interval while awaiting payment, it all comes to much the same thing in the end-working capital is largely borrowed from the commercial banks.

The corporation chart does indicate, however, that a portion of the working capital is usually derived from the sale of securities. Indeed, if a business is to have a good credit standing with its bank, it must, in fact, provide a considerable part of its working capital by stock subscriptions.

Fourth, one might conclude from the corporation diagram that savings banks are associated only with the problem of raising fixed capital. As a matter of fact, many savings-bank loans are also made for working capital purposes (see chap. xvii).

Fifth, the position of the trust company in the financial structure of society is not adequately revealed. As the chart stands, the trust company is related only to the raising of fixed capital and is placed in a parallel position with savings banks and insurance companies. In fact, as we shall later see (chap. xviii below), the trust company performs so wide a variety of unctions that it is impossible in the present diagram to indicate its relationship to the entire financial structure. The commercial banking department of the trust company would go with the commercial banks, the bond department with the bond houses, the savings department with the savings banks, the insurance department with the insurance companies. But, in addition, the trust company performs a great variety of services for the holders of corporate securities in connection with the safekeeping of valuables, the holding of mortgages in trust, the transfer of ownership of stocks and bonds, the financial reorganization of companies, etc.

Finally, the diagrams tend to give a false impression of specialization by financial institutions. The truth is that more and more there is being conducted under one roof and by a single administrative organization a great variety of financial activities. Just as the trust company has many departments, the commercial bank nowadays usually has associated with it savings and bond departments, and, in the last two or three years, trust departments as well. The designations given on

the diagram must, therefore, be considered as representing types of financial functions rather than (in every case) distinct and specialized financial institutions.1

The remaining chapters of the volume will be devoted to a discussion of the services and functions that are performed by the numerous parts of this financial organization, the problems of regulation that have arisen in connection with the various types of financial institutions, and the interrelations of this intricate financial mechanism with the larger economic organization of which it forms so important a part.

See chap. xxix.

CHAPTER XI

THE CORPORATION AS A DEVICE FOR

RAISING CAPITAL

At the head of the diagram showing the financial institutions and agencies that function in the raising of capital in the modern industrial world (p. 136) is placed the corporation, the dominant type of business organization at the present time. In discussions of the corporation as a form of organization for the conduct of business, its advantages over the partnership have usually been listed as follows: (1) greater ease of raising capital; (2) perpetual (or, at least, definite) existence; (3) centralization of managerial responsibility and power. It is the purpose of the present chapter to outline the significance of the corporation as a capital-raising institution-to account for its origin and development in terms of capital requirements.

It is not too much to say that the outstanding advantage of the corporation over the partnership is its greater effectiveness in assembling the capital required for large-scale enterprise. Partnerships may be-and some have been given a perpetual life. Partnerships may delegate the management to a single individual or group of individuals and hold them responsible for results, quite after the fashion of the corporate organization. Indeed, some modern partnerships are thus organized; while the "silent partner" is, of course, a common phenomenon. But without shares of stock and bonds and without the principle of limited liability the partnership could not possibly effect the accumulation of the large quantities of capital required by the great majority of modern businesses. Some modern partnership associations, it is true, have the equivalent of shares and some have been organized with a limited liability; but these features constitute the very essence of the corporate form of organization. To the extent that they have now been

taken over by partnerships the latter may be said to have been "corporationized."

I. ADVANTAGES OF THE CORPORATION IN

RAISING CAPITAL

The corporation is for several reasons an effective agency for the raising of capital. In the first place, the division of the capital into small units in the form of shares of stock or bonds makes it possible to attract funds from people of very moderate means. To this end the par value of bonds and of shares of stock is made small, often very small in the case of shares. While the standard unit is $100, many companies are organized that sell shares at $10, $5, $1, and even at 5 cents each. Investments are thus brought within the reach of every class.

Second, the division of the shares and bonds of corporations into small denominations also makes it possible for individuals to diversify their investments and thus reduce the risks of loss to a minimum. Even so small a fund as $10,000 may be invested in a hundred or more different companies. It is of note that "baby bonds," of $100 denominations, and with instalment-payment provisions, have become increasingly popular in recent years.

Third, the division of corporate securities into bonds and shares serves to attract the investments of people of different temperaments and of different economic position. Bonds, constituting a first claim upon earnings, make their appeal to those who are by temperament conservative, or whose economic position is such as to make safety of investment the prime requisite. On the other hand, stock offers an opportunity of higher returns and thus appeals to people who are willing to take chances in the hope of large rewards, and to those whose economic position is such that they can afford to assume larger risks.

Similarly, the division of stock into preferred and common shares is calculated to appeal to investors of different degrees of conservatism. The preferred stock, while not so safe as bonds, is still relatively safe in well-established companies,

and it yields a higher return than bonds. Common stock is subject to still greater risks, but affords the possibility of very large returns. Nowadays there is, moreover, a great variety of subclasses of shares, notes, and bonds, all designed to facilitate the raising of funds through varied appeals.'

Fourth, the easy transferability of bonds and shares, made possible by the development of organized stock exchanges, enables an individual to withdraw his investment in a corporation at almost a moment's notice. The significance of this for our present purpose is that the ease with which one may get out of a corporation has an important bearing on his willingness to get in. Under present conditions one is not necessarily committed to a given undertaking once and for all; with readily marketable securities the investor retains almost instantaneous command over capital.

Fifth, the large aggregations of capital made possible by virtue of these various advantages, together with the limitedliability principle discussed below, give to the corporation unusual competitive strength and stability, and this in its turn renders securities the more attractive to the general investing public.

Sixth, the corporation now universally embodies the principle of limited liability, i.e., liability of each shareholder only to the amount (usually) of his individual stock. This is indispensable to the assembling of the vast amounts of capital required by modern business establishments, for it would be utterly impossible to induce an individual to purchase shares of stock in a corporation of large size if his individual liability to creditors was equal to the entire capital. Unlimited liability will be assumed only where the number of owners is few, where they are well known to each other, and where the amounts involved are relatively small.

It should be noted that the principle of limited liability applies only to stock, the bondholders being creditors of the corporation. It is apparent, finally, therefore, that even without the principle of limited liability the corporation would have 1 See pp. 155-56.