capital are, of course, those items which consist of capitalized good-will, since these are intangible goods from start to finish. It is upon this factor of good-will in capital that a change in presumptive earning-capacity falls most immediately, and this factor shows the widest and freest market fluctuations. The variations in the capitalized value of merchantable good-will are relatively wide and unstable, as is shown by the quotations of common stock.
In the capital market the commodity in which trading is done, then, is the capitalized putative earning-capacity of the property covered by the securities bought and sold. This property is in part tangible, in part intangible, the two categories being seldom clearly distinguishable. The items bought and sold are put into merchantable form by being standardized in terms of money and subdivided into convenient imaginary shares, which greatly facilitates the traffic. The earning-capacity on which the market capitalization runs and about which the traffic in merchantable capital turns is a putative earning-capacity. It follows that this putative earning-capacity of a given block of capital, as it takes shape in the surmises of outside investors, may differ appreciably from the actual earning-capacity of the capital as known to its managers; and it may readily be to the latter's interest that such a discrepancy between actual and imputed earning-capacity should arise.99 When, e.g., the putative earning-capacity of the capital covered by a given line of securities, as shown by the market quotations, rises appreciably above what is known to its managers to be its actual earning-capacity, the latter may find their advantage in selling out, or even in selling short; while in the converse case they will be inclined to buy. Moreover, putative earning-capacity is the outcome of many surmises with respect to prospective earnings and the like; and these surmises will vary from one man to the next, since they proceed on an imperfect, largely conjectural, knowledge of present earning-capacity and on the still more imperfectly known future course of the goods market and of corporate policy. Hence sales of securities are frequent, both because outsiders vary in their estimates and forecasts, and because the information of the outsiders does not coincide with that of the insiders. The consequence is that a given block of capital, representing, e.g., a controlling interest in a given industrial enterprise, may, and in practice it commonly will, change owners much more frequently than a given industrial plant was wont to change owners under the old regime, before the fully developed corporation finance came to occupy the field of industrial business.100
It follows, further, that under these circumstances the men who have the management of such an industrial enterprise, capitalized and quotable on the market, will be able to induce a discrepancy between the putative and the actual earning-capacity, by expedients well known and approved for the purpose. Partial information, as well as misinformation, sagaciously given out at a critical juncture, will go far toward producing a favorable temporary discrepancy of this kind, and so enabling the managers to buy or sell the securities of the concern with advantage to themselves. If they are shrewd business men, as they commonly are, they will aim to manage the affairs of the concern with a view to an advantageous purchase and sale of its capital rather than with a view to the future prosperity of the concern, or to the continued advantageous sale of the output of goods or services produced by the industrial use of this capital.
That is to say, the interest of the managers of a modern corporation need not coincide with the permanent interest of the corporation as a going concern; neither does it coincide with the interest which the community at large has in the efficient management of the concern as an industrial enterprise. It is to the interest of the community at large that the enterprise should be so managed as to give the best and largest possible output of goods or services; whereas the interest of the corporation as a going concern is that it be managed with a view to maintaining its efficiency and selling as large an output as may be at the best prices obtainable in the long run; but the interest of the managers, and of the owners for the time being, is to so manage the enterprise as to enable them to buy it up or to sell out as expeditiously and as advantageously as may be. The interest of the community at large demands industrial efficiency and serviceability of the product; while the business interest of the concern as such demands vendibility of the product; and the interest of those men who have the final discretion in the management of these corporate enterprises demands vendibility of the corporate capital. The community's interest demands that there should be a favorable difference between the material cost and the material serviceability of the output; the corporation's interest demands a favorable pecuniary difference between expenses and receipts, cost and sale price of the output; the corporation directorate's interest is that there should be a discrepancy, favorable for purchase or for sale as the case may be, between the actual and the putative earning-capacity of the corporation's capital.
It has been noted in an earlier chapter that there unavoidably results a discrepancy, not uncommonly a divergence, between the industrial needs of the community and the business needs of the corporations. Under the regime of the old-fashioned "money economy," with partnership methods and private ownership of industrial enterprises, the discretionary control of the industrial processes is in the hands of men whose interest in the industry is removed by one degree from the interests of the community at large. But under the regime of the more adequately developed "credit economy," with vendible corporate capital,101 the interest of the men who hold the discretion in industrial affairs is removed by one degree from that of the concerns under their management, and by two degrees from the interests of the community at large.
The business interest of the managers demands, not serviceability of the output, nor even vendibility of the output, but an advantageous discrepancy in the price of the capital which they manage. The ready vendibility of corporate capital has in great measure dissociated the business interest of the directorate from that of the corporation whose affairs they direct and whose business policy they dictate, and has led them to centre their endeavors upon the discrepancy between the actual and the putative earning-capacity rather than upon the permanent efficiency of the concern. Their connection with the concern is essentially transient; it can be terminated speedily and silently whenever their private fortune demands its severance. Instances are abundant, more particularly in railway management, where this discrepancy between the business interest of the concern and the private business interest of the managers for the time being has led to very picturesque developments, such as could not occur if the interests of the management were bound up with those of the corporation in the manner and degree that once prevailed. The fact is significant that the more frequent and striking instances of such management of corporate affairs for private ends have hitherto occurred in railroading, at the same time that the methods and expedients of modern corporation finance have also first and most widely reached a fair degree of maturity in railroading. It holds out a suggestion as to what may fairly be looked for when corporation finance shall have made itself more thoroughly at home in the "industrials" proper. Indeed, the field of the "industrials" is by no means barren of instances comparable with the maturer and more sagacious railroad financiering.102
The stock market interest of those men who have the management of industrial corporations is a wide and multifarious one. It is not confined to the profitable purchase and sale of properties whose management they may have in hand. They are also interested in making or marring various movements of coalition or reorganization, and to this ulterior end it is incumbent on them to "manipulate" securities with a view to buying and selling in such a manner as to gain control of certain lines of securities.103 Hence it is a rule of this class of business traffic to cultivate appearance, - to avoid, or sometimes to court, the appearance of sin. So that under this leadership the course of industrial affairs is, in great measure, if not altogether, guided with a view to a plausible appearance of prosperity or of adversity, as the case may be. Under given circumstances it may as well become the aim of men in control to make an adverse showing as a favorable one. The higher exigencies of the captain of industry's personal fortunes, as distinct from those of the corporation controlled
