days of moral awakening as to rights and justice in the industrial world is the abandonment of past and present financial and corporate methods based on profits and the substitution of those that show the actual facts in relation to social service. Then, and then only, will profit-sharing, stock-ownership, participation in management, and like economic appeals possess to the workers the attractions inherent in their principles.

The effect of corporation finance in the past, which has involved among other practices the issuance of a tremendous amount of fictitious "investment," has been in the nature of a blanket mortgage exacting an unjust claim on the annual increase in wealth production. This increase should in justice be partly distributed among the people in lower prices and higher wages, but instead is being taken from them by the "legalization" of this fictitious investment. Much of it has been taken in the past through low wages to the worker. Now the European war has released this Titan from his bonds and he has risen to full stature and is today demanding his just share in wealth production. He is very likely not only to maintain but also to advance that claim successfully, which means that the burden of a continuance of past corporation practices will be shifted to the shoulders, or rather to the pocketbook, of the consumer through high prices. The consumer, being unorganized, will at first be unable to resist and will be subjected to a period of high prices until their exactions become so burdensome as to force him, also, into organization for his self-protection. Only when the worker and the consumer are each sufficiently organized, either separately or in combination, to resist the claims of organized capital will society reach that point where justice will be determined as between the "rights" of the capitalist, the worker and the consumer. Thus the organization of the consumer is the next step in the socialization of industrial production. In the meantime there should be brought about in the public interest an agreement as to the financial principles that should form the basis of a present day valuation of virtually all our great industries. This is not the place to discuss this aspect of the problem except to say that these principles must rest upon public confidence by the adoption of just and fair methods for determining this valuation. Above everything else such a valuation must be open and above board with no hidden secrets or concealed claims of value that cannot stand the light of publicity.

The Investor and the Industrial Enterprise

By HON. GEORGE W. NORRIS

Farm Loan Commissioner, Washington, D. C.

THE average manufacturer, like most other business men, needs to use more money than he has. A part of this money he may reasonably expect to borrow from banks, but it is the business of banks to make "loans," as distinguished from "investments." In other words, a bank is supposed to make only such loans as the borrower may reasonably be expected to repay within a few months. A bank's loans are short-time loans. It is expected to keep its assets "liquid." Indeed, the Federal Reserve Banks are prohibited by law from re-discounting paper that is not "self-liquidating"-that is to say, paper that is issued in the course of a commercial transaction, ordinarily representing the price of goods which have been bought with the expectation, and in the probability, that they will be marketed within a few months, and that the proceeds of their sale will enable the maker of the note to pay it. It is not good banking for a bank to loan money to a manufacturer to be invested by him in land, buildings or machinery, because these are not things that he expects to sell, and he will therefore be unable to pay the loan at maturity, unless he can secure the funds out of the profits of his business, or in some other way. The funds cannot be secured from the sale of the articles which he bought out of the money secured by the loan. The money which goes into land, buildings or machinery, is capital permanently invested in the business, and if the manufacturer has to borrow this money, he should borrow it from an investor.

Investments in industrial enterprises have long been a wellestablished form of investment in several European countries, but in this country they are of comparatively recent development. The first investments made to any extent in corporate securities in this country were in turnpikes and canals. Subsequently, there came very large investments in railroads, and then in street railways, telegraph and telephone companies, gas companies, and electric light and power enterprises. Practically all of these

investments had the attraction for the investor of being something more than a mere industrial enterprise. They included a franchise and it was recognized that with the growth of population this franchise was likely to become increasingly valuable, so that even if mismanagement temporarily made the enterprise unprofitable, it was probable that other interests would take it up because of the possibilities of profit inherent in the franchise. Investments in purely industrial enterprises that had no franchise feature connected with them were first made on a large scale in connection with the consolidation of various enterprises in the same line of business. The so-called "Sugar Trust," to which the American Sugar Company succeeded, was one of the first of these consolidations. Subsequently, similar consolidations were made in many other industries. The promoters dwelt upon the advantages of consolidation; the ability to purchase raw materials in large quantities at low prices; the elimination of the less profitable plants and the reduction of overhead expenses by the concentration of manufacturing in the most economical plants; the ability to control prices; and the economy in distribution. In some cases, these expectations were realized. In the majority of cases, they were not. In all of them, very large amounts of securities were issued, which were listed on the stock exchanges, and the investors had the pleasure and excitement of anticipating large profits by the sale of their securities at higher prices, without waiting for the slower returns of dividends.

The single industrial establishment which has no franchise and whose securities are not issued in sufficient volume to justify their being listed on a stock exchange, does not have the attraction for either the real investor or the speculative investor that was possessed by either of the above classes. It is a business enterprise pure and simple. The investor in its securities cannot anticipate a ready market for them, nor can he hope to get his money back unless the enterprise is established on sound lines, is properly managed, and pays satisfactory dividends. In some cases, the place of a franchise is taken by a patent or trademark or copyright. Where there is no one of these things and the proposition is simply to manufacture textiles or pig iron or some other standard product, in open competition with every other manufacturer in the same line in the country, the enterprise is probably more

difficult to finance than any other class of enterprise, and the man who is going to run the business and wants to find outside capital, must expect to make attractive terms to the investor. He should be prepared to satisfy the investor that there is a market for the goods which he proposes to manufacture; that his plant is to be located in a suitable place, taking into account both the securing of his raw material and the marketing of his finished product; that he can secure an adequate supply of labor; that living conditions will be such as to enable him to hold this labor; that he can secure power at reasonable cost; and that, as a result of all these conditions, he will be able to conduct his manufacturing operations at a cost at least as low as the average of his competitors. He must also be prepared to satisfy the investor that the total amount of capital at his disposal will be sufficient to cover the cost of building or enlarging his plant, to carry him over the period of difficulties and delays incident to the establishment of a business, and to leave him sufficient working capital to conduct the business thereafter in the volume which is anticipated. If any one of these factors is wanting, he should not expect the coöperation of the investor— indeed, he should not enter upon the enterprise himself. If all these factors are present, there remains for consideration the general scheme of capitalization and the relative proportions in which the operator and the investor should share in the anticipated profits.

Just at this point there lies a rock upon which many enterprises have come to shipwreck. The investor, if not thoroughly experienced, is apt to stipulate for mortgage bonds, generally with a stock bonus added. His idea is that his money should be secured by a lien on the plant; that the interest on his money should be a first charge upon the profits of the business; and that if these profits are sufficient to pay him his interest and leave a large balance, he should share in the distribution of that balance. All this is very natural and very reasonable, but very dangerous. The world today is full of successful enterprises which either trembled in the balance for years, or actually "went bad" and had to be reorganized. Most of our railroads have been reorganized some of them two or three times. The Welsbach mantle was a flat failure when it first came out and for years was supposed to be a total loss, until a supplemental discovery made

it a great commercial success. Most new manufacturing plants have what might be called "children's diseases." The plant cost more than was anticipated, or it took longer to build than was anticipated, or the first machinery that was installed did not work satisfactorily, or it was necessary to install other machinery to dry or shred or grind, or there was delay in getting the product introduced. Even in the case of a staple standard product or a business that has been in successful operation for years, there are almost certain to be periods of depression. This is a great country in which the tide of business rises higher and higher, but it has its periods of ebb. The business which is so capitalized that it can live through a period of depression will, when the period of prosperity comes, reward those who have waited for it, but the business which is handicapped by an annual fixed charge goes to the wall before the "boom" comes, and the unfortunate investors in its securities are wiped out. Therefore, the interests of both operators and investors require that no such burden be placed upon the business, or that the burden be made so light that it can be carried in even the worst of times. This means that the investor should be given preferred stock, upon which dividends may be passed if there are no profits, rather than bonds which call for interest in any event and for foreclosure if there are no profits to meet the interest.

The next thing to be borne in mind is that there should be some flexibility about the financial plan. It is bad practice, for example, to make an issue of $100,000 preferred stock, with a provision that no bonds or additional preferred stock can be issued without the consent of all or a large majority of the holders of the original preferred stock. This puts it within the power of a small minority, or even of a single stockholder, to prevent the corporation from securing additional capital that may be needed for the development or even for the preservation of the business. If $100,000 is sufficient for the original investment, the authorized issue of preferred stock should be made at least $200,000-preferably $500,000—with provisions that the additional stock is only to be issued by a majority vote and for actual value. This takes care of future growth. Many public utility companies in this country have actually been wrecked by their success. The communities in which they operated grew and it became necessary to extend