cent cumulative preferred, and $25,000,000 common. The actual issue in 1901 was about $8,000,000 preferred and $17,000,000 common, of which the preferred was presumed to cover the value of the tangible assets. Another coalition organized by the same promoter (Mr C.R. Flint), the American Chicle Company, illustrates the same general feature. The preferred stock of this company ($3,000,000) "in round numbers was three times the amount of tangible assets," while the common stock ($6,000,000) represents no tangible assets. The aggregate capitalization is about nine times the tangible assets. The witness says that this corporation has been proved by events to be "on a conservative basis from the fact that the company has paid 8 per cent on its common stock," which has been selling at 80. - Report of the Industrial Commission, vol. XIII. pp. 47, 50.
91It may be argued that this identification of the common stock with the intangible assets holds true in theory only, in the sense that this is the view held by the business men who occupy themselves with such matters; while in point of fact no distinction of this nature between common and preferred stock is or can practically be maintained after the stock has once found its way into the market. It might seem, in other words, that when the stock has once passed the stage of organization and gone into the hands of the purchasers, each share represents nothing but an undivided interest in the aggregate capitalization of the concern, so that the particular item of wealth represented by a given share or given form of security can no longer be identified. On the face of the situation such appears to be the case, but there are facts which argue for the view set out above. It is, e.g., well known that whenever circumstances arise which immediately affect the value of the good-will of a corporation, it is the quotations of the common stock that first and most decidedly are affected. If the goodwill of the concern makes a great and rapid gain, e.g. through manoeuvres which put it in a position of monopoly or through changes in the goods market which greatly increase the demand for the concern's product, and the like, it is the quotation of the common stock that measures and registers the advantage which thereby accrues to the concern, and the market fluctuation of the common stock is likewise the instrument by means of which manipulations are carried through that affect these intangible assets. At the same time this rule does not hold hard and fast, as is seen in case of a liquidation when the capital of the concern may have shrunk to such dimensions that the entire capital, including the intangible assets, will no more than satisfy the claims represented by the debentures. Still, in point of practical fact, the (theoretical) preconception of businessmen that the common stock in some intelligible sense covers the intangible assets is fairly borne out by everyday experience, taken by and large. A curious parallel might be traced between the current endeavors of the business community to organize and manage the industrial equipment on the basis of immaterial assets and the medieval business perplexities and actions relative to loans on interest. In both cases the business community has had to face untried exigencies together with a popular, traditional prejudice that discountenances the expedients by which these exigencies are to be met. The medieval presumption was that the management of productive goods and the profits accruing from their use must go to their users. (Cf. Ashley, Economic History, vol. I. ch. III, vol. II ch. VI; Endemann, Die nationalokonomische Grundsatze der kanonistischen Lehre.) The modern presumption is that the management of the equipment and the gains from such management must vest in the owner. The modern exigencies decide that the equipment must be managed by others than the owners and that profits must largely accrue to those who financially manage the concern. The expedient by which this result is sought to be reached is the fiction of intangible assets and the impersonal, irrevocable credit extension covered by the preferred stock. The effect is to dissociate ownership from management. This is the necessary outcome of a "credit economy" consistently and fully carried through. The management of the material equipment of industry is thrown into the hands of those who own the immaterial wealth; that is to say, those who own the claim to manage the equipment. The current prejudice which insists on management by the owners is set aside by feigning that this claim has an industrial value, and so capitalizing it on the basis of the differential advantage which accrues to its holders.
92See also a discussion by E.S. Meade, Quarterly Journal of Economics, February 1902, pp. 217 et seq., of how "good-will" may vary in magnitude, or even disappear, when a concern eaters a larger coalition; also, on the same general head, W.F. Willoughby," Integration of Industry in the United States," ibid., November 1902.
93p. 113 above.
94cap' = cap + cap/n > cap, in which cap' is the nominal capital, as increased by the credit element cap/n.
95mat' = mat + (1/n)(cap/n) > mat, in which mat' is the current value of the material equipment,as increased (over mat) by the competitive demand for equipment due to the credit element cap/n. One of the substantial secondary benefits to be noted as flowing from these modern business expedients is the effect of corporation finance upon the aggregate nominal wealth of the community. A given community, possessed of a given complement of material wealth, is richer in capital if a large proportion of its industrial equipment is capitalized and managed by corporation methods, quite apart from any increase in the material items of which the community is possessed. (Cf. Twelfth Census of the United States, "Manufactures," pt. I. p. xcvi) Wealth may in this way be increased (about twofold on an average), inexpensively, by the simple expedient of incorporating the community's business concerns in the form of joint-stock companies. The more highly involved and the more widely extended the corporation financiering is, the richer, in statistical terms of capital, is the community, other things equal. Among these other things are the material facts of the case.
96The commodities bought and sold in the goods market are the outcome of a process of production and are useful for a material purpose; those bought and sold in the capital market are the outcome of a process of valuation and are useful for purposes of pecuniary gain.
97Cf. Marx, Kapital (4th ed.) bk. I, ch. IV.
98Effective capital = current market value of nominal capital = presumptive earning capacity x purchase period, neglecting fortuitous and incalculable items which may affect any given case. If nominal capital = cap, effective capital = cap', presumed annual earnings = ea', and the purchase period of capitalized property (years' purchase) = yp = 1/interest rate per annum, we have cap <> cap' = ea' x yp = ea'/int. This equation between cap' and ea' is disturbed by the presence in any given case of variable factors which cannot be included in the equation, but it remains true after all qualification has been made that cap' = f(ea'/int).
99Something of this kind is the usual ground of the obstinate resistance which most business men oppose to publicity of accounts. In lines of business, as, e.g. railroading, in which accounts are readily and effectually sophisticated ("doctored"), the objections to publicity are commonly less strenuous.
100Cf., e.g., Eberstadt, Deutsche Kapitalismarkt.
101The capital of any industrial concern under the "money economy" is, of course, also vendible, but with relative difficulty; while the readier vendibility of modern corporate capital is so characteristic and consequential a factor in business and contrasts so broadly with the old-fashioned business methods that it may fairly be spoken of as vendibility par excellence. The "holding company" is the mature development of this traffic in vendible capital in industrial business.
102It may be noted, by the way, that the question of the turnover
