preference income, so to speak, is especially assured, it is indicated in making the preferred dividend cumulative. That is, if not paid as due it accumulates as a charge to be paid later in full. Finally the common stock represents the risks and potentialities often of undemonstrated values of the company's net earning capacity. They who take the risks want title to the contingent outcome, and they get it in common stock.

It is thus seen that common stock, which is to a large extent speculative in character, improves with aging under good management. It means, among other things, a title to opportunities, to latent resources. As earnings are put back into the company, the potential becomes real value. That in turn is expressed in the rising price of the security in question reflecting higher surplus income. How the market price of such a security varies as the "water" is being eliminated, is shown by a calculation given below, covering nine years of the Steel Corporation's history, from 1902 to 1910.

The same general policy of fortifying the market value of the common stock probably went on at a slower rate for the next three years, when common earned 8.9, 5.7 and 11 per cent respectively, and its average prices were 66, 741⁄2 and 592. At the end of 1914 the common capital stood at $508,302,500, of which over half may have represented real value.

It is estimated that between 1902 and 1909, in which time this common stock rose from 38 to 68, or $30 a share, the total of $300,000,000 of "water" was eliminated.* According as the single undeveloped asset of 1,200,000,000 tons of iron ore were valued higher or lower, the company's common stock was calculated to have a higher or lower value. The company's giving it a book value of $600,000,000 made Steel Common worth $150. The government's valuation of $134,000,000 made the stock average $44.70 a share. The one had in mind the cost of duplication, the other an idle property to be used far in the future.

Capitalization of industrials, railways, or public utilities is closely related to all questions of prices and rates. State commissions consider it

* P. V. Davis in The Independent, October 19, 1911.

necessary, at the very start of their labors, to find an answer to the question, What is the fair value of a given electric plant, a street railway property or an inter-urban line? Shall it be figured on the original cost or going value, or on cost of reproduction? The conclusion of Halford Erickson of the Wisconsin Railroad Commission, not only utilizes both as advisable, but recognizes the necessity of including developmental costs, depreciation and other risks. Of the latter he says: "Public utilities are not wholly free from risks to investors. If investors therein must bear losses from decreasing prices, is it fair to deprive them of profits from increases in prices? . . . Would not the elimination of such profits be reflected in higher rates of interest for needed capital?"

On this the Courts have not said their last word. How far earning capacity enters into rate-making principles in corporations exempt in the main from competition, and therefore from competitive risks, is ably discussed in a pamphlet by the same official.*

4. Use and Abuse of Over-Capitalizing

The mistake is usually made in allowing those who take stock for promotion and properties to work it off at once through the stock market or any other way. France requires her promoters and sellers of property to hold such se

* Valuation of Public Utilities, Halford Erickson, 1912.

curities for two years, thus protecting values and safeguarding legitimate industry. Otherwise inflation is the certain effect of such heavy flotations marketed after the usual plan. An underwriting syndicate with options in hand at high figures for the concerns to be combined, arranges to pay for them in stock of the combination. It has no time to lose. "It arranges for the new issues to be listed on the Stock Exchange, where they are made 'active' by many brokers who had been let in on the underwriting of the whole scheme. This speculative activity before long would result in distributing many millions of new shares, bought for a rise by traders in stocks and so taken off the hands of the syndicate."*

Over-capitalizing consists in the issue of stocks and bonds in excess of the property equivalents of the corporation's possessions. This excess is usually known as "watered" stock or bonds. Where this rule of capitalization is followed the "watered" "issue is usually small. But where earning power, actual or assumed, is made the basis of capital issue, the opportunity for abuses is far greater.†

Under the inflation of capital values, in the financing of combinations, a large part of the

*

Big Business and Government, C. N. Fay. Moffat, Yard & Co., New York.

This aspect is critically discussed by E. S. Mead in his Trust Finance, D. Appleton & Co., New York, chs. XVI-XVII.

capitalization stands for some of the most uncertain qualities and conditions in commercial and industrial experience. A Hawaiian sugar combination capitalized its property fourfold, including "climate" at more than $1,000,000, or twenty-five per cent of the total. Yet this is the thing with which the stock market occupies itself in trading and the general public is supposed to buy or sell as of actual value. A combination of twenty-five manufacturing plants into a single trust created a degree of monopoly, otherwise known as capacity to control the markets and beat competitors. This alleged advantage the promoters immediately capitalized without testing its capacity to withstand competition. They forthwith distributed certificates of stock pro rata to the unrealized prospect.

5. Banking Credit and Trust Control

By reason of the dependence of trust financing upon leading banking institutions for underwriting and marketing their securities financial control becomes direct and highly concentrated. In the capacity of fiscal agents these leading banking interests give continuity to that relationship. This in itself tends to perpetuate the dependence of trusts upon the single institution or group of bankers who have become accustomed to act together in syndicate operations or otherwise. Nowhere has there been