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only the railroads and steamships, but also the banks and exchanges, and all the other manifold agencies by which the products of the soil are brought to the homes of consumers in forms fit for human use. Wall Street, in its financial machinery, facilitates the natural flow of money, provides the means for the promotion of enterprises, safeguards and assists the movement of commerce, and maintains that system of credits by which a tenfold power of service is given to every dollar.

By the machinery of its stock market it promotes the diffusion of wealth; it makes possible for great capital to be accumulated for vast undertakings, governmental and private, too big for individual effort; it enables a multitude of small capitalists to become partners in these big enterprises, by its agencies for the distribution of securities from the hands of producers into the hands of investors as the ultimate consumers; and it is able by its speculative machinery to anticipate human needs, and to secure a more even and equitable level of prices. For this work it must be paid; call it a fee if it be regarded as professional service, call it a toll if it is thought to liken Wall Street to a gate, or a tax if one prefers to speak of Wall Street as exercising legislative power, or a price if it is thought more proper to regard Wall Street as a merchant selling credit and securities for the most they will bring. But whether a fee, a toll, or a price, it cannot be disputed that Wall Street earns a reward for an indispensable service.

Nowhere else in the world is actual money handled with such a minimum of loss, through dishonesty and carelessness, as in Wall Street; and in its credit and security transactions it compares well for good faith and efficiency with any other department of human endeavor.

Wall Street is the seat of, (1) the stock market; (2) the, money market. Each is distinct from the other, but both are interdependent. The stock exchange is the head of one and the bank clearing-house of the other.

The stock market is a place where securities may be bought or sold, (a) for investment; (b) for speculation.

The money market is in four main divisions, all closely allied to each other and having many subdivisions: (a) foreign exchange, by which the operations of Anternational enterprise and international commerce are financed; (b) domestic credits, by which, through checks and commercial paper, food and merchandise are marketed and the mani

fold needs of inland trade cared for; (c) promotion, by which corporate and other large enterprises are created, underwritten, and financed; (d) stock-exchange loans, both on call and time, by which investment and speculative transactions in securities are made possible.

135. LIFE INSURANCE COMPANIES AS INVESTMENT INSTITUTIONS1

From a financial point of view the life insurance company is a device for accumulating savings which shall be returned, not to the man who saves, but to his heirs at his demise. Some of the insured, it is true, die long before the sum of the premiums they have paid equals the sum that the insurance company has agreed to pay at their death. On the average, however, the insured live long enough so that their premiums, together with the earnings of the capital which those premiums form, are at least equal to the sums which the insurance company pays out in death claims.

It is obvious that in a country like the United States, where life insurance is exceedingly common, immense sums of money must be collected by the companies every year to be held as a reserve against death claims. As the business of life insurance is steadily growing, the funds accumulated by these companies are also increasing. The annual receipts of practically every important life insurance company exceed the annual disbursements. Accordingly, a life insurance company may invest its funds without much regard to the possibility of turning its investments into cash at short notice. It is important, however, that the business should be conducted in a conservative manner, since the failure of an insurance company would be a more widely felt calamity than the failure of almost any other business enterprise of equal magnitude. The loss would be borne in the end largely by the dependents of propertyless men.

The reserves of life insurance companies are largely invested in real-estate mortgages, in state and municipal bonds, and in the bonds of railway, commercial, and industrial corporations. Stock investments have often been made by insurance companies, but the practice is now generally regarded with disfavor, since the values of stocks are likely to show a wide range of fluctuation.

Taken by permission from A. S. Johnson, Introduction to Economics, pp. 320-21. (D. C. Heath & Co., 1909.)

136. TYPES OF BUSINESS ORGANIZATION1

In an individualistic competitive economic society every competent individual of mature age is a potential entrepreneur. Each person is in varying degree awake to the voicings of demand for consumable goods. There is no ear on which these fall wholly without answering resonance.

Of all these possible enterprisers there are a comparative few who, from training, experience, temperament, or what not, are inclined to answer some of these demands. There is, speaking broadly, only one form which their answer can take. If they wish to reply to the demand for consumable goods they must undertake production. This means that they must assume to direct the forces which produce wealth; to "start up in business," in the ordinary sense of the term, is to declare one's self to society as ready to undertake the direction of its social energy.

The potential enterpriser, having decided to what end he will undertake to direct social energy, looks about for ways and means. There are chiefly three ways in which the enterpriser may launch his business. They are these:

1. He may become an individual organizer or entrepreneur.

2. He may join in a relation with other persons, called a partnership. 3. He may decide that his business should be conducted by a corporation.

There are some advantages and disadvantages in each of these forms of business organization from the standpoint both of the entrepreneur and of society as a whole. We shall consider the three types in order.

1. The individual entrepreneur organization.-A first advantage of the individual entrepreneur organization is the ease with which it may be formed and terminated. To start in business it is not necessary to go through any formalities. One may begin with any kind of business. He may start any time he thinks he can do so profitably, and may stop without consulting anyone but himself.

A second advantage which the individual finds in going into business alone is that if there are profits he takes them all. If he is capable and energetic he is likely to be successful, and can keep for himself all the results of his ability and industry. His management is likely to be definite and coherent in its policy, and will never suffer from a variety of counsels.

Prepared by L. S. Lyon.

In some ways society also gains by having individual entrepreneur organizations. Men who know that their chances of success or failure depend on themselves will work hard. The chance for gain is a strong incentive. This means, if they are capable, increased production of goods, which of course means that there will be more for society to consume. Society also profits from this type of organization because these people are being constantly educated in business management. Lured by the prize of profits, threatened by the rod of failure, they are diligent in learning to direct more and more social energy for society's benefit.

There are, of course, disadvantages in this form of organization. If a man goes into business alone he makes all the profits, but if there is a loss he has no one with whom to share it. Besides this, he has always to rely mainly on his own judgment. Management is limited in breadth of view. The enterpriser has no one who is really interested in his business with whom to consult. Limitations in capital are also apparent. The amount of money which he can put into his business is limited by his personal fortune and his credit. It may be that there will be times when he could make large profits if he had more funds, but he is unable to supply them. At such times he is likely to wish for a partner. The final disadvantage in this form of business, as the entrepreneur views it, grows out of the fact that there is no distinction between his business liabilities and assets and his personal liabilities and assets. He is unable to take the risks of business with part of his money only. If his business fails the receiver will utilize "personal property" as well as "business property" in satisfying creditors.

2. The partnership.-Suppose that, instead of going into business alone, the enterpriser joins with two or three others, agreeing to divide the profits and losses. Although men may be, and often actually become, partners by implication, partnership is usually based upon a simple oral or written agreement. The legal relationship arising from their agreement to transact business in this way is called a partnership. The partners together are usually spoken of as a firm. The partnership brings with it changes in management and ordinarily of capital. The management generally rests with all the partners and, though by no means necessary, all may invest capital.

From what has just been said of the individual entrepreneur, it is easy to see why the partnership should arise. When business began to be transacted on so large a scale that one man did not have sufficient capital to conduct the business alone, and when business became so

specialized that one man was not likely to know everything about every phase of the business, the partnership became a valuable institution.

From the standpoint of the individuals concerned it is valuable because, though each of them has only a small amount of money, they may, by combining, have enough to carry on an extensive business. One of them may be a specialist and expert in managing a small manufacturing plant. The other may be an able salesman, and, by combining the ability of both, they are able to manufacture goods and sell them to advantage. Neither has the partnership necessarily lessened the driving motives. Reward still depends on success. Profits will still be closely related to endeavor.

It is easy to see that this institution of partnership is a good type of business organization in each of these cases, from the standpoint of society as well as from the view of the partner. It makes good use of social energy.

As the entrepreneur views the matter, there are some disadvantages and limitations connected with the partnership. The first is that the amount of capital, although fairly large, may be insufficient. Even by joining their money the two or three or more persons may not have secured enough to carry on the business which they have undertaken. The discussion of other disadvantages will reveal why the number of persons in a given partnership must be somewhat limited.

A second group of difficulties grows out of the new elements in management. One of these is a certain degree of inflexibility. Policies cannot be so easily modified and fitted to new conditions as they can be where one individual is in command. Lack of harmony in management may easily grow out of the responsible relations of partnership where viewpoint and opinion vary.

Another objection to partnership, which comes from the widened management, is a certain amount of instability. The partnership may undergo dissolution from a number of causes. Some of these it is beyond the power of the firm to prevent. The bankruptcy of a partner or his death will ordinarily cause a dissolution of the firm. Unless there is an agreement to the contrary, one party may withdraw or sell his share and thus bring about a dissolution. Even though an agreement may exist, one partner may withdraw if he cares to undergo an action for damages. Any of these things occurring at certain times might be disastrous to the welfare of the firm.

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