In such a case, when a corporation starts with a fully organized capital and debt, the owners of the concern are also its creditors; they are, at the start, the holders of both common and preferred stock, and probably also of the bonds of the company - so adding another increment of confusion to the relation between modern capital and credit, as seen from the old-fashioned position as to what capitalization and its basis should be.
This syncopated process of expanding capital by the help of credit financiering, however, is seen at its best in the latter-day reorganizations and coalitions of industrial corporations; and as this class of transactions also illustrate another interesting and characteristically modern feature of credit financiering, the whole matter may best be set out in the way of a sketch of what takes place in a case of coalition of industrial corporations on a large scale such as recent industrial history has made familiar.
The avowed end of these latter-day business coalitions is economy of production and sale and an amicable regulation of intercorporate relations. So far as bears on the functioning of credit in the attendant business transactions, the presence or absence of these purposes, of course, does not affect the course of events or the outcome. These avowed incentives do not touch the credit operations involved. On the other hand, the need of large credit in consummating the deal, as well as the presumptive gains to be drawn from the credit relations involved, offer inducements of their own to men who are in a position to effect such a coalition. Inducements of this kind seem to have been of notable effect in bringing on some of the recent operations of this class.
Credit operations come into these transactions mainly at two points: in the "financing" of the deal, and in the augmentation of debentures; and at both of these points there is a chance of gain on the one hand to the promoter (organizer) and the credit house which finances the operation, and on the other hand to the stockholders. The gain which accrues to the two former is the more unequivocal, and this seems in some cases to be the dominant incentive to effect the reorganization. The whole operation of reorganization may, therefore, best be taken up from the point of view of the promoter, who is the prime mover in the matter.
A reorganization of industrial concerns on a large scale, such as are not uncommon at the present time, involves a campaign of business strategy, engaging, it is said, abilities and responsibilities of a very high order. Such a campaign of business strategy, as carried out by the modern captains of industry, runs, in the main, on credit relations, in the way of financial backing, options, purchases, leases, and the issuance and transfer of stock and debentures. In order to carry through these large "deals," in the first place, a very substantial basis of credit is required, either in the hands of the promoter (organizer) himself or in the hands of a credit house which "finances" the organization for him.
The strategic use of credit here involved is, in effect, very different from the old-time use of loan credit in investments. In transactions of this class the time element, the credit period, is an inconspicuous factor at the most; it plays a very subordinate and uncertain part. The volume of credit at the disposal of a given strategist is altogether the decisive point, as contrasted with the lapse of time over which the incident credit extension may run. The usefulness of the credit extension is not measured in terms of time, nor are the gains which accrue to the creditor in the case proportioned to the length of time involved.
This follows from the peculiar nature of the work which these great captains of industry have in hand, and more remotely, therefore, from the peculiar character of the earnings which induce them to undertake the work. Their work, though it is of the gravest consequence to industry, is not industrial business, in that it is not occupied with anything like the conduct of a continuous industrial process. Nor is it of the same class as commercial business, or even banking business, in that there is no investment in a continued sequence of transactions. It differs also from stock and produce speculation, as that is currently conceived,75 in that it does not depend on the lapse of time to bring a change of circumstances; although it has many points of similarity with stock speculation. In its details this work resembles commercial business, in that it has to do with bargaining; but so does all business, and this peculiar work of the trust promoter differs from mercantile business in the absence of continuity. Perhaps its nearest business analogue is the work of the real estate agent.
The volume of credit involved is commonly very great; whereas the credit period, the lapse of time, is a negligible factor. Indeed, if an appreciable credit period intervenes, that is a fortuitous circumstance. The time element in these credit operations is in abeyance, or at the best, it is an indeterminate magnitude. Hence the formula shown above (p. 95, n. 3) is practically not applicable to business of this class. So far as bears upon the credit operations involved in these transactions of the large finance, the question about which interest turns is almost exclusively the volume of the turnover; its velocity is a negligible quantity. Such strategic use of credit is not confined to the business of making or marring industrial coalitions. It is habitually to be met with in connection with stock (and produce) speculation, and ramifications of the like use of credit run through the dealings of the business community at large in many directions; but it rarely attains the magnitude in the service of stock speculation which it reaches in the campaign incident to a trust-making deal. The form of credit extension employed in these transactions with indeterminate time also varies. The older and more familiar form is that of the call loan, together with the stock exchange transactions for which call loans are largely used. Here the time element is present, especially in form; but the credit period is somewhat indeterminate, as is also the gain that accrues to the creditor from the transaction; although the creditor's gain here continues to be counted at a (variable) rate per cent. per time-unit. The strategic use of credit in the affairs of the large business finance has much in common with the call loan. Indeed, the call loan in set form is often resorted to as a valuable auxiliary recourse, although the larger arrangements for financing such a campaign of business strategy are not usually put in the form of a call loan. The arrangement between the promoter and the financial agent is commonly based on a less specific stipulation as to collateral, and the payment for credit obtained takes even less, if any, account of the length of the credit period. In financing a campaign of coalition the credit house that acts as financial agent assumes, in effect, an even less determinate credit responsibility. Here, too, the gains accruing to the creditor are no longer, even nominally, counted per cent. per time-unit, but rather in the form of a bonus based mainly on the volume of the turnover, with some variable degree of regard to other circumstances.
Answering to the essentially timeless character of the gains accruing to the financial agent, the earnings of the promoter engaged in transactions of this class are also not of the nature of profits per cent. per time-unit, but rather a bonus which commonly falls immediately into the shape of a share in the capitalization of the newly organized concern. Much of the increment of capital, or capitalization, that goes to the promoter is scarcely distinguishable from an increase of the liabilities of the new corporation (e.g. preferred stock); and the remainder (e.g. common stock) has also some of the characteristics of a credit instrument. It is worth noting that the cost of reorganization, including the bonus of the promoter and the financial agent, is, in the common run of cases, added to the capitalization; that is to say, as near as this class of transactions may be spoken of in terms borrowed from the old-fashioned business terminology, what answers to the "interest" due the creditor on the credit extension involved is incorporated in the "capital" of the debtor, without circumlocution or faltering.76
The line between credit and capital, or between debt and property, in the values handled throughout these strategic operations of coalition, remains somewhat uncertain. Indeed, the old-fashioned concepts of "debt" and "property," or "liabilities" and "assets," are not fairly applicable to the facts of the case - except, of course, in the way of a technical legal distinction. The old-fashioned law and legal presumptions and the new-fashioned facts and usages are parting company, at this point as well as at some others in the affairs of modern business.
When such a large transaction in the reorganization
