of application and fuller employment of the industrial plant.
73See chapter VI.
74The question of "stock watering" "overcapitalization" and the like is scarcely pertinent in the case of a large industrial corporation financed as the modern situation demands. Under modern circumstances the common stock can scarcely fail to be all "water", unless in a small concern or under incompetent management. Nothing but "water" - under the name of good-will - belongs in the common stock; whereas the preferred stock, which represents material equipment, is a debenture. "Overcapitalization," on the other hand, if it means anything under modern business conditions, must mean overcapitalization as compared with earning-capacity, for there is nothing else pertinent to compare it with; and earning-capacity fluctuates, while the basis (interest rates) on which the earning-capacity is to be capitalized also fluctuates independently. In effect, the adjustment of capitalization to earning-capacity is taken care of by the market quotations of stock and other securities; and no other method of adjustment is of any avail, because capitalization is a question of value, and market quotations are the last resort in questions of value. The value of any stock listed on the exchange, or otherwise subject to purchase and sale, fluctuates from time to time; which comes to the same thing as saying that the effectual capitalization of the concern, represented by the securities quoted, fluctuates from time to time. It fluctuates more or less, sometimes very slowly, but always at least so much as to compensate the long-period fluctuations of discount rates in the money market; which means that the purchase price of a given fractional interest in the corporation as a going concern fluctuates so as to equate it with the capitalized value of its putative earning-capacity, computed at current rates of discount and allowing for risks. Cf. Report of the Industrial Commission, vol. I. p. 587 (Testimony of Rogers); vol. XIII. pp. 106-107 (Testimony of E.R. Chapman). See also Chapter VI below.
75See, e.g. Emery, Speculation on the Stock and Produce Exchanges of the United States, ch. IV; Hadley, Economics, ch. IV.
76Report of the Industrial Commission, vol. I, (Testimony of W.H. Moore) pp. 960-963, (W.E. Reis) p. 949, (Gates) p. 1032; vol. IX. (T.L. Greene) p. 491; vol. XIII, p. viii, with corresponding testimony. See also Chapter VI below.
77Report of the Industrial Commission, vol. I (Testimony of Dodd) pp. 1054-1055, 1057, 1058-1059, (Gates) pp. 1021-1022; vol. XIII, p. ix, with testimony.
78Report of the Industrial Commission, vol. I (Testimony of Dos Passos) p. 1179; vol. XIII (C.R. Flint) p. 48. Testimony to the same effect recurs elsewhere in the Report. See p. 125, n. 1 above.
79See Chapter VI below.
80The distinction between business capital and "industrial capital" or "capital goods" has been shown by Knies, Geld und Credit, vol. I. ch. II. pp. 40-60. Distinctions having a very similar erect in some bearings are to be found in Rodbertus ("private capital" and "national capital"), in Bohm-Bawerk ("acquisitive capital" and "productive capital," or "private capital" and "social capital"), in Clark ("capital" and "capital goods"). Similar distinctions are made by various writers to help out the incompetency of the received definition of the term. The merit of these distinctions does not concern the present inquiry, since they are made for other purposes than that here aimed at. The distinction made above is not an attempt to recast the terminology of economic theory, but is simply an expedient for present use. It amounts to an unqualified acceptance of the concept (more or less well defined) which business men habitually attach to the term "capital." Mr F.A. Fetter has latterly spoken for the restriction of "capital," as a technical term, practically to what is here called "business capital." Mr Fetter's "capital concept," however, should probably not be taken to cover intangible assets. The practical distinction is visible in the testimony of various witnesses before the Industrial Commission, as also in the special report on "Securities," Report, vol. XIII.
81Even so late and competent a student of corporate capital as J. von Korosi is bound by this antique preconception, and his work has suffered in consequence. See Finanzielle Ergebnisse der Actiengesellschaften, p. 3.
82This state of the case is brought out, in a veiled manner, by the well-known proposition, expounded in varying form by various writers, that the cost of equipment on which capitalization must, in theory, take place is the cost of reproduction of all valuable items included, tangible and intangible.
83"Nothing is more illusive and delusive than the idea that if a corporation's stock be only paid in in money at the outset it is therefore better off than one that has issued its stock for property that could not be converted for one cent on the dollar. The question is what assets the corporation has got at the time of the particular transaction, and that can be ascertained only by present inquiry." - Testimony of F.L. Stetson, Report of the Industrial Commission, vol. I. p. 976. Cf. Meade, Trust Finance, ch. XVI and XVIII.
84Earning-capacity is practically accepted as the effective basis of capitalization for corporate business concerns, particularly for those whose securities are quoted on the market. It is in the stock market that this effective capitalization takes place. But the law does not recognize such a basis of capitalization; nor are business men generally ready to adopt it in set form, although they constantly have recourse to it, in effect, in operations of investment and of credit extension. Cf. Report of the Industrial Commission, vol. I. pp. 6, 17, 21 (Test. F.B. Thurber); p. 967 (Test. F.L. Stetson); pp. 585-587 (Test. H.H. Rogers); pp. 110-111, 124 (Test. H.O. Havemeyer); pp. 1021, 1032 (Test. J.W. Gates); pp. 1054-1055 (Test S. Dodd); vol. XIII. pp. 287-288 (Test. H. Burn); p. 388 (Test. J. Morris); pp. 107-108 (Test. E.R. Chapman). See Quarterly Journal of Economics, February 1903, pp. 344-345, "The Holyoke Water Case," for an illustrative decision.
85The advantages afforded their owners by these intangible assets have latterly been discussed by economists under such headings as "Rent" or "Quasi-Rent." These discussions, it is believed, are of great theoretical weight. In business practice, however, the items in question are treated as capital, which must avail as an excuse for including them here in business Capital.
86Compare Bohm-Bawerk's and Clark's distinctions between "private" and "social" capital, and between "capital" and "capital goods."
87See Chapter III above.
88On the books of the corporation it is, of course, carried as an item of liability; as is the common stock; but that is a technical expedient of accountancy, and does not touch the substantial question.
89See testimony of various witnesses on "Capitalization" before the Industrial Commission, vols. I, IX, XIII.
90As one of many illustrative cases, the Rubber Goods Manufacturing Company may be taken as a typical instance of a corporation organized in a conservative but up-to-date manner for permanent success and stable value. Its authorized issue of stock is $25,000,000 7 per
