has in the efficient management of the concern as an industrial enterprise. It is to the interest of the community at large that the enterprise should be so managed as to give the best and largest possible output of goods or services; whereas the interest of the corporation as a going concern is that it be managed with a view to maintaining its efficiency and selling as large an output as may be at the best prices obtainable in the long run; but the interest of the managers, and of the owners for the time being, is to so manage the enterprise as to enable them to buy it up or to sell out as expeditiously and as advantageously as may be. The interest of the community at large demands industrial efficiency and serviceability of the product; while the business interest of the concern as such demands vendibility of the product; and the interest of those men who have the final discretion in the management of these corporate enterprises demands vendibility of the corporate capital. The community's interest demands that there should be a favorable difference between the material cost and the material serviceability of the output; the corporation's interest demands a favorable pecuniary difference between expenses and receipts, cost and sale price of the output; the corporation directorate's interest is that there should be a discrepancy, favorable for purchase or for sale as the case may be, between the actual and the putative earning-capacity of the corporation's capital.
It has been noted in an earlier chapter that there unavoidably results a discrepancy, not uncommonly a divergence, between the industrial needs of the community and the business needs of the corporations. Under the regime of the old-fashioned "money economy," with partnership methods and private ownership of industrial enterprises, the discretionary control of the industrial processes is in the hands of men whose interest in the industry is removed by one degree from the interests of the community at large. But under the regime of the more adequately developed "credit economy," with vendible corporate capital,101 the interest of the men who hold the discretion in industrial affairs is removed by one degree from that of the concerns under their management, and by two degrees from the interests of the community at large.
The business interest of the managers demands, not serviceability of the output, nor even vendibility of the output, but an advantageous discrepancy in the price of the capital which they manage. The ready vendibility of corporate capital has in great measure dissociated the business interest of the directorate from that of the corporation whose affairs they direct and whose business policy they dictate, and has led them to centre their endeavors upon the discrepancy between the actual and the putative earning-capacity rather than upon the permanent efficiency of the concern. Their connection with the concern is essentially transient; it can be terminated speedily and silently whenever their private fortune demands its severance. Instances are abundant, more particularly in railway management, where this discrepancy between the business interest of the concern and the private business interest of the managers for the time being has led to very picturesque developments, such as could not occur if the interests of the management were bound up with those of the corporation in the manner and degree that once prevailed. The fact is significant that the more frequent and striking instances of such management of corporate affairs for private ends have hitherto occurred in railroading, at the same time that the methods and expedients of modern corporation finance have also first and most widely reached a fair degree of maturity in railroading. It holds out a suggestion as to what may fairly be looked for when corporation finance shall have made itself more thoroughly at home in the "industrials" proper. Indeed, the field of the "industrials" is by no means barren of instances comparable with the maturer and more sagacious railroad financiering.102
The stock market interest of those men who have the management of industrial corporations is a wide and multifarious one. It is not confined to the profitable purchase and sale of properties whose management they may have in hand. They are also interested in making or marring various movements of coalition or reorganization, and to this ulterior end it is incumbent on them to "manipulate" securities with a view to buying and selling in such a manner as to gain control of certain lines of securities.103 Hence it is a rule of this class of business traffic to cultivate appearance, - to avoid, or sometimes to court, the appearance of sin. So that under this leadership the course of industrial affairs is, in great measure, if not altogether, guided with a view to a plausible appearance of prosperity or of adversity, as the case may be. Under given circumstances it may as well become the aim of men in control to make an adverse showing as a favorable one. The higher exigencies of the captain of industry's personal fortunes, as distinct from those of the corporation controlled by him, may from time to time be best sewed by an apparent, if not an actual, mismanagement of industrial affairs. A convincing appearance of decline or disaster will lower the putative earning-capacity of the concern below its real earning-capacity and so will afford an advantageous opportunity for buying with a view to future advance or with a view to strategic control. Various other expedients looking to the like outcome are well known to the craft, besides bona fide mismanagement. A given line of securities may be temporarily depressed by less heroic tactics; but the point in question here is the fact that under this system of corporation finance the affairs of the corporation are in good part managed for tactical ends which are of interest to the manager rather than to the corporation as a going concern.
What was said in speaking of credit extension without a determinate time interval 104 applies to this class of business, with a slight change of phrase. In this higher development of corporation finance, in the manipulations of vendible capital, the interval of the turnover spoken of above becomes an indeterminate factor. The gains of the business come to have but an uncertain and shifty relation to the lapse of time and cannot well be calculated per cent. per time-unit. There is, therefore, on these higher levels of business management, properly speaking no ascertainable ordinary rate of earnings. The capital which may be distinctively regarded as operative in the business of manipulation, the valuable items specifically employed in the traffic in vendible corporate capital, is made up of the operator's good-will and his financial solvency. Solvency on a large scale is requisite to carrying on traffic of this class, but the collateral on which this extensive solvency constructively rests is to but a partial extent drawn into the business as a basis for an actual credit extension. What counts in the case is the solvency of the operator rather than an outright resort to the credit extension which this solvency might afford. The working capital involved in these transactions is accordingly of a peculiarly elusive character, and the time element in the use of this capital is hard to determine, if such a time element can properly be said to enter into the case at all.
More in detail, the business man in pursuit of gain along this line must, in the ordinary case, be possessed of large holdings of property, this being the basis of the solvency necessary to the business. These holdings are commonly in the form of securities in the concern whose vendible capital is the subject of his traffic, as well as in other corporations. These securities represent capital, tangible and intangible, which is already employed in the ordinary business of the concern by which they have been issued; the capital, therefore, is already in use to the full extent and is presumably yielding the ordinary rate of earnings. But the solvency for which the ownership of this capital affords a basis may further be useful in enabling the owner to carry on a traffic in vendible corporate capital without withdrawing any appreciable portion of his holdings from the lucrative investments in which they have been placed. In other words, he is able, under modern circumstances, to make a secondary use of his investments for the purpose of trading in vendible corporate capital; but this secondary use of investments bears no hard and fast quantitative relation to the investments in question, nor does it in any determinate way interfere with the ordinary employment of this invested capital in the commonplace conduct of the corporations' business traffic. The capital employed, as well as the potential credit extension which it affords for the purposes of this higher business traffic, is therefore in a peculiar degree intangible, and, in respect of its amount, highly elusive.
Much the same is true of the good-will employed in this traffic. It is also in good part good-will which already serves the purposes of
