16 ECONOMIC ESSAYS IN HONOR OF JOHN BATES CLARK 
who raised the question whether the term “profit” should not be 
applied to the combination of wages of management and interest, 
leaving the “mere labor” of employing capital to be remunerated 
by wages. “This would make it necessary to subdivide capital- 
ists into two classes, the inactive and the active: the first receiv- 
ing mere interest, the second obtaining profit.” * The chief illus- 
tration which he used was that of a bill broker making £4,000 a 
year net by employing £400,000 of other people’s money. He 
decides on the whole that “the inconveniences occasioned by a 
departure from an established nomenclature and an established 
classification are so great that we do not think that they will 
be compensated by the nearer approach to precision.” The con- 
ception of the identity of capitalist and undertaker persisted.” 
IT 
By the latter part of the nineteenth century, banking and other 
credit facilities had increased so greatly that a large part of the 
capital used in industry and commerce was borrowed capital. 
From 1851 to 1872, according to the best available estimates, the 
loans and discounts of English banks doubled. A similar expan- 
sion occurred in the United States. Freedom of incorporation 
had been obtained in both countries. The scale on which industry 
and commerce was carried on was as yet relatively small. The 
proportion of fixed capital to circulating capital was in most 
industries low. Under these conditions, the possessor of business 
ability was able to secure funds for the conduct of business on 
the basis of managerial ability.* 
1 Senior, N. W., Political Economy, 1854, p. 133. It is interesting to note 
that the term “active” capitalist occurs twice in economic theory. Senior, 
as indicated above, uses it in the sense of a capitalist who receives more 
than ordinary interest and wages by reason of his skill and intelligence. 
Professor F. A. Fetter defines active capitalists as “risk takers getting 
non-contractual capital-incomes, whom we call enterprisers” (Fetter, F. A, 
Economic Principles, Vol. 1, p. 319). 
2 J. S. Mill says, “The control of the operations of industry usually 
belongs to the person who supplies the whole or the greatest part of the 
funds by which they are carried on. . . .” (Principles, 5th ed., 1868, p. 496.) 
3 As early as 1870 in the introductory chapter of Lombard Street, Bagehot 
said, “English trade is carried on upon borrowed capital to an extent of 
which few foreigners have an idea, and none of our ancestors could have 
conceived. In every district small traders have arisen who discount their 
bills largely, and with the capital so borrowed harass and press upon the 
old capitalist. . . . In modern English business, owing to the certainty of 
obtaining loans on discount of bills or otherwise at a moderate rate of 
interest, there is steady bounty on trading with borrowed capital, and a 
constant discouragement to confine yourself solely or mainly to your 
own capital.”