other firms into a larger corporate whole. There is in this matter no hard and fast rule, of course. On the one hand, the approved methods of corporation finance may in some measure be resorted to by a private firm, Without formal conversion of the concern into the corporate form; and on the other hand, an incorporated company may continue to carry on its business after the manner usual with privately owned concerns. But taken by and large, it will be found that with the assumption of the corporate form is associated a more modern method of capitalization and a freer use of credit. The advantages which the corporate form offers in these respects are commonly not neglected. The more archaic forms of organization and business management, in which recourse is commonly not had to the characteristic methods of corporation finance, prevail chiefly in those "backward" lines of industry in which monopoly or other differential advantages of an intangible nature are not readily attainable; such, e.g., as farming, fishing, local merchandising, and the minor mechanical trades and occupations. In this range of industries large (corporate) organization has hitherto been virtually impracticable, and here at the same time differential advantages, of the nature of good-will (as indicated above), are relatively scant and precarious. Where extensive differential advantages of this kind come in, the corporate form of organization is also likely to come in.
The cases are also frequent where a corporation starts out full-fledged from the beginning, without derivation from a previously existing private firm. Where this happens, the start is commonly made with some substantial body of immaterial goods on which to build up the capitalization; it may be a franchise, as in the case of a railway, telegraph, telephone, street-car, gas, or water company; or it may be the control of peculiar sources of material, as in the case of an oil or natural gas company, or a salt, coal, iron, or lumber company; or it may be a special industrial process, patented or secret; or it may be several of these. When a corporation begins its life history without such a body of immaterial differential advantages, the endeavors of its management are early directed to working up a basis of good-will in the way of trade-marks, clientele, and trade connections which will place it in something of a monopoly position, locally or generally 87 Should the management not succeed in these endeavors to gain an assured footing on some such "immaterial" ground, its chances of success among rival corporations are precarious, its standing is insecure, and its managers have not accomplished what is looked for at their hands. The substantial foundation of the industrial corporation is its immaterial assets.
The typical modern industrial corporation is a concern of sufficient magnitude to be of something more than barely local consequence, and extends its trade relations beyond the range of the personal contact of its directive officials. Its properties and its debts are also commonly owned, in part at least, by persons who stand in no direct personal relation to the board of managers. In an up-to-date corporation of this character the typical make-up of the corporate capital, or capitalization, is somewhat as follows: The common stock approximately covers the immaterial properties of the concern, unless these immaterial properties are disproportionately large and valuable; in case of a relatively small and local corporation the common stock will ordinarily somewhat more than cover the value of the immaterial property and comprise something of the plant; in case of the larger concerns the converse is likely to be true, so that here the immaterial property, intangible assets, is made to serve in some measure as a basis for other securities as well as for the common stock. The common stock, typically, represents intangible assets and is accounted for by valuable trade-marks, patents, processes, franchises, etc. Whatever material properties, tangible assets, are in hand or to be acquired are covered by preferred stock or other debentures. The various forms of debentures account for the material equipment and the working capital (the latter item corresponding roughly to the economists' categories of raw materials, wages fund, and the like). Of these debentures the preferred stock is the most characteristic modern development. It is, de jure, counted as a constituent of the concern's capital and the principal is not repayable; in this (legal) respect it is not an evidence of debt or a credit instrument.88 But it has little voice in the direction of the concern's business policy.89 In practice the management rests chiefly on the holdings of common stock. This is due in part to the fact that the preferred bears a stated rate of dividends and is therefore taken up by scattered purchasers as an investment security to a greater extent than the common. In this (practical) respect it amounts to a debenture. Its practical character as a debenture is shown by the stated rate of dividends, and where it is "cumulative" that feature adds a further step of assimilation to the ordinary class of debentures. Indeed, in point of practical effect preferred stock is in some respects commonly a more pronounced credit instrument than the ordinary mortgage; it alienates the control of the property which it represents more effectually than the ordinary bond or mortgage loan, in that it may practically be a debt which, by its own terms, cannot be collected, so that by its own terms it may convey a credit extension from the holder to the issuing corporation in perpetuity. Its effect is to convey the discretionary control of the material properties which it is held to represent into the hands of the holders of the common stock of the concern. The discretionary management of the corporate capital is, by this device, quite as effectually as by the use of ordinary credit instruments, vested in the common stock, which is held to represent the corporation's goodwill. The discretionary disposal of the entire capital vests in securities representing the intangible assets. In this sense, then, the nucleus of the modern corporate capitalization is the immaterial goods covered by the common stock.90
This method of capitalization, therefore, effects a somewhat thoroughgoing separation between the management and the ownership of the industrial equipment. Roughly speaking, under corporate organization the owners of the industrial material have no voice in its management, and where preferred stock is a large constituent of the capital this alienation of control on the parts of the owners may be, by so much, irrevocable. Preferred stock is, practically, a device for placing the property it represents in perpetual trust with the holders of the common stock, and, with certain qualifications, these trustees are not answerable for the administration of the property to their trustors. The property relation of the owners to their property is at this point attenuated to an extreme degree. For most business purposes, it should be added, the capital covered by other forms of debentures is in much the same position as that covered by the preferred stock.91
The various descriptions of securities which in this way represent corporate capital are quotable on the market and are subject to market fluctuations; whereby it comes about that the aggregate effective magnitude of the corporate capital varies with the tone of the market, with the manoeuvres of the business men to whom is delegated the management of the companies, and with the accidents of the seasons and the chances of peace and war. Accordingly, the amount of the business capital of a given concern, or of the business community as a whole, varies in magnitude in great measure independently of the mechanical facts of industry, as was noted above in speaking of loan credit.92 The market fluctuations in the amount of capital proceed on variations of confidence on the part of the investors, on current belief as to the probable policy or tactics of the business men in control, on forecasts as to the seasons and the tactics of the guild of politicians, and on the indeterminable, largely instinctive, shifting movements of public sentiment and apprehension. So that under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact.
But in this uncertain and shifting relation of the business capital to the material equipment there are one or two points which may be set down as fairly secure. Since the credit instruments involved in modern capitalization may be used as collateral for a further credit extension, as noted in the chapter on loan credit,93 the aggregate nominal capital in hand at a given time is, normally, larger by an appreciable amount than the aggregate value of the material properties
