industrial concerns has been completed, the values left in the hands of the former owners of the concerns merged in the new coalition are only to a fractional and uncertain extent of the nature of material goods. They are in large part debentures, and much of the remainder is of a doubtful character. A large proportion of the nominal collective capital resulting in such cases is made up of the capitalized good-will of the concerns merged.77 This good-will is chiefly a capitalization of the differential advantages possessed by the several concerns as competitors in business, and is for the most part of no use for other than competitive business ends. It has for the most part no aggregate industrial effect. The differential advantages possessed by business concerns as competitors disappear when the competitors are merged, in the degree in which they cease to compete with rival bidders for the same range of business. To this aggregate defunct good-will of the consolidated concerns (which in the nature of things can make only an imaginary aggregate) is added something in the way of an increment of good-will belonging to the new corporation as such;78 and the whole is then represented, approximately, by the common stock issued. The nominal capital of the concerns merged (in good part based on capitalized goodwill) is aggregated, after an appraisement which commonly equalizes the proportion of each by increasing the nominal shares of all. This aggregate is covered with common and preferred stock, chiefly preferred, which is a class of debentures issued under the form of capital. The stock, common and preferred, goes to the owners of the concerns merged, and to the promoter and the financial agent, as indicated above. In case bonds are issued, these likewise go to the former owners, in so far as they do not replace outstanding liabilities of the concerns merged.
"Capital" in the enlightened modern business usage means "capitalized presumptive earning-capacity," and in this capitalization is comprised the usufruct of whatever credit extension the given business concern's industrial equipment and good-will will support.79 By consequence the effectual capitalization (shown by the market quotations) as contrasted with the nominal capital (shown by the par value of the stock of all descriptions) fluctuates with the fluctuations of the prevalent presumption as to the solvency and earning-capacity of the concern and the good faith of its governing board.
When the modern captain of industry reorganizes and consolidates a given range of industrial business concerns, therefore, and gives them a collective form and name as an up-to-date corporation, the completed operation presents, in syncopated form and within a negligible lapse of time, all that intricate process of cumulative augmentation of business capital through the use of credit which otherwise may come gradually in the course of business competition. At the same time it involves a redistribution of the ownership of the property engaged in industry, such as otherwise occurs at a period of liquidation. The result is, of course, not the same at all points, but the equivalence between the two methods of expanding business capital and distributing the gains is close in some respects. The resemblances and the differences between the two processes, so far as relates to credit, are worth noticing. The trust-maker is in some respects a surrogate for a commercial crisis.
When credit extension is used competitively in the old-fashioned way for increasing the business of competing concerns, as spoken of above (pp. 94-100, 109-114), the expansion of business capital through credit operations occupies a period of some duration, commonly running over an interval recognized as a period of speculative advance or "rising prosperity." The expansion of capitalized values then takes place more or less gradually through a competitive enhancement of the prices of industrial equipment and the like. The creditors then commonly come in for their resulting share in the industrial equipment only at the period of liquidation, with its attendant shrinkage of values. In the timeless credit transactions involved in the modern reorganizations of industrial business, on the other hand, the creditors' claim takes effect without an appreciable lapse of time, a liquidation, or a shrinkage of values.
The whole process of credit extension, augmentation of business capital, and distribution of proceeds is reduced to a very simple form. The credit extension is effected in two main forms: (a) the "financing" undertaken by the credit house in conjunction with the promoter, and (b) the issuance of debentures. The bonus of the financing house and promoter, as well as the debentures, are all included in the recapitalization, together with an increment of good-will and any other incidental items of expense or presumptive gain. The resulting collective capitalization (assets and liabilities) is then distributed to the several parties concerned in the transaction. The outcome, so far as touches the present argument, being that when the operation is completed the ownership of the recapitalized industrial equipment, with whatever other property is involved, appears distributed between the 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
