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.

More

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

porary flurry, and may be overcome by mounting sales and increasing net profits. In any event, such situations are what the market investor must take into account, and what the market speculator banks on.

23

An American living temporarily in Paris was surprised one day to see an acquaintance, a professor at the Sorbonne, sweep up to his house in a handsome automobile. He had not supposed the Frenchman to be so prosperous, for he lived very simply. "But I did not buy a motor," said the professor when the American offered his congratulations on what he supposed to be a windfall, "until I had economized and laid aside. enough in securities to cover, not only the indebtedness I assumed on the automobile, but enough to pay in interest the upkeep as well. If anything happens to me or to the machine, my wife will be fully protected."

There was the cautious French psychology at work, the psychology which has made the nation famous for its thrift and its substantial worth. The American, pondering the fondness of his countrymen for mortgaging their future salaries under the instalment plan, was surprised and a little amused at the professor's extreme conservatism. The United States is incorrigibly optimistic, and the New York stock market reflects the national faith. Sometimes, as happened in the spring and fall of 1926, there are misgivings, and the market slumps; but by and large its tone is sanguine.

Yet the practice, now generally followed in Wall Street, of basing capitalization on earning-power, in

volves more than hopefulness; it involves a sound principle. B. M. Anderson, Jr., economist of the Chase National Bank, has illustrated the relation of earning-power, as expressed in income, to capitalization and interest rates, by the figure of a lighted candle, a disk, and the shadow the disk throws on the wall. "The disk," he says, "represents the annual income, the distance between the candle and the disk represents the rate of discount, and the shadow on the wall represents capital value. As the disk is reduced in size, the shadow grows smaller. The shadow, moreover, increases or decreases vastly more than the disk increases or decreases. A moderate change in the annual income makes a vast change in the capital value."

Now, the Wall Street investor takes into account not only earnings of the immediate past, and of years past, but prospective earnings. (If he is wise, he is cautious of average earnings, which may prove deceptive.) And any Wall Street syndicate, about to reorganize an enterprise, takes these factors into account. After the settlement of the Boxer uprising in China, for instance, shipping was drawn into the Pacific Ocean on the prospect of better trade with the Far East; and then the Boer War had the effect still further of increasing marine transportation rates in the Atlantic. Those lines engaged in transatlantic business won phenomenal profits. On the strength of their fine showing a syndicate headed by the House of Morgan undertook, a quarter of a century ago, to organize the International Mercantile Marine, known in that day as "the shipping trust.”

But ocean rates are highly competitive, and the term "trust" was a misnomer. New carriers entered the Atlantic to take advantage of the high charges, and the period of prosperity was soon past. The business of operating ships upon the seven seas is unstable and uncertain at best, and the consolidation did not prosper. The incident is too far in the past to be of any market importance now. It is set down here only as illuminating one side of the shield. When such ventures come to grief, the investing public is not the sole sacrificial goat; the promoters lose too. On the other side of the shield is the United States Steel Corporation, which began in much the same way as the International Mercantile Marine Company; its common stock represented at first an intangible hope, and sold as low as $8 a share, but now it is about the solidest thing on the Wall Street horizon.

A marked modern tendency in American industry is away from family control. The sale by the Pattersons of the National Cash Register and by the Candlers of Coca Cola are examples. Another is that of the Dodge automobile property, one of the most spectacular deals of modern times. The two Dodge brothers, who had been the informing genius of the business, died within a few months of each other; and the business was put on the market for the highest bidder. All competitors soon dropped out save two, a group headed by the Morgans and representing General Motors, and another group headed by Dillon-Read. The latter bid fourteen millions more than the

Morgan group, and paid $146,000,ooo in cash for the property. The single check for that amount, signed by Clarence Dillon, was the largest ever made in a commercial transaction in this country.

The actual physical properties thus purchased were valued at fifty millions. In the refinancing, there was included seventy-five millions in debentures, the first great bond issue against an automobile property. Up to that time, the total bonded indebtedness of the industry had been about twenty-five millions; whereas the packing and steel industries were bonded, each of them, for about a billion and a half. This made the Dodge financing doubly noteworthy.

In the reorganization stock was issued which now has a market value of considerably more than a hundred millions. There were 850,000 shares of preferred stock, to carry a seven per cent dividend, which is selling as I write a little above 70; and there were authorized 2,535,000 shares of A common, of which 1,934,554 are outstanding, and are selling around 17. The A stock has no votingpower; this is carried by 500,000 shares of B common stock, which was not put on the market. The issue, which was put out last May, oversubscribed. The selling price was $100 for a share of common plus one of preferred.

was

On the books of the reorganized Dodge Brothers concern, good-will is carried at one dollar. The book valuation of the preferred stock is one dollar a share, and of the A common stock ten cents a share. On the ledger, therefore, the shares of common and preferred stock which

now have a market value around $100 are listed at $1.10; and on the preferred the company agrees to pay out of its earnings $7 a year, or 700 per cent of its listed value. Bookkeeping of this sort seems to become necessary when capitalization is based on earning-power or good-will, and good-will is carried at a dollar. The Dodge company's net earnings for the first quarter of 1925 were $6,357,152; for the first quarter of 1926, $5,990,489; the first quarter of 1927 $1,545,349; it has an earned surplus of more than twenty-five millions, and still has in its treasury a large part of the A common stock. It is not necessarily an argument against the continued success of the Dodge business that it has passed out of the hands of the two men who made it and is now in the hands of Wall Street bankers. This argument is sometimes heard in such cases, and is based on the aphorism, a favorite in this country, that every business is the lengthened shadow of some man. The Ford Motor Company, for example, is the lengthened shadow of Henry Ford; but its chief competitor, General Motors, was not organized and is not now controlled by a genius of production. It is a child of Wall Street. Its board of directors includes such men as Junius S. Morgan, Jr., son of J. P. Morgan, Pierre S. du Pont, and George F. Baker, Jr.

General Motors, which has more than 45,000 stockholders, declared a stock dividend last year of fifty per cent; and at the present market this "melon" has a value of more than $450,000,000. The new stock will return dividends like the other common. The increase in capital

ization put the concern in the first rank among the industrial corporations of the world. Henry Ford cannot teach General Motors anything about high wages, nor about the economies to be effected from mass production, nor about "vertical" trusts. Since the two came into acute competition General Motors has sold about one fifth of all the cars marketed in the United States, and Mr. Ford has made what may be called concessions; that is, he is producing a high-priced car, as well as a cheap one, and he has changed the appearance of his cheap The Ford is no longer painted solely black; it has an altered radiator and a lowered chassis. No one denies Mr. Ford's genius in his field; but neither can any one deny that Wall Street management has put his genius to its trumps.

car.

General Motors Motors makes other things beside pleasure automobiles and trucks, of course; it makes taxicabs and coaches, accessories and parts, electric refrigerators, farm lighting and power plants, washingmachines, water-pumps, and so on. It has twenty-nine major divisions; it has a pay-roll of a quarter of a billion dollars; its net profits for the first half of last year were nearly eighty-three millions (as compared with less than forty-seven millions for the first half of 1925); and it is, I repeat, a creature of Wall Street enterprise. The The tendency away from private control seems not without its justification.

Fleischmann's yeast, Burroughs adding-machines, Case threshingmachines, Listerine, the Childs restaurants, the Woolworth stores-one might fill this page with notes on the