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and domestic propaganda, have led us further astray from the facts than has the subject of disarma


From the beginning of the advance publicity concerning the Washington Arms Conference, many of our people thought that the European powers and Japan looked at the question as they looked at it themselves. They believed that all the participating nations considered disarmament as a way to insure peace, and have only differed as to the details of an equitable arrange


The records of the Washington Arms Conference, the Geneva conferences, and the various negotiations entered into by this country to obtain a second naval conference show this is not the fact. They demonstrate clearly that Europe and Japan regard such conferences as opportunities to strengthen their relative position as to armament at the expense of their neighbors. The whole matter is merely a new form of armament race, based on diplomatic ability "to put one over," rather than the old-fashioned method of simply building more ships than a rival could afford to construct.

It is not that our view is fundamentally virtuous and that of the others fundamentally evil. It is simply that Europe and Japan see nothing in past history, or in the present condition of the world, to warrant them in trusting anything as precious as national security to the good-will of the other powers, who are their trade, racial, and frequently territorial rivals. They simply believe that national security depends upon adequate armament.

Lord Balfour's opening speech at the Washington Arms Conference stressed the view that not sentiment but national security must govern Britain in any negotiations concerning her Navy. The representatives of all the other powers, except ours, expressed the same opinion. Our people were too wrapped up in their desire to inaugurate a new era based on peace and good-will to heed the few American voices that were raised in an endeavor to make their countrymen understand the truth of the situation.

Great Britain is primarily dependent on overseas trade for her wealth.

She has never tolerated the possession by a trade rival of a navy larger than her own. Spain, Holland, France, and Germany have successively learned this fact.

Our Navy, in capital ships built and building, was superior to that of Great Britain at the time the negotiations which led to the Washington Arms Conference were begun. Our purpose in the conference was to establish a uniform ratio for all classes of ships. After we agreed to sacrifice our superiority in capital ships, Britain tried to force France to agree to abolish submarines as the price of Britain's agreeing to a ratio for cruisers and destroyers.

The war proved Britain susceptible to great damage by submarine attack in the waters surrounding her home island. Also, the route to India passes through the Mediterranean, a sea which furnishes excellent opportunity for such attack. Having deprived us of our supremacy in capital ships, Britain needed only to secure the abolition of submarines to be supreme.

On the other hand, France, which entered the war one of the four great naval powers of the world, finished it with virtually no navy at all. This partly because of naval losses, but mostly because she threw her whole strength into her army, instead of using part of her resources to augment her navy, as did Britain. At the same time she became more than ever dependent upon her North African possessions. It is essential to her in war-time that she keep open the communications between France and North Africa, across the Mediterranean. To do this, and to prevent absolute domination of her Channel and Atlantic coasts by Britain, the submarine is essential.

At the time of the Washington Conference, this country was flooded with British propaganda against submarines. No mention was made of their proper military uses, but only of the sinking, without warning, of passenger ships. The French readiness to sign any agreement that would limit the submarine to military uses, and the few warning voices of Americans who tried to point out the vital part submarines must play in our own defense, were lost in the whirlwind of sentimental outcries against submarines.

Japan, both from the point of view of capital ships and from that of naval bases, gained greatly, in relation to ourselves, through the Washington Arms Conference.

Japan have outbuilt us in cruisers and other auxiliaries.

If additional proof is needed of the fallacy of the idea that disarmament as a means to peace is the motive actuating Europe and Japan in any arms conference, a study of the answers to Mr. Coolidge's recent invitation to another conference should be convincing. Britain will not give up her supremacy in cruisers, despite the fact that we gave up ours in capital ships. Her propagandists have again started a campaign against submarines based on the horror aroused by their improper use, and not on the facts of their military value. France has not changed her position since the Washington Conference. Japan, like Britain, is unwilling to give up her cruiser supremacy established since the conference, despite our generosity at that conference in regard to capital ships and to the fortification of our Pacific islands, which so increased her effective naval strength.

We are a practical people. We pride ourselves on our hard-headedness. We practise it in our business dealings. It is therefore all the more strange that when it comes to national defense we are anything but businesslike. We act spasmodically as the result of sentimentalism and prejudice, instead of continuously as the consequence of a thorough understanding of the facts of our past history, the world as it is to-day, and the danger to our material and

Since the conference, Britain and spiritual welfare.



How Wall Street Converts Earning-Power into Stocks


NEWFANGLED Contrivance, invented by an unknown named James Ritty, was offered for sale back in the early eighties to the owners of a mining store in Coalton, Ohio. When punched forcibly, it registered on a strip of paper the amounts of cash sales. The device could not have cost more than twenty dollars to make, and the price was $100. The mining store, moreover, was steadily losing money; yet the Patterson brothers, who owned it, bought two of the devices, because the salesman recommended it as a good thief-catcher. During the next year, without any apparent increase in turnover, the business made a profit of $12,000.

One of these brothers was the late John H. Patterson; and after three years had passed, at a time when the contrivance seemed an assured failure, he bought control of the manufacturing business for $6500 and renamed it the National Cash Register Company. He had faith in it, although his neighbors grinned. To keep the new enterprise going required prolonged effort, and for years it remained just what it was represented to be when he bought it, a thief-catcher. But as time went on many changes were made in it, and many new inventions were either

patented or bought. Now the register is advertised as assuring correct change for the customer, credit for payments on account, accurate bills, and proof of purchase when goods are returned. The boast is made that it protects the clerk from others' errors, from misunderstandings, and from making mistakes himself. Whether the transaction is in cash, on part payment, or for a charge account, it can be registered on one of these machines; for they issue not only receipts but charge-slips, paidout vouchers, and received-on-account records, "in every desired form."

The National Cash Register Company now sells nine tenths of such contrivances in the United States, as well as covering the world with them, wherever retail business is done. In its plant are forty-four acres of floor-space, and its employees number twelve thousand. From gross sales in 1890 of less than two million dollars, it had grown at the beginning of this century to more than a thousandfold of what John Patterson paid for control of the business at the beginning of his career, when he was forty-one years old. At the end of 1925 the firm had in' accounst receivable alone, thanks partly to the sweep of instalment buying,

more than twenty-one million dollars; and its net earnings were nearly eight millions.

From an acorn of $6500 this mighty oak has grown, a typical example of American ingenuity and business acumen. Now and then the partners have been rewarded in such a way that the reward could not be taxed as income. In 1898 there was a stock dividend of 200 per cent, in 1906 another of 125 per cent, in 1916 one of 50 per cent, in 1921 of 50 per cent. The stock, that is to say, had been diluted by more than fifteen times its volume; yet at the end of 1925, with book assets of nearly thirty-eight millions and a capital issue of thirty millions, the earnings were $7 on each share.

All this while the National Cash Register was a close corporation, held almost entirely by the Pattersons; but early in 1926 a group of banking houses in Wall Street, headed by Dillon, Read & Co., took it over and reorganized it. The capitalization had been thirty millions; now $55,000,000 in stock was sold, at $50 a share, and 400,000 shares of B common stock were withheld from the market, mostly in the hands of the Pattersons. Both classes of stock have voting-power, but the B stock has the power to elect the majority of the board of directors. The A stock, which was put on the market, was immensely oversubscribed, and closed the first day above 52; for the company had a practical monopoly of its field, based on some four thousand patents, and its earnings had constantly increased over a long period.

What was done in this case was to capitalize continued prosperity. It

is the general practice in Wall Street, and is worth reporting here to that lay public which regards the operations of Wall Street as mysteriously occult. Not the physical assets held by a company determine the market price of its stock, but its earning capacity. Behind every share of stock in the United States Steel Corporation is $275 in net tangible assets, yet you can buy one of those shares, as this is written (before the forty per cent stock dividend), for $143. Behind each share in the F. W. Woolworth Company, owner of fiveand-ten-cent stores, is an asset value of $35; yet these shares have sold as high as $220 each, and cost as I write more than $140. The investor in common stock does not buy physical property; he buys a partnership, and he rates its value on prospective dividends.

We have a compact example of this in the Coca Cola Company, which has property valued at less than seven millions, and is capitalized on a basis which gives it a market value of more than ninety millions. This company was bought from the Candlers of Atlanta in 1919 by the Trust Company of Georgia and the Guaranty Company of New York—a subsidiary of the Guaranty Trust Company-for $15,000,000 in cash and $10,000,000 of preferred stock. In the refinancing, 500,000 shares of no par value were issued, and the preferred stock has since been bought back out of earnings. The common stock is selling around $197 a share.

On the books of the company, each of these shares is carried at $30.20. Good-will is carried at twenty millions. The company's good-will, in fact, was what was capitalized in re

financing it, although most corporations nowadays either ignore this item or list it at $1. In the days when William Jennings Bryan was railing at Wall Street as "the enemy country," and even in Theodore Roosevelt's trust-busting days, it was popular to make a great hullabaloo about the capitalization of good-will, even to call such capital plain water. The Supreme Court of the United States, however, recognizes it as an asset, and has more than once made use of the definition given to it by John Scott, Earl of Eldon, that "good will is the probability that the old customers will resort to the old place." In one of the opinions where this was cited, the Supreme Court explained that "good will, of course, does not keep customers from buying in the lowest market. Barter is not conducted on philanthropic principles; but good will promises the business that it may see the return of old customers whom it has treated fairly in price and quality."

In the case of the Coca Cola Company, the market investor eagerly bought good-will as revealed in the recipe for a "soft" drink sold continuously for more than two score years to an immense public. The intangible and invisible fact that "everybody knows Coca Cola" is an asset. In subways, on streetcars, in newspapers, and in magazines one found reminders of it, and the advertising was an asset. Moreover there is the record of sales: in 1922 (using round figures) more than twenty-one million dollars; the next year, twenty-four millions; the next, twenty-five; in 1925, twenty-eight millions; and in 1926 thirty millions.

Confident that the sales will be maintained or will be increased, with a corresponding record of net profits, the public or that part of it which enters the stock market-has bid up the evidence of partnership to its present price. The purchaser does not believe that any other sodafountain drink is likely to displace Coca Cola in popular favor, and he buys not only present but prospective earning-power.

In the case of the National Cash Register Company, the 1925 earnings exceeded those of the year before by more than a million and a quarter, and the net profit was nearly eight millions. In 1926 the net earnings fell off more than a million and a quarter. The enterprise had made giant strides through highpressure salesmanship; by many in Wall Street the selling organization was regarded as the best in this country, and the salesmen were stimulated to their best efforts by a profit-sharing scheme. This the reorganizers did away with, and substituted some of the B stock which had been held off the market. As this stock will share equally in earnings after $3,300,000 a year has been paid on the A stock, and as it elects a majority of the directors, the salesmen who received it may be said still to share in the profits. In the latter part of February, 1926, after the reorganization had taken place, a court decision upheld the right of the Remington Arms Company, chief competitor of the National, to certain cash-register patents which the National had claimed. The stock, perhaps adversely affected by these circumstances, is now selling above 40. This may be but a tem

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