ABSTRACT

Economic activity needs two sorts of capital-fixed capital (like machinery), which pays for itself over a long period, and circulating capital, for the payment of wages and the purchase of raw materials. The requirements of entrepreneurs vary with the nature of their business – an industrialist, for instance, will require a larger amount of fixed capital than a merchant. An entrepreneur wishing to expand his activities beyond what his personal resources can support, must borrow capital. If he seeks a loan to launch a major enterprise involving new plant and buildings, he will need to borrow from a long-term lender. If, on the other hand, he only needs cash to tide him over a temporary crisis until, say, he makes a large sale, he will need to borrow from a short-term lender. The former operates on a time-scale of years, the latter of months or even weeks. The institutional framework which supports the activities of long-term lenders are known as the capital market, of short-term lenders as the money market. Nowadays their activities overlap and mesh together, but they developed quite independently of one another.