, and (4) according to the conditions of trading prescribed by an organized commodity exchange or conditions generally understood in the trade. Payment and delivery are postponed to a future time, for the goods may not even be in existence at the time of the contract, as is the case of many grain contracts made before the commodity has actually been harvested.
A futures contract is an agreement to buy or to sell and not a consummated purchase or sale. Such contracts, regardless of the specific commodity involved, generally have certain prescribed characteristics that have been established for the purpose of simplifying the trading activity. First, all contracts involve a standard quantity unit of the commodity or some multiple thereof. Thus, in wheat futures, trading is in terms of "round lots" of 5,000 bushels. Similarly defined standard units are recognized for other commodities. Second, trading is ordinarily confined to a single so-called contract grade or to a few such grades specified for this purpose. The assumption is that prices of grades other than those recognized for trading purposes will fluctuate in the same manner as contract grades. It is, accordingly, not necessary to establish machinery for trading in all recognized grades of a commodity. Third, delivery of the commodity must be made during a specified month. Futures trading does not involve specific delivery dates; rather, the seller has the option as to the day of the specified month that he will make delivery. Fourth, the seller has the option of delivering certain stipulated grades higher or lower than the contract grade, at a specified premium on or discount from the contract grade as the case may be. Fifth, the commodity to be delivered on the contract must be weighed and graded by licensed inspectors. Finally, delivery must be made from approved warehouses. These characteristics constitute elements of standardization in exchange, which are well understood by those engaged in futures trading. Because of their existence and widespread acceptance, such contracts may be effected speedily and without delay in accordance with rigidly maintained, equitable principles of trade.
Even though considerable attention is devoted to the terms of delivery in the foregoing discussion, such contracts seldom involve actual physical delivery of the commodity from seller to buyer.
A futures contract is an agreement between two parties—one who agrees to sell and deliver and one who agrees to buy and receive (1) a certain kind and quantity of a commodity, (2) at some specified future time, (3) at a specified price, and (4) according to the conditions of trading prescribed by an organized commodity exchange or conditions generally understood in the trade. Payment and delivery are postponed to a future time, for the goods may not even be in existence at the time of the contract, as is the case of many grain contracts made before the commodity has actually been harvested.
A futures contract is an agreement to buy or to sell and not a consummated purchase or sale. Such contracts, regardless of the specific commodity involved, generally have certain prescribed characteristics that have been established for the purpose of simplifying the trading activity. First, all contracts involve a standard quantity unit of the commodity or some multiple thereof. Thus, in wheat futures, trading is in terms of "round lots" of 5,000 bushels. Similarly defined standard units are recognized for other commodities. Second, trading is ordinarily confined to a single so-called contract grade or to a few such grades specified for this purpose. The assumption is that prices of grades other than those recognized for trading purposes will fluctuate in the same manner as contract grades. It is, accordingly, not necessary to establish machinery for trading in all recognized grades of a commodity. Third, delivery of the commodity must be made during a specified month. Futures trading does not involve specific delivery dates; rather, the seller has the option as to the day of the specified month that he will make delivery. Fourth, the seller has the option of delivering certain stipulated grades higher or lower than the contract grade, at a specified premium on or discount from the contract grade as the case may be. Fifth, the commodity to be delivered on the contract must be weighed and graded by licensed inspectors. Finally, delivery must be made from approved warehouses. These characteristics constitute elements of standardization in exchange, which are well understood by those engaged in futures trading. Because of their existence and widespread acceptance, such contracts may be effected speedily and without delay in accordance with rigidly maintained, equitable principles of trade.
Even though considerable attention is devoted to the terms of delivery in the foregoing discussion, such contracts seldom involve actual physical delivery of the commodity from seller to buyer.
Shifting Risks of Market Conditions
Risks of changes in market conditions are not insurable because losses cannot be anticipated with accuracy; and, even if this could be done, the cost of such insurance would be prohibitive. Consequently, various methods indicated in the following discussion are used to shift all or parts of such risks to others.
Shifting Individual Risks to Society
A high degree of protection has been enjoyed by many companies when the government, under conditions of war or national emergency, has guaranteed minimum prices for certain products. Over a long period of war and nonwar years, prices of certain basic agricultural products have been controlled or supported at given levels as a matter of public policy. This does not eliminate price risks, but does involve the shifting of a large part of the risk of individuals to the government and, consequently, to the whole of society.
Cooperative Activity
Risks incident to fluctuations in prices have frequently been reduced through the activity of trade associations. Although price fixing through such associations is contrary to law, it is probable that there still remain informal understandings among members of some associations with regard to prices that should prevail at a given time. Another example of risk-shifting activity is afforded by cooperative marketing organizations. When a large group of agricultural producers pool their commodities, the place and time risks arising out of sale in unfavorable markets are greatly diversified and minimized for each participant.
Manufacture to Order
Market risks are reduced when goods are sold in advance of manufacturing. This is not the usual situation in industry but is common for some types of products, such as major industrial installations, special purpose industrial equipment, and certain classes of fashion apparel. Most men's suits, for example, are sold to retailers from a sample line shown many months prior to delivery, and manufacturing is largely devoted to merchandise that has been sold in advance. Some farm products, as sweet corn, tomatoes, and pumpkins, are sold to canners even in advance of cultivation, and in some instances canners furnish the seeds or plants for this purpose.
Price Guaranties
Some vendors offer their customers guaranties against price declines. This involves shifting risks that may normally be carried by the buyer to the seller. The practice offers protection to purchasers who are hesitant in placing orders because of fear of a falling market, an unfavorable change in consumer preferences, or a modification of styles or model numbers.
Subcontracting
An illustration of shifting risks by contracts is afforded by the building industry. General contractors in the building trades submit bids for the construction of a building on the basis of their knowledge of the business and of other factors including the cost of materials, labor conditions, and so on. The successful contractor, if he is so inclined, may then proceed immediately to let subcontracts for necessary materials and for the construction of all or most of the different parts of the building. In this manner, the general and original contractor shifts most of his risk to those who are presumably experts in their fields, unless his estimates have been incorrect or some subcontractors fail to perform their function.
Shifting Individual Risks to Society
A high degree of protection has been enjoyed by many companies when the government, under conditions of war or national emergency, has guaranteed minimum prices for certain products. Over a long period of war and nonwar years, prices of certain basic agricultural products have been controlled or supported at given levels as a matter of public policy. This does not eliminate price risks, but does involve the shifting of a large part of the risk of individuals to the government and, consequently, to the whole of society.
Cooperative Activity
Risks incident to fluctuations in prices have frequently been reduced through the activity of trade associations. Although price fixing through such associations is contrary to law, it is probable that there still remain informal understandings among members of some associations with regard to prices that should prevail at a given time. Another example of risk-shifting activity is afforded by cooperative marketing organizations. When a large group of agricultural producers pool their commodities, the place and time risks arising out of sale in unfavorable markets are greatly diversified and minimized for each participant.
Manufacture to Order
Market risks are reduced when goods are sold in advance of manufacturing. This is not the usual situation in industry but is common for some types of products, such as major industrial installations, special purpose industrial equipment, and certain classes of fashion apparel. Most men's suits, for example, are sold to retailers from a sample line shown many months prior to delivery, and manufacturing is largely devoted to merchandise that has been sold in advance. Some farm products, as sweet corn, tomatoes, and pumpkins, are sold to canners even in advance of cultivation, and in some instances canners furnish the seeds or plants for this purpose.
Price Guaranties
Some vendors offer their customers guaranties against price declines. This involves shifting risks that may normally be carried by the buyer to the seller. The practice offers protection to purchasers who are hesitant in placing orders because of fear of a falling market, an unfavorable change in consumer preferences, or a modification of styles or model numbers.
Subcontracting
An illustration of shifting risks by contracts is afforded by the building industry. General contractors in the building trades submit bids for the construction of a building on the basis of their knowledge of the business and of other factors including the cost of materials, labor conditions, and so on. The successful contractor, if he is so inclined, may then proceed immediately to let subcontracts for necessary materials and for the construction of all or most of the different parts of the building. In this manner, the general and original contractor shifts most of his risk to those who are presumably experts in their fields, unless his estimates have been incorrect or some subcontractors fail to perform their function.
Insurable Risks
While all classes of risks can be reduced substantially through good management, even the best managed companies are still confronted with hazards that they are reluctant or unwilling to assume. Most firms are quite willing to bear normal risks when they can afford to absorb possible losses without endangering their financial structure. On the other hand, they are not willing to assume risks when possible losses involve catastrophic consequences. Attempts are usually made to shift such risks to others if there is an opportunity to do so at reasonable cost. Some kinds of risks may be covered by insurance, which is a social or institutional device whereby the uncertain risks confronting individuals are combined in a group and thus made more certain. Then, the certainty of a relatively small, fixed insurance premium is substituted for the uncertain probability of a large loss.
Among the risks of physical destruction or deterioration, insurance protection is available and commonly carried for protection against fire, windstorm, hail, and damage to merchandise inventories, buildings, and equipment. Losses from theft by outsiders can be covered by insurance, and defalcation of employees may be insured against by having such persons bonded by surety companies. Personal risks involving key individuals are often minimized by insurance policies on their lives. Insurance is even available for certain types of protection against credit losses; it is, however, quite costly and provides only partial coverage, with the result that its use is relatively restricted.
Among the risks of physical destruction or deterioration, insurance protection is available and commonly carried for protection against fire, windstorm, hail, and damage to merchandise inventories, buildings, and equipment. Losses from theft by outsiders can be covered by insurance, and defalcation of employees may be insured against by having such persons bonded by surety companies. Personal risks involving key individuals are often minimized by insurance policies on their lives. Insurance is even available for certain types of protection against credit losses; it is, however, quite costly and provides only partial coverage, with the result that its use is relatively restricted.
Minimizing Risk through Management Practices
There are two general methods of minimizing market risks. One is to lessen the chance of their occurrence, through good management practices. The other involves shifting risks to others who are better able or more willing to assume the hazard.
All classes of market risk can be reduced, frequently to a very considerable extent, through various management practices. To an increasing extent, large business firms regard the task of risk management as an important function which requires for proper performance specialized personnel who analyze risks, ascertain potential losses, institute corrective or risk-reducing measures, as well as handle decisions about insurable risks.
Preventive measures are employed to minimize possible losses from physical destruction or deterioration. Fire hazards are decreased by fireproof buildings and safeguards such as sprinkler systems, night watchmen, or fire inspections. Provision of proper storage conditions may forestall losses due to vermin, dirt, or extreme temperature changes.
Risks of theft can be minimized by the use of burglar alarm systems, night watchmen, safes for the protection of money or high-value merchandise, and other similar practices. Losses from shoplifting can be kept at a minimum by appropriate methods of displaying merchandise most likely to be pilfered; by training store employees to be observant in "policing" the selling area; and, in large institutions, by the use of store detectives.
Some personal risks, including accidents and, to a certain extent, sickness of employees, may be prevented by the adoption of safety devices, proper ventilation, and healthy working conditions. To guard against losses that may arise in the case of death or illness of key employees, competent substitutes can be trained for responsible positions.
For most firms, the only effective way to minimize credit risks is through efficient management in the granting of credit and the collection of accounts. This does not mean that all losses from bad debts will be eliminated. The most successful credit manager is not the one who has practically no losses but one who reduces losses from uncollectible accounts to a minimum, without sacrificing sales volume. Some losses must be expected in all businesses, and creditors should stand ready to bear their proportionate share. To keep this share of losses down to a minimum, sound control of credit operations is essential.
Both time and place risks of changes in market conditions can be controlled to a considerable extent through good management. Since most risks of market conditions result from changes in, or uncertainties regarding, supply and demand conditions, well-managed firms find it advisable to make careful qualitative and quantitative analyses of markets, and to gather and intelligently interpret market news from various sources. Only a study and analysis of information gathered from various sources enable one to ascertain the current status of the market and to forecast its future trend.
Proper and adequate control of inventories is a significant earmark of successful management. Only in this way can a buyer determine the quantity and quality of goods to be bought from time to time in order to prevent overstocks on the one hand and "outs" on the other. Careful planning of financial, merchandise, manufacturing, and selling requirements and a proper coordination of these factors contribute much toward the reduction in risks of vendor or purchaser.
All classes of market risk can be reduced, frequently to a very considerable extent, through various management practices. To an increasing extent, large business firms regard the task of risk management as an important function which requires for proper performance specialized personnel who analyze risks, ascertain potential losses, institute corrective or risk-reducing measures, as well as handle decisions about insurable risks.
Preventive measures are employed to minimize possible losses from physical destruction or deterioration. Fire hazards are decreased by fireproof buildings and safeguards such as sprinkler systems, night watchmen, or fire inspections. Provision of proper storage conditions may forestall losses due to vermin, dirt, or extreme temperature changes.
Risks of theft can be minimized by the use of burglar alarm systems, night watchmen, safes for the protection of money or high-value merchandise, and other similar practices. Losses from shoplifting can be kept at a minimum by appropriate methods of displaying merchandise most likely to be pilfered; by training store employees to be observant in "policing" the selling area; and, in large institutions, by the use of store detectives.
Some personal risks, including accidents and, to a certain extent, sickness of employees, may be prevented by the adoption of safety devices, proper ventilation, and healthy working conditions. To guard against losses that may arise in the case of death or illness of key employees, competent substitutes can be trained for responsible positions.
For most firms, the only effective way to minimize credit risks is through efficient management in the granting of credit and the collection of accounts. This does not mean that all losses from bad debts will be eliminated. The most successful credit manager is not the one who has practically no losses but one who reduces losses from uncollectible accounts to a minimum, without sacrificing sales volume. Some losses must be expected in all businesses, and creditors should stand ready to bear their proportionate share. To keep this share of losses down to a minimum, sound control of credit operations is essential.
Both time and place risks of changes in market conditions can be controlled to a considerable extent through good management. Since most risks of market conditions result from changes in, or uncertainties regarding, supply and demand conditions, well-managed firms find it advisable to make careful qualitative and quantitative analyses of markets, and to gather and intelligently interpret market news from various sources. Only a study and analysis of information gathered from various sources enable one to ascertain the current status of the market and to forecast its future trend.
Proper and adequate control of inventories is a significant earmark of successful management. Only in this way can a buyer determine the quantity and quality of goods to be bought from time to time in order to prevent overstocks on the one hand and "outs" on the other. Careful planning of financial, merchandise, manufacturing, and selling requirements and a proper coordination of these factors contribute much toward the reduction in risks of vendor or purchaser.
Market Risk, Speculation, and Hedging
The assumption of risk is an important function that must be performed by all types of middlemen, manufacturers, and original producers in the agricultural and extractive industries. In addition, there are numerous specialists in risk bearing, known as speculators. A number of types of risk which are of especial interest to those engaged in marketing are considered in this chapter. Major emphasis is placed upon the risks which arise out of changing market conditions and the methods whereby such risks may be minimized or shifted to others.
Classification of Market Risks
Market risks may be classified according to their cause or character into five groups, as follows:
1. Physical destruction or deterioration of commodities or other properties which may result from natural causes such as windstorms, floods, earthquakes, drought, or unseasonably cold or hot weather, or from controllable causes such as inadequate safeguards against fire, vermin, or freezing
2. Theft, including fraud or pilferage by employees, burglary, or shoplifting
3. Personal contingencies relating to accident or sickness of employees, death of key executives, or, especially in small companies, of key salesmen who account for a large proportion of a firm's sales volume
4. Credit extensions which involve the risk that debtors may be unwilling or unable to meet their obligations at maturity or ultimately
5. Market conditions which involve risks arising out of uncertainty about the exchange value of commodities
Of these classes, the most significant risks are those which arise out of market conditions. They may be divided principally into time risks and place risks. Practically all marketing transactions involve a certain degree of hazard due to changes wrought by the passage of time. Merchants buy goods with the hope of reselling them at a profit; manufacturers attempt to make products that will sell at remunerative prices; farmers raise what they think will be in demand. But markets for certain commodities may be glutted; the wants of consumers may change; or seasonal changes may be too slow or otherwise unfavorable. Any of these changes may affect the demand for and supply of any commodity one way or another, with a resulting increase or decrease in risk. Place risks are great when a commodity is offered for sale, or a purchase must be made, in an unfavorable market. Special losses may result from misjudging markets. This is often true of perishable fruits and vegetables when, because of a lack of adequate information on the part of shippers, they are forwarded to a glutted market where they must be sold without delay to prevent physical deterioration.
Classification of Market Risks
Market risks may be classified according to their cause or character into five groups, as follows:
1. Physical destruction or deterioration of commodities or other properties which may result from natural causes such as windstorms, floods, earthquakes, drought, or unseasonably cold or hot weather, or from controllable causes such as inadequate safeguards against fire, vermin, or freezing
2. Theft, including fraud or pilferage by employees, burglary, or shoplifting
3. Personal contingencies relating to accident or sickness of employees, death of key executives, or, especially in small companies, of key salesmen who account for a large proportion of a firm's sales volume
4. Credit extensions which involve the risk that debtors may be unwilling or unable to meet their obligations at maturity or ultimately
5. Market conditions which involve risks arising out of uncertainty about the exchange value of commodities
Of these classes, the most significant risks are those which arise out of market conditions. They may be divided principally into time risks and place risks. Practically all marketing transactions involve a certain degree of hazard due to changes wrought by the passage of time. Merchants buy goods with the hope of reselling them at a profit; manufacturers attempt to make products that will sell at remunerative prices; farmers raise what they think will be in demand. But markets for certain commodities may be glutted; the wants of consumers may change; or seasonal changes may be too slow or otherwise unfavorable. Any of these changes may affect the demand for and supply of any commodity one way or another, with a resulting increase or decrease in risk. Place risks are great when a commodity is offered for sale, or a purchase must be made, in an unfavorable market. Special losses may result from misjudging markets. This is often true of perishable fruits and vegetables when, because of a lack of adequate information on the part of shippers, they are forwarded to a glutted market where they must be sold without delay to prevent physical deterioration.
Relation of Finance to Distribution Channels
The financial strength of a vendor has a decided influence upon his channels of distribution. Some canners of fruit and vegetables dispose of their entire output through selling agents to whom they are financially obligated. A similar reason is often advanced for the employment of selling agents in the textile trades although another marketing specialist, the factor, is often used for purely financial assistance.
Whether or not a firm shall embark upon a method of distribution involving the elimination of the wholesaler or even the retailer may hinge largely or entirely upon the extent of its financial resources. Few manufacturers, indeed, can muster the capital required for establishing their own retail stores. Many of them cannot even afford to establish a sales organization to sell directly to retailers, or to maintain the warehouses necessary to furnish prompt delivery. This is one of the important reasons for the utilization of the wholesaler in the channel of distribution. One reason for the employment of manufacturers' agents is the inability of sellers to finance their own sales force.
This problem may be viewed, with results not dissimilar, from the standpoint of the buyer. Relatively few retailers can afford to purchase their merchandise requirements directly from manufacturers. Most independent druggists and hardware merchants use wholesalers not only as a source of supply for merchandise but also as a source of capital for financing inventories through trade credit.
Whether or not a firm shall embark upon a method of distribution involving the elimination of the wholesaler or even the retailer may hinge largely or entirely upon the extent of its financial resources. Few manufacturers, indeed, can muster the capital required for establishing their own retail stores. Many of them cannot even afford to establish a sales organization to sell directly to retailers, or to maintain the warehouses necessary to furnish prompt delivery. This is one of the important reasons for the utilization of the wholesaler in the channel of distribution. One reason for the employment of manufacturers' agents is the inability of sellers to finance their own sales force.
This problem may be viewed, with results not dissimilar, from the standpoint of the buyer. Relatively few retailers can afford to purchase their merchandise requirements directly from manufacturers. Most independent druggists and hardware merchants use wholesalers not only as a source of supply for merchandise but also as a source of capital for financing inventories through trade credit.
Selection of Kinds of Goods
Freedom in determining the kinds of goods to be purchased varies from one type of business to another. In many lines of manufacturing the materials to be bought are fixed automatically by the nature of the product manufactured. The manufacturer of cotton textiles must buy cotton yarn or raw cotton, and the butter manufacturer must have cream. Installations and industrial equipment are determined largely by the nature of the manufacturing process, with the result that there is sometimes rather limited freedom in their purchase.
For most merchants, on the other hand, the determination of kinds of goods to be purchased is a real problem, since the firm may not constantly handle exactly the same merchandise. While within certain limits most wholesalers and retailers find their choice of merchandise circumscribed by their clientele and competition, nevertheless it is a rare mercantile business which does not have some latitude.
This problem has been aggravated considerably by a pronounced tendency for many types of stores to expand or diversify their merchandise lines. Self-service grocery stores, for example, have sought to handle any type of merchandise that is suitable for sale by self-service methods. In seeking new items to purchase, they have been attracted by the higher margins obtainable on numerous items normally handled by drug-, department, or hardware stores. As a result, numerous advertised brands of proprietary remedies, toilet preparations, cosmetics, housewares, magazines, and alcoholic beverages have been successfully added to the lines carried by many supermarkets. Drugstores, hardware stores, and other kinds of business, feeling the pressure of this competition, have also sought to expand their offerings by invading fields hitherto foreign to them. Similarly, most variety chains have abandoned their limited-price position, and some have become in essence junior department stores. Department stores, in turn, have expanded their sales volume by the addition of departments for sporting goods, cameras and photographic equipment, and other kinds of merchandise that have been sold traditionally in specialized types of establishments.
Many marketing establishments have made costly mistakes in experimental attempts to diversify their merchandise offerings. For most small establishments, experience has indicated that new items cannot ordinarily be added successfully unless (1) they are in keeping with the general character of the business as reflected by firm name, atmosphere, location, and advertising and promotion policies; (2) they can be sold according to the present method of sale and by present employees; and (3) sufficient space and capital investment can be devoted to the new merchandise to offer customers a reasonable range of choice within the classification to which it belongs. Obviously, these rules have not been important limiting factors for very large wholesale or retail firms where it is more feasible to add specialized personnel or facilities to handle the merchandising of items not closely related to those previously sold.
For most merchants, on the other hand, the determination of kinds of goods to be purchased is a real problem, since the firm may not constantly handle exactly the same merchandise. While within certain limits most wholesalers and retailers find their choice of merchandise circumscribed by their clientele and competition, nevertheless it is a rare mercantile business which does not have some latitude.
This problem has been aggravated considerably by a pronounced tendency for many types of stores to expand or diversify their merchandise lines. Self-service grocery stores, for example, have sought to handle any type of merchandise that is suitable for sale by self-service methods. In seeking new items to purchase, they have been attracted by the higher margins obtainable on numerous items normally handled by drug-, department, or hardware stores. As a result, numerous advertised brands of proprietary remedies, toilet preparations, cosmetics, housewares, magazines, and alcoholic beverages have been successfully added to the lines carried by many supermarkets. Drugstores, hardware stores, and other kinds of business, feeling the pressure of this competition, have also sought to expand their offerings by invading fields hitherto foreign to them. Similarly, most variety chains have abandoned their limited-price position, and some have become in essence junior department stores. Department stores, in turn, have expanded their sales volume by the addition of departments for sporting goods, cameras and photographic equipment, and other kinds of merchandise that have been sold traditionally in specialized types of establishments.
Many marketing establishments have made costly mistakes in experimental attempts to diversify their merchandise offerings. For most small establishments, experience has indicated that new items cannot ordinarily be added successfully unless (1) they are in keeping with the general character of the business as reflected by firm name, atmosphere, location, and advertising and promotion policies; (2) they can be sold according to the present method of sale and by present employees; and (3) sufficient space and capital investment can be devoted to the new merchandise to offer customers a reasonable range of choice within the classification to which it belongs. Obviously, these rules have not been important limiting factors for very large wholesale or retail firms where it is more feasible to add specialized personnel or facilities to handle the merchandising of items not closely related to those previously sold.
Specialization in Buying
Unless buying of raw materials, semimanufactures, and the many items of equipment and supplies needed for the production process is effectively accomplished, manufacturers handicap themselves in their ability to compete with those who may be more skillful in the performance of this function. Ability to select from many offerings just what will sell best and to determine the most economic quantities to be bought at a given time is one of the prime tests of the efficiency of both wholesaler and retailer.
Moreover, buying is closely related to other marketing functions. Its practices and policies are often determined, in part at least, by the financial position of the purchaser, the availability of adequate and economical transportation and storage facilities, and the degree to which standardization has been accomplished. Risk is often reduced by the adoption of proper buying policies. Skillful buyers make use of reliable and pertinent market information from a variety of sources. Goods purchased for resale must be selected primarily with reference to what the market will absorb. In short, this marketing function is closely related to the functioning of almost every part of our marketing system.
Specialization in Buying
That buying is a very active and quantitatively significant function cannot be questioned when it is considered that manufacturing companies and middlemen ordinarily employ specialists to perform this activity. In manufacturing establishments a key employee, generally known as the purchasing agent, sometimes bearing the title of Vice President in Charge of Procurement, is responsible for the function. All wholesale merchants have buyers who generally occupy the position of executives, the number depending upon the size of the business and the number of different merchandise departments involved. Larger retail stores employ buyers who are also usually the managers of merchandise departments. Quite a number of large department stores have more than 100 buyers each. In the chain store field the buying function is either centralized or divided between the central office and the individual retail store unit. Among smaller independent stores, the buying function is usually the responsibility of the proprietor or one of the partners, but it is almost invariably one of the most important of their activities.
Moreover, buying is closely related to other marketing functions. Its practices and policies are often determined, in part at least, by the financial position of the purchaser, the availability of adequate and economical transportation and storage facilities, and the degree to which standardization has been accomplished. Risk is often reduced by the adoption of proper buying policies. Skillful buyers make use of reliable and pertinent market information from a variety of sources. Goods purchased for resale must be selected primarily with reference to what the market will absorb. In short, this marketing function is closely related to the functioning of almost every part of our marketing system.
Specialization in Buying
That buying is a very active and quantitatively significant function cannot be questioned when it is considered that manufacturing companies and middlemen ordinarily employ specialists to perform this activity. In manufacturing establishments a key employee, generally known as the purchasing agent, sometimes bearing the title of Vice President in Charge of Procurement, is responsible for the function. All wholesale merchants have buyers who generally occupy the position of executives, the number depending upon the size of the business and the number of different merchandise departments involved. Larger retail stores employ buyers who are also usually the managers of merchandise departments. Quite a number of large department stores have more than 100 buyers each. In the chain store field the buying function is either centralized or divided between the central office and the individual retail store unit. Among smaller independent stores, the buying function is usually the responsibility of the proprietor or one of the partners, but it is almost invariably one of the most important of their activities.
In every transaction someone engages in buying
In every transaction someone engages in buying. Goods or services may be purchased for industrial or commercial use, for resale, or for ultimate consumption. The buyer may be one who specializes in performing this function, one who does buying along with many other business activities, or an ultimate consumer satisfying a personal want. In any event, there is no better indication of the importance and pervasive nature of the buying function than the fact that someone buys every time a sale is made. Buying is significant not only as a differentiated specific function but also as an economic activity, the understanding of which is basic to modern concepts of customer-oriented marketing management.
Buying—An Active Marketing Function
While buying is a basic marketing function, it is often improperly relegated to an unimportant position. It is sometimes erroneously assumed that it is of a passive character—merely the opposite of selling. Quite to the contrary, buying does not take care of itself, but is indeed an active function.
The skill used in buying has an important influence in determining the relative value of what is purchased by the consumer. The constant increase in the variety of products offered to him, the growing tendency to procure more goods and services in the market rather than to produce them in the home, the multiplicity of brands, the frequency of relatively small quality differentials, and the widely differing services offered by stores, all combine to add to the difficulty of the consumer's choice and to stress the importance of his being able to buy with intelligence.
The active character of buying is especially conspicuous in the case of the consumer. Traditionally, he has taken the initiative in the exchange process. When wants are recognized and the consumer is ready to act upon them, it is customary for him to seek out a seller or sellers. When a salesperson comes into contact with the consumer-buyer, the process of exchange is often nearly completed. This is dramatically emphasized by the small proportion of retail business which is accounted for by house-to-house canvassers or other sellers who take the initiative in seeking out prospective consumer-buyers, and, by way of contrast, by the predominant proportion which is accounted for by regular retail establishments that are visited by a purchasing-minded public. Developments in simplified selling or self-service merchandising accentuate the importance of consumer buying activity. The more the retail selling and service functions are curtailed, the greater becomes the task and responsibility of the consumer as a buyer. While there is a substantial amount of pre-buying stimulation in the form of aggressive retailer and manufacturer advertising and sales promotion activity, the number of items competing for consumer attention is so vast and diverse that the ordinary person must play an extremely active role in making the purchases that satisfy his wants. Because of the detailed treatment of consumer demand and motivation in the early part of this book, the discussion in this chapter is devoted substantially to buying by business firms. It may be observed, however, that buying is often as active when examined from the standpoint of the firm as it is in the case of the ultimate consumer.
Buying—An Active Marketing Function
While buying is a basic marketing function, it is often improperly relegated to an unimportant position. It is sometimes erroneously assumed that it is of a passive character—merely the opposite of selling. Quite to the contrary, buying does not take care of itself, but is indeed an active function.
The skill used in buying has an important influence in determining the relative value of what is purchased by the consumer. The constant increase in the variety of products offered to him, the growing tendency to procure more goods and services in the market rather than to produce them in the home, the multiplicity of brands, the frequency of relatively small quality differentials, and the widely differing services offered by stores, all combine to add to the difficulty of the consumer's choice and to stress the importance of his being able to buy with intelligence.
The active character of buying is especially conspicuous in the case of the consumer. Traditionally, he has taken the initiative in the exchange process. When wants are recognized and the consumer is ready to act upon them, it is customary for him to seek out a seller or sellers. When a salesperson comes into contact with the consumer-buyer, the process of exchange is often nearly completed. This is dramatically emphasized by the small proportion of retail business which is accounted for by house-to-house canvassers or other sellers who take the initiative in seeking out prospective consumer-buyers, and, by way of contrast, by the predominant proportion which is accounted for by regular retail establishments that are visited by a purchasing-minded public. Developments in simplified selling or self-service merchandising accentuate the importance of consumer buying activity. The more the retail selling and service functions are curtailed, the greater becomes the task and responsibility of the consumer as a buyer. While there is a substantial amount of pre-buying stimulation in the form of aggressive retailer and manufacturer advertising and sales promotion activity, the number of items competing for consumer attention is so vast and diverse that the ordinary person must play an extremely active role in making the purchases that satisfy his wants. Because of the detailed treatment of consumer demand and motivation in the early part of this book, the discussion in this chapter is devoted substantially to buying by business firms. It may be observed, however, that buying is often as active when examined from the standpoint of the firm as it is in the case of the ultimate consumer.
Commercial Letter of Credit
A substantial volume of foreign trade is transacted on "draft basis," in which the parties to the exchange instrument are the exporter and the importer. A standard and simple transaction on draft basis has been described; the following two chapters will supply the variations. The reader should have observed that when foreign trade is handled in this manner banks may act in either of two capacities, as collectors or as negotiators. There are many occasions in which the strength of a bank's name is used to assist foreign trade. Importing and exporting in this instance is on "bank credit basis" and involves the use of the commercial letter of credit, which may be described as an instrument by which "a banker, for account of a buyer, gives formal evidence to a seller of its willingness to permit him to draw on certain terms and stipulates in legal form that all such bills will be honored" on presentation.
From the viewpoint of a single country, commercial letters of credit may be divided into two groups. If an American importer provides the foreign exporter or shipper with a credit, we would consider it an import letter of credit, since it is being used to finance our imports. To the foreigner it will be an export letter of credit. If an American exporter is provided with a credit by the foreign importer or buyer, we would call it an export letter of credit, since it is being used to finance our exports. To the foreigner it will be an import letter of credit. In the case of either import or export letters, the credit may be in dollars or in foreign currency and may provide either for sight drafts or for time drafts.
From the viewpoint of a single country, commercial letters of credit may be divided into two groups. If an American importer provides the foreign exporter or shipper with a credit, we would consider it an import letter of credit, since it is being used to finance our imports. To the foreigner it will be an export letter of credit. If an American exporter is provided with a credit by the foreign importer or buyer, we would call it an export letter of credit, since it is being used to finance our exports. To the foreigner it will be an import letter of credit. In the case of either import or export letters, the credit may be in dollars or in foreign currency and may provide either for sight drafts or for time drafts.
Commercial or Trade Drafts
Some small imports are paid for by money orders, and when importers pay for goods in advance they usually use the bank draft or cable or mail transfer just described. The draft, cable transfer, and mail transfer are, furthermore, the principal forms of remittance by which an importer will cover a maturing obligation incurred a month or so earlier when he bought goods on an open account or consignment basis. But traditionally and generally the dominant type of exchange instrument in the commodity trade between nations is the draft drawn by the exporter either in United States dollars or in foreign currency. If the exporter is satisfied with the credit rating of the importer and the exchange risk, he may draw an ordinary draft on the importer. If the credit rating of the buyer is not acceptable to the seller, or if custom requires, he may draw on a bank under a commercial letter of credit, assuming that a letter of credit is opened by the buyer through his bank. In either case the drafts may be in the exporter's currency or in the importer's currency.
Let us suppose that for one reason or another an American exporter decides to sell goods to an English importer on a sterling draft basis. He will prepare the goods for shipment, make up a commercial invoice, obtain an insurance certificate or policy, and deliver the goods to a carrier to obtain a bill of lading. He will also obtain whatever authorization is required by the British Consul. These papers--the commercial invoice, consular invoice, insurance certificate or policy, and bill of lading-are the principal "documents" used in export-import trade.
The exporter will then draw a draft on the importer either to his own order or, to the order of a bank. The terms of the sale will have been agreed upon in advance. If the Englishman is to pay on sight or on arrival of the goods, the draft will be drawn payable "at sight" or "on arrival"; otherwise it will be payable a specified number of days "after sight" or "after date" as the case may be. The importer will not be able to obtain the goods until he has paid the sight or arrival draft and obtains the shipping documents. In general postponing the details-the documents on a time draft will be turned over to him either on payment (i.e., "documents on payment" or D/P) or on acceptance of the draft (i.e., "documents on acceptance" or D/A). In this case say the agreed terms are: a sterling draft 60 days date, documents on acceptance, goods invoiced, and draft drawn for £3,000. If, as is probable, the exporter is charging the importer interest for the 60 days' credit, we may assume it is included in the cost of the merchandise, since interest on drafts is customarily implicit rather than explicit.
The exporter attaches to the draft the documents previously mentioned and if the credit standing of the importer warrants he may send the documents direct to the importer. More probably, however, he will employ an intermediary as collecting agent--a bank, for example. The bank will forward the draft and documents to its correspondent nearest the English importer. The importer will inspect the documents and if he finds everything in order he will write his "acceptance" across the face of the bill, hand it back to the correspondent, and retain the documents. Following instructions, the correspondent will now hold the acceptance till maturity, when it will be presented to the acceptor for payment.
Ultimate payment will be in pounds sterling, and if the exporter, who is in this case carrying the draft till. maturity, fears that sterling may decline during the 60 days the acceptance is outstanding, he may enter a contract with his bank to sell £3,000 for future delivery at an agreed rate. He might, however, have sold the draft to his bank, avoiding the exchange risk and obtaining the dollar equivalent of £3,000 at the current rate on 60-day sterling bills. If, by chance, acceptance should be refused by the importer-drawee in England, the loss will rest on the exporter-drawer in the United States and not on his bank which bought the draft in good faith. Whether the bank will have its correspondent in England hold the acceptance until maturity or discount it in the London market depends on whether it wants to add to its sterling deposits at once or prefers to earn the interest on the bill.
Let us suppose that for one reason or another an American exporter decides to sell goods to an English importer on a sterling draft basis. He will prepare the goods for shipment, make up a commercial invoice, obtain an insurance certificate or policy, and deliver the goods to a carrier to obtain a bill of lading. He will also obtain whatever authorization is required by the British Consul. These papers--the commercial invoice, consular invoice, insurance certificate or policy, and bill of lading-are the principal "documents" used in export-import trade.
The exporter will then draw a draft on the importer either to his own order or, to the order of a bank. The terms of the sale will have been agreed upon in advance. If the Englishman is to pay on sight or on arrival of the goods, the draft will be drawn payable "at sight" or "on arrival"; otherwise it will be payable a specified number of days "after sight" or "after date" as the case may be. The importer will not be able to obtain the goods until he has paid the sight or arrival draft and obtains the shipping documents. In general postponing the details-the documents on a time draft will be turned over to him either on payment (i.e., "documents on payment" or D/P) or on acceptance of the draft (i.e., "documents on acceptance" or D/A). In this case say the agreed terms are: a sterling draft 60 days date, documents on acceptance, goods invoiced, and draft drawn for £3,000. If, as is probable, the exporter is charging the importer interest for the 60 days' credit, we may assume it is included in the cost of the merchandise, since interest on drafts is customarily implicit rather than explicit.
The exporter attaches to the draft the documents previously mentioned and if the credit standing of the importer warrants he may send the documents direct to the importer. More probably, however, he will employ an intermediary as collecting agent--a bank, for example. The bank will forward the draft and documents to its correspondent nearest the English importer. The importer will inspect the documents and if he finds everything in order he will write his "acceptance" across the face of the bill, hand it back to the correspondent, and retain the documents. Following instructions, the correspondent will now hold the acceptance till maturity, when it will be presented to the acceptor for payment.
Ultimate payment will be in pounds sterling, and if the exporter, who is in this case carrying the draft till. maturity, fears that sterling may decline during the 60 days the acceptance is outstanding, he may enter a contract with his bank to sell £3,000 for future delivery at an agreed rate. He might, however, have sold the draft to his bank, avoiding the exchange risk and obtaining the dollar equivalent of £3,000 at the current rate on 60-day sterling bills. If, by chance, acceptance should be refused by the importer-drawee in England, the loss will rest on the exporter-drawer in the United States and not on his bank which bought the draft in good faith. Whether the bank will have its correspondent in England hold the acceptance until maturity or discount it in the London market depends on whether it wants to add to its sterling deposits at once or prefers to earn the interest on the bill.
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