former owners, the promotcr, and the credit house which financed the operation. But, by virtue of the debentures distributed, the former owners, together with the other parties named, appear in the role of creditors of the new corporation as well as owners of it; they commonly come out of the transaction with large holdings of preferred stock or similar debentures at the same time that they hold the coommon stock. The preferred stock, of course, is presently disposed of by the large holders to outside parties. The material equipment is then practically the same as it was before; the business capital has been augmented to comprise such proportion of the goodwill of the several concerns incorporated as had not previously been capitalized and hypothecated, together with the good-will imputed to the new corporation and such debentures as these items of wealth will float.
The effective capitalization resulting is, of course, indicated by the market quotations of the securities issued rather than by their face value. The value of the corporation's business capital so indicated need suffer no permanent shrinkage; it will suffer none if the monopoly advantage (good-will) of the new corporation is sufficient to keep its earning-capacity up to the rate on which the capitalization is based.
It appears, then, that in the affairs of latterday business, as shown by modern corporation finance, capital and credit extension are not always distinguishable in fact, nor does there appear to be a decisive business reason why they should be distinguished. "Capital" means "capitalized putative earning-capacity," expressed in terms of value, and this capitalization comprises the use of all feasible credit extension. The business capital of a modern corporation is a magnitude that fluctuates from day to day; and in the quotations of its debentures the magnitude of its credit extension also fluctuates from day to day with the course of the market. The precise pecuniary magn itude of the business community's invested wealth, as well as the aggregate amount of the community's indebtedness, depends from hour to hour on the quotations of the stock exchange; and it rarely happens that it remains nearly the same in the aggregate from one week's end to the next. Both capital and credit, therefore, vary from hour to hour. and, within narrow limits, from place to place. The magnitude and fluctuations of business capital, - "capital" in the sense in which that term is used in business affairs, - of course, stand in no hard and fast relation to the material magnitude of the industrial equipment; nor do variations in the magnitude of the business capital reflect variations in the magnitude or the efficiency of the industrial equipment in any but the loosest and most indecisive manner. So also, and for the same reason, the magnitude and the variations of the aggregate credit afloat at a given time bear, at the most, but a remote, indirect, and shifty relation to the aggregate of material wealth and the material changes to which this wealth is subject. All this applies with peculiar cogency wherever and in so far as industry and business are carried on hy modern expedients and in due contact with the market.
Modern Business Capital
What has been said on the use of loan credit has anticipated much of what is peculiar in modern business capital. Such is necessarily the case, since it is in the extensive use of credit that the later phases of the management of capital contrast most strikingly with the corresponding features of earlier business traffic. To follow the terminological precedents set by German writers, the late-modern scheme of economic life is a "credit economy," as contrasted with the "money economy" that characterizes early-modern times. The nature of business capital and its relations to the industrial process under the later, more fully developed, credit economy is in some degree different from what it was before the full and free use of credit came to occupy its present central position in business traffic; and more particularly is it at variance with the theoretical expositions of the economists of the past generation.
It has been the habit of economists and others to speak of "capital" as a stock of the material means by which industry is carried on, - industrial equipment, raw materials, and means of subsistence. This view is carried over from the situation in which business and industry stood at the time of Adam Smith and of the generation before Adam Smith, from whose scheme of life and of thought he drew the commonplace materials and conceptions with which his speculations were occupied. It further carries over the point of view occupied by Adam Smith and the generation to whom he addressed his speculations. That is to Say, the received theoretical formulations regarding business capital and its relations to industry proceed on the circumstances that prevailed in the days of the "money economy," before credit and the modern corporation methods became of first-class consequence in economic affairs. They canvass these matters from the point of view of the material welfare of the community at large, as seen from the standpoint of the utilitarian philosophy. In this system of social philosophy the welfare of the community at large is accepted as the central and tone-giving interest, about which a comprehensive, harmonious order of nature circles and gravitates. These early speculations on business traffic turn about the bearing of this traffic upon the wealth of nations, particularly as the wealth of nations would stand in a "natural" scheme of things, in which all things should work together for the welfare of mankind.
The theory, or what there is in the way of a theory, of business capital in the received body of doctrines is worked out from the point of view and for the theoretical purposes of the eighteenth century scheme of natural liberty, natural rights, and natural law; and the received theorems concerning the part played by capital and by the capitalist are substantially of the character of laws of nature, as that term was understood during the period to which these theorems owe their genesis. What these received theorems declare concerning the nature and normal function of capital and of the capitalist need not be recited here; their content is familiar enough to all readers, lay and learned. Also the merits of such a point of view for purposes of economic theory, and the adequacy of the received concept of capital for the purposes to which it was originally applied, need not detain the inquiry. Modern business management does not take that point of view, nor does "capital" carry such a meaning to the modern business man; because the guiding circumstances under which modern business is carried on are not those supposed to be given by a beneficent order of nature, nor do the controlling purposes of business traffic include that general well-being which constituted the final term of Adam Smith's social philosophy.
As a business proposition, "capital" means a fund of money values; and since the credit economy and corporation finance have come to be the ruling factors in industrial business, this fund of money values (taken as an aggregate) bears but a remote and fluctuating relation to the industrial equipment and the other items which may (perhaps properly) be included under the old-fashioned concept of industrial capital.80
Capital has been spoken of as the capitalized (aggregated) cost of industrial equipment, etc.,81 a view which had its significance for economic theory a hundred years ago; but since corporation finance has come to pervade the management of business this view is no longer of particular use for a theoretical handling of the facts. To avoid the tedium of argument it may be conceded that under the old dispensation, of partnerships and individual management in business, the basis of capitalization was the cost of the material equipment owned by any given concern; and so far as the methods of partnership and private firms still prevails such may still be the current method of capitalization, especially de jure. But in so far as business procedure and business conceptions have been shaped in the image of the modern corporation (or limited liability company), the basis of capitalization has gradually shifted, until the basis is now no longer given by the cost of material equipment owned, but by the earning-capacity of the corporation as a going concern.82
A given corporation's capital is, of course, de jure a magnitude fixed in the past by an act of legislature chartering the company, or by an issuance of stock by the company under the terms of its charter or of the acts which enable it. But this de jure capitalization
