Wall Street and the Country

THE perturbations to which prices have been subjected on the New York Stock Exchange during the past year have naturally caused revulsions of feeling among those who have suffered from them, and much questioning of the wisdom of some of the recent operations of prominent American financiers. It is a familiar aphorism that “ Wall Street ” is very popular in periods of ascending prices, and is very unpopular in periods of declining prices. The public often seem to forget that quotations in Wall Street are only the mirror of their own estimate of the value of securities, and that most financiers would be as well pleased as outsiders if they could warp this mirror to give the reflection of a constantly ascending value to the properties which they control. There are many lessons to be learned from recent experiences, one of the most obvious being that the outsider should not enter the stock market in the gambling spirit, but only for investment, and then only when he has made a careful study of values of properties and their earning power, and of the conditions which affect the market.

The creation of industrial companies during the past five years and the ascending prices of their securities until within the past year have written a new chapter in the history of the world’s effort to work out its economic destiny. It has afforded a new illustration of the law of the survival of the fittest. Practically every form of financial enterprise has had to go through the same birthpangs when it was a new and untried project; and only those features of it have survived which have been found to possess real economic value. It is usually those who initiate the new methods who take the greater risks. If their projects will not stand the test of competition, they carry down their projectors with them to disaster; if they succeed, they sometimes confer rich rewards upon the far-sighted and venturesome pioneer ; but in the latter case they render a net economic service to the community. It is the experience through which the new methods of finance have passed, and that through which they are yet to pass, which is to determine whether they have in them elements of survival.

The mechanism of modern finance has been devised piece by piece to meet the constantly growing demand for more efficient methods of giving mobility to capital. By mobility is meant facility for transferring capital promptly and without loss from one person to another. It was the use of money which primarily made possible the transfer of capital when trade began to emerge from the condition of barter. It has been the function of modern commerce and finance, as capital grew in volume, to devise new means of transferring it from place to place and from industry to industry. Hence has arisen the complicated but symmetrical structure of deposit banking, note issue, the joint stock company, the negotiable security, the produce and stock exchanges, the bankers’ clearing house, the stock exchange clearing house, the cable transfer for credit, and the arbitrage of stock and exchange transactions, by which the change of a fraction of one per cent in the rate indicating the demand for credit in one market would put at its command the resources of the other markets of the world.

This great fabric has been rendered necessary by the growth of the fund of capital seeking investment. This growth in the volume of capital has been the phenomenon of our generation. It has been a growth of astonishing rapidity, because the increase in the investment fund has been much more rapid than the increase in the total capital of the community. This has resulted from a simple process of mathematical increment. If an agricultural producer in 1850 had an annual producing power which might be expressed by $350, of which $300 was necessary to supply his actual physical necessities, he would have a surplus of $50, to be made a part of the investment fund of the community. If ten years later, in 1860, he had increased his producing power by one seventh, his total annual product would be $400 ; but the effect would be felt upon the investment fund of the community, not merely by the increase of one seventh, or about 15 per cent, in his total product, but by an increase of 100 per cent in the net product. Assuming that his actual needs were still supplied by $300, he would have $100 for investment where he formerly had $50. If by 1880 his annual producing power further increased by one fourth part of its efficiency in 1860 to a total of $500, the surplus funds seeking investment in the market would have risen by another 100 per cent within twenty years, or by 400 per cent within thirty years.

These conclusions, based upon hypothesis, are sustained by the evidence. The increase in the capital employed in manufactures over and above the normal increase in proportion to population is one of the gauges of the increased fund of saving in the community. This increase was from $2,118,208,769 in 1870 to $9,835,086,909 in 1900. This increase of more than $7,700,000,000 in manufacturing capital since 1870 is paralleled by the increased application of capital in another direction, —the construction and equipment of railways. The total liabilities of American railways, chiefly upon their capital stock and funded debt, increased from $3,784,543,034 in 1873 to $12,326,491,526 in 1901.¹ The proportional increase called for by the growth of population was only to about $7,000,000,000, leaving a residue of about $5,300,000,000 as the result of the increased producing power of the people of the United States under modern conditions. The two items of manufacturing capital and railway investment thus account for an investment fund of $16,000,000,000, which has been accumulating during the past generation, and these are only illustrations of the great fund of saved capital seeking investment which has been accumulating in recent years in every field of productive industry.

Capital available for investment is subject to the law of supply and demand. In this respect, it does not differ from commodities of a more specific character. Other things being equal, two important elements operate upon the price paid for an investment, — its safety and the net return paid in interest or dividends. A high degree of safety will contribute toward raising the price of an investment, but this rise in price will render it less attractive upon the other side by reducing the return upon it. For the owner of an investment security, and especially for him who has it to sell, a scarcity of safe securities and a rise in their price are acceptable and desirable. For the owner of capital seeking investment, however, an excess of such capital in the market and a high price for securities are an injury, because they reduce the earning power of his capital, in whatever particular securities he may invest it. To meet his needs, new demands for capital must be found from time to time, equal to the amount of capital created.

To find such openings for investment is the business of the financier and promoter. He found them early in the nineteenth century without difficulty, because new demands for capital were springing up faster than they could be met. When society is in a stationary state, — that is, when there are no important new inventions or changes in social conditions, — saved capital accumulates faster than opportunities for secure and profitable investments present themselves. The tendency of such a condition is to correct itself by creating new wants, and hence invoking a demand for the capital to provide the mechanism to supply them; but this tendency has not prevented on several occasions the serious congestion of savings beyond effective demand and a consequent fall in the rate of interest.

In modern times, even more than in those more remote, there has been a frequent tendency to the accumulation of saved capital temporarily beyond the legitimate demand for it for the creation of new enterprises. The eminent French economist, Paul Leroy-Beaulieu, in discussing this subject in L’Économiste Français of January 28, 1899, calls attention to the fact that there were interruptions in the downward course of interest when steam came to be generally employed as a motive power between 1850 and 1865, and again after the great destruction of capital in the FrancoPrussian war. But, he declares, “ after each of these interruptions, the rate of interest again tended to decline to a level lower than before; so that, in taking as the point of departure the beginning of the last quarter century, or that of the last half century, or that of the last century, — the year 1874 or the year 1850,— it may be noted that the rate of interest has considerably fallen, not in a straight line, it is true, but in a broken line, and that never in our history was it as low as in 1897.”

One of the best proofs of this superabundance of capital in the market about 1897 was the great number of cases in which governments and stock companies successfully sought to convert old obligations on which they were paying a high rate of interest into new ones paying a low rate of interest. Great Britain refunded her consolidated debt in 1888 at two and three quarters per cent, and in 1897 and 1898 the quotations of these new issues reached 112, and even a maximum of 1131/8. The great Prussian conversion was operated during 1897, and applied to $850,000,000 of consolidated four per cent securities. These four per cents were quoted at 104.5, and the three and a half per cents were quoted at 104.2 in October, 1896. The three per cent obligations issued in 1890 and then quoted at 86.5 reached par on July 5, 1895, and stood at 99.6 on October 5, 1896. Herr Miquel, the Prussian Minister, in announcing his project, recalled the fact that in 1894 France had converted her four and a half per cents into three and a half per cents; that Sweden, Norway, Luxembourg, Zurich, Saxe-Gotha, Wurtemberg, and Bavaria had converted four per cent into three and a half per cent securities; and that Denmark, Belgium, Holland, Bremen, and Berne had converted three and a half per cents into three per cents, not to speak of the great Russian conversion of five per cents into four per cents.

In the United States, in spite of the fact that a new country usually makes large demands for capital, the supply tended to exceed the legitimate and effective demand down to 1897. The fact that this increase in the supply had greatly reduced its capacity to earn interest is plainly indicated by the facts set forth in the spring of 1903 by Professor Meade :

“ For the last thirty years the investment rate of interest has been steadily sinking. In the early Seventies seven per cent railway bonds were common. In the next decade these were largely replaced by five per cent bonds, and in recent years three and a half per cent bonds have been generally issued by railway companies. At the same time that the interest rate was falling, the price of a $1000 bond increased. In the Seventies railway companies often paid ten per cent for money. At the present time three and a half per cent is the ordinary rate.”

It is clear that this great accumulation of capital would be employed with great difficulty but for the organization of a system of transferring it readily from hand to hand and place to place. If every one who saved was compelled to employ his savings under his own personal care and direction in order to make them fruitful, many difficulties would arise and serious blunders would be made. Large savings would seem in the natural course of events, therefore, to have suggested the organization of means of employing them without imposing the burden upon each individual who had made savings. This has been the case in advanced commercial society, but has not been the case in undeveloped society.

The economic efficiency of Europe and America is due in a large degree to the fact that saved capital does not repose in idle hoards, but is transferred as fast as it is saved into hands which are able to put it to productive use. In all civilized countries the mechanism of credit has now attained a considerable degree of efficiency, but this efficiency varies to a marked extent from country to country.

Among the methods of putting capital into negotiable form these may be enumerated : attracting deposits to banking institutions ; the organization of stock companies for banking and other large enterprises; the organization of railroad companies; the capitalization of industrial enterprises as stock companies ; the diversification of banking methods and of the forms of security investment.

It is not necessary here to dwell upon the expansion of banking in its simpler forms. This has been more obvious to the ordinary observer as a means of accumulating and transferring capital than some of the other features of the modern organization of credit. Next in order to banking deposits as a part of the new mechanism of finance comes the joint stock company. A joint stock company affords the means for dividing the ownership of properties in such a way that, on the one hand, an individual of small means may become part owner in a great enterprise, and, on the other hand, enterprises may be successfully carried out, of a magnitude which could not well be undertaken by a single individual. The creation of share companies divides the risk of an undertaking among many persons, and places the enterprise beyond the accidents of a single human existence by giving it a fictitious body dowered by law with perpetual life. When these properties are listed on the stock exchange they are afforded a general market, in which it is easy to obtain a definite test of their value. A mill or a factory which is in private hands is salable or not according to individual and local circumstances. When not converted into the form of shares, a small property of this character has a market which is narrow and uncertain. The property may pay a fair dividend upon the capital invested or upon the cost of replacement, but unless it happens to attract the attention of a capitalist who is also an expert in the same line of industry, it cannot be sold at the will of the owner. When, however, it is a part of a property which comprises many other mills, and this property is represented by bonds, preferred stock and common stock, distributed among a multitude of owners and listed on the stock exchange, then it is in the power of the individual owner to part with his property at will at the quotations of the market.

One of the natural consequences of the abundance of capital seeking investments is the tendency to produce new forms of securities. The evidence of this is afforded by the great variety of securities which are now at the command of the investor in Great Britain and America. The first form of investment offered in the stock markets was government obligations. These represented capital taken from the community and often applied in a manner which was not economic, for the purposes of war or preparations for war. Then came the primitive form of the stock company, which was simply the issue of shares establishing a common and divisible right in a large property. It has remained for recent years to develop the preferred share, the mortgage bond, income bonds, convertible bonds, debentures, and many other forms of obligation. These various types of securities offer a variety of investment which permits each investor to choose among them according to his individual valuation of the relative advantages of risk with large returns, security with small returns, prompt returns or ultimate profit. The mortgage bond of a first-class railway, varying little under ordinary conditions in its market quotations because it pays a fixed income, is the most secure investment after the government bond, and the most appropriate for the investment of trust funds. The preferred stock of a well-established investment enterprise offers a fixed return with perhaps a higher degree of risk, and is, therefore, likely to pay a larger return in relation to the price than the bond. The convertible bond offers a high degree of security, with the additional allurement of admitting the bondholder to a share in the expanding profits of the preferred shareholder when the price of stock rises above the price of the bonds.

Every form of investment which proves more attractive to a certain class of investors than previous forms adds to the means for drawing capital out of hoards and private hands and putting it at the command of the community. If bonds and ordinary shares prove unattractive to a certain type of investor, then the market where only those forms of investment are available does not afford the highest facilities for drawing hoarded capital from idleness into utilities. This was the case until recently in France, where the issue of preferred shares was not permitted by law, but only common shares and bonds. The device so frequent in the organization of American industrial corporations, by which the assured earning power is capitalized as preferred stock and the contingent profits of bankers and promoters are converted into common stock, to be sold for what it will bring or laid away until it earns dividends, was not available for the French financier. Hence the inducement was lacking to unify and strengthen French industry by consolidating old companies and putting the best equipment and most far-sighted management at the command of new companies.

The countries of Europe, especially those of the Continent, have much to learn from America in diversifying the forms of investment so as to put saved capital to its most productive use; but America has also something to learn from Europe. We have done much more than France and Germany to draw the small capitals of the masses into our commercial banks ; but they have developed forms of investment which we have not tried, or which we have not managed with prudence.

A striking instance of the diversification of banking methods which has thus far failed to obtain a firm footing in America is the mortgage loan bank. The purpose of such an institution is to give to the ownership of real estate something of the transferability and divisibility of other property. This is accomplished by converting the aggregate of many small mortgages upon real estate into negotiable bonds. In Europe great banks of this character exist in France, Germany, Austria-Hungary, Spain, and several other countries, and recently the system has been extended to Egypt. By the sale of a block of debenture bonds, secured by mortgages upon the land upon which loans have been made, the investor has a security which is negotiable at any time on the market, instead of dealing with a single mortgage which he might find difficulty in selling, in case of need, for what he paid for it. There is no doubt of the perfect practicability and safety of the system, when loans are made to only a legitimate percentage of the ascertained value of the property and other proper precautions are taken. The Crédit Foncier of France, which is engaged in such business, has mortgage bonds out to the amount of about $350,000,000. In Germany thirty-three such banks have similar obligations to the amount of more than $1,500,000,000, scattered in every part of the empire ; while the Land Mortgage Bank of Austria-Hungary has debentures of nearly $40,000,000, and the Mortgage Bank of Spain has similar obligations of $17,000,000. These institutions practically bring into the security market a large part of the land values of Europe. A mortgage bank of this sort is able to increase its loans to the limit of the debentures which it can sell, and every few months witnesses an offer of a block of such securities, which are eagerly subscribed for by those seeking a safe and steady investment.

The genius of American financiers and promoters has blazed out investment paths of its own. The path followed during the last few years has been the conversion into large corporations of industrial enterprises. The Wall Street Journal recently estimated the new securities thrown upon the market as a result of this process at nine billions of dollars, and declared : —

“ The next stage was the sale of these securities to people who had up to that time neither been owners of plants and manufacturers, nor investors, but who, tempted by the novel opportunity, invested their money in the new industrial securities. The fact that the United States Steel Corporation now has something like 55,000 stockholders is the best demonstration of this that any one could wish. Consequently, the industrial promotions had the effect of tapping to quite a large extent a fund which had heretofore not been available to the security market, having found investment largely in savings banks, real estate,” etc.

When capital began to accumulate rapidly, therefore, after the recovery from the long prostration of 1893—97, and only a limited outlet was found for it at first in the creation of new manufacturing plants and the extension of railways, the financier turned naturally to the project of organizing manufacturing industries upon the basis of stock companies. Other reasons, like the severity of competition, undoubtedly produced the tendency to consolidate industries by bringing to an end useless duplications of expenditures and getting rid of competition. These causes, however, could not have produced the phenomena of recent years if there had not been a great fund of capital in the money market seeking new investments. There would not have been the capital available in the hands of one manufacturer to buy out another, or in the hands of promoters to buy them both out, which has been found available under the conditions of recent years.

When, however, the earning power of a number of mills or factories could be capitalized into bonds and preferred stock, a supply of securities could be thus created which would meet the demand for new forms of investment arising from among those who were rapidly making money under favorable commercial conditions. In many cases it was found that the owners of the old establishments were willing to retire from business and to accept a fixed income upon their capital. To others the original investment could be reimbursed from the savings of outsiders who became shareholders in the consolidated industries. The transfer of such considerable sums to the owners of the old plants, where they were paid in cash, added to the fund seeking investment, and thereby added to the capacity of the market for absorbing securities.

That this tendency to create securities has been overdone within the past few years is undoubtedly true. The inevitable operation of the law of supply and demand curtailed demand when the supply of capital available for such investments was absorbed. The process of creating new securities proved so profitable — or at least appeared so — that the demand was soon more than satisfied. Hence came the phenomenon of a mass of “ undigested securities ” which could no longer find the ready market of a few years before. The fault has not lain altogether with the character of the securities. The fall in quotations for industrials on the New York stock market is not due altogether to impairment of confidence in the value of such enterprises, but it is the inevitable result of an excessive offer in relation to effective demand. That effective demand depends upon the supply of capital. The evidence of deficiency of capital in Great Britain is afforded by the heaviness of British consols, which carried them down from 112 in 1897 to 94 in 1899, and finally below 88 in 1903. It was not that confidence had been impaired in the willingness and ability of the British government to pay interest in full on these securities as it became due, but the fact that new issues of such obligations increased the supply on the market beyond the demand for a safe security at the higher prices. To a like cause — absorption of the surplus capital in the market — may be attributed the fall in first-class railroad stocks and the hesitation of the market to absorb new stocks and bonds of the most gilt-edged character.

Undoubtedly, also, in the case of industrial securities issued on the American market, the character of those issued has tended in many cases to become worse as the issues have increased. This would not necessarily be the fact in each separate case, but would result from the natural tendency to consolidate industries and issue securities first where there was the best economic justification for it. The first consolidations were the result of the pressure of economic necessity in order to escape forms of competition which had become unprofitable. They promised real economies in management and increased earnings, in order to commend themselves to the promoters and investors who took them up. When consolidation, however, had become simply an imitative mania, and the investor, tempted by the large profits, or apparent large profits, of the first combinations, became eager to buy their securities, it was inevitable that the quality of new enterprises of this character should progressively deteriorate. When the demand for new securities was small, it was necessary that they should be of the highest character to find a market; when the demand became apparently insatiable, it was natural that shrewd and sometimes unscrupulous promoters should set themselves to provide a supply. It might be said in a broad sense that the early consolidations were forced upon promoters and financiers by industrial conditions, — while some of the later ones were the result of the efforts of such promoters to create conditions which would afford them opportunities for “ a rake-off.” In an economic sense, the later process was putting the cart before the horse. When mushroom trust companies were created for the purpose of imitating the large profits of the older and more conservative companies, it was natural that they should greedily swallow any bait which promised large profits, without going behind the prospectus to inquire too closely into the solidity of the new projects, or even into the honesty of those who brought them forward.

But the public is to blame in such cases quite as much as misguided or dishonest promoters. If they pass by conservative companies and safe investments to seize upon glittering offers of speculative stocks by mushroom institutions, who is to stay them or retrieve their errors, so long as those who delude them keep barely within the line of indictable fraud ? It is the same old story which has been told many times in periods of expanding trade. The public fail to discriminate between those securities which are proper for trust investments and those whose low prices are determined by the very fact that they are speculative. Each successive generation in a period of prosperity and ascending prices seems to forget the fundamental rule of finance, — that the return paid upon a security is inversely to its safety. To those financiers who inculcate this rule they turn a deaf ear, and the latter are perforce compelled to drift with the current or see themselves stranded without clients or profits.

Every new form of financial organization has to pass through the test of fire. Experience is required, to develop its elements of strength and weakness. When the principle of the stock company with limited liability was first recognized in modern industry, Adam Smith declared that its use was limited to a few special enterprises like banking, which followed a settled routine. Every one has gotten away from that prejudice, but the ultimate capacity of the joint stock system of organization is still untested. During the past century it has been extended to nearly every form of manufacture and to the complicated problems of transportation by land and sea. It contains, however, other possibilities which have not yet been developed. Among those which have recently been put into practice have been the consolidation of great industries, the leasing of one corporation’s property to another, and the control of operating companies by companies holding their securities. Whether these new forms of joint stock enterprise will be successful must be determined by the same test which has been applied to all other enterprises, — the test of experience.

It is not surprising that the first experiments have afforded results which in some cases are subject to criticism. This was the case with some of the first joint stock companies in their simplest form, and was so conspicuously the case with banking in our earlier history that the innocent use of credit in the form of printed bank-notes has not yet shaken off the prejudice resulting from these experiments. Even the corporate organization of railways, with their issues of bonds and stock to create pathways through the wilderness, resulted in great losses in 1873, and nearly two hundred receiverships as recently as 1893. The London Statist has within a few weeks recalled to British investors that “ in their early days many of the [American] railroads were over-capitalized much as industrial companies now are, but owing to their enormous betterment outlays for many years past, the water in American railway capital has now been in most cases effectively squeezed out, and the properties brought up to their book values.”

But the joint stock principle, the railways and the banks have survived the trials resulting from early errors, and are now admitted by every one to be essential and beneficent parts of our financial machinery. Railway bonds and many railway stocks have reached a solid investment basis, superior to the storms of business disturbance which are sweeping over the newer enterprises. The older and larger banks and trust companies have also avoided the blunders of early days, and have kept their assets in a form in which they could be quickly converted into cash in case of need. The fact that deposits payable on demand should be covered by assets convertible on demand has been well learned by American bankers. Only the amateurs and the incompetents among bankers and trust company managers have forgotten the famous distinction of Mr. Hankey between a mortgage and a bill of exchange. The more conservative of the New York trust companies in particular, making their advances exclusively on the best stock exchange securities, with a margin of twenty per cent between the market value and the amount loaned, have not failed since the first signs of a coming storm to husband their resources, to scan critically even highpriced collateral, and to give the benefit of the doubt always on the side of conservatism.

It remains to apply to the industrial trust and the new forms of financial organization the lessons so well learned in the school of experience in railroading and banking. To obtain a given result by the greatest possible economy of capital and of effort is the secret of success in finance, in industry, and in competition in foreign markets. The Bank of England does the great business of the British banking system with a metallic reserve many times less than that of the New York banks and the Treasury of the United States. In the early days of England’s financial primacy, the reserve proved insufficient, and English finance was all but wrecked. So it may be that our industrial combinations must learn the lesson of larger reserves and sufficient working capital before they are planted on a solid basis; but in the end, even if they cannot realize the ambitious dream of putting an end to perturbations in industry, they are likely to vindicate their claim to increasing the productive efficiency and competitive power of our country.

It may well prove, also, that the principle of the operating company, and the security-holding company, in spite of the fact that they give a minority of strong holders the power to dictate the policy of the corporation under control, may serve the public interest by bringingunity and concentration into management which has been incoherent and incompetent. The system of the securityholding company permits far-sighted men, for instance, who are willing to postpone present dividends to future wealth, to study the needs of a growing community, and to promote its growth by building traction lines in advance of the public demand instead of waiting for such a demand to become imperative. It enables the managers of a great trunk line to put an end to transfers of passengers at state boundaries and local terminals, and to run the palatial trains across the continent upon harmoniously adjusted schedules which, far from being “ in restraint of trade,” have done more to promote it than all the laws for preventing combination or all the suits begun in pursuance thereof. The system of the holding company undoubtedly increases the power of the big financiers, but it enables them in many cases to go forward with far-sighted plans for meeting the certain expansion of local traffic in our imperial city, or of international traffic between the grainfields of Minnesota and the markets of Asia, which would be difficult or impossible under the old system of petty competing organizations governed by the restricted vision of some neighborhood magnate.

The voting trust is another system of organization designed to the same end, — to put properties into the hands of competent and responsible persons, and to remove them from the danger of manipulative control through the stock market. One of the greatest evils of our system of an unfettered stock market is the opportunity which it affords to rich buccaneers to upset values and threaten the tranquil ownership of property. Against this danger the voting trust forms a safeguard. In thus making it easy to locate upon a few heads the responsibility for the conduct of great enterprises, the management of our financial projects follows the tendency toward the fixing of responsibility which has become the model under our best city charters, where the scattered authority of commissions and legislative bodies has been concentrated to a large degree in the hands of a single executive.

The concentration of banking resources and the power which is derived from coöperation among the banks and a few resolute leaders in times of crisis are generally recognized to be one of the most potent factors in our recent industrial progress and our present financial security. If the recent decline in the price of securities had found the market depending upon a large number of banking institutions with small capital, indifferently managed, and divided by petty jealousies, it might have tumbled them over like a row of bricks, and made the declining market of 1903 a repetition of the panic experiences of 1873 and 1893. Combination has vindicated itself the world over in banking ; it remains to be seen whether, after due experimentation, it will not also vindicate itself in railway management and manufacturing.

America has a great destiny to perform in the industrial development of the world. She can perform it only by applying to every part of the machinery of production, transportation, and exchange the principle of the greatest economy of effort to obtain the greatest sum of results. The opportunity for every man to rise by his talents from the lowest to the highest place, the right to reap and hold the rewards of one’s labor without excessive taxation or vexatious visitation, the privilege of transferring property on the stock exchanges without the fetters imposed on such transactions in Europe, and the freedom to extend new methods of economy and combination in trade and finance across the continent, untrammeled by local tariffs and state boundaries, are among the weapons which give our country its great advantages in dealing with older competitors. It is not surprising that, in the strenuous work of forging these weapons to their sharpest temper, mistakes have been made, capital has been lost, the subtile resentment has been aroused of those incompetent to meet the new conditions : but such errors are the almost inevitable incidents of a period of progress. They correct themselves in the furnace of competition better than they are likely to be corrected by paternal legislation, which is usually bungling and often ineffective.

A community which does not within proper limits encourage the enterprise of the promoter puts fetters upon the transfer of its capital to its most efficient uses and upon the development of the highest industrial efficiency. Upon the proper direction of capital rests the industrial development of a nation. Everything which tends to hamper the transfer of capital from an industry which has ceased to be profitable, because perhaps it has been too widely extended, tends to prevent the direction of the capital of the country into the channels where it is most efficient. The work of the promoter in recent years has tended to increase this transferability of capital by providing a method for getting rid of useless plants without direct loss to their owners, and adjusting the productive capacity of an industry to the actual demand for its products. More than this, in the organization of a new enterprise, like the opening of a new mine, the promoter actually adds to the efficient wealth of the community by opening sources of income which were before untouched. As Professor Meade well says in his book on Trust Finance : —

“In the present scheme of production the resources and the money are useless apart. Let them be brought together, and wealth is the result. The unassisted coincidence of investment funds with investment opportunities, however, is fortuitous and uncertain. The investor and the land or patent or mine owner have few things in common. Left to themselves they might never meet. But the promoter brings these antithetical elements together, and in this way is the means of creating a value which did not before exist, and which is none the less a social gain because much of it is absorbed by the promoter and the financier.”

The new methods and the new projects are going through the test of fire to-day, and some of them are being consumed. The tests which weeded out the badly organized and incompetent of the early stock companies, which drove to the wall the “ wildcat ” banks of antebellum days, and which wiped out dividends and stock rights in badly managed railways, are now being applied to the new forms of organization which have been the growth of the past decade. But the stronger and better organized of these new corporations are likely to meet these trials without disaster, or to modify their methods to conform to the teachings of experience, until there remains to the financial world a valuable residuum of new methods for giving flexibility to capital and promoting its transfer promptly and efficiently from the industries where it is not needed to those where it will render its highest service.

Charles A. Conant.