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porary flurry, and may be overcome volves more than hopefulness; it by mounting sales and increasing net involves a sound principle. B. M. profits. In any event, such situa- Anderson, Jr., economist of the tions are what the market investor Chase National Bank, has illustrated must take into account, and what the relation of earning-power, as the market speculator banks on. expressed in income, to capitaliza

tion and interest rates, by the figure An American living temporarily in of a lighted candle, a disk, and the Paris was surprised one day to see shadow the disk throws on the wall. an acquaintance, a professor at the “The disk,” he says, “represents the

” Sorbonne, sweep up to his house in a annual income, the distance between handsome automobile. He had not the candle and the disk represents supposed the Frenchman to be so the rate of discount, and the shadow prosperous, for he lived very simply on the wall represents capital value.

. “But I did not buy a motor,” said As the disk is reduced in size, the

" the professor when the American shadow grows smaller. The shadow, offered his congratulations on what moreover, increases or decreases he supposed to be a windfall, “until vastly more than the disk increases I had economized and laid aside or decreases. A moderate change enough in securities to cover, not

in the annual income makes a vast only the indebtedness I assumed on change in the capital value." the automobile, but enough to pay Now, the Wall Street investor in interest the upkeep as well. If takes into account not only earnings anything happens to me or to the

me or to the of the immediate past, and of years machine, my wife will be fully past, but prospective earnings. (If

, protected.”

he is wise, he is cautious of average There was the cautious French earnings, which may prove deceppsychology at work, the psychology tive.) And any Wall Street syndicate, which has made the nation famous about to reorganize an enterprise, for its thrift and its substantial takes these factors into account. worth. The American, pondering After the settlement of the Boxer the fondness of his countrymen for uprising in China, for instance, mortgaging their future salaries un- shipping was drawn into the Pacific der the instalment plan, was sur- Ocean on the prospect of better prised and a little amused at the trade with the Far East; and then professor's extreme conservatism. the Boer War had the effect still The United States is incorrigibly further of increasing marine transoptimistic, and the New York stock portation rates in the Atlantic. market reflects the national faith. Those lines engaged in transatlantic Sometimes, as happened in the spring business won phenomenal profits. and fall of 1926, there are misgivings, On the strength of their fine showing

, and the market slumps; but by and a syndicate headed by the House of large its tone is sanguine.

Morgan undertook, a quarter of a Yet the practice, now generally century ago, to organize the Interfollowed in Wall Street, of basing national Mercantile Marine, known capitalization on earning-power, in- in that day as “the shipping trust.”


But ocean rates are highly competi- Morgan group, and paid $146,000,tive, and the term “trust” was a ooo in cash for the property. The misnomer. New carriers entered single check for that amount, the Atlantic to take advantage of signed by Clarence Dillon, was the the high charges, and the period of largest ever made in a commercial prosperity was soon past. The busi- transaction in this country. ness of operating ships upon the The actual physical properties seven seas is unstable and uncertain thus purchased were valued at fifty at best, and the consolidation did millions. In the refinancing, there not prosper. The incident is too far was included seventy-five millions in the past to be of any market im- in debentures, the first great bond portance now. It is set down here issue against an automobile proponly as illuminating one side of the erty.

erty. Up to that time, the total shield. When such ventures come to bonded indebtedness of the industry grief, the investing public is not the had been about twenty-five millions; sole sacrificial goat; the promoters whereas the packing and steel inlose too. On the other side of the dustries were bonded, each of them, shield is the United States Steel for about a billion and a half. This Corporation, which began in much made the Dodge financing doubly the same way as the International noteworthy. Mercantile Marine Company; its In the reorganization stock was common stock represented at first issued which now has a market value an intangible hope, and sold as low of considerably more than a hundred as $8 a share, but now it is about the millions. There were 850,000 shares solidest thing on the Wall Street of preferred stock, to carry a seven horizon.

per cent dividend, which is selling as A marked modern tendency in I write a little above 70; and there American industry is away from were authorized 2,535,000 shares of family control. The sale by the

The sale by the A common, of which 1,934,554 are Pattersons of the National Cash outstanding, and are selling around Register and by the Candlers of 17. The A stock has no votingCoca Cola are examples. Another power; this is carried by 500,000 is that of the Dodge automobile shares of B common stock, which property, one of the most spectacular was not put on the market. The deals of modern times. The two issue, which was put out last May, Dodge brothers, who had been the oversubscribed. The selling informing genius of the business, price was $100 for a share of common died within a few months of each plus one of preferred. other; and the business was put on On the books of the reorganized the market for the highest bidder. Dodge Brothers concern, good-will All competitors soon dropped out is carried at one dollar. The book save two, a group headed by the valuation of the preferred stock is Morgans and representing General one dollar a share, and of the A comMotors, and another group headed mon stock ten cents a share. On by Dillon-Read. The latter bid the ledger, therefore, the shares of fourteen millions more than the common and preferred stock which



now have a market value around ization put the concern in the first $100 are listed at $1.10; and on the rank among the industrial corporapreferred the company agrees to tions of the world. Henry Ford pay out of its earnings $7 a year, cannot teach General Motors anyor 700 per cent of its listed value. thing about high wages, nor about Bookkeeping of this sort seems to the economies to be effected from become necessary when capitaliza- mass production, nor about “vertition is based on earning-power or

cal” trusts. Since the two came good-will, and good-will is carried at into acute competition General Mo a dollar. The Dodge company's net tors has sold about one fifth of all earnings for the first quarter of 1925 the cars marketed in the United were $6,357,152; for the first quarter States, and Mr. Ford has made what of 1926, $5,990,489; the first quarter may be called concessions; that is, of 1927 $1,545,349; it has an earned he is producing a high-priced car, as surplus of more than twenty-five well as a cheap one, and he has millions, and still has in its treasury changed the appearance of his cheap a large part of the A common stock. car. The Ford is no longer painted

It is not necessarily an argument solely black; it has an altered radiaagainst the continued success of the tor and a lowered chassis. No one Dodge business that it has passed denies Mr. Ford's genius in his field; out of the hands of the two men who but neither can any one deny that made it and is now in the hands of Wall Street management has put Wall Street bankers. This argu- his genius to its trumps. ment is sometimes heard in such General Motors makes

makes other cases, and is based on the aphorism, things beside pleasure automobiles a favorite in this country, that every and trucks, of course; it makes taxibusiness is the lengthened shadow of cabs and coaches, accessories and some man. The Ford Motor Com- parts, electric refrigerators, farm pany, for example, is the lengthened lighting and power plants, washingshadow of Henry Ford; but its chief machines, water-pumps, and so on. competitor, General Motors, was It has twenty-nine major divisions; not organized and is not now con- it has a pay-roll of a quarter of a trolled by a genius of production. billion dollars; its net profits for the It is a child of Wall Street. Its first half of last year were nearly board of directors includes such men eighty-three millions (as compared as Junius S. Morgan, Jr., son of J. P. with less than forty-seven millions Morgan, Pierre S. du Pont, and for the first half of 1925); and it is, I George F. Baker, Jr.

repeat, a creature of Wall Street General Motors, which has more enterprise. The tendency away than 45,000 stockholders, declared from private control seems not witha stock dividend last year of fifty out its justification. per cent; and at the present market Fleischmann's yeast, Burroughs this “melon” has a value of more adding-machines, Case threshingthan $450,000,000. The new stock machines, Listerine, the Childs reswill return dividends like the other taurants, the Woolworth stores-one common. The increase in capital might fill this page with notes on the

businesses which have found their stricted and cavernous district, not way out of one-man or one-family merely the resident buyers. Figures control into Wall Street. In the case such as those I have just cited have of the Woolworth company the con- served to push the lowly five-andtrol was merely shared; for Goldman, ten-cent stores into the financial upSachs & Co. and Lehman Brothers, per crust. Woolworth is one of the who refinanced it, make it a general aristocrats of the Stock Exchange. policy to require that those who built Its shares have ranged above 200 up an enterprise shall take part in when the going was good. The comtheir reorganizations. The Wool- pany controls 1500 stores in the worth stores represent strikingly the United States, Canada, and Great gesture—it has almost the air of Britain, and employs 28,000 persons. swank- of writing off good-will as a Another chain which has gone out large item of the balance-sheet. of private ownership is Childs, which Originally fifty million dollars, this served fifty million meals in 1925.

served was reduced by twenty millions in The Childs string embraces more 1922, by ten millions in 1923 and than one hundred restaurants, half again in 1922, and in 1925 to the of them in New York; they have infinal figure of $1.

vaded Fifth Avenue. It happens This company, with 5300 stock- that in this case the value of realty, holders, represents a merger of sev- plants, and equipment is not far eral smaller chains into the over- from the value of outstanding stock; shadowing Woolworth business. The more than half of the authorized shares are carried on the books at common is still in the treasury. Be$25 each; the physical value back of fore the refinancing, the common had each share is about $35. The stock a par value of $100; in 1923 it was was put on the market in 1912 at $55 changed to no par value, and five a share; each has been split into four new shares were issued for each of the shares, and there has been a thirty old ones. Now the new shares are per cent stock dividend; so that what selling around fifty-five dollars each. cost $55 fourteen years ago is worth Childs had a gross income in 1926 of at present prices nearly $1000, prac- about twenty-seven millions, an avertically all of which is based on earn- age of about half a dollar for each ing-power-on the magic of sales, meal served. It does not list goodat "Nothing over ten cents in this will. store!”

The growth of chain systems such The Woolworth sales, please note, as these is an interesting phase of were nearly 253 millions in 1926; in industry's effort to solve the problem the single month of last September of distribution. About forty-nine they were more than a million above cents of every dollar we spend goes the sales for that month in 1925. into that complex of transportation, Such figures as these, not the prop- insurance, rent, services, and so on erty account, are what interests Wall which is called distribution. AmerStreet investors; and by Wall Street ican business genius has been deinvestors, of course, I mean the mil- voted to production at the cost of lions whose money flows into this re- merchandising; but now the chainstores, the mail-order houses, the Sachs & Co. and Bond & Goodwin; department-stores (some of which these were oversubscribed, and are are themselves grouped in chains), selling as this is written above $67 and the “company stores” are com- a share; a gain, say, of $35 a share peting with the small individual for those who bought at the market shops to take the major place in re- price at the time of issue. The extailing. In the stock market re- planation is to be found in earnings. ports, a part of the struggle is The Lambert Pharmacal Company reflected.

earned in 1922 $8.67 on each of its If we turn away from chain-stores, shares; in 1923, $15.75; in 1924, which require a comparatively large $23.50; in 1925, $30; and in 1926, investment in “plant,” we find more $47. The Lambert Company, ownstriking examples of the manner in ing more than half of those shares, which the investor ignores property sprays out a part of the prosperity account when looking at earning to the stockholding public. power. There is Listerine. It has All the enterprises we have been been on the market for more than talking about, excepting the Dodge forty years, and it is like Coca Cola company, had their beginnings back in that “everybody” knows it. The in the eighties. The automobile inLambert Pharmacal Company's phys- dustry was born at the beginning of ical properties are valued at a little this century; but the Childs restaumore than a quarter of a million dol- rants set up in business in 1899, and lars, and its total assets are less than the others I have mentioned even a million and three quarters; but the earlier. They have persisted, thereoutstanding stock, based on about fore, through more than a generation half its earning-power, is worth more of the human span, all of them on an than seventeen millions, and is sell- ascending scale of profits; and finally ing well above the price at which it their prosperity has been capitalized. was offered to the public.

The goods labeled Listerine are Now, prosperity, particularly on a made by the Lambert Pharmacal large scale, has a way of going to Company, and this is controlled by a the head. Twenty-five-cent sugar holding concern, the Lambert Com- ruined many Cuban sugar planters pany; it is the latter's shares which and caused a general financial colare on the market. The Lambert lapse on the island. A few years of Pharmacal Company has but 60,000 exceptionally high prices for wheat shares, of no par value, carried on and hogs and corn brought disaster its books at a valuation of $600,000, in the long run to many American and the Lambert Company owns a farmers. Individuals are likely to little more than half of them. Now, become reckless or extravagant in the Lambert Company has an au- boom periods, and they pay through thorized issue of a million shares of the nose in the reaction. Every no-par stock, of which 281,000 are boom has its morning after. Corpooutstanding. Nearly 200,000 shares rations are less likely to be swept off were put on the market in March, their feet; there are advantages in 1926, at $41.75 each by Goldman, being "soulless."

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