social and political success of the highest type is faithfulness to a trust, a keen sense of honor. This evil of speculation, coming from the work of the promoter and financier, which has led to the substantial bribery of bank officials and to excessive stock watering on the part of the industrial combinations, is to be counted among the great evils which have attended their organization. They should be so conservatively capitalized and managed that their stocks will prove as safe an investment as farm mortgages, and a far more convenient one for the man of small means.

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CHAPTER VI

THE BASIS OF CAPITALIZATION

So much has been said of late years with rer erence to the evils of over-capitalization and of fraudulent practices in connection with stock watering, that it may be worth while to consider briefly the actual and the proper basis of capitalization of industries. It is ordinarily assumed in discussion by those who are opposed to what is generally called "stock watering," that stock ought to be issued for cash or for what is called the "actual cash value" of the property taken. It is generally assumed that the actual cash value will represent fairly well the cost of reproduction of the properties in present condition together with needed running capital in the form of cash on hand. Such an issuance of stock in an ordinary manufacturing business, under conditions of fair competition, will give dividends in the long run probably not materially different from, but perhaps somewhat higher than the usual rate of interest in the community.

It seems to have been the purpose of the corporation law of Massachusetts, and of some other States and countries, to secure capitalization on this basis. The new law for Puerto Rico, lately passed by Congress, takes this position, and shows how conservative it has tried to make its action on this subject. In Massachusetts, not merely must the directors or organizers of a corporation, part of whose stock is issued against property, make oath that the property has been received at its actual cash value, and that the stock is issued at this rate at par, but the Commissioner of Corporations of the State must also certify that he is satisfied that this is the case. Let us note just what this means. This is the capitalization of the plant and running capital, not necessarily that of the business as a going

concern.

On the other hand, most business men are of the opinion that the value of any property depends upon its earning capacity, its value as

a going concern," and that it is wise and just to issue stock of a corporation upon that basis. In the case of corporations, such as those mentioned in the paragraph above, the probability is that the reproduction value of the establishment

would correspond closely with the capitalization of its earning capacity at current interest rates. On the other hand, it must be remembered that much higher rates of profit can often be made, either (a) in times of more than usual business prosperity, or (b) under exceptionally skilful management, or (c) with the possession of considerable monopolistic power, from whatever source derived, whether the possession of patents, or of exceptional good-will, or of a very large capital. Mr. Bryan's dictum that "only in the case of monopoly can you secure dividends upon stock that does not represent money invested" is not always strictly accurate; but it is so generally true that it ought carefully to be noted. The times of prosperity when this can be done without monopoly may be fleeting. The exceptional skill or the monopolistic power are likely to endure for a longer season. Under those circumstances, with any of these advan tages, the corporation might readily pay dividends of the usual rate of interest on a capitalization twice or three times more than the reproduction cash value of the plants.

Attention is frequently called to the case of a newspaper with a tangible property of, say,

$100,000. Such a newspaper, ably edited, with a strong constituency of subscribers and a large advertising patronage, might readily pay good dividends on $1,000,000 or more. Why should the capitalization not be placed at $1,000,000, regardless of what the plant might cost? The earning capacity may be due largely to the skill of the editor, or to the fact of connection with some political party, or to the peculiar business skill of its advertising manager, or to the good will gained through many years of skilful catering to the public taste. Why, it is asked, should not the capitalization be made upon its earning capacity rather than with reference to the cost of the plant?

Most business men, as has been intimated, prefer capitalization on the basis of earning capacity. In the first place, if the dividends declared seem to be at about the normal rate of interest, it conceals the actual state of the business from all persons not so situated that they either know the details of the business of this special establishment, or know that kind of business so well that they may readily judge the profits from external signs. This concealment of large profits lessens the temptation to rivals