The Theory of Business Enterprise/Chapter 6
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 the terminological precedents set by German
writers, the late-modern scheme of economic life is a "credit
economy," as contrasted with the "money economy" that
characterizes early-modern times. The nature of business capital
and its relations to the industrial process under the later, more
fully developed, credit economy is in some degree different from
what it was before the full and free use of credit came to occupy
its present central position in business traffic; and more
particularly is it at variance with the theoretical expositions
of the economists of the past generation.

It has been the habit of economists and others to speak of
"capital" as a stock of the material means by which industry is
carried on, - industrial equipment, raw materials, and means of
subsistence. This view is carried over from the situation in
which business and industry stood at the time of Adam Smith and
of the generation before Adam Smith, from whose scheme of life
and of thought he drew the commonplace materials and conceptions
with which his speculations were occupied. It further carries
over the point of view occupied by Adam Smith and the generation
to whom he addressed his speculations. That is to Say, the
received theoretical formulations regarding business capital and
its relations to industry proceed on the circumstances that
prevailed in the days of the "money economy," before credit and
the modern corporation methods became of first-class consequence
in economic affairs. They canvass these matters from the point of
view of the material welfare of the community at large, as seen
from the standpoint of the utilitarian philosophy. In this system
of social philosophy the welfare of the community at large is
accepted as the central and tone-giving interest, about which a
comprehensive, harmonious order of nature circles and gravitates.
These early speculations on business traffic turn about the
bearing of this traffic upon the wealth of nations, particularly
as the wealth of nations would stand in a "natural" scheme of
things, in which all things should work together for the welfare
of mankind.

The theory, or what there is in the way of a theory, of
business capital in the received body of doctrines is worked out
from the point of view and for the theoretical purposes of the
eighteenth century scheme of natural liberty, natural rights, and
natural law; and the received theorems concerning the part played
by capital and by the capitalist are substantially of the
character of laws of nature, as that term was understood during
the period to which these theorems owe their genesis. What these
received theorems declare concerning the nature and normal
function of capital and of the capitalist need not be recited
here; their content is familiar enough to all readers, lay and
learned. Also the merits of such a point of view for purposes of
economic theory, and the adequacy of the received concept of
capital for the purposes to which it was originally applied, need
not detain the inquiry. Modern business management does not take
that point of view, nor does "capital" carry such a meaning to
the modern business man; because the guiding circumstances under
which modern business is carried on are not those supposed to be
given by a beneficent order of nature, nor do the controlling
purposes of business traffic include that general well-being
which constituted the final term of Adam Smith's social
philosophy.

As a business proposition, "capital" means a fund of money
values; and since the credit economy and corporation finance have
come to be the ruling factors in industrial business, this fund
of money values (taken as an aggregate) bears but a remote and
fluctuating relation to the industrial equipment and the other
items which may (perhaps properly) be included under the
old-fashioned concept of industrial capital.(1*)

Capital has been spoken of as the capitalized (aggregated)
cost of industrial equipment, etc.,(2*) a view which had its
significance for economic theory a hundred years ago; but since
corporation finance has come to pervade the management of
business this view is no longer of particular use for a
theoretical handling of the facts. To avoid the tedium of
argument it may be conceded that under the old dispensation, of
partnerships and individual management in business, the basis of
capitalization was the cost of the material equipment owned by
any given concern; and so far as the methods of partnership and
private firms still prevails such may still be the current method
of capitalization, especially de jure. But in so far as business
procedure and business conceptions have been shaped in the image
of the modern corporation (or limited liability company), the
basis of capitalization has gradually shifted, until the basis is
now no longer given by the cost of material equipment owned, but
by the earning-capacity of the corporation as a going
concern.(3*)

A given corporation's capital is, of course, de jure a
magnitude fixed in the past by an act of legislature chartering
the company, or by an issuance of stock by the company under the
terms of its charter or of the acts which enable it. But this de
jure capitalization is nominal only, and there are few, if any,
cases in which the effective capital of a company coincides with
its de jure capital. Such could be the case only so long as all
the securities which go to make up the company's capital were
quoted at par on the market. The effective capitalization of any
modern company, that is to say, the capitalization which is
effective for current business purposes as distinct from the
formal requirements of the charter, is given by the quotations of
the company's securities, or by some similar but less overt
market valuation in case the company's capital is not quotable on
the market. The effective (business) capitalization, as distinct
from the de jure capitalization, is not fixed permanently and
inflexibly by a past act of incorporation or stock issue. It is
fixed for the time being only, by an ever recurring valuation of
the company's properties, tangible and intangible, on the basis
of their earning-capacity. (4*)

In this capitalization of earning-capacity the nucleus of the
capitalization is. not the cost of the plant, but the concern's
good-will, so called, as has appeared in the last preceding
chapter.(5*) "Good-will" is a somewhat extensible term, and
latterly it has a more comprehensive meaning than it once had.
Its meaning has, in fact, been gradually extended to meet the
requirements of modern business methods. Various items, of very
diverse character, are to be included under the head of
"good-will"; but the items included have this much in common that
they are "immaterial wealth," "intangible assets"; which, it may
parenthetically be remarked, signifies among other things that
these assets are not serviceable to the community, but only to
their owners. Good-will taken in its wider meaning comprises such
things as established customary business relations, reputation
for upright dealing, franchises and privileges, trade-marks,
brands, patent rights, copyrights, exclusive use of special
processes guarded by law or by secrecy, exclusive control of
particular sources of materials. All these items give a
differential advantage to their owners, but they are of no
aggregate advantage to the community.(6*) They are wealth to the
individuals concerned differential wealth; but they make no part
of the wealth of nations.(7*)

It is in the industrial corporations that this capitalization
of good-will is seen to the best advantage - including, under the
term "industrial corporations," railway companies, iron and steel
concerns, mines, etc., as well as what are known in the stock
market specifically as "industrials." The corporation is, of
course, not the only form of business concern in the industrial
field, but it is the typical, characteristic form of business
organization for the management of industry in modern times, and
the peculiarities of modern capital are therefore best seen in
these modern corporations. Many of these corporations have grown
out of partnerships and firms previously existing, and such is
still the genesis of many of the corporations that come forward
from time to time. In such a case of conversion from partnership
or firm to corporation the rule is that the new corporation takes
over a body of good-will, under one form and name or another,
previously pertaining to the partnership which it displaces.
Conversely, when a flourishing partnership or similar private
firm has gained an assured footing of good-will, in the way of
any or all of the items enumerated under that term above, its
lot, as prescribed by modern business exigencies, is to go up
into a corporation, either by simple conversion into the
corporate form or through coalition with 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 (8*) 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.(9*) But it has little voice in the direction of the
concern's business policy.(10*) 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.(11*)

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.(12*)

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.(13*)
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,(14*) 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
involved;(15*) and at the same time the current value of these
material properties is also greater than it would be in the
absence of that credit financiering for which corporate
capitalization affords a basis.(16*)

German writers have familiarized economic readers with the
terms "credit economy," "money economy" (Geldwirtschaft), and
"natural economy" (Naturalwirtschaft), the later-modern scheme of
economic life being characterized as a "credit economy." What
characterizes the early-modern scheme, the "money economy," and
sets it off in contrast with the natural economy (distribution in
kind) that went before it in West-European culture, is the
ubiquitous resort to the market as a vent for products and a
source of supply of goods. The characteristic feature of this
money economy is the goods market. About the goods market
business and industrial interests turn in early modern times; and
to this early-modern system of industrial life the current
doctrines of political economy are adapted, as indicated above.

The credit economy - the scheme of economic life of the
immediate past and the present - has made an advance over the
money economy in the respect which chiefly distinguishes the
latter. The goods market, of course, in absolute terms is still
as powerful an economic factor as ever, but it is no longer the
dominant factor in business and industrial traffic, as it once
was. The capital market has taken the first place in this
respect. The capital market is the modern economic feature which
makes and identifies the higher "credit economy" as such. In this
credit economy resort is habitually had to the market as a vent
for accumulated money values and a source of supply of
capital.(17*)

Trading under the old regime was a traffic in goods; under
the new regime there is added, as the dominant and characteristic
trait, trading in capital. Both in the capital and in the goods
market there are professional traders, as well as buyers and
sellers who resort to the market to dispose of their holdings and
to supply their needs of what the market affords. In either class
of trading the ends sought by those engaged in the business are
generically the same. The endeavors of those who are in the
business of trading, who buy in order to sell and sell in order
to buy, are directed to the pecuniary gain that is to be got
through an advantageous discrepancy between the price paid and
the price obtained; but on the part of those who resort to the
market to supply their needs the end sought is not the same in
the two cases. The last buyer of goods buys for consumption, but
the last negotiator of capital buys for the sake of the ulterior
profit; in substance he buys in order to sell again at an
advance. The advance which he has in view is to come out of the
prospective earnings of the capital for which he negotiates. What
he has in view as his ulterior end in the transaction is the
conversion of the values for which he negotiates into a larger
outcome of money values, - whatever process of production and the
like may intervene between the inception and the goal of his
traffic.(18*)

The value of any given block of capital, therefore, turns on
its earning-capacity; or, as the mathematical expression has it,
the value of capital is a function of its earning-capacity, (19*)
not of its prime cost or of its mechanical efficiency. It is only
more remotely, and through the mediation of the earning-capacity,
that these last-named factors sensibly affect the value of the
capital. This earning-capacity of capital depends in its turn,
not so much on the mechanical efficiency of the valuable items
bought and sold in the capital market, as on the tension of the
market for goods. To recur to an expression already employed in a
similar connection, the question of earning-capacity of capital
relates primarily to its effectiveness for purposes of
vendibility, and only at the second remove to its effectiveness
in the way of material serviceability. But the earning-capacity
which in this way affords ground for the valuation of marketable
capital (or for the market capitalization of the securities
bought and sold) is not its past or actual earning-capacity, but
its presumptive future earning-capacity; so that the fluctuations
in the capital market -the varying market capitalization of
securities - turn about imagined future events. The forecast in
the case may be more or less sagacious, but, however sagacious,
it retains the character of a forecast based on other grounds
besides the computation of past results.

All capital which is put on the market is in this way
subjected to an interminable process of valuation and revaluation
- i.e. a capitalization and recapitalization - on the basis of
its presumptive earning-capacity, whereby it all assumes more or
less of a character of intangibility. But the most elusive and
intangible items of this marketable capital are, of course, those
items which consist of capitalized good-will, since these are
intangible goods from start to finish. It is upon this factor of
good-will in capital that a change in presumptive
earning-capacity falls most immediately, and this factor shows
the widest and freest market fluctuations. The variations in the
capitalized value of merchantable good-will are relatively wide
and unstable, as is shown by the quotations of common stock.

In the capital market the commodity in which trading is done,
then, is the capitalized putative earning-capacity of the
property covered by the securities bought and sold. This property
is in part tangible, in part intangible, the two categories being
seldom clearly distinguishable. The items bought and sold are put
into merchantable form by being standardized in terms of money
and subdivided into convenient imaginary shares, which greatly
facilitates the traffic. The earning-capacity on which the market
capitalization runs and about which the traffic in merchantable
capital turns is a putative earning-capacity. It follows that
this putative earning-capacity of a given block of capital, as it
takes shape in the surmises of outside investors, may differ
appreciably from the actual earning-capacity of the capital as
known to its managers; and it may readily be to the latter's
interest that such a discrepancy between actual and imputed
earning-capacity should arise.(20*) When, e.g., the putative
earning-capacity of the capital covered by a given line of
securities, as shown by the market quotations, rises appreciably
above what is known to its managers to be its actual
earning-capacity, the latter may find their advantage in selling
out, or even in selling short; while in the converse case they
will be inclined to buy. Moreover, putative earning-capacity is
the outcome of many surmises with respect to prospective earnings
and the like; and these surmises will vary from one man to the
next, since they proceed on an imperfect, largely conjectural,
knowledge of present earning-capacity and on the still more
imperfectly known future course of the goods market and of
corporate policy. Hence sales of securities are frequent, both
because outsiders vary in their estimates and forecasts, and
because the information of the outsiders does not coincide with
that of the insiders. The consequence is that a given block of
capital, representing, e.g., a controlling interest in a given
industrial enterprise, may, and in practice it commonly will,
change owners much more frequently than a given industrial plant
was wont to change owners under the old regime, before the fully
developed corporation finance came to occupy the field of
industrial business.(21*)

It follows, further, that under these circumstances the men
who have the management of such an industrial enterprise,
capitalized and quotable on the market, will be able to induce a
discrepancy between the putative and the actual earning-capacity,
by expedients well known and approved for the purpose. Partial
information, as well as misinformation, sagaciously given out at
a critical juncture, will go far toward producing a favorable
temporary discrepancy of this kind, and so enabling the managers
to buy or sell the securities of the concern with advantage to
themselves. If they are shrewd business men, as they commonly
are, they will aim to manage the affairs of the concern with a
view to an advantageous purchase and sale of its capital rather
than with a view to the future prosperity of the concern, or to
the continued advantageous sale of the output of goods or
services produced by the industrial use of this capital.

That is to say, the interest of the managers of a modern
corporation need not coincide with the permanent interest of the
corporation as a going concern; neither does it coincide with the
interest which the community at large 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,(22*)
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.(23*)

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.(24*) 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 (25*) 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 the commonplace business traffic of the
corporations on whose securities the business man in question
rests his solvency. So that in this higher business traffic the
good-will engaged is also here turned to a secondary use. The
business economies which are in this way made practicable by a
reduplication of uses and made to inure to the greater business
men's profit are of great magnitude; but the magnificent
additions which are in this way made to the business community's
capitalizable forces need scarcely be dwelt on here.

The elusive and flexuous character of the elements of wealth
engaged, as well as the absence of an ascertainable ordinary rate
of earnings in this line of business, has led economists to speak
of this traffic in vendible capital as a "speculative"
business.(26*) The mere buying and selling of stocks by outsiders
for a rise or a decline is of course a speculative business; it
is a typical form of speculative business. But in so far as such
buying and selling is carried on by the managers of the
corporations whose securities are the subject of the traffic, and
especially where the securities are bought and sold with a view
to the control of the corporations in question and their
management for private, tactical ends, a characterization of the
business as "speculative" is inadequate and beside the point.
This higher reach of corporation financiering has little if any
more of a speculative character than what belongs to the
commonplace business management of any industrial enterprise. In
all business enterprise that stands in relations with the market
and depends on vendibility of its output there is more or less
uncertainty as to the outcome.(27*) In this sense all industrial
business, as well as commercial business, has something of a
speculative character. But it is little to the purpose on that
account to lump industrial enterprises and corporation
financiering together as "speculative business" and deal with
them as if this were their most salient and consequential
bearing. What speculative risk there is in these lines of
business is incidental, and it neither affords the incentive to
engaging in these pursuits nor does it bound the scope of their
bearing upon economic affairs. The speculative risk involved is
no greater, relatively to the magnitude of the interests
involved, in this larger traffic that deals in vendible capital
than it is in the ordinary lines of business traffic that deal in
vendible products. In both cases there may be speculation, but in
both cases it is a side issue. Indeed, as near as one may
confidently hold an opinion on so dark a question, the certainty
of gain, though perhaps not the relative amount of it, seems
rather more assured in the large-scale manipulation of vendible
capital than in business management with a view to a vendible
product.

What may obscure the question is the fact that the
manipulations involved in this traffic in vendible capital
commonly impose increased risks upon the business concerns
engaged in industry - the corporations whose capital is involved,
as well as other firms. The everyday business of the corporations
whose securities are involved, as well as of other business
concerns engaged in rival or related lines of industry, is
rendered more hazardous than it might be in the absence of this
financiering traffic in vendible capital. The manipulations carry
risk, not so much to the manipulators as such, as to the
corporations whose properties are the subject of manipulation;
but since the manipulators commonly own but a relatively small
proportion of the properties involved or touched by their
manipulations, the risks which arise do not fall chiefly on them.
To this is to be added, as of prime importance for the whole
question, that the manipulators have the advantage of being able,
in great part, to foresee the nature, magnitude, and incidence of
the risks which they create. Rightly seen, this, of course, goes
to say that the increased speculative risk due to the traffic in
vendible capital does not fall on that traffic, but on the
business enterprise engaged about the output of vendible goods.
The traffic in vendible capital is not without its speculative
risks, but the risks which it creates fall with relatively
greater weight upon the business men who are not immediately
concerned in this traffic. Indeed, so secure and lucrative is
this class of business, that it is chiefly out of gains accruing,
directly and indirectly, from such traffic in vendible capital
that the great modern fortunes are being accumulated; and both
the rate and the magnitude of these accumulations, whether taken
absolutely or relatively to the total increase of wealth, surpass
all recorded phenomena of their kind. Nothing so effective for
the accumulation of private wealth is known to the history of
human culture.

The aim and substantial significance of the "manipulations"
of vendible capital here spoken of is an ever recurring
recapitalization of the properties involved, whereby the
effective capitalization of the corporations whose securities are
the subject of the traffic is increased and decreased from time
to time. The fluctuations, or pulsations, of this effective
capitalization are shown by the market quotations of the
securities, as noted above.(28*) It is out of these variations in
capitalization that the gains of the traffic arise, and it is
also through the means of these variations of capitalization that
the business men engaged in this higher finance are enabled to
control the fortunes of the corporations and to effect their
strategic work of coalition and reorganization of business
enterprises. Hence this traffic in vendible capital is the
pivotal and dominant factor in the modern situation of business
and industry.(29*) It has been noted above that what may be
called the working capital on which this higher corporation
finance proceeds is made up, chiefly, of two elements: the
solvency (and consequent potential credit) of the men engaged,
and the "good-will" of these men. Both of these elements are of a
somewhat intangible and elusive character, resting, as they do,
somewhat indirectly and shiftily on elements already elsewhere
engaged in business enterprise. The solvency in question rests in
large part on the capital of the corporations whose
capitalization is subject to the fluctuations induced by the
traffic in vendible capital. It is therefore necessarily a
somewhat indeterminate and unstable magnitude. To this is to be
added the "floating capital" and banking capital at the disposal
of these men. If a common-sense view be taken of the business,
the good-will engaged must also be added to the assets. There is
involved a very considerable and very valuable body of good-will,
appertaining to the financiers engaged and to the financing firms
associated with them.(30*) This goodwill and this solvency is
capital, for the purpose in hand, as effectually as the good-will
and securities incorporated in the capitalization of any
corporation engaged in industrial business.

But hitherto this particular category of goodwill has not
been formally capitalized. There may be peculiar difficulties in
the way of reducing this good-will to the form of a fund,
expressing it in terms of a standard unit, and so converting it
into quotable common stock, as has been done with the
corresponding good-will of incorporated industrial enterprises.
So also as regards the body of solvency engaged, - the potential
credit, or credit capacity, of the promoters and financiers.
Perhaps this latter had best also be treated as an element of
good-will; it is difficult to handle under any other, more
tangible, conception. It may be difficult to standardize, fund,
and capitalize these unstable but highly efficient factors of
business enterprise; but the successful capitalization of
good-will and credit extensions in the case of the modern
industrial corporations argues that this difficulty should not be
insurmountable in case an urgent need, - that is to say, the
prospect of a profitably vendible result, - should press for a
formal capitalization of these peculiar elements of business
wealth. There can be no question, e.g., but that the good-will
and large solvency belonging to such a firm as J.P. Morgan and
Company for the purposes of this class of business enterprise are
an extremely valuable and substantial asset, as is also, and more
unequivocally, the good-will of the head of that firm. These
intangible assets, immaterial goods, should, in all consistency,
be reduced to standard units, funded, issued as common stock, and
so added to the statistical aggregate of the country's
capitalized wealth.

It is safe to affirm that this good-will of the great
reorganizer has in some measure entered in capitalized form into
the common stock of the United States Steel Corporation, as also
into that of some of the other great combinations that have
latterly been effected. The "good-will" of Mr Carnegie and his
lieutenants, as well as of many other large business men
connected with the steel industry, has also no doubt gone to
swell the capitalization of the great corporation. But good-will
on this higher level of business enterprise has a certain
character of inexhaustibility, so that its use and capitalization
in one corporation need not, and indeed does not, hinder or
diminish the extent to which it may be used and capitalized in
any other corporation.(31*) The case is analogous, though
scarcely similar, to that of the workmanlike or artistic skill of
a handicraftsman, or an artist, which may be embodied in a given
product without abating the degree of skill possessed by the
workman. Like other good-will, though perhaps in a higher degree
of sublimation, it is of a spiritual nature, such that, by virtue
of the ubiquity proper to spiritual bodies, the whole of it may
undividedly be present in every part of the various structures
which it has created. Indeed, the fact of such good-will having
been incorporated in capitalized form in the stock of any given
corporation seems rather to augment than to diminish the amount
at which it may advantageously be capitalized in the stock of the
next corporation into which it enters. It has also the
correlative spiritual attribute that it may imperceptibly and
inscrutably withdraw its animating force from any one of its
creatures without thereby altering the material circumstances of
the corporation which suffers such an intangible shrinkage of its
forces.

There can be no question but that the good-will of the
various great organizers and their financiering houses has
repeatedly been capitalized, probably to its full amount, in the
common stock of the various corporations which they have created;
but taken in the sense of an asset belonging to the financing
house as a corporation, it is not known that this item of
immaterial wealth has yet been formally capitalized and offered
in quotable shares on the market or included in the schedules of
personal property.(32*)

The sublimation of business capital that has been going
forward in recent times has grave consequences for the owners of
property as well as for the conduct of industry. In so far as
invested property is managed by the methods of modern corporation
finance, it is evident that the management is separated from the
ownership of the property, more and more widely as the scope of
corporation finance widens. The discretion, the management, lies
in the hands of the holders of the intangible forms of property;
and with the extension of corporation methods it is increasingly
true that this management, again, centres in the hands of those
greater business men who hold large blocks of these intangible
assets. The reach of a business man's discretionary control,
under corporation methods, is not proportioned simply to the
amount of his holdings. If his holdings are relatively small,
they give him virtually no discretion. Whereas if they are
relatively large, they may give him a business discretion of much
more than a proportionate reach. The effective reach of a
business man's discretion might be said to increase as the square
of his holdings; although this is to be taken as a suggestive
characterization rather than as an exact formula.

Among the holdings of industrial property that count in this
way toward control of the business situation, the intangible
assets (represented by common stock, good-will, and the like) are
chiefly of consequence. Hence follow these two results: the
fortunes of property owners are in large measure dependent on the
discretion of others the owners of intangible property; and the
management of the industrial equipment tends strongly to centre
in the hands of men who do not own the industrial equipment, and
who have only a remote interest in the efficient working of this
equipment. The property of those who own less, or who own only
material goods, is administered by those who own more, especially
of immaterial goods; and the material processes of industry are
under the control of men whose interest centres on an increased
value of the immaterial assets.(33*)

NOTES:

1. The distinction between business capital and "industrial
capital" or "capital goods" has been shown by Knies, Geld und
Credit, vol. I. ch. II. pp. 40-60. Distinctions having a very
similar erect in some bearings are to be found in Rodbertus
("private capital" and "national capital"), in Bohm-Bawerk
("acquisitive capital" and "productive capital," or "private
capital" and "social capital"), in Clark ("capital" and "capital
goods"). Similar distinctions are made by various writers to help
out the incompetency of the received definition of the term. The
merit of these distinctions does not concern the present inquiry,
since they are made for other purposes than that here aimed at.
The distinction made above is not an attempt to recast the
terminology of economic theory, but is simply an expedient for
present use. It amounts to an unqualified acceptance of the
concept (more or less well defined) which business men habitually
attach to the term "capital." Mr F.A. Fetter has latterly spoken
for the restriction of "capital," as a technical term,
practically to what is here called "business capital." Mr
Fetter's "capital concept," however, should probably not be taken
to cover intangible assets. The practical distinction is visible
in the testimony of various witnesses before the Industrial
Commission, as also in the special report on "Securities,"
Report, vol. XIII.

2. Even so late and competent a student of corporate capital as
J. von Korosi is bound by this antique preconception, and his
work has suffered in consequence. See Finanzielle Ergebnisse der
Actiengesellschaften, p. 3.

3. This state of the case is brought out, in a veiled manner, by
the well-known proposition, expounded in varying form by various
writers, that the cost of equipment on which capitalization must,
in theory, take place is the cost of reproduction of all valuable
items included, tangible and intangible.

4. "Nothing is more illusive and delusive than the idea that if a
corporation's stock be only paid in in money at the outset it is
therefore better off than one that has issued its stock for
property that could not be converted for one cent on the dollar.
The question is what assets the corporation has got at the time
of the particular transaction, and that can be ascertained only
by present inquiry." - Testimony of F.L. Stetson, Report of the
Industrial Commission, vol. I. p. 976. Cf. Meade, Trust Finance,
ch. XVI and XVIII.

5. Earning-capacity is practically accepted as the effective
basis of capitalization for corporate business concerns,
particularly for those whose securities are quoted on the market.
It is in the stock market that this effective capitalization
takes place. But the law does not recognize such a basis of
capitalization; nor are business men generally ready to adopt it
in set form, although they constantly have recourse to it, in
effect, in operations of investment and of credit extension. Cf.
Report of the Industrial Commission, vol. I. pp. 6, 17, 21 (Test.
F.B. Thurber); p. 967 (Test. F.L. Stetson); pp. 585-587 (Test.
H.H. Rogers); pp. 110-111, 124 (Test. H.O. Havemeyer); pp. 1021,
1032 (Test. J.W. Gates); pp. 1054-1055 (Test S. Dodd); vol. XIII.
pp. 287-288 (Test. H. Burn); p. 388 (Test. J. Morris); pp.
107-108 (Test. E.R. Chapman). See Quarterly Journal of Economics,
February 1903, pp. 344-345, "The Holyoke Water Case," for an
illustrative decision.

6. The advantages afforded their owners by these intangible
assets have latterly been discussed by economists under such
headings as "Rent" or "Quasi-Rent." These discussions, it is
believed, are of great theoretical weight. In business practice,
however, the items in question are treated as capital, which must
avail as an excuse for including them here in business Capital.

7. Compare Bohm-Bawerk's and Clark's distinctions between
"private" and "social" capital, and between "capital" and
"capital goods."

8. See Chapter III above.

9. On the books of the corporation it is, of course, carried as
an item of liability; as is the common stock; but that is a
technical expedient of accountancy, and does not touch the
substantial question.

10. See testimony of various witnesses on "Capitalization" before
the Industrial Commission, vols. I, IX, XIII.

11. As one of many illustrative cases, the Rubber Goods
Manufacturing Company may be taken as a typical instance of a
corporation organized in a conservative but up-to-date manner for
permanent success and stable value. Its authorized issue of stock
is $25,000,000 7 per cent cumulative preferred, and $25,000,000
common. The actual issue in 1901 was about $8,000,000 preferred
and $17,000,000 common, of which the preferred was presumed to
cover the value of the tangible assets. Another coalition
organized by the same promoter (Mr C.R. Flint), the American
Chicle Company, illustrates the same general feature. The
preferred stock of this company ($3,000,000) "in round numbers
was three times the amount of tangible assets," while the common
stock ($6,000,000) represents no tangible assets. The aggregate
capitalization is about nine times the tangible assets. The
witness says that this corporation has been proved by events to
be "on a conservative basis from the fact that the company has
paid 8 per cent on its common stock," which has been selling at
80. - Report of the Industrial Commission, vol. XIII. pp. 47, 50.

12. It may be argued that this identification of the common stock
with the intangible assets holds true in theory only, in the
sense that this is the view held by the business men who occupy
themselves with such matters; while in point of fact no
distinction of this nature between common and preferred stock is
or can practically be maintained after the stock has once found
its way into the market. It might seem, in other words, that when
the stock has once passed the stage of organization and gone into
the hands of the purchasers, each share represents nothing but an
undivided interest in the aggregate capitalization of the
concern, so that the particular item of wealth represented by a
given share or given form of security can no longer be
identified.

On the face of the situation such appears to be the case, but
there are facts which argue for the view set out above. It is,
e.g., well known that whenever circumstances arise which
immediately affect the value of the good-will of a corporation,
it is the quotations of the common stock that first and most
decidedly are affected. If the goodwill of the concern makes a
great and rapid gain, e.g. through manoeuvres which put it in a
position of monopoly or through changes in the goods market which
greatly increase the demand for the concern's product, and the
like, it is the quotation of the common stock that measures and
registers the advantage which thereby accrues to the concern, and
the market fluctuation of the common stock is likewise the
instrument by means of which manipulations are carried through
that affect these intangible assets. At the same time this rule
does not hold hard and fast, as is seen in case of a liquidation
when the capital of the concern may have shrunk to such
dimensions that the entire capital, including the intangible
assets, will no more than satisfy the claims represented by the
debentures. Still, in point of practical fact, the (theoretical)
preconception of businessmen that the common stock in some
intelligible sense covers the intangible assets is fairly borne
out by everyday experience, taken by and large.

A curious parallel might be traced between the current
endeavors of the business community to organize and manage the
industrial equipment on the basis of immaterial assets and the
medieval business perplexities and actions relative to loans on
interest. In both cases the business community has had to face
untried exigencies together with a popular, traditional prejudice
that discountenances the expedients by which these exigencies are
to be met. The medieval presumption was that the management of
productive goods and the profits accruing from their use must go
to their users. (Cf. Ashley, Economic History, vol. I. ch. III,
vol. II ch. VI; Endemann, Die nationalokonomische Grundsatze der
kanonistischen Lehre.) The modern presumption is that the
management of the equipment and the gains from such management
must vest in the owner. The modern exigencies decide that the
equipment must be managed by others than the owners and that
profits must largely accrue to those who financially manage the
concern. The expedient by which this result is sought to be
reached is the fiction of intangible assets and the impersonal,
irrevocable credit extension covered by the preferred stock. The
effect is to dissociate ownership from management. This is the
necessary outcome of a "credit economy" consistently and fully
carried through. The management of the material equipment of
industry is thrown into the hands of those who own the immaterial
wealth; that is to say, those who own the claim to manage the
equipment. The current prejudice which insists on management by
the owners is set aside by feigning that this claim has an
industrial value, and so capitalizing it on the basis of the
differential advantage which accrues to its holders.

13. See also a discussion by E.S. Meade, Quarterly Journal of
Economics, February 1902, pp. 217 et seq., of how "good-will" may
vary in magnitude, or even disappear, when a concern eaters a
larger coalition; also, on the same general head, W.F.
Willoughby," Integration of Industry in the United States,"
ibid., November 1902.

14. p. 113 above.

15. cap' = cap + cap/n > cap, in which cap' is the nominal
capital, as increased by the credit element cap/n.

16. mat' = mat + (1/n)(cap/n) > mat, in which mat' is the current
value of the material equipment,as increased (over mat) by the
competitive demand for equipment due to the credit element cap/n.
One of the substantial secondary benefits to be noted as flowing
from these modern business expedients is the effect of corporation
finance upon the aggregate nominal wealth of the community. A
given community, possessed of a given complement of material
wealth, is richer in capital if a large proportion of its
industrial equipment is capitalized and managed by corporation
methods, quite apart from any increase in the material items of
which the community is possessed. (Cf. Twelfth Census of the
United States, "Manufactures," pt. I. p. xcvi) Wealth may in this
way be increased (about twofold on an average), inexpensively, by
the simple expedient of incorporating the community's business
concerns in the form of joint-stock companies. The more highly
involved and the more widely extended the corporation
financiering is, the richer, in statistical terms of capital, is
the community, other things equal. Among these other things are
the material facts of the case.

17. The commodities bought and sold in the goods market are the
outcome of a process of production and are useful for a material
purpose; those bought and sold in the capital market are the
outcome of a process of valuation and are useful for purposes of
pecuniary gain.

18. Cf. Marx, Kapital (4th ed.) bk. I, ch. IV.

19. Effective capital = current market value of nominal capital =
presumptive earning capacity x purchase period, neglecting
fortuitous and incalculable items which may affect any given
case.

If nominal capital = cap, effective capital = cap', presumed
annual earnings = ea', and the purchase period of capitalized
property (years' purchase) = yp = 1/interest rate per annum, we
have cap <> cap' = ea' x yp = ea'/int.

This equation between cap' and ea' is disturbed by the
presence in any given case of variable factors which cannot be
included in the equation, but it remains true after all
qualification has been made that cap' = f(ea'/int).

20. Something of this kind is the usual ground of the obstinate
resistance which most business men oppose to publicity of
accounts. In lines of business, as, e.g. railroading, in which
accounts are readily and effectually sophisticated ("doctored"),
the objections to publicity are commonly less strenuous.

21. Cf., e.g., Eberstadt, Deutsche Kapitalismarkt.

22. The capital of any industrial concern under the "money
economy" is, of course, also vendible, but with relative
difficulty; while the readier vendibility of modern corporate
capital is so characteristic and consequential a factor in
business and contrasts so broadly with the old-fashioned business
methods that it may fairly be spoken of as vendibility par
excellence. The "holding company" is the mature development of
this traffic in vendible capital in industrial business.

23. It may be noted, by the way, that the question of the
turnover (spoken of on p. 95 above) becomes, under the
circumstances of the modern corporation finance, in great part a
question of the interval between the purchase and sale of the
capital engaged in industry on the one hand, and of the magnitude
of the discrepancy between actual and putative earning-capacity
on the other hand, rather than a question of the period of the
industrial process and the magnitude of the output and its price.
The formula there shown becomes: --

turnover = capital/time (actual earning capacity/n = putative earning capacity - actual earning capacity)

in which capital is the amount of the operator's investment in
the concern's securities, the time is the interval between
purchase and sale of the securities, and the putative earning
capacity is taken to exceed the actual earning capacity by an
indeterminate fraction of the latter.

24. Cf. Chapter III above.

25, Cf. Chapter V above.

26. Cf. Emery, "Place of the Speculator in the Theory of
Distribution." Proceedings of the twelfth annual meeting of the
American Economic Association; also "Discussion" following Mr
Emery's paper.

27. Well shown in Mr Emery's paper cited above.

28. p. 154.

29. As is true of good-will and credit extensions generally, so
with respect to the good-will and credit strength of these
greater business men ; it affords a differential advantage and
gives a differential gain. In the traffic of corporation finance
this differential gain is thrown immediately into the form of
capital and so is added to the nominal capitalized wealth of the
community. What it gives to its holders in this capitalized form
is a claim to a proportionate share in the existing wealth. If
other things are supposed to remain the same (which may not be
the case), the claim so enforced by the great financiers on the
basis of good-will and credit extension deducts that much from
the wealth held by the rest, the previous holders, as counted in
terms of material wealth; as counted in term of money value, of
course, the holdings of previous holders do (or need) not suffer,
since the new claim take the form of an edition to the number of
capitalized value units, although the increased aggregate number
of value units constitutes a claim on the same aggregate mass of
wealth as before. The pro rata reduction of the material
magnitude of the several shares of wealth is not felt as an
impoverishment, because it does not take the form of a reduction
of the nominal value of the shares.

This capitalization of the gains arising from a differential
advantage results in a large "saving" and increase of capital.
The wealth so drawn in by the financiers (entrepreneurs) is
nearly all held as capital, very little of it being consumed in
current expenses of living. It has been cogently argued that the
profits of the undertakers is the chief and normal source of
capitalized savings in the modern situation, and the method here
indicated seem to be the method by which such saving is chiefly
effected. An extremely suggestive discussion of the undertaker's
gains in this connection occurs in a paper by L.V. Birck
("Driftsherrens Geviust"), read before the Danish Economic
Association, December 1901. More immediately to the point still
is V. Schou's discussion of Mr Birck's paper. (See
Nationalokonomisk Tidsskrift, January-February 1902, pp. 76,
78-80) J.B. Clark, in lectures hitherto unprinted, follows a line
of analysis somewhat closely parallel with Schou, though not
carried to quite the same length.

This process of combined recapitalization and saving may be
stated formally as follows: The initial value of the properties
submitted for coalition and recapitalization, cap, is in the
normal case augmented by the increment delta, making the
effective value of the properties = cap + delta, in effective
units, Uc. This augmented effective value of the properties =
Uc(cap + delta) is capitalized at a nominal value of cap' =
Un(cap + delta), in nominal units, Un, nominally equivalent to
Uc. In the recapitalization the number of units of capitalization
is increased by an element of intangible assets assigned the
owners on account of a presumed increase of earning-capacity due
to the coalition. This element of good-will due to coalition may
be called co. Further there is added the bonus of the promoter,
taken as a block of stock in the new capitalization, pro. Hence
Un(cap') = Un(cap + delta) = Un(cap + co + pro). Un (pro) = Un
(cap' - cap - co) = Un (delta - co) is evidently a secure gain to
the promoter of Uc(delta - co) , which is a fraction of the
effective value Uc(cap + delta). This is saved by him in the
capitalized form. The account of the former owners of the
properties will then stand as follows: Uc(cap + delta - pro) <>
Uc(cap) according as Uc delta <> Uc(pro). The nominal gain of the
owners, co, may or may not be a real gain according as the event
may prove that the promoter's bonus has not or has absorbed the
entire effective augmentation of value, delta, due to the
coalition ; it is therefore a problematical gain, which may or
may not, in the event, prove to be an effective element of
capitalized savings.

The constitution of delta will decide what is the ultimate
source of the savings effected by this transaction. If delta
consists entirely of economies of production, the capitalized
savings held by the promoter and former owners as a result of the
transaction represent new values added to, or saved to, the
aggregate wealth of the community. If delta consists entirely of
good-will in the shape of monopoly advantage, the saving is
effected at the cost of the community and for the benefit of the
promoter and owners; it is then an involuntary or subconscious
saving on the part of the community, whereby a part of the
community's wealth at large passes into the hands of the
recapitalized corporation. Where delta is made up of these two
constituents together, the result, as regards the present point,
should be plain without discussion. If, on the other hand, delta

0, so that cap'  cap, then the promoter's savings; pro, are
secured at the cost of the former owners; Uc(cap' - pro) = Uc(cap
+ (delta = 0) - pro) = Uc(cap - pro). Whereas if Uc(pro) =
Uc(delta), Uc(co) = 0, leaving the owners without effective
profit or loss in spite of any nominal increase of the
capitalization.

30. "Good-will" in this field of enterprise most frequently takes
the form of a large ability to help or hinder other financiers
and financing houses in any similar manoeuvres in which they may
be engaged, or an ability to put them in the way of lucrative
financing transactions. The guild of financiers is commonly split
up into more or less well-defined factions, each comprising an
extensive ramification of financing houses and financiers
furthering one another's endeavors under more or less settled
working arrangements. These working arrangements are a large part
of the financiers' "good-will."

31. This category of good-will stands in a relation to the
creation of vendible capital similar to that which the corporate
good-will of an industrial business concern bears to the creation
of vendible products.

32. Parenthetically it may be remarked that the failure to
capitalize such items of good-will is likely to involve a virtual
evasion of the tax on personal property, and may, therefore, be
questionable on moral grounds.

The case of J.P. Morgan and Company is, of course, not here
cited as being a unique or peculiar instance, but simply as a
typical and striking illustration of what happens and of what
might be accomplished in a number of large and very consequential
cases of the same class.

33. This dissociation of the business control from workmanlike
efficiency and from immediate contact with or ownership of the
industrial plant gives the existing situation a superficial
resemblance to the feudal system, in so far as touches the
immateriality of the captain's connections with the everyday life
and interests of the community of whose affairs he is master. It
gives a certain plausibility to the attempted interpretation of
latter-day economic developments in feudalistic terms. - See
Ghent, Our Benevolent Feudalism.