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 establishment if one includes good-will at all 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 its value 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. Even the reproduction values of physical plants are subject to great fluctuation with changing invention and fluctuating market and labor conditions, while it is impossible to estimate the reproduction value of good-will, in practically all

cases.

There can be no doubt, either, 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. If the business possesses any element of monopoly, however well justified, it is likely to lead to high prices-not neces

sarily unjust prices. But in far too many cases the pressure for dividends has led to actual fraud and the illegal act of paying dividends when they have not been earned out of funds that should have been issued for other purposes such as construction, repairs, or even out of capital.

The only just method of preventing the evils which are likely to come through the capitalization of any establishment of which the shares are sold to the public, 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. From the statements 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 the business from year to year being made fully known would enable the different parties concerned to judge fairly 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 men, but gamblers.

A method to avoid the chief evils connected with capitalization by providing that shares of stock, repre

senting dollars as their par value, should not be issued, but that a plan first reported by a committee of the New York State Bar Association and later adopted as a permissive, though not a compulsory plan of stock issue in New York, should be followed. This, it was thought, would afford a remedy for all these evils. The plan 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

*Proceedings of New York State Bar Association, January, 1892, p. 148. New York Laws of 1912, chap. 351, Stock Corporation Law, sec. 13.

prove effective; but there is no general interest in a change, and it is probably, for the present at least, not practicable for use on an extended scale.

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

METHODS OF

B

CHAPTER VIII

ORGANIZATION AND MANAGEMENT

EFORE the compact combinations of the present day were known, various forms of specific agreements among independent independent corporations and individual competitors were common, such agreements often being called pools, even when 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. From the fund thus raised some distillers were paid to export goods at a loss, and thus, by relieving the home market of its surplus, make sufficient

*In a pool properly so called all the companies put their net earnings, or any other special funds agreed upon, which are then expended for some common purpose or distributed according to some special rule. In use the word was greatly extended in meaning. As in the case cited below, each distiller paid into a common fund a certain amount per bushel of corn mashed. From this fund then were refunded to the exporters the losses made by them when their goods were sold abroad at a loss in order to enable the others to maintain prices in the home market. This was really a pool. But the same word was used to characterize a mere agreement to restrict the output, or one to sell at a common price agreed upon, or one to divide the territory among different sellers, the latter forms of agreement not being pools at all in the proper use of the word, but merely agreements for what was supposed to be the common good.