LAWYERS AND CORPORATE CAPITALIZATION I have thus dealt with objections to the abolition of nominal capitalization. That is to say, I have criticised the validity of the reasons which, for our day and generation, are supposed to make the system advantage ous. There remains, however, a further and practical support for the present sys tem; and that support, I fancy, is ten times or, perhaps, one hundred times as efficient to prevent a reform as all the other reasons put together. It is the advantage, real or supposed, which the nominal valuation of shares which are to be sold or distributed by corporations gives to those who promote or control the corporations. I believe that most successful or legitimate corporations wish and intend that every share of their capitals shall represent full actual value. I fear, however, that I shall not have their support- for the reform which I advocate. Very certainly I shall not have the support of those who promote or control the corpora tions whose promotion or, perhaps, the mani pulation of whose stock upon Wall Street makes one of the enormously profitable callings of the twentieth century. Take, for instance, an industrial corporation formed to take over a business heretofore conducted by a partnership or group of partnerships or lesser concerns. It is usual to issue bonds or preferred stock for. the estimated actual value of the lands, plants, stock, and other physical assets actually in hand, and then to issue common stock for the present estimated capitalized value of the future income as estimated — or, rather, hoped for — or, perhaps, even rather imagined — of the entire enterprise over and above the amount of the preferred stock, or of the preferred stock and bonds. It ex cites no surprise, therefore — it is deemed in deed quite normal — that, immediately after the launching of a modern industrial cor poration with a seven per cent preferred stock selling at or near par, to have the common stock, in theory also worth par, selling at only 30 or 20 or 10 or 5, prices which represent sound, hard-headed judg
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ment against speculative dreams colored with more or less insincerity. Banking and other syndicate profits are not uncommonly made out of the issues of common stock which — for such is the happy illusion of those engaged in such enterprises — seem not to come out of the pockets of the prin cipals engaged and, therefore, are without much of a wrench, issued profusely to the bankers or promoters. It is needless to say that these happy men do not in such cases mean to retain as permanent invest ments the common stock which they have thus acquired. They usually mean to sell for cash, and to sell promptly. And it is, I fear, beyond doubt that the purchasing community is affected in its willingness to buy such stock and in the price it is willing to pay by the nominal magnitude of the amounts which promoters and bankers have ap proved. Many of these transactions are, I concede, or rather affirm, conducted with most scrupulous and conservative precision, the value being carefully and conservatively estimated. But in many cases, very many cases, even those in which men of high character are engaged, the valuations rep resent, as I have said, hope rather than belief — a hope which is more or less con sciously cherished for communication to the purchasers of the common stock and which, to the extent of their purchases, is cherished at their risk rather than at the risk of the bankers and promoters who have sold them stock. If the system of nominal capitaliza tion at round and large figures were abol ished, the opportunities for profit of this kind would largely disappear. It will be said that, within the limits of the strictest honesty, it is right to communicate to those who buy stocks the hope and expectation of those who sell them. That I shall not dispute; for it is the right of every kind of merchant. Every seller may transfer his hopeful expectation to the buyer with the goods. I am disputing, however, the whole some influence of nominal or arbitrary cap italization and for the very reason that it
