and machinery.  Things of this last type are sometimes called “capital goods,” because it is in them that a large part of the capital of a business is embodied.  Now the fact that it will cost much more than it did before the war to construct fresh capital goods, has a significance which very few people appreciate.  An existing factory cost, let us say, $500,000 to build and equip with machinery before the war.  To construct a similar factory to-day would cost, let us assume (it is probably a moderate assumption) $1,000,000.  Suppose 10 per cent to be the gross profit that is necessary to attract capital to the particular industry.  Then it will not pay to construct this new factory unless the trade prospects point to the probability of a profit of about $100,000 per annum.  But if the old factory is equally well managed, it too should be able to earn this $100,000, which upon the capital actually sunk would represent a rate of 20 per cent.  The particular figures given are, of course, purely illustrative; the conclusion to which they point is that, if new enterprises are to be undertaken, pre-war enterprises are likely to yield a rate of profit, on their fixed capital at least, increased in rough proportion to the price-level.  Of course, in years when trade is bad, the factory which dates from pre-war times will not earn a profit of this kind, it may very likely make an actual loss.  At those times it is very certain that few new factories will be erected.  But it is difficult to reconcile a condition of trade activity, in which the constructional industries are busily employed, with a rate of profit to pre-war businesses on the fixed part of their capital of a lesser order of magnitude than has been indicated.  It makes no difference, it should be observed, whether we suppose the new enterprises to take the form of starting of new concerns or extending old ones; in neither case will they be undertaken, unless there is reason to expect an adequate return on the capital which they require at post-war constructional prices.  High profits (taking always good years together with bad) on capital sunk before the war in buildings and machinery are thus a likely consequence of an increase in the price-level.

This fact is, indeed, the counterpart or complement of another phenomenon with which we are more familiar.  While prices are actually rising, profits, as we have come to recognize, necessarily rule high, because every trader or manufacturer is constantly in the position of selling at a higher price-level, stock which he purchased, or goods made from materials which he purchased at a lower level.  He thus acquires an abnormal profit on his circulating capital, which is essentially similar to the profit on fixed capital, which we have just examined.  The difference is that the former profit is crowded into the years when prices are actually on the increase, and thus is very noticeable indeed; while the latter profit continues to accrue in smaller