lished and its methods of management are well known, this contention is largely true. On the other hand, when new corporations are organized, and only those who are closely connected with the management know on what terms properties are purchased for which stock is issued, there is great opportunity for deception. Even a public statement of actual earnings of different corporations for a series of years past may be so arranged that the results will be decidedly misleading. Average profits over a period of five years might well be 10 per cent., when if a period of seven years were taken the average would be not more than five. Even the profits of the last two years might be nil. The ordinary investor, who has not had the opportunity of studying the details of organization, is unable to judge.

Even capitalization at the reproduction value of the plants may be as misleading in many ways as capitalization on supposed earning capacity, because unskilful management or a changing state of the market may either double the value of the plant or halve it within a year or two, if we are to take as the basis of value what it might actually bring in the market,

which depends again, as has been intimated, on its earning capacity.

There can be no doubt, too, that a high capitalization brings pressure to bear upon officers of corporations to raise prices of their products. Payment of dividends is likely to seem their first duty, and they push prices as high as the market will bear.

The only just method of preventing the evils which are likely to come through the capitalization of any establishment, is to place clearly and fully before all investors, at the time of the organization, the plan of organization itself, the amounts actually allowed for all and each of the properties taken into the establishment, with as complete information as possible regarding these properties, so that a fair judgment can be made regarding both their cost and their earning capacity. In like manner the condition of the business from year to year must be impartially set before the public, so that its earning capacity can be fairly known. Whatever capitalization is then made at the beginning, the value of its stock will in the main be based upon its fair probable earning capacity, while the changing conditions of business from year to year being

made fully known would determine with even justice among the different parties concerned the changing values.

The chief evils of our over-capitalization in recent years have appeared in those organizations that have issued stock far beyond any reasonable likelihood of dividends on the common stock, short of monopoly, and whose promoters have been primarily, not business

gamblers.

men, but

A proposition has been made to avoid all evils connected with capitalization by providing that shares of stock, representing dollars as their par value, should not be issued, but that a plan reported by a committee of the New York State Bar Association should be adopted, which it was thought would afford a remedy for all these evils. The proposition is as follows:

"To permit the formation of a distinct class. of business stock corporations, whose capital stock may be issued as representing proportional parts of the whole capital without any nominal or money value.

"The effect of such amendment would be to provide for the measurement of the interest or shares of the members of such a corporation

by a statement of proportion, as in case of the part owners of a ship, and not by an arbitrary assignment of money value, which is delusive in the case of every corporation whose capital stock has a market value either more or less than its nominal par value.

"Such an amendment, though somewhat radical, is not altogether novel. It embodies a principle adopted in corporation laws in Germany.

"It would relieve any possibility of injury to the public from misleading representations as to the money value of corporate stock, and would also relieve from embarrassment conscientious corporate officers often compelled to deal with legal fiction as to which they have no personal knowledge, as though it were a reality within their own observation.” *

The suggestion is valuable and would apparently prove effective; but there is no general interest in a change, and it is probably, for the present at least, not practicable.

The effect of over-capitalization upon prices will be discussed briefly in a later chapter.

* Proceedings of New York State Bar Association, January, 1892, p. 148.

CHAPTER VII

METHODS OF ORGANIZATION AND

MANAGEMENT

Before the compact combinations of the present day were known, various forms of specific agreements among independent corporations and individual competitors were common, such agreements often being called pools, although the earnings of the different companies were not put into one common stock from which profits were to be distributed.

For some years before the organization of the Whiskey Trust, competition had been very fierce among the different distillers, and agreements were usually made from year to year which fixed the amount that each distiller should produce during the year. At other times, under agreement, an assessment was levied which each distiller should pay upon each bushel of corn mashed, in order to export the goods at a loss, and thus, by relieving the home market of its surplus, make sufficient provision for selling