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 THE CAPITALIZATION OF GOODWILL 
 
 BY 
 
 KEMPER SIMPSON 
 
 Ji 
 
 A DISSERTATION 
 
 Submitted to the Board ot University Studies of The Johns 
 
 Hopkins University in confcrmity with the Requirements 
 
 for the degree of Doctor of Philosophy 
 
 1917 
 
 
 BALTIMORii 
 1921 
 
 1' Ij 
 
 I Ulb. 
 
EXCHANGE 
 
Digitized by the Internet Archive 
 
 in 2007 with funding from 
 
 Microsoft Corporation 
 
 http://www.archive.org/details/capitalizationofOOsimprich 
 
THE CAPITALIZATION OF GOODWILL 
 
THE CAPITALIZATION OF GOODWILL 
 
 BY 
 
 KEMPER SIMPSON 
 
 A DISSERTATION 
 
 Submitted to the Board of University Studies of The Johns 
 
 Hopkins University in conformity with the Requirements 
 
 for the degree of Doctor of Philosophy 
 
 1917 
 
 Baltimore 
 1921 
 

 Copyright 1921 
 THE JOHNS HOPKINS PRESS 
 
 PRESS OF 
 
 THE NEW ERA FRINTINQ COMPANY 
 
 LANCASTER, PA. 
 
1/ 
 
 i 
 
 CONTENTS 
 
 Page 
 
 Preface vii 
 
 Chapter I. Introduction 9 
 
 Chapter II. The Development of a New Type of 
 
 Stock Flotation 15 
 
 Chapter III. The Motives of the Owners and the 
 
 Bankers 23 
 
 Chapter IV. The Method of Flotation 33 
 
 Chapter V. The Principles of Capitalization .... 37 
 Chapter VI. The Seven Per Cent Preferred Stocks 
 
 and Their Provisions 53 
 
 Chapter VII. The Success of the New Industrial 
 
 Corporations 68 
 
 Chapter VIII. A Social Estimate of the New Indus- 
 trial Corporations 78 
 
 Appendices 83 
 
 4 
 
 ^•^^003 
 
PREFACE 
 
 This monograph had its origin in an investigation carried 
 on by the author while a member of the economic seminary 
 of the Johns Hopkins University. The actual material 
 was obtained for the most part from bankers actively 
 engaged in the flotations described. Mr. Henry Goldman 
 of Goldman, Sachs & Co., New York, and Mr. Abel Rosen- 
 burg of Frank, Rosenburg & Co., Baltimore, aided the 
 author in obtaining material and information. Acknowl- 
 edgement is made to Merrill, Lynch & Co., to Ladenburg, 
 Thalmann & Co. of New York, and to Stein Bros, of 
 Baltimore. Finally, the author wishes to express his appre- 
 ciation of the helpful criticism received from Professor J. H. 
 Hollander, Professor G. E. Barnett, and from the other 
 members of the economic seminary in the Johns Hopkins 
 University. Some of the data in the first two chapters was 
 presented in entirely different form in articles in "The 
 Annalist." 
 
 K. S. 
 
 vu 
 
THE CAPITALIZATION OF GOODWILL 
 
 CHAPTER I 
 
 Introduction 
 
 In the United States during the last decade there came 
 into prominence a type of industrial corporation, the study 
 of which constitutes an important part of the field of cor- 
 poration finance and takes on perhaps even a larger signifi- 
 cance from its economic implications. The emergence of 
 a new type of corporation was the accompaniment and the 
 result of a new and changed economic condition. A glance 
 at the quotations of any of the stock exchanges of today will 
 disclose a considerable number of proper names in the titles 
 of the corporations represented. Sears Roebuck, Stude- 
 baker, Julius Kayser, Willys-Overland, and F. W. Wool- 
 worth appear along with the United States Steel Corpora- 
 tion, the United States Rubber Co., and the International 
 Harvester Co. The appearance of these proper names on 
 the stock exchange has an interesting economic significance. 
 These companies had been for the most part originally 
 private businesses begun in a small way by the men whose 
 names they bore. As these businesses grew, most of them 
 were incorporated in order to obtain the legal advantages 
 of the corporation and to escape the inconveniences of the 
 partnership and of the private business. These incorpora- 
 tions, however, ordinarily brought about no change in the 
 methods of financing employed. Later, as these businesses 
 expanded they found difficulty in financing themselves in 
 the usual way through the commercial banks, or their 
 owners desired to withdraw their capital investments. 
 They were then reincorporated in order to issue seven per 
 cent stock to be sold on the stock exchange. 
 
 9 
 
10 THE CAPITALIZATION OF GOODWILL 
 
 The rise of this new class of industrials is associated with 
 the increasing size of the industrial business unit, and with 
 the extension of the once limited field of incorporation and 
 of corporation finance. It is doubtful, however, whether 
 these businesses would have assumed the form they did, 
 and whether such reincorporations would have spread in 
 the way they did, had it not been for the investment 
 bankers. The other fields — railroads, public utilities, and 
 industrial combinations — had been so thoroughly exploited 
 that this new type of flotation was eagerly sought. The 
 more important events in corporation finance since 1890 
 ay be enumerated as follows : the spread of combination 
 between 1886 and 1890; the enactment of the Sherman 
 Anti-Trust law of 1890; the ineffectiveness of this statute 
 
 / for twenty years after its passage; the failures and re- 
 
 / organizations of the great "trusts" from 1900 to 1905; 
 
 I the panic of 1907, followed by reaction and than by the 
 prosperity of the years from 1910 on; the anti-trust activi- 
 ties which started in the Northern Securities Case and which 
 culminated in the Standard Oil and Tobacco decisions of 
 1911; and the rise of the new flotations here considered 
 in 1911 and 1912. For a number of reasons, the last of 
 these events is logically connected with the preceding events. 
 
 ^^,.-^' There was more than one motive which influenced the 
 owners to reincorporate their businesses for purposes of 
 flotations. The economic background and the part which 
 the bankers played — as well as the motives of the owners — 
 are considerations of importance and will be discussed in 
 detail in this study. From one point of view, these busi- 
 nesses were reincorporated merely in order to sell preferred 
 stock. Incorporations of this kind were not brought about 
 by the desire for combination, nor were the purely legal 
 advantages responsible. Most of them were purely financial 
 expedients, and as such were somewhat different from the 
 corporations that had existed before. 
 
 These industrial co^rporations constituted a definite class 
 of corporations, not merely because they came at the same 
 time, because they were the results of the same motives, 
 
INTRODUCTION II 
 
 and because they had the same purposes, but because of 
 their great similarity in form and in construction. The 
 actual mechanism of the flotation was so simple and so 
 much the same in most instances that it can be explained 
 here in a few words. Whether the banker approached the 
 successful business man or whether the owner sought out 
 the banker, the process was practically the same. The 
 owner sold his business to a newly created corporation, 
 which paid him an issue of seven per cent preferred stock 
 and an issue of common stock. The preferred stock was 
 supposed to bear some definite relation to the tangible 
 assets, and was usually covered by them. Behind the 
 common stock something, known variously as "goodwill" 
 or earning power, was supposed to stand; as a matter of 
 fact, the common stock was justified solely by the knowledge 
 that the business earned or was hoping to earn more than 
 enough to pay the preferred dividends. Sometimes second 
 preferred stock was issued, and sometimes bonds; but this 
 was not typical and was the result of unusual circumstances. 
 The preferred stock was sold in the market and the pro- 
 ceeds were used in the different ways already described. 
 The owner held the greater part of the common stock and 
 with it the control of the business. The banker, who was 
 usually paid for his work by a common stock bonus, would 
 sometimes market his block of common, thereby "creating 
 an appetite for that particular kind of stock so that if in 
 the future the owner wanted to dispose of a part of his 
 holdings there would be a ready market for it." Of course, 
 there were many exceptions to the rule, but on the whole 
 the essential features of these industrials were the same. 
 An issue of seven per cent preferred stock, marketed through 
 one of a few well known investment bankers, an issue of 
 common stock held, at least for a short time, by the 
 men who were responsible fo^ the success of the business, 
 and an almost stereotyped method of capitalization wete 
 the criteria of the class. 
 
 One of the most distinctive features of these corporations 
 was the kind of preferred stock which they created. There 
 
12 THE CAPITALIZATION OF GOODWILL 
 
 had been preferred stocks before, and there had been 
 preferred stocks guaranteeing from four per cent to as high 
 as ten per cent, but there had never been a class of cumula- 
 tive preferred stocks to which there had been appended 
 such a series of carefully worked out provisions of a marked 
 similarity. A seven per cent industrial preferred stock 
 came to mean something almost as definite as a United 
 States government bond. Industrial corporations, very 
 similar in structure to these, existed before the issues of 
 Sears Roebuck and the United Cigar Manufacturers were 
 floated in 1906. But, as a class, these industrials have 
 existed only for a little more than a decade ; and they have 
 been a factor of importance for only about half of that time. 
 
 Naturally, the short time these companies have been in 
 existence makes it difficult to form any satisfactory judg- 
 ment of their success. Furthermore, the number of com- 
 panies which conform strictly to the type is not nearly so 
 large as it promises to become. Many companies, which 
 were exactly like the typical examples already described, 
 did not market their preferred or common stock on the 
 public exchanges. Many companies, which might have 
 been listed on the smaller exchanges and eventually on the 
 New York Stock Exchange, sold their stock privately. 
 These companies were, for the most part, smaller; but 
 this was not always true. 
 
 From the theoretical economist's point of yiew these 
 incorporations have an especial interest since they represent 
 a definite division between the functions of the entre- 
 preneur and of the capitalist. In the typical capitalization 
 of this class, the preferred stock holder is the capitalist 
 and is paid interest. The high rate is probably explained 
 by the risk involved; when the risk is not great, he pays 
 more than par for the stock. He assumes the capitalist's 
 function which the original owner in some cases entirely 
 surrenders. (The accountant's misconception when he 
 treats preferred dividends different from bond interest is 
 apparent) . As long as the original owners hold the common 
 stock, they perform a purely entrepreneurial function. In 
 
INTRODUCTION 1 3 
 
 some cases it was definitely provided at the time of incor- 
 poration that the original owners, who had been responsible 
 for the success of the business, must retain their common 
 stock holdings for a certain period. 
 
 The subsequent sale of the common stock by the original 
 owners represents one of the most important problems of 
 these flotations. So long as the common stocks are closely 
 held by the original owners, it makes no difference into 
 how many shares they are divided. But the sale ot the 
 common stock in the market represents the social capitaliza- 
 tion of a large amount of industrial goodwill. The sale 
 of a part of the common stock, however, does not mean the 
 surrender of the entrepreneur's function, because the entre- 
 preneur's function implies control. Common stock is en- 
 titled to vote, but a small holding of common stock does 
 not represent very much of the entrepreneur's function. 
 The sale of a small block of industrial common stock is not 
 very different from the sale of preferred stock. Common 
 stocks so sold might be thought of as second preferred 
 stocks, except, of course, that they have no preference 
 as to income and assets. Inasmuch as the risk inherent in 
 these common stocks is usually considerable, they ordinarily 
 sell at low prices. The purchaser of common stock who 
 buys for investment, and not for the purpose of exerting 
 control or direction, has little of the entrepreneurial 
 function. 
 
 The sale of these industrial common stocks, then, is the 
 sale and capitalization of goodwill. Of course, a part of the 
 preferred issue may have no actual investment behind it, 
 but this is unusual. The sale of the preferred stock could 
 be justified as the sale of the original investment, but the 
 sale of the common stock is more difficult to justify. The 
 entrepreneur's share is thereby transferred into a capitalist's 
 share. The consequent claim upon the invested capital of 
 society in many cases cannot be justified. These flotations 
 have often made possible a gross over-capitalization of 
 industrial goodwill. 
 
 When the entire common stock is sold by the original- 
 
14 THE CAPITALIZATION OF GOODWILL 
 
 owners, the possibility presents itself that the investor in 
 preferred or common stock has purchased a security less 
 safe than he was led to believe. For this reason, prudent 
 investment bankers usually insist that the men who have 
 been responsible for the success of a business must not 
 dispose of their common stock holdings, and must take the 
 same interest in the companies as they did before their 
 investment was withdrawn. As investments, the first 
 preferred stocks have proved their value. The same, how- 
 ever, cannot be said for the majority of the common stocks. 
 
CHAPTER II 
 [E Development of a New Type of Stock Flotation 
 
 The reasons why men have preferred the corporate form 
 of business organization to the partnership have been much 
 the same throughout the history of industrial corpora- 
 tions. First, there was the perpetual succession made 
 possible by legal authority and the dignity lent by govern- 
 mental concession. Second, the corporation was the usual 
 form employed by men who desired to obtain the control 
 or the monopoly in a certain trade or in a particular 
 industry. Third, the corporation is superior to the partner- 
 ship as a method of financing a venture which requires a 
 considerable amount of capital. In the different epochs in 
 the history of corporation finance, however, these different 
 motives have not always had the same importance. 
 
 The earliest corporations in England were the result of 
 certain institutions and ideas which were vital in the 
 economic organization of the Middle Ages. The corporate 
 idea was developed in the mediaeval guilds, where "the 
 conception of perpetual succession was implicit."^ The 
 internal government of the guilds and their jurisdiction in 
 economic affairs are important in understanding the rise 
 of the regulated companies, which were practically guilds 
 of merchants engaged in foreign trade. Just as in the case 
 of the merchant guilds, these early companies had a more 
 or less exclusive control of the trade in which they were 
 interested. It was with the joint-stock companies that 
 corporation finance emerged. These companies, which 
 carried on foreign trade and later manufacturing, undertook 
 ventures which individuals could not have financed. Shares 
 were thus created; and those who financed the ventures, 
 the shareholders, were capitalists as well as entrepreneurs. 
 
 ^ W. R. Scott, Joint-Stock Companies to 1720, vol. i, chap. i. 
 
 15 
 
l6 THE CAPITALIZATION OF GOODWILL 
 
 The dignity adhering to the corporation, which was evinced 
 by the common seal and the crests of the eariiest companies, 
 was a feature which it is hard to overestimate. As a matter 
 of fact, not all of the joint-stock companies had control 
 of the trade in which they were engaged; and, later, 
 monopoly became unusual. Furthermore, corporation fi- 
 nance as it is understood today was not possible until the 
 limited liability provision was developed in the middle of 
 the seventeenth century. 
 
 The use of the corporate form of organization to control 
 trade or industry was exemplified at a much later epoch in 
 the history of industrial corporations. This use of the 
 corporate form was popularly known as the "trust move- 
 ment," and played one of the most important r61es in the 
 economic history of the United States. In England, in the 
 early years of the eighteenth century, the United East 
 India Company was formed as a consolidation of seven 
 diff"erent organizations. ^ But the so-called trust movement 
 in England came at about the same time as in the United 
 States, and that was not until after the Civil War. Simeon 
 Baldwin's list of private incorporations in the United States 
 before 1800 records but 225, of which only 12 were devoted 
 to manufacturing. Between 1800 and the Civil War the 
 expansion in our industry necessitated a more extensive 
 use of the corporate form in industry, but it was not until 
 about i860 that the industrial combination and trust move- 
 ment became a feature in our national Hfe.^ Starting with 
 the pools in the cordage industry in i860, combination 
 spread over all industry. The formation of an employers' 
 association, or even a chance social gathering of men, in- 
 fluential in a particular industry, led not infrequently to 
 agreements and common rules. A loose combination of 
 some kind was inevitably the next step. Only a short time 
 elapsed before the advantages of the corporate methods of 
 financing in the formation of such combinations were recog- 
 nized and made use of wherever possible. 
 
 2 Ibid., vol. i, chap. xix. 
 
 ' W. H. S. Stevens, Industrial Combinations and Trusts, The Mac- 
 millan Company, 1913, p. i. 
 
DEVELOPMENT OF NEW TYPE OF STOCK FLOTATION 1 7 
 
 In the period from i860 there were two kinds of incorpora- 
 tions which brought together separate properties: there 
 were those by which a number of businesses already in 
 operation were combined, ostensibly to obtain the advan- 
 tages of large scale production, but actually, in most cases, 
 to effect a monopoly; and there were those incorporations 
 which were developed by men who saw the possibility of 
 the development of an industry and who bought up the 
 necessary properties from those who had owned them. In 
 the first class, the idea of combination might have occurred 
 to the owner of one of the combined businesses; nor is it 
 necessary to think of an outside promoter as a factor in the 
 combination. But in the second class, the outside promoter 
 was usual. That one of these methods was as common as 
 the other suggests the reason why the inside promoter and 
 the outside promoter came to be thought of as equally 
 probable contingencies. This fact is important in under- 
 standing the class of promotions which constitute the sub- 
 ject of this study. 
 
 It appears that it was as far back as 1865 that the com- 
 bination in oil was first begun, and though it was begun in 
 a small way, the economic organization in which^it was 
 placed was a rapidly expanding one. The industrial de- 
 pression from 1873 to 1877 niade people consider the evils 
 of economic organization, and the combinations came in 
 for their share of criticism. The Standard Oil Trust was 
 formed in 1882, but this was a mere formality as the trade 
 had already been monopolized long before. Other trusts 
 sprang up, and in 1885 Congress gave up its former attitude 
 of non-interference with private matters and abandoned its 
 laissez-faire policy. After two years of discussion the Inter- 
 state Commerce Act was passed. This was followed in 
 1890 by the Sherman Anti-Trust Law, which has been 
 called the most important statute in our history. The 
 excitement it caused was only equalled by that in the Dred 
 Scott case; however, its effect was far less important than 
 might have been expected. Walker, in his book on the 
 history of the Sherman law, has summarized the results 
 
1 8 THE CAPITALIZATION OF GOODWILL 
 
 attained under this law for each administration.^ The 
 conclusions of his chapters will be presented in order to 
 show the results of the passage of this act. 
 
 The Sherman law was passed in 1890 during Harrison's 
 administration. He was president thirty-two months after 
 it went into effect. Walker states: "It is apparent that 
 the Sherman law was never used to any considerable extent 
 as an instrument for the promotion of justice, or for the 
 prevention of injustice, at any time prior to the end of the 
 administration of President Harrison." In Cleveland's 
 administration, eight of the ten cases under the law were 
 concerned with labor organizations. Walker's analysis of 
 these cases shows that the practical effect of this law in the 
 four years from 1893 to 1897 was insignificant. "The 
 eleven litigations relevant to the Sherman law between 
 private parties which occurred during McKinley's adminis- 
 tration ( 1 897-1 901) included eight cases in which that law 
 was invoked in vain, and two cases in which it was success- 
 fully invoked by the defendants, and only one case in which 
 it was successfully invoked by a plaintiff on a complaint 
 as a means of remedying a wrong which had been inflicted 
 by the defendants in violation of that law." Walker says: 
 "Not even one 'trust' accurately so called was ever prose- 
 cuted prior to the end of McKinley's administration for 
 violation of the Sherman law; and only two such prosecu- 
 tions were begun prior to that time against any holding 
 company, as if they were trusts." 
 
 The financial straits which led up to the panic of 1893 
 and the monetary difficulties thereafter would suggest that 
 this was no period for promotions of any kind. Between 
 1890 and 1893, however, the starch, the leather, and the 
 cordage consolidations were effected. The victory of the 
 gold party in 1896, the trade revival in 1898, and the rail- 
 road and industrial expansion that followed were accom- 
 panied by a considerable number of combinations; yet no 
 interference from the Sherman law was encountered. In 
 the Northern Securities Case (i 902-1 904) there appeared 
 
 * A. H. Walker, History of the Sherman Law of the United States of 
 America, 19 10. 
 
DEVELOPMENT OF NEW TYPE OF STOCK FLOTATION I9 
 
 in the courts for the first time an effective anti-trust feehng. 
 The final culmination of this feeling came about in the 
 Standard Oil and Tobacco decisions of 191 1. Aside from 
 the effect on judicial opinion of the trust abuses, there was 
 growing in the minds of the people a feeling against com- 
 bination engendered by the great number of failures be- 
 tween 1900 and 1907. Two- thirds of the combinations that 
 Dewing describes failed or were reorganized in the first 
 years of the century.^ The Rich Man's Panic and the 
 Armstrong Investigation aroused further the public dis- 
 trust of "big business." The bad effects of the panic of 
 1907 had hardly worn off before the Standard Oil and 
 Tobacco decisions convinced bankers and investors that a 
 combination of competing businesses was, at best, a doubt- 
 ful basis for the issue of securities. 
 
 A new class of industrials invaded the stock market in 
 191 1 and 1 912. These industrials were incoiporated private 
 businesses or reincorporated closed corporations formed 
 for the purpose of issuing stock and selling it in the market. 
 Before this many private businesses and partnerships had 
 been converted into corporations because of the very 
 obvious legal advantages to be gained, but the sale of a 
 business to a corporation in return for an issue of stock 
 to be listed on the exchange was at that time a new thing. 
 Prior to 1900 some well known businesses had been incor- 
 porated and had issued preferred stocks to be sold in a 
 limited area. Some few small private businesses that had 
 been converted into corporations were listed on the ex- 
 changes of the Middle West; between 1900 and 1906 they 
 increased considerably. Among these a few small issues of 
 department stores are noteworthy. 
 
 In 1906 Mr. Henry Goldman, of Goldman, Sachs and Co., 
 brought out the United Cigar Manufacturers and Sears 
 Roebuck. Before the panic of 1907, this banker had ap- 
 praised the value of a great private business as the basis of 
 a flotation, and the New York Stock Exchange became 
 
 ^ Arthur Stone Dewing, Corporate Promotions and Reorganizations, 
 Harvard University Press, 1914. 
 
20 THE CAPITALIZATION OF GOODWILL 
 
 acquainted with a new kind of industrial corporation. For 
 a few years after the panic any activity of this kind would 
 have been impossible, but with the coming of better times 
 in 1 910 a few promotions appeared, the most notable of 
 which were the work of Mr. Henry Goldman. It was in 
 
 1911 and 1912 that industrials of this type first became 
 prominent. They may be considered as constituting a 
 distinct class of corporations, and as representing a new 
 epoch in corporate development. Some of the same motives 
 which actuated the earliest incorporations are present, but 
 in different degrees. As the historical study shows, these 
 flotations were in a large degree the result of the reaction 
 against combinations. Naturally, they have not that fea- 
 ture which has been so often associated with the corpora- 
 tion, that is, the control of the trade or the industry. The 
 primary motive of the incorporators of these industrials 
 is the desire to obtain the financial advantages which the 
 corporate form of organization offers. It gofes without 
 saying that often the legal advantages of the corporation 
 have a large appeal for the ordinary business man. Of 
 course he can incorporate and have perpetual succession 
 without selling stock on the exchange, but it is partly the 
 importance and the dignity attaching to a public flotation 
 that influences him. Moreover, the advertising value in 
 being listed on the exchange is considerable. 
 
 The history of the spread of these companies in 191 1 and 
 
 1 91 2 and the subsequent growth of the movement is not 
 Qnly interesting but is also valuable in the solution of one 
 of the most important problems dealt with in the following 
 chapter, — the motives of the incorporators. The particular 
 question on which the history throws light is whether it is 
 the banker or the owner who is to be held responsible for 
 the rise and spread of these industrial corporations. 
 
 In 1912 the B. F. Goodrich Co. was reincorporated with 
 the issue of ninety million dollars of stock.^ Shortly before 
 this, the bankers, Goldman, Sachs and Co., had planned the 
 reincorporation of B. F. Goodrich with about forty-five 
 
 ^ See appendix iii. 
 
DEVELOPMENT OF NEW TYPE OF STOCK FLOTATION 2 1 
 
 million dollars of stock. That the flotation, as finally put 
 out, was twice as large as the one originally proposed is 
 explained by the fact that meanwhile the Diamond Rubber 
 Co. approached the same bankers with a view to incorpora- 
 tion, or rather, reincorporation. These bankers brought the 
 two competitors together and finally combined them in one 
 company. In the interval between the incorporation of 
 the original B. F. Goodrich Co. and its acquisition of the 
 Diamond Rubber Co., the Goodyear Rubber and Tire Co. 
 was reincorporated. The Goodyear flotation and the Fisk 
 flotation, which followed in October of the same year, were 
 the work of William Salomon & Co. From the five million 
 dollars' worth of preferred stock issued by Goodyear, four 
 million dollars were obtained by the business for working 
 capital; from the three million dollars of preferred stock 
 issued by Fisk, two million, four hundred thousand dollars 
 were returned to the business, avowedly for working capital, 
 partly perhaps for the liquidation of indebtedness. 
 
 The spread of flotations in the chains of five and ten cent 
 stores started when in January, 19 12, Goldman, Sachs & Co. 
 brought out the F. W. Woolworth stock. ^ This was the 
 first of the five and ten cent chain flotations; its beginnings 
 have an almost romantic interest. The men who owned 
 the several chains that were combined in this flotation 
 grew up together in the same little town. They had always 
 looked forward to the time when this combination might be 
 effected. When an incorporation was suggested to them 
 they were in a thoroughly receptive mood. There seems 
 to have been no particular need for this kind of financing 
 except as a method of allowing the owners to withdraw their 
 investments of capital. Later in the same year the Kresge 
 flotation occurred. The purpose of this reincorporation 
 was the withdrawal of capital. The sale of preferred was 
 neither for expansion, nor for liquidation. Whether Kresge, 
 emulating Woolworth, sought out the financiers, or whether 
 they went to him is an unessential consideration. It is 
 enough to say, that the movement in this field that was 
 
 ' See appendix iv. 
 
22 THE CAPITALIZATION OF GOODWILL 
 
 started by the bankers resulted in the Woolworth, the 
 Kresge, and, a few years later, the McCrory flotations. 
 
 The incorporation of the private businesses in manu- 
 facturing agricultural implements started in 1911.^ In 
 that year William Salomon & Co. brought out Rumely 
 preferred. The grandson of the original founder had been 
 induced by the bankers to consider the possibility of a 
 flotation. In the next year, 1912, four of the largest 
 businesses of the same kind were incorporated, or rein- 
 corporated, Emerson Brantingham, J. I. Case, the Moline 
 Plow Co., and Deere & Co. In a so-called "Special 
 Memorandum" of Emerson Brantingham the following 
 words occur: "The acquisition by the Emerson Branting- 
 ham Co. of the assets and businesses of these various com- 
 panies is the natural result of the rapid changes which are 
 taking place in agricultural methods and the implement 
 industry." As "working capital" was acquired in prac- 
 tically all of these incorporations, this excerpt from the 
 Emerson Brantingham prospectus is to be regarded as 
 significant. 
 
 The financial depression which accompanied the opening 
 of the European War stopped the spread of these incorpora- 
 tions, but only temporarily. The great era of prosperity 
 which followed, when America came to be the producer for 
 the world, stimulated these promotions in a spectacular 
 manner. Businesses of a kind which had never been 
 thought of as stock market possibilities were made the 
 bases of flotations. The bankers have sought out the 
 great merchants; and the merchants have approached the 
 great bankers. 
 
 8 See appendix i. 
 
CHAPTER III 
 The Motives of the Owners and the Bankers 
 
 It is necessary to consider the promoter of these industrial 
 corporations and his function before the motives which 
 are responsible for the existence of these corporations can 
 be understood. The pure promoter, the outsider who 
 merely proposed the scheme to the owner and who interested 
 the bankers, was usually not a factor in these flotations. 
 The work of bringing together the different units which 
 constituted a combination had furnished a justification 
 for the outside promoter; but when enterprises in which 
 there was nothing to combine were to be incorporated, the 
 most important function of the outsider disappeared, and 
 with it his excuse for existence. Some of his other functions 
 were important, but these, it is easy to see, could be readily 
 assumed by others. Discovering the business organization 
 and obtaining the underwriting syndicate were other neces- 
 sary services which formerly were assumed to be, in most 
 cases, the duties of the pure promoter. The occupation of 
 the promoter was attractive because his remuneration 
 was considerable. It was, therefore, only natural that 
 those who were forced to pay for his services considered 
 the possibility of assuming his functions. The banker 
 coveted a part of these profits. This interest of the banker 
 proved effective in many cases in that he was able to 
 develop that specialized knowledge which many promoters 
 had, but which was beyond the capability of ordinary 
 business men. Finally, the banker had always been such 
 an integral factor in the process, and had so definite a 
 function in his own right, that it was perfectly natural for 
 him to assume the other duties of the promoter. 
 
 Although the pure promoter can be disregarded in a 
 study of these flotations, there still remains the important 
 question as to whether it was the banker or the owner 
 
 23 
 
24 THE CAPITALIZATION OF GOODWILL 
 
 who is to be considered responsible for the actual promotion. 
 There are really two issues involved in this question. 
 First, was it the banker or the owner who took the initiative 
 in the greater number of cases? Second, was the movement 
 as a whole the result of the activities of the great investment 
 bankers or was it brought about by the great merchants? 
 In every promotion the banker must play a very definite 
 r61e; but it seems somewhat unwarranted to call him the 
 promoter, unless it was his initiative that was responsible 
 for the incorporation. It might be established that in the 
 large majority of cases the banker was not promoter in this 
 strict sense, and there would still remain the important 
 question as to whether, in a more general way, bankers 
 have been responsible for the general rise and spread of these 
 promotions during the last ten years. It is impossible to 
 give a dogmatic or unqualified answer to either of these 
 questions. It would seem that the answer to the first 
 question could be determined by actual count, and that the 
 answer to the second would emerge in the history of the 
 movement. If the testimony of the most reliable invest- 
 ment bankers can be accepted, the number of cases in which 
 the bankers sought out the owners has been about equal to 
 those in which the owners sought out the bankers. The 
 second question, although more difficult to answer, admits 
 of a more definitive settlement. It seems reasonably clear 
 from the historical description presented in the foregoing 
 chapter that the rise and spread of these industrials in 
 191 1 and 1912 resulted primarily from the activities of the 
 great investment bankers. 
 
 The view suggested above that bankers sought out large 
 successful businesses as a basis for flotations when their 
 former sources of supply, that is, combinations, were no 
 longer available, however, like most views needs qualifica- 
 tions which will be best set in their proper perspective by 
 some consideration of the other views as to the genesis of 
 these corporations. 
 
 One set of these theories is associated with the motives 
 of the owners. "The owners of successful businesses after 
 
MOTIVES OF OWNERS AND BANKERS 2$ 
 
 reaching a certain age wish to incorporate and they seek 
 the necessary financial agents in order to withdraw their 
 capital and, at the same time, retain the management,'* 
 was a suggestion offered both by a student of corporation 
 finance and by a shrewd investment banker. The student 
 suggested that in a majority of cases the incorporations 
 would be found to have occurred about twenty years 
 after the founding of the businesses. The actual facts 
 show there is no uniformity in the number of years that 
 elapsed before incorporation, and that if there is any 
 number of years more common than others it is some- 
 where around forty. Furthermore, it is clear that 
 there are comparatively few incorporatio^ns for which 
 the withdrawal of capital was the sole motive. Finally, 
 often when the withdrawal of capital was effected, it ap- 
 pears that it was in the nature of an inducement offered 
 by the promoting banker rather than the motive of the 
 owner which made them seek the banker. 
 
 A second theory of this kind emphasizes the fact that 
 in the great number of promotions of 191 1 and 191 2 the 
 acquisition of capital for expansion or for the liquidation 
 of indebtedness was sought. It suggests that the industrial 
 expansion and the difficulty of obtaining capital in those 
 years induces owners of well known businesses to incor- 
 porate. Although this theory does not explain the promo- 
 tions prior to 191 1 and 1912, and although it is known to 
 be insufficient for many of the incorporations of those two 
 years, it undoubtedly has a value which should not be 
 neglected. Many of the companies incorporated in 191 1 
 and 1912 sold their preferred stock issues, or parts of them, 
 to obtain "working capital for expansion." Some of the 
 most prominent issues of those years were of this kind. 
 The Fisk Tire Co., The Brown Shoe Co., the Julius Kayser 
 Co., and the Loose Wiles Biscuit Co., gave this as the 
 principal reason for their issues. One half of the Stude- 
 baker preferred was returned to the business for working 
 capital; Goodyear Rubber Tire Co., and Moline Plow Co. 
 wanted capital both for expansion and for the liquidation 
 of indebtedness. 
 
26 THE CAPITALIZATION OF GOODWILL 
 
 It seems reasonably clear that the bankers first taught 
 the merchants the value of this kind of financing. The 
 spread of incorporation in the industries, described in the 
 foregoing chapter, shows how the merchants profited by 
 the examples of their competitors. The bankers' initiative, 
 displayed in the Goodrich, the Woolworth, and the Rumely 
 flotations, resulted in the spread of flotations in those 
 industries. But this theory of the initiation of these pro- 
 motions does not preclude the possibility that it was 
 usually the owners who were the seekers and the bankers 
 who were sought. Some of the bankers maintain that 
 the flotations which were the result of their initiative have 
 been, generally speaking, the more successful ones. Im- 
 portant as were the bankers in the general movement, the 
 motives of the owners to whom they had to appeal and 
 the motives which led so many owners to take the initiative 
 deserve as much attention and as detailed study as the 
 motives which impelled the bankers. 
 
 One of the reasons why the bankers started these flota- 
 tions has been sufficiently treated; they wanted large, 
 successful, private businesses as bases for flotations at a 
 time when prosperity and expansion encouraged stock 
 market promotions and when combinations were considered 
 unsafe and illegal. The most successful of these bankers 
 had done a mercantile credit business which gave them a 
 knowledge of the conditions in different industries; and 
 it was this knowledge which enabled them to choose the 
 proper businesses when they saw that the market could 
 absorb new securities. There was another, perhaps more 
 definite, consideration which influenced them in the direc- 
 tion of their activities. In this particular kind of flotation 
 a large amount of "watered" common stock was always 
 issued. At the time of the issue this common stock usually 
 had but little value, since the earnings of the businesses 
 were seldom large enough to warrant any dividends on the 
 common stock. The bankers, however, took pa5anent for 
 their services in large common stock bonuses, since they 
 saw that with the growth of the business the common stock 
 would become more and more valuable. 
 
MOTIVES OF OWNERS AND BANKERS 27 
 
 The arguments, which the bankers employed to justify 
 these large common stock bonuses and to convince un- 
 willing owners to part with so large a share of their busi- 
 nesses, were apparently the following. First, said the 
 bankers, we are the promoters and as such deserve a con- 
 siderable remuneration. Second, when our customers buy 
 the securities which we offer, they must have some assurance 
 as to our knowledge and our ability to control or to regulate, 
 in some degree, the conduct of the businesses which we float. 
 When we sell an issue of stock, our reputation is dependent 
 upon the success or failure of the business which underlies 
 that issue. Our only effective method of supervising these 
 businesses is through the voting power which attaches to 
 the common stock. Third, although it is to the interest of 
 everyone concerned (the bankers, the investors, and the 
 owners) that the men who are responsible for the success 
 of a business should retain their common stock as ong as 
 possible (and with it their control and interest), there will 
 come a time when they will have every justification for 
 wishing to dispose of their holdings of common stock in the 
 market; and this legitimate desire can best be fulfilled if 
 the bankers be given a large enough block of common stock 
 so as to sell it or a part of it at the time of the flotation and 
 cultivate the market's taste for that particular kind of 
 stock. These were the arguments which enabled the 
 bankers to obtain the enormous stock bonuses which, it 
 appears, they received. 
 
 The motives which were effective in making the owners 
 desire these flotations and the inducements which the 
 bankers held out to the owners whom they wanted to 
 interest were of many kinds. Although the purely financial 
 advantages offered by these flotations and the possibility 
 of capitalizing their goodwill were the most important con- 
 siderations, there were others which cannot be neglected. 
 Just as the crests, the common seal, and the other dignities 
 which attached to the early corporations made the men of 
 the Middle Ages prefer the corporate form and its perpetual 
 succession to the private business organization, so the fact 
 
28 THE CAPITALIZATION OF GOODWILL 
 
 that a business was listed on the New York Stock Exchange 
 made a large appeal to the ordinary American business man. 
 A private business obtained in this way a considerable 
 advertisement, and was helped materially in the develop- 
 ment of its trade name.^ The fact that F. W. Woolworth 
 was quoted on the New York Exchange may have had some 
 effect on Kresge or McCrory. The success of Studebaker 
 and of Hart, Schaffner and Marx, as stock market ventures, 
 stimulated other promotions in the automobile and cloth- 
 ing industries. The spread of these incorporations in the 
 rubber and agricultural implement industries and in the 
 chains of five and ten cent stores must be explained in part 
 as due to this motive. 
 
 It must be clearly understood that seldom was any 
 one motive entirely responsible for a flotation. Even 
 where there was one motive which was clearly predominant, 
 there were others which were contributory. In the numer- 
 ous cases where the banker's motive was simply the desire 
 for monetary profit — ^where the business floated was not a 
 really sound basis for this kind of promotion — the induce- 
 ment or inducements to incorporation which influenced 
 the owner must not be neglected. 
 
 One of the great advantages which has been associated 
 with the corporation throughout history was not present 
 in these industrials. Many of the earliest corporations 
 were granted an exclusive right to a certain trade. A 
 number of American corporations in an earlier period had 
 obtained what was practically the same result by combina- 
 tion. The industrials included in this study could attempt 
 no control of an industry. The casual observer might 
 point to the fact that many of them were combinations, 
 that is, Woolworth, Kresge, McCrory, Kresge, Jewel Tea, 
 Acme Tea, May Department Stores, etc. These combina- 
 tions, however, were very different from those of the trust 
 movement. The two purposes of combination are the 
 control of an industry (maintained by the stifling of compe- 
 
 1 This advertisement value was recognized by Goodrich, Sears 
 Roebuck, and Underwood Typewriter. 
 
MOTIVES OF OWNERS AND BANKERS 29 
 
 tition) and the advantages of large-scale production (made 
 possible by the law of increasing returns). But the courts 
 forbade restraint of trade; and investors became skeptical 
 as to the advantages of large-scale production after the 
 failures in the first part of the century. The new industrials 
 were combinations of non-competing businesses, and as 
 such did not come into conflict with the Sherman law. 
 The organizations combined were retail and for the most 
 part in different cities. Furthermore, it is obvious that 
 practically none of the advantages of large-scale production 
 were possible in this kind of combination. Indeed, these 
 businesses, which were owned in most cases by the same 
 man or group of men, did not require a flotation or even 
 incorporation in order to be combined ; nor was combination 
 ever a motive which was effective in bringing about the 
 promotion. 
 
 This class of industrials was distinguished from those that 
 went before by the fact that the purely financial advan- 
 tages of flotation influenced the owners of these businesses. 
 There were some industrials which came at the same period, 
 and which had the same form as those in this class; but 
 they were different in that they were not private businesses 
 incorporated or corporations reincorporated. They started 
 out as corporations and with a public issue of stock, which 
 was intended to obtain capital for the initial financing.^ 
 The new industrials were all private businesses incorporated, 
 or closed corporations reincorporated, which issued and 
 sold preferred and common stock in the public market. 
 
 The sale of preferred stock, then, ordinarily had one or 
 more of three purposes: (i) the withdrawal of the owner's 
 capital; (2) the acquisition of working capital for the 
 expansion of the business; (3) the liquidation of the in- 
 debtedness of the business. These were the three motives 
 of the owners, which the remainder of this chapter will 
 treat in some detail. 
 
 The desire to withdraw capital is the motive which 
 some have held to be solely responsible for the rise of these 
 
 * E.g., United Five and Ten Cent Stores; Burt Olney Canning Co. 
 
30 THE CAPITALIZATION OF GOODWILL 
 
 corporations. As was explained before, this view is un- 
 sound; sufficient proof of this contention is found in two 
 facts: (i) this motive was not effective in the earliest 
 flotations; (2) in very few cases was it the sole inducement 
 for the later incorporations. However, in practically every 
 industrial corporation there was some withdrawal of capital, 
 even in cases in which expansion of business or liquidation 
 of indebtedness was the motive which really brought about 
 the flotation. Finally, in all those flotations where the only 
 financial consideration was the withdrawal of capital, it 
 was either the banker's initiative or the psychological effect 
 of other flotations on the minds of the owners that was 
 really effective. Examples of this type were Woolworth, 
 May, Kresge, Goodrich, and Rumely. 
 
 The withdrawal of capital was seldom set forth in the 
 prospectus as one of the reasons for the sale of preferred 
 stock. It may have been assumed that the investor would 
 understand that any capital, which was not intended for 
 expansion or for liquidation of indebtedness, was to be 
 withdrawn. However, it is more likely that this reticence 
 was due to the belief that the ordinary investor would 
 not have approved such a withdrawal. He would have 
 felt that the owner was trying to withdraw his capital, 
 and yet keep control of the business that was being financed 
 by the money of other people. The answers which com- 
 panies like Woolworth, May, and Kresge, could have given 
 might have been convincing; yet the absence of any 
 definite avowal of this purpose in most prospectuses is 
 evidence that it was considered advantageous not to present 
 it. 
 
 The second motive which influenced owners to incor- 
 porate was the desire to obtain working capital for expan- 
 sion. The advantage of borrowing from the public when 
 compared with borrowing from the commercial banks was 
 recognized in many cases as very considerable. The loan 
 could be made for a long period, and the company's credit 
 was thereby increased at the bank. Shortly after Rumely 
 and Goodrich were reincorporated there was a spread of 
 
MOTIVES OF OWNERS AND BANKERS 3I 
 
 flotations in the agricultural implement and the rubber 
 tire industries. This may have been suggested by the 
 example of those first two incorporations; but the fact 
 that the other companies needed capital for expansion in 
 the years 191 1 and 1912 is important.^ Although the 
 general need for expansion in those years was not the sole 
 explanation of the interest of the owners in these flotations, 
 it is reasonably clear that this motive played an important 
 part. 
 
 This motive was the one which the prospectuses were 
 most willing to acknowledge. Expansion or the need for 
 capital, throughout the history of corporation finance, 
 has been considered a justification for a public sale of stock. 
 In England, although an issue of debentuires in the original 
 financing of a company might have been questioned, such 
 an issue was considered quite the proper method of obtain- 
 ing capital for expansion later in the company's history, 
 and preferable to making a call on the original stock holders. 
 Expansion seemed the legitimate criterion of a successful 
 business, and the need for working capital was one which 
 investors were expected to be willing to satisfy. In some 
 of the prospectuses of the new industrials, the alleged 
 "working capital for expansion" was really intended for 
 the liquidation of indebtedness. Naturally, this liquidation 
 of indebtedness increased the credit of the company at the 
 banks, and thus established the possibility of expansion. 
 It is a question, however, whether the investor who believed 
 that his money was to be used for expansion would have 
 been equally satisfied if he had known that it was to be 
 used for the payment of debts. 
 
 The fact that these industrials did increase rapidly in a 
 time of business expansion gives great importance to the 
 second motive. As soon as the country had recovered from 
 the economic prostration attendant upon the panic of 1907, 
 these industrials began to appear. Again when it was 
 realized that the European War would mean great pros- 
 perity for the United States, the market teemed with these 
 
 3 See below, p. 84. 
 
32 THE CAPITALIZATION OF GOODWILL 
 
 industrial issues. Certainly the proceeds of much of the 
 preferred stock that was sold went into expansion, the 
 purchase of new machinery, etc. And it is just as true 
 that much of the money which it was believed would be 
 used for new working capital was employed to pay off 
 debts which were the result of rapid expansion. 
 
 The third motive, the liquidation of indebtedness, is one 
 of peculiar interest. It might seem that the company in 
 issuing preferred stock to pay off existing indebtedness was 
 borrowing from Peter to pay Paul. But, although seven 
 per cent was a high price, the terms were far better for the 
 borrower. There was no need to renew the notes as they 
 fell due; and small investors were easier to manage than the 
 bankers. Furthermore, bankers as stock holders were 
 allies; but bankers as creditors had not always been so 
 friendly. It is easy to see how this motive led to incorpora- 
 tion. When a merchant needed a sum of money for some 
 debt or other, he approached the banker. Goldman, Sachs 
 & Co. had done a credit business of this kind long before the 
 rise of these industrials. The banker discussed with the 
 owner the value of a flotation as a method of obtaining 
 money. This was an important motive in the Sears 
 Roebuck incorporation. In some cases the banker used 
 as one of his arguments, when trying to induce an owner to 
 incorporate, the possibility of converting large outstanding 
 liabilities into a preferred issue. Stern Bros, changed a 
 bond issue into an issue of preferred stock; but it was for 
 reasons of taxation and not for the purpose of improving 
 its credit. However, in the J. I. Case flotation one of the 
 reasons — and perhaps the principal one — for the preferred 
 issue was the cancellation of a large bonded debt. In the 
 Manhattan Shirt Co., the Moline Plow Co., and in Henry 
 Sonneborn Co., this motive was of great importance. 
 
CHAPTER IV 
 The Method of Flotation 
 
 In most studies on corporation finance, much has been 
 made of the technic of the underwriting. The actual 
 mechanism of the new flotations and the modus operandi 
 of the creation and the disposal of the preferred stocks in 
 the new industrials was not particularly complicated and 
 is of interest merely because it shows the way in which the 
 banker-promoter received his remuneration. The sale of 
 the business to a newly created corporation, which has been 
 described elsewhere, was a comparatively simple process. 
 A corporation was formed which bought the old business 
 from its owners, and in return gave them the issues of 
 preferred and common stocks. The former owners were 
 then in entire possession of the preferred and common 
 stocks. So much for those flotations wherein the owners 
 withdrew their capital. In those cases where the sale of 
 preferred stock was partly intended to obtain money for 
 the business, there was another possibility. The corpora- 
 tion might have given the owners the entire issue of 
 common stock, but only a part of the preferred issue. 
 The part which the new company retained could then be 
 used to procure the new capital necessary. In some cases, 
 however, the owners received all the stock; but after they 
 had disposed of it, they returned a part of the proceeds from 
 the sale of this stock to the new company in return for its 
 note. 
 
 It was with the holders of the stock, namely, the former 
 owners of the business, that the banker-promoter dealt. 
 The banker-promoter, alone in most cases, or with one or 
 two associates, bought the entire issue of preferred stock. 
 One of the leading banker-promoters in the field said: 
 *' We bought for our own account and at our own risk from 
 3 33 
 
34 THE CAPITALIZATION OF GOODWILL 
 
 the stock holders of the new company (not from the com- 
 pany) all or a part of the Preferred Stock, with a bonus of 
 Common Stock." So far no underwriting was done, and 
 no syndicate organized. In this respect, the purchase of 
 an issue of seven per cent industrial preferred stock differed 
 from the ordinary procedure in the case of a large bond issue. 
 After the promoter banker had bought the preferred stock 
 issue, he organized what was called a syndicate to effect 
 the actual marketing of the stock. The case that was 
 simplest, though probably somewhat exceptional, was that 
 of Cluett Peabody. The banker-promoter telegraphed to 
 a number of bankers throughout the country — ^who were 
 the usual customers for such preferred stock — the amount 
 of stock which was allotted to them. They were to answer 
 immediately if they accepted his allotment, and to send a 
 check for the amount the same day. Furthermore, they 
 were given a price below which they were not to market 
 the stock. If any one of them had not taken his allotment, 
 he had less chance of being included in the next offering. 
 
 A second method of marketing the stock was the one 
 which was commonly used by the largest and most success- 
 ful promoter-bankers. Such a banker often would merely 
 announce in the market that he had purchased an issue of 
 stock, and customers would be immediately available. 
 These customer-bankers were allowed to subscribe for a 
 definite portion of the issue. In these cases they did not 
 pay for their allotments and carry off their stock. They 
 signed their names as underwriters in a syndicate agreement. 
 Then they returned to their offices and proceeded to sell 
 the stock at a price below which no member of the syndicate 
 could sell. If any banker did not sell his entire allotment, 
 he was nevertheless liable for it at the same price. Thus, 
 his entry into the syndicate agreement amounted to an 
 actual purchase of the stock. In many cases his entry into 
 the syndicate implied immediate remittance to the syndi- 
 cate-manager (that is, the banker-promoter) of the entire 
 amount of his liability. In some cases this payment was 
 deferred; but in no case was his liability different from 
 
METHOD OF FLOTATION 35 
 
 what it would have been if he had made an outright purchase 
 of his allotment. 
 
 A third method of marketing the stock was by letters 
 to bankers throughout the country, who were invited to 
 join the syndicate and participate in the manner described 
 above. There was nothing very complicated about these 
 syndicates. Perhaps the fundamental idea in the syndicate 
 marketing was the collective buying and selling in order to 
 keep a standard price below which no participant could 
 sell. It was a more attractive way of buying from the 
 small banker's point of view, because in many cases he 
 did not have to pay for his entire allotment until after he 
 had sold his stock or at least a part of it. However, his 
 liability was the same as in the case of actual purchase. 
 
 This syndicate marketing is interesting in that it reveals 
 the way in which the banker-promoter and the other bankers 
 received their remuneration. The promoter-banker re- 
 ceived from the owners a bonus of common stock with the 
 purchase of the preferred. When he organized the syndi- 
 cate of which he was usually a member, he sometimes 
 distributed half or more of the bonus he had received 
 among the participants in the syndicate. He did not reveal 
 the price which he had paid the original owners for the 
 preferred stock nor the amount of the common stock 
 bonus, but it was generally understood that the syndicate 
 was to receive the preferred stock at about the same price 
 that he paid for it and that it was to be marketed with but 
 a point or so of profit. In return for marketing the stock, 
 the participants received common stock bonuses; and the 
 banker-promoter or syndicate-manager also received his 
 remuneration from the common stock he withheld from 
 the syndicate. 
 
 The participant in a syndicate sometimes received his 
 remuneration in a different way. He bought preferred stock 
 at 98 which he was told to market at 100, and common 
 stock at 32 which he was told to sell at 40. Assuming that 
 the amounts of preferred and common were equal (a con- 
 venient though improbable assumption), he could calculate 
 
36 THE CAPITALIZATION OF GOODWILL 
 
 a profit of 10 points on the purchase taken as a whole. 
 This remuneration to him seemed no different in kind from 
 the profit he received from buying bonds at 95 and selling 
 them at 100. But, theoretically, there was a difference. 
 The original owners of the preferred stock were supposed 
 to receive almost all the market would give for such stock. 
 What the promoter-bankers received from them and what 
 the syndicate participants were given was a common stock 
 bonus and not a difference in buying and selling price. 
 The actual amount of these bonuses and the remuneration 
 received by the banker-promoters and the customer- 
 bankers is hard to discover. The promoter-bankers told 
 their correspondents very little, and the information on 
 this subjected extended by them was meager. 
 
CHAPTER V 
 The Principles of Capitalization 
 
 The development of industrial corporations which repre- 
 sent the capitalization of goodwill and intangible assets 
 offers some new problems for the accountant and for the 
 economist. It is particularly interesting to the economist 
 to determine in how far bankers and business men take 
 heed of the fundamental laws which govern interest and 
 profit and from which proper principles of capitalization 
 can be deduced. 
 
 The accountant defines capital investment as the fixed 
 assets and current assets, which are needed continuously for 
 the operation of a business. He distinguishes carefully the 
 capital which is invested in a business and which is kept 
 there from the money expended by the business for ma- 
 terials, labor, and other items, which go to make up the 
 costs of production. The distinctions which he makes 
 between the capital account (that is, the investment) and 
 the cost account (that is, the costs of production) are not, 
 however, so clearly definable as he seems to think. The 
 accountant insists that investment represents the amount 
 of money actually invested and not any market or other 
 arbitrary evaluation put on the properties. 
 
 The accountant adds the sum of the expenditures for 
 any period (namely, the cost of the labor, the cost of the 
 materials, and the overhead costs) and subtracts this sum 
 from the value of the sales in order to determine what he 
 calls profit. As no interest on the investment is included 
 in these expenditures, the accountant's profit includes what 
 the economist regularly defines as interest and profit.^ 
 The accountant divides his profit by investment in order 
 to determine the return on the investment for the period. 
 
 ^ No bond interest is included in cost. 
 
 37 
 
38 THE CAPITALIZATION OF GOODWILL 
 
 The logical implications of strict accounting reasoning 
 might seem to result in the principle that the capitalization 
 should be identical with the investment. But if the ac- 
 countant insisted upon a capitalization not in excess of 
 investment his path would not be an easy one. The 
 captains of industry often desire to conceal the actual 
 investment and often feel the necessity of disguising very 
 large returns. Furthermore, in the case of the consolida- 
 tion of two businesses in which the investment might be 
 the same but the earnings different, it would be obviously 
 unfair to expect the stock holders of the two corporations 
 to accept the same amount of capital stock. Either the 
 differential theory of interest or the differential theory of 
 profit might be adduced in extenuation of a capitalization 
 larger than the original investment. The profits earned 
 by the entrepreneur on different pieces of capital goods may 
 be different, even though the capital invested in the capital 
 goods be the same in amount. Whether these differences 
 represent differences in interest or differences in profits is 
 a technical economic problem which has considerable 
 interest.^ 
 
 2 If the preferred stock holders replace the investment of the original 
 owners, the preferred stock dividends may be considered interest. 
 If 7 per cent bonds had been issued instead of preferred stock there 
 would have been little difficulty in determining the economic nature of 
 the return. The high rate of interest, however, seems to suggest the 
 possibility that there is some profit included in this interest, yet, if it 
 be assumed that profit is the entrepreneur's gain and presupposes 
 actual administrative control and that the return for risk is a capitalist's 
 return, the preferred dividend would be considered interest and its 
 size could be explained by the risk involved. The better preferred 
 stocks are marketed in many cases above par, so that the interest paid 
 on investment is not always 7 per cent when the risk is not so great. 
 The earnings on the common stock, then, represent pure profit. This 
 analysis is based on Francis Walker's theory of profit, and practically 
 assumes the inclusion of interest in cost for the determination of pure 
 profit. 
 
 The accountant, who includes neither bond interest, preferred 
 dividends, nor estimated interest on investment in cost, seems to 
 assume the differential theory of capital as the basis of his analysis. 
 Different pieces of capital goods are operated with different degrees of 
 efficiency and bring different returns, — and by returns are meant 
 interest plus profit. 
 
 The distinction between interest and profit has been less carefully 
 defined by economists than its importance merits. If profit or loss 
 in any particular case can be thought of as the difference between cost 
 
PRINCIPLES OF CAPITALIZATION 39 
 
 When the proceeds from the sale of the preferred stock 
 are used to replace the investment of the original owners, 
 the preferred stock theoretically should represent approxi- 
 mately the original investment, and the common stock 
 would then represent the entrepreneur's claim on pure 
 profits. If the entrepreneurs hold all the common stock, 
 it makes no difference into how many shares the common 
 stock is divided. If they sell all or a part of it, the prob- 
 lem is not so simple. Those who buy common stock in the 
 stock market are ordinarily not entrepreneurs; although 
 they have legal title to a part of the capital goods and to 
 the product, they have no administrative control. They 
 invest capital in the business, and receive a less certain 
 return because of the claims of the preferred stock holders. 
 Thus, they perform the capitalist's rather than the entre- 
 preneur's function and receive technically the entrepreneur's 
 return or a part of it. 
 
 From the point of view of the practical business man, 
 the preferred stock represents assets and the common stock 
 
 and selling price, interest must be included in cost. The accountant 
 includes only actual expenditures in cost, and for the entrepreneur who 
 owns his investment, interest is not an actual expenditure. But 
 when the entrepreneur, i.e., the common stock holders, does not own the 
 investment, the 7 per cent dividend payable to the preferred stock- 
 holders, i.e., the capitalists, is clearly an actual expenditure and a cost. 
 Capital goods, the accountant maintains, do not always yield enough 
 to cover the expenditures of the company and its preferred stock 
 dividends: obviously in such cases there are no profits; there may even 
 be losses. Wage earners do not always earn their wages; yet, the 
 accountant includes in cost the actual amounts paid in wages. Wages 
 must be paid or laborers will not work. If wages are larger than the 
 product produced by the laborers, the profits of the entrepreneur are 
 reduced, but the interest on the capital should certainly not be affected. 
 If capital is not well invested in captal goods, the return imputable to 
 such capital goods is less than the amount which must be allowed for 
 the use of capital. The entrepreneur's profit is, then, reduced by that 
 amount. Capital goods do not earn returns, as is popularly main- 
 tained: the entrepreneur with his capital investment, his labor, his 
 land, etc., does the earning. But whether the capital is well invested 
 or poorly invested in capital goods, as capital its return must be con- 
 sidered before profit can be determined. The chief difficulty of the 
 accountant lies in the necessity of estimating the interest on investment 
 to be included in cost. However, when the 7 per cent dividend is 
 actually paid or payable, as in the industrial corporations represented 
 in this study, these dividends should be considered as interest and 
 included in the cost to be deducted from the value of the sales for the 
 determination of profit. 
 
40 THE CAPITALIZATION OF GOODWILL 
 
 is explained in either two ways, by the intangible values or 
 goodwill and by the earning power in excess of the preferred 
 stock requirements. 
 
 It is interesting to consider the opinions of the bankers 
 who have been most active in the flotations of these com- 
 panies. There seems to be general agreement that no 
 matter what the earnings of a business were at the time of 
 incorporation, the preferred stock had to be covered by the 
 tangible assets. And with but one or two exceptions, this 
 seems to have been the case. The most prominent, per- 
 haps, of the banker-promoters asserted that the value of 
 the tangible assets had to be two or three times as great 
 as the issue of preferred. As a matter of fact, in two-thirds 
 of his companies the preferred was just about equal to the 
 tangible assets, and in the other third the margin above 
 this was very slight. Another banker thought that the 
 amount of preferred stock should have been about one half 
 of the tangible assets at the time of incorporation. All of 
 these estimates were too conservative. The preferred stock 
 was in practically every case covered by the tangible 
 assets, but not by such a margin as these men supposed. 
 The question of common stock issues is a more difficult one. 
 If the owners intended to hold the common stock, the 
 arnount of it did not concern them particularly. If the 
 common stock was to be marketed immediately after in- 
 corporation, the owners would in all probability have de- 
 sired as large an issue as possible. Certain bankers esti- 
 mated that the earnings on the common stock after the 
 payment of the preferred dividends were, on the average, 
 five or six per cent. As a matter of fact, the average was 
 considerably higher. The reason for this will be considered 
 later. 
 
 The opinions of the bankers are interesting in that they 
 show that there was no one principle of capitalization which 
 explained both preferred and common stock and that a 
 different theory explained the preferred stock from that 
 which explained the common. The preferred stock was 
 limited by the tangible assets; the common stock had its 
 
PRINCIPLES OF CAPITALIZATION , 4I 
 
 justification in the earning power. True, the preferred 
 dividends had to be covered by the earnings: so seldom, 
 however, did an issue of preferred stock appear, the divi- 
 dends of which were not easily covered by the profits, 
 that the bankers seldom thought of the preferred stock in 
 its relation to the earnings. Sometimes a prospectus would 
 announce the ratio of the earnings to the preferred dividend 
 obligations, but this was clearly not a significant feature 
 and was adduced more in the nature of additional evidence 
 for convincing the investor of the safety of the preferred. 
 An issue of preferred stock was usually thought of as an 
 issue of obligations; important similarities to bonds will 
 be indicated in another place. As much as the bankers 
 say about the intangible values or good will that were 
 behind the common stock, they realized that it wac the 
 earning power that was the real justification. The fact 
 that the corporation earned more or was expected to earn 
 more than enough to pay the dividends on the preferred 
 stock gave value to the common stock. 
 
 Evidently there are two things which are of importance 
 in the capitalization of these industrials: first, the ratio of 
 tangible assets to the preferred stock at the time of in- 
 corporation; second, the earnings on the common stock. 
 
 The amount of preferred stock issued at the time of 
 incorporation is shown in the first column of the table on 
 page 44. In the second column is the ratio of the tangible 
 assets to the preferred stock. By tangible assets are meant 
 capital stock and surplus with goodwill deducted, as they 
 appeared on the first balance sheet. This amounted to 
 the same thing as the tangible assets with the bonds, notes, 
 and current liabilities deducted. Very often, as it Was 
 explained earlier, a part of the proceeds from the sale of the 
 preferred stock was returned to the corporation for working 
 capital. This addition would naturally be included in the 
 tangible assets. Furthermore, when the outstanding lia- 
 bilities of the business were liquidated by the sale of the 
 preferred stock, the tangible assets appeared that much 
 greater because of the decrease in the amount deducted for 
 
42 THE CAPITALIZATION OF GOODWILL 
 
 liabilities. If the preferred stock was equal to the tangible 
 assets, this ratio was unity. If the preferred stock was 
 one half or one third of the tangible assets, this ratio was 
 two or three. Thus,' the larger this ratio, the more con- 
 servative was the issue of preferred. 
 
 In the third column is the amount of common stock 
 issued. In the fourth column are the earnings (after the 
 deduction of the preferred dividends) on the common stock. 
 Although the companies were just starting their corporate 
 lives, there was naturally a record of yearly earnings for 
 the private businesses which preceded them. If these earn- 
 ings had showed any regular increases or decreases, the 
 probable earnings for the first year of the corporation might 
 have been estimated. As a matter of fact, these pre-incor- 
 poration profits were in most every case so irregular and 
 fluctuating that some more arbitrary method of calculating 
 the probable earnings has had to be adopted. The earnings 
 of the three, four, or five years preceding incorporation 
 were usually given when a flotation was advertised. An 
 average of these three, four, or five years has been calcu- 
 lated. As most of these businesses increased their earnings 
 from year to year, this average seemed in many cases too 
 low an estimate of the corporation's probable success. 
 Therefore, it seemed best to take an average of this average 
 and of the profits for the last year. The figures in column 4 
 have been obtained in this way. This method was desirable 
 because it gave a larger prominence to the profits of the 
 year immediately preceding incorporation. In most cases, 
 when a prospectus gave profits, it meant profits after the 
 deduction of interest charges. When a business paid its 
 debts by the sale of the preferred stock, its profits after 
 incorporation showed an increase, other things being equal, 
 merely because the interest charges were decreased or done 
 away with and because the preferred dividends were not 
 deducted from net profits. Furthermore, the new working 
 capital would in all probability have increased future earn- 
 ings. However, a business that was incorporated merely 
 to enable the owners to withdraw their capital could 
 
PRINCIPLES OF CAPITALIZATION 43 
 
 anticipate as great an increase in profits as the other types 
 because it was most Hkely a better business in that it had 
 been built up slowly and had no large debts, and no need of 
 new working capital. 
 
 The table on the following pages shows the capitalization 
 of forty-six industrial corporations.^ 
 
 When the large number of private businesses that were 
 incorporated is considered, this material may seem meager. 
 Many private businesses were incorporated, however, be- 
 cause of the legal disadvantages inherent in a partnership. 
 Many of them were closed corporations, that is, they had 
 no securities in the open market. Some merely issued 
 common stock and were capitalized in a different, and in a 
 less elaborate, way than those discussed here. Some were 
 quoted on the smaller exchanges and were not so well 
 known; the necessary data concerning these companies 
 was usually not available. Of the forty-six corporations 
 given, twenty-four were listed on the New York Stock 
 Exchange and seven were traded in on the Curb ; practically 
 all of the others were listed on the smaller exchanges. 
 Many of the industrials quoted on the exchanges, and even 
 a number of those which had preferred stock, were very 
 different from the type dealt with here. The trusts and 
 the combinations did not ordinarily issue stock only for 
 sale in the market. The stock of these companies was 
 usually issued in part to the different owners in pajmient 
 for the businesses which they surrendered to the trust or 
 to the combination. 
 
 Of the industrials in the table, five produced rubber 
 goods and rubber tires."* There were four automobile com- 
 panies.'* There were six which made agricultural imple- 
 ments.* There wer€ four chains of five and ten cent stores, 
 and two department stores.'* There was one canning com- 
 pany and one can making company, and three which manu- 
 factured and sold articles of food consumption. There 
 were twelve which produced or sold articles of clothing. 
 
 ' From original prospectuses issued by the promoter-bankers and 
 from Poor's and Moody's Manuals of Industrials. 
 * See appendices i, ii, iii, and iv. 
 
44 
 
 THE CAPITALIZATION OF GOODWILL 
 
 
 
 
 
 
 Probable 
 Per Cent 
 
 
 
 
 Ratio of 
 Tangible 
 Assets to 
 Preferred 
 Stocks 
 
 
 Earned on 
 the Common 
 
 Name of Corporation 
 
 Preferred Stock 
 
 Common Stock 
 
 Stock (After 
 Deducting 
 Preferred 
 Dividends 
 
 
 
 
 
 
 from Net 
 
 
 
 
 
 
 Profit) 
 
 B. F. Goodrich 
 
 $30,000,000 
 
 113 
 
 $60,000,000 
 
 8.3 
 
 Goodyear 
 
 
 5,000,000 
 3,000,000 
 2,000,000 
 
 2.00 
 
 5,000,000 
 8,000,000 
 
 22.8 
 
 Fisk 
 
 1st 
 
 1. 00 
 
 5.2 
 
 
 2d 
 
 
 
 Kelly-Springfield . . . 
 
 1st 
 
 2d 
 
 3,758,000 
 907,000 
 
 1.24 
 
 4,000,000 
 
 23-5 
 
 Ajax-Grieb 
 
 
 330,000 
 
 3.71 
 
 450,000 
 
 340 
 
 Studebaker 
 
 
 13*500,000 
 
 1.77 
 
 30,000,000 
 
 4-5 
 
 Willys-Overland. . . . 
 
 
 5,000,000 
 
 2.16 
 
 20,000,000 
 
 12.5 
 
 Maxwell 
 
 1st 
 
 13,000,000 
 11,000,000 
 
 
 13,000,000 
 
 0.0 
 
 
 2d 
 
 1.04 
 
 
 Hupp 
 
 
 1,500,000 
 
 1.73 
 
 5,000,000 
 
 9.0 
 
 Emerson- Branting- 
 
 
 ham 
 
 
 12,000,000 
 37,800,000 
 
 1-45 
 1. 18 
 
 10,000,000 
 
 7.0 
 
 7-5 
 
 Deere 
 
 
 18,400,000 
 
 Cased. I.) 
 
 
 12,000,000 
 
 1.66 
 
 8,000,000 
 
 5.7 
 
 Moline Plow 
 
 1st 
 
 7,500,000 
 
 
 9,000,000 
 
 
 
 2d 
 
 1,500,000 
 
 2.04 
 
 9,000,000 
 
 II.O 
 
 M. Rumely 
 
 
 8,000,000 
 
 2.32 
 
 9,000,000 
 
 6.3 
 
 Hart-Parr 
 
 
 750,000 
 15,000,000 
 
 2.44 
 1. 00 
 
 1,000,000 
 
 24.5 
 6.8 
 
 F.W. Wool worth... 
 
 
 50,000,000 
 
 S. S. Kresge 
 
 
 2,000,000 
 
 1.23 
 
 1,000,000 
 
 3-3 
 
 S. H. Kress 
 
 
 4,000,000 
 
 1. 10 
 
 12,000,000 
 
 6.6 
 
 McCrory 
 
 
 1,250,000 
 5,000,000 
 
 1.60 
 
 5,000,000 
 15,000,000 
 
 4-3 
 5-9 
 
 May Dept. Stores. . 
 
 
 1. 00 
 
 Kaufman Dept. 
 
 
 
 
 
 
 Stores 
 
 
 2,500,000 
 
 1. 00 
 
 7,500,000 
 
 8.0 
 
 Hart Schaffner & 
 
 
 
 
 Marx 
 
 
 5,000,000 
 750,000 
 
 1. 00 
 
 15,000,000 
 2,500,000 
 
 3.9 
 
 Sonneborn 
 
 1st 
 
 
 
 2d 
 
 1,000,000 
 
 1. 14 
 
 
 6.7 
 
 A. B. Kirschbaum. . 
 
 
 1,350,000 
 
 1.48 
 
 2,650,000 
 
 5.0 
 
 Frisbie Stansfield.. . 
 
 
 1,300,000 
 
 115 
 
 1,500,000 
 
 3-0 
 
 Barnhart Bros. & 
 
 
 
 
 
 
 Spindler 
 
 1st 
 
 1,250,000 
 
 
 1,000,000 
 
 
 
 2d 
 
 750,000 
 
 1. 00 
 
 
 1.3 
 
 Pierce, Butler & 
 
 
 
 
 
 
 Pierce 
 
 1st 
 
 700,000 
 150,000 
 
 1. 17 
 
 800,000 
 
 4.3 
 
 
 2d 
 
 
 ^ 
 
 International Shoe . 
 
 
 8,250,000 
 
 1. 00 
 
 12,750,000 
 
 6.9 
 
 McElwain Shoe .... 
 
 1st 
 
 2,500,000 
 
 
 1,500,000 
 
 
 
 2d 
 
 1,000,000 
 
 143 
 
 
 30.0 
 
 Brown Shoe 
 
 
 4,000,000 
 
 2.50 
 
 6,000,000 
 
 5-0 
 
 Julius Kayser 
 
 1st 
 
 3,000,000 
 
 
 6,000,000 
 
 9.3 
 
 
 2d 
 
 695,000 
 
 1.26 
 
 
 
 Cluett Peabody .... 
 
 
 8,000,000 
 
 1. 00 
 
 18,000,000 
 
 8.2 
 
 Manhattan Shirt . . . 
 
 
 3,000,000 
 
 1. 00 
 
 5,000,000 
 
 5.6 
 
PRINCIPLES OF CAPITALIZATION 
 
 45 
 
 
 
 
 
 
 Probable 
 Per Cent 
 
 
 
 
 Ratio of 
 
 
 Earned on 
 
 Name of Corporation 
 
 Preferred Stock 
 
 Tangible 
 Assets to 
 
 Common Stock 
 
 the Common 
 Stock (After 
 
 
 
 
 Preferred 
 
 
 Deducting 
 
 
 
 
 Stocks 
 
 
 Preferred 
 Dividends 
 from Net 
 
 Profits) 
 
 Acme Tea 
 
 1st 
 
 2,750,000 
 500,000 
 
 
 3,500,000 
 
 
 
 2d 
 
 1. 00 
 
 12. 1 
 
 Jewel Tea 
 
 
 4,000,000 
 5,000,000 
 
 .99 
 
 12,000,000 
 8,000,000 
 
 II. I 
 
 Loose-Wiles 
 
 1st 
 
 
 2d 
 
 2,000,000 
 
 1. 00 
 
 
 00.0 
 
 Continental Can . . . 
 
 
 5,500,000 
 
 
 8,000,000 
 
 
 
 
 5,500,000 
 
 1. 00 
 
 
 5-0 
 
 Armsby Co. of N. Y. 
 
 
 500,000 
 
 2.00 
 
 420,000 
 
 26.9 
 
 Sears Roebuck 
 
 
 10,000,000 
 
 1. 00 
 
 30,000,000 
 
 5.8 
 
 National Cloak & 
 
 
 
 
 
 
 Suit 
 
 
 5,000,000 
 6,000,000 
 
 I 00 
 
 12,000,000 
 9,300,000 
 
 8.0 
 
 12.9 
 
 Griffin Wheel 
 
 
 I.4I 
 
 Kelsey Wheel 
 
 
 3,000,000 
 
 1. 00 
 
 10,000,000 
 
 7.5 
 
 Pettibone Mulliken. 
 
 1st 
 
 2,250,000 
 
 
 7,000,000 
 
 
 
 2d 
 
 750,000 
 
 .82 
 
 
 5.6 
 
 Burns Bros 
 
 
 2,000,000 
 
 1.25 
 
 5,500,000 
 
 6.3 
 
 Owens Bottle Ma- 
 
 
 
 
 
 
 chine 
 
 
 7,000,000 
 
 1.92 
 
 9,000,000 
 
 27.5 
 
 Underwood Type- 
 
 
 writer 
 
 
 5,000,000 
 
 1. 00 
 
 8,500,000 
 
 4-5 
 
 
 
 There were two mail-order houses, two wheel manufacturing 
 companies, and four miscellaneous companies. 
 
 The ratios of the tangible assets to the preferred issues 
 furnish the basis for some reasonably satisfactory generaliza- 
 tions. The average of the figures in the second column is 
 about 1.39. In other words, the amount of preferred stock 
 issued by the companies, studied in the table, was roughly 
 seven-tenths of the tangible assets. In more than one- 
 third of the cases recorded the preferred stock was about 
 equal to the tangible assets. The fact that the average is 
 as high as it is can be explained by several causes; first, 
 earlier in the history of these industrials when preferred 
 stock of this kind was not so well known, some of the issues 
 were more conservative; second, the smaller companies, 
 which were comparatively less stable, had to be more 
 careful in their financing; third, industrials like the agri- 
 cultural implement companies, the earnings of which seemed 
 likely to be subject to great fluctuations, were wisely 
 
46 THE CAPITALIZATION OF GOODWILL 
 
 somewhat conservative in their preferred issues. All these 
 factors tended to make the average for this table higher 
 than the figure which represented the usual practice, that 
 is, the practice which obtained in the largest number of 
 flotations. 
 
 The average of the percentages earned on the common 
 stock of these companies was 9.7; yet in most cases the 
 percentage lies somewhere between 5 per cent and 7 per cent. 
 Here, too, the usual percentage was considerably lower 
 than the average for this table. This disparity is due to the 
 large percentages earned by the common stocks of the 
 smaller industrials. All those companies which earned 
 more than twenty per cent on their common stock, with 
 the exception of Goodyear, were small and not so well 
 known, for example, Armsby, Owens Bottle Machine, 
 Kelly-Springfield Tires, Ajax Rubber & Tire, Hart-Parr, 
 and McElwain Shoe. The per cent earned by the common 
 stock of the better known industrials is surprisingly low. 
 Sears Roebuck, Underwood Typewriter, Continental Can, 
 Studebaker, Brown Shoe, F. W. Woolworth, Manhattan 
 Shirt, and Hart, Schaffner and Marx, started with common 
 stock issues which were very large when compared to their 
 past earnings. The first six of the eight industrials men- 
 tioned were the work of the bankers, Goldman, Sachs & Co. 
 The common stocks bought out by these bankers are 
 usually listed and traded in on the New York Stock Ex- 
 change immediately after the incorporation. This would 
 seem to indicate that some of the most important of the 
 common stock issues — those which were released by the 
 owners and sold to the public — have been the least con- 
 servatively capitalized. True, these companies had been 
 enormously successful as private businesses and anticipated 
 futures which seemed to justify large issues of common 
 stock. 
 
 There is one important question as to the difference 
 between those common stocks which were held by the 
 owners and those which were sold in the market. When a 
 private business was incorporated or when a closed corpora- 
 
PRINCIPLES OF CAPITALIZATION 47 
 
 tion was reincorporated so that the preferred stock could 
 be sold, the control of the common stock, theoretically, 
 was held by the owners.^ The common stock with its 
 voting power was the means by which they controlled 
 the business. Apparently one, of the most useful arguments 
 employed by the bankers who were trying to persuade a 
 large merchant to incorporate was that by so doing the 
 intangible values, or goodwill, and the surplus earning 
 power could, thus, be capitalized and sold. If at the death 
 of one of the two partners, who owned a business with 
 tangible assets values at $2,000,000, but with yearly earn- 
 ings of about $400,000, and if the widow of the deceased 
 were paid off by the surviving partner with $1,000,000, 
 she could count on an income of $60,000 at best, whereas 
 before her husband's death their income had been $200,000. 
 If these partners had been incorporated they could have sold 
 $2,000,000 worth of preferred stock; each one might have 
 withdrawn his million and, yet, with $4,000,000 worth of 
 common stock they would have controlled the business and 
 its surplus earnings. At the death of one of the partners the 
 widow would receive $2,000,000 worth of common stock 
 besides the $1,000,000 withdrawn by her husband when he 
 sold the preferred. The banker explained further that there 
 was a method by which this widow could be put in a position 
 to dispose of her common stock if at any time she so desired. 
 All that the owner had to do was to give the banker a large 
 enough slice of the common issue so that he could put it 
 on the market and, thus, advertise it. Then, at any time, 
 the large holder of the common stock could unload. How- 
 ever, the careful banker tried to keep the owner from selling 
 his common until he reached the age of retirement. It was 
 to the interest of all that the men who had been responsible 
 for the success of the business should hold the reins as long 
 as possible. 
 
 There is a well-marked difference between those common 
 stock issues which were to be held by the owners and those 
 
 * Jones Bros. Tea Company sold the common stock and held the 
 preferred stock, but this was exceptional. 
 
4^ THE CAPITALIZATION OF GOODWILL 
 
 which were to be sold in the market. Obviously it made 
 very little difference to the owner whether the common 
 stock was divided into a million or into four million parts, 
 provided he held it all. Thus, companies like Kelley- 
 Springfield (the early issue), Ajax-Grieb, Hart- Parr, Mc- 
 Elwain Shoe, Armsby Co., and Owens Bottle Machine 
 earned between twenty and thirty per cent on the common 
 stock. Even where common stock was marketed, small 
 companies like those mentioned were obliged to offer 
 especial inducements because of the advantages of larger, 
 more stable, and better advertised companies. The reason 
 why the larger and the better known industrials showed 
 such small earnings on the common at the time of incorpora- 
 tion is explained paradoxically enough by the difficulty of 
 selling industrial common stocks at a high price. It was 
 difficult to market at par what most people usually con- 
 sidered water. The larger the amount, the lower was the 
 price that could be put upon it. But it was not an imme- 
 diate market which was anticipated. The owners hoped 
 for large earnings in the future and they desired to be in a 
 position to sell the rights to these earnings — in the form of 
 common stock — to the best advantage. 
 
 There are corporations represented in the table that 
 earned nothing on their common stock. The amount 
 necessary to pay the preferred dividends completely covered 
 the probable earnings. Two such companies were the 
 Maxwell Motor Co. and the Loose Wiles Biscuit Co. A 
 very interesting fact is that both of these companies had 
 second preferred stock. A natural deduction would be 
 that the owners of those compaines, which earned nothing 
 on the common stock, took the second preferred stock so as 
 to assure themselves a dividend. There are twelve com- 
 panies in the table which have second preferred stock: 
 two show no earnings on the common stock ; one shows only 
 1.3 per cent; and four show very low percentages. How- 
 ever, three or four show earnings considerably above the 
 average. It is worthy of mention that five of the twelve 
 companies noted were sponsored by William Salomon & Co., 
 a firm which seems partial to second preferred stocks. 
 
PRINCIPLES OF CAPITALIZATION 49 
 
 Some important facts emerge when these industrials are 
 divided into classes according to the kinds of business 
 which they transacted. It is found that the corporations 
 which had the highest ratios of tangible assets to the respec- 
 tive preferred issues are the agricultural implement com- 
 panies, the rubber and tire companies, and the automobile 
 companies. The average ratio for the agricultural imple- 
 ment companies was 1.85. When compared with the 
 general average 1.39, this seems remarkably high. There 
 are two possible explanations for the high ratio in the case 
 of the agricultural implement companies. The agricultural 
 implement stocks were brought out in 191 1 and 1912 when 
 these new industrials were just coming into prominence. 
 Furthermore, this type of business seemed obliged to under- 
 go great fluctuations in profits from year to year.® In all 
 but one of these companies, however, the amount authorized 
 was considerably higher than the amount issued. If the 
 authorized preferred stock had been used to calculate this 
 ratio it would have averaged 1.21 instead of 1.85. Another 
 explanation of the high ratios applicable to all three indus- 
 tries is based on the fact that they all had large plants and 
 expensive machinery.'^ This was not true of the depart- 
 ment stores and the other manufacturing businesses.^ The 
 ratio of the preferred stock to the earnings may have been 
 very much the same, but in these three kinds of companies 
 the greater value of the tangible assets seems to explain 
 the high ratios shown. 
 
 Studebaker was put out with a very conservative pre- 
 ferred issue. The ratio in this case was 1.77. After the 
 explanations of the high ratios in the table, it is interesting 
 to consider the facts in the case of Studebaker. When 
 Studebaker was incorporated, the automobile business was 
 not as highly developed as it is today. The bankers did 
 not know at that time whether the automobile was merely 
 a fad or whether the business was to develop stability. For 
 this reason they were probably cautious. If the business 
 
 * See appendix i. 
 
 ' See appendices i, ii, iii. 
 
 * See appendix iv. 
 
 4 
 
50 THE CAPITALIZATION OF GOODWILL 
 
 had failed to develop, the real estate, buildings, machinery, 
 and equipment, amounting to almost $10,000,000, would 
 have been worth very little. The preferred issued, there- 
 fore, was covered by the inventories, which amounted to 
 more than $14,500,000, and the amount authorized was 
 very little more. 
 
 Generally considered, the earnings on the common stock 
 of the agricultural implement companies and of the rubber 
 and tire companies were high, whereas the earnings for the 
 automobile companies were below the average. Inasmuch 
 as the preferred issues of these companies were small when 
 compared to the tangible assets, it is natural to ask whether 
 the issues of common were correspondingly small when 
 compared to the earnings. In other words, the possible 
 relation of the figures in column 2 with those in column 4 is 
 suggested. Was a conservatively issued preferred stock 
 likely to be accompanied by a conservative issue of common ? 
 It is natural that there should be a certain relation between 
 the figures in the second and fourth columns inasmuch as 
 in both cases they are affected by the amount of preferred 
 stock. If this amount is small not only will the ratio of 
 tangible assets to the preferred be comparatively high, 
 but the earnings on the common will be larger because of 
 the smaller deduction necessary for the preferred dividends. 
 An estimate of this relation in mathematical terms seems 
 to show that the ratios in the two columns are not so 
 closely related as one might expect. Furthermore, it is 
 evident that there is a greater dispersion for the percentages 
 in the fourth column than for the ratios in the second. 
 Preferred stock issues in relation to tangible assets varied 
 much less than common stock issues in their relations to 
 earning power. 
 
 The principles deducible from the data given in the table, 
 important as they are, do not furnish material sufficient 
 to construct any complete theory of capitalization. They 
 are valuable as evidence and as proof of a theory which 
 anyone, who is familiar with these industrials, might have 
 evolved. The amount of preferred stock issued was, to 
 
PRINCIPLES OF CAPITALIZATION 5 1 
 
 some extent, dependent upon the particular reason for the 
 flotation. If the owners wanted to withdraw a certain 
 sum and felt that it was best to pay off a part of the in- 
 debtedness at the same time, the size of the preferred issue 
 was influenced by these desires. True, the preferred issued 
 was seldom more than the tangible assets; yet, how much 
 less it was, was determined by the purposes of the owners. 
 The period in which the stock was floated, the condition 
 of the market at the time, and other factors determined the 
 capitalization rather than any abstract principle. When 
 a business had large tangible assets or when there was some 
 particular need for caution, the bankers probably insisted 
 upon an abnormally conservative ratio of tangible assets to 
 preferred stock. In short, the size of a preferred stock 
 issue was determined chiefly by the amount of money 
 which the managers of the flotation could obtain with 
 safety from the public at the time. The reason why in 
 such a great number of cases the preferred issue was equal 
 or almost equal to the tangible assets is explained by the 
 desire of the owners to obtain as much money as possible. 
 When there was an abnormally small amount of preferred, 
 the issue seems to have been merely a more convenient 
 method of obtaining money than that of borrowing from 
 the banks or selling bonds. The amount of preferred stock 
 may at times have had less direct relation to the value of 
 the assets or to the earning power of a business than it had 
 to the specific needs which prompted the incorporation. 
 
 Some of these companies showed earning on the common 
 stock (see page 44, column 4,) as low as nothing and others 
 as high as thirty per cent. Those common stocks which 
 showed no earnings represented mere anticipations of future 
 profits. Those which earned abnormally high percentages 
 were usually held closely, and were not sold in the market. 
 They were associated with small preferred issues; these 
 flotations were, as it was explained before, merely methods 
 of borrowing a small sum from the public in preference to 
 getting it from the banks. If the common stock was to be 
 kept by the owners, it made little difference to them into 
 
52 THE CAPITALIZATION OF GOODWILL 
 
 how few shares it was divided. If it was to be sold, the 
 amount was determined by the conditions of the market. 
 It was divided so that the shares could be sold for a low 
 enough price and so that the aggregate would net for the 
 sellers the amount that they desired. Somewhere between 
 five and six per cent was the usual amount earned on the 
 common, because stock capitalized in this way was most 
 profitably marketed. The relation between the figures in 
 the second and fourth columns shows that there is no reason 
 to believe that there was any definite theory of capitaliza- 
 tion which generally influenced the incorporators. 
 
CHAPTER VI 
 
 The Seven Per Cent Preferred Stocks and their 
 . Provisions 
 
 The kinds of securities which were created for these com- 
 panies constitute an important part of this study because 
 these businesses were incorporated in most cases merely to 
 sell stock and because the stock sold was different in certain 
 respects from any that had been issued before. There were 
 three kinds of securities which might have been issued — 
 bonds, preferred stocks, and common stocks. The wide- 
 spread use of preferred stocks instead of bonds is a matter 
 of some interest. Did these companies issue preferred 
 stocks rather than bonds because bonds represented mort- 
 gages on the property, or because bonds called for a regular 
 interest even in times of depression? Were investors satis- 
 fied with preferred stocks because they realized that a 
 business of this kind could furnish no real security for a 
 mortgage? These are questions which cannot be answered 
 until after the development of preferred stock has been 
 traced and the actual provisions of the modern preferred 
 stocks have been analyzed. 
 
 In England during the seventeenth century there was 
 the gradual emergence in the joint-stock company of a 
 division of the whole capital into different classes with 
 special rights. In the case of the new East India company, 
 the stock as such was divided into separate classes, each 
 of which had distinct rights, the original stock being entitled 
 to eight per cent, paid by the government, and to certain 
 contingent advantages, while the additional stock was to 
 receive the profits made in trading.^ Out of this differentia- 
 tion of stock in England there developed the debentures 
 which were like our bonds except that they embodied no 
 
 ^ Scott, vol. i, p. 364. 
 
 53 
 
54 THE CAPITALIZATION OF GOODWILL 
 
 mortgage feature. In "The Minutes of Evidence taken 
 before the Select Committee on the Hmited liability Acts," 
 1867, there was an interesting discussion of the use and 
 the rights of debentures in limited liability companies. 
 It was stated there that debentures had been issued to 
 obtain new capital when the company did not want to 
 make calls on the original share holders. The rights of the 
 debenture holder with respect to the assets, the earnings, 
 and the creditors of the company, as there outlined, were 
 similar in many respect to those of the preferred share 
 holder. 
 
 There were two specialized uses to which preferred stock 
 was put in the earlier development of corporation finance 
 in the United States. When the corporate form was used 
 as a financial instrument for combining individual busi- 
 nesses, preferred stock was a common feature in the financial 
 plan. The owners who surrendered their businesses to the 
 corporation, received in many cases a certain percentage of 
 preferred stock as well as common stock. This preferred 
 stock had a priority over the common stock mainly with 
 respect to earnings. It was very much like the English 
 debenture and merely represented a differentiation in capital 
 stock. The other use of preferred stock was one common in 
 railroad finance. A writer in 1897 stated that the majority 
 of preference shares in the hands of the public at that time 
 had been issued by the railways as evidences of debt which 
 the exigencies of the time required should be deferred, — 
 perhaps some peculiar obligation not then easily paid; 
 but more frequently, such preferred shares had been given 
 to bond holders who were compelled by the insolvency of 
 the company to yield something of the principal and 
 interest of their debt.^ In the reorganization of the Chesa- 
 peake and Ohio Railway in 1888 the bond holders consented 
 to readjust their claims without foreclosure, and took as 
 part payment for the old bonds a certain percentage of 
 first preferred stock. Eleven years earlier in the case of 
 the Lake Superior and Mississippi Railroad which was 
 
 2 T. L. Greene, Corporation Finance. 
 
SEVEN PER CENT PREFERRED STOCKS 55 
 
 sold under foreclosure to the holders of its first mortgage 
 bonds, these bonds were exchanged for preferred shares at 
 the rate of $1200 of such shares for each bond of $1000. 
 
 The new seven per cent preferred stocks differed ma- 
 terially from both of these. They had both bond features 
 and common stock features. Although the type of seven 
 per cent cumulative preferred stocks employed by the new 
 companies was not fully developed until the rise of these 
 industrial corporations in the present century, there had 
 been some very considerable issues of industrial preferred 
 stocks before that time. In 1890 the H. B. Claflin Com- 
 pany was formed in New York City to take over the jobbing 
 business of H. B. Claflin and Co. The new company had 
 a capital of $9,000,000 divided into first preferred stock, 
 bearing cumulative dividends of five per cent, second pre- 
 ferred stock, bearing cumulative dividends of six per cent, 
 and common shares covering nearly one half of the capitali- 
 zation. But this preferred stock of H. B. Claflin and the 
 other preferred stocks which were issued before the rise 
 of the new industrials were merely stocks with a certain 
 priority and fixed dividend. The safety features exempli- 
 fied in the new seven per cent preferred stocks were not 
 present.^ There was no possibility of standardization in 
 the preferred stocks of the older period because they varied 
 in role with every incorporation.^ They had an indefinite 
 position somewhere between bonds and stocks. They paid 
 dividends anywhere from four per cent to eight per cent 
 and higher; sometimes they were cumulative and some- 
 times they were not. 
 
 The new industrial preferred stocks constituted a definite 
 class of financial instruments; and although there were 
 differences in the provisions of different issues, these were 
 usually of minor importance. Practically all of the stocks 
 paid seven per cent, and all were cumulative. When 
 Spicer was put out with an eight per cent cumulative 
 dividend in 19 16, the bankers probably offered the extra 
 
 ' One of the earliest mutual insurance companies had a temporary 
 capitalization of seven per cent preferred stock. 
 
 * Except perhaps in their use in railroad reorganizations. 
 
56 THE CAPITALIZATION OF GOODWILL 
 
 one per cent as a special inducement at a time when the 
 market was teeming with so-called speculative issues. The 
 necessity of the cumulative feature was evident; a pre- 
 ferred stock would have been little better than a common 
 stock if the company could have deferred the dividend 
 with impunity. The regular per cent paid on the preferred 
 stock and the cumulative feature were similar in nature to 
 bond provisions. Most of the rights of the preferred stock 
 holders, as set forth in the articles of incorporation of these 
 industrials were directly or indirectly provisions for safety, 
 and as such made preferred stocks still more like bonds. 
 These provisions were engrafted on what would have been 
 ordinary shares of capital stock. Consequently, the dif- 
 ferences between bonds and stocks may be used conven- 
 iently as a basis of classification of these provisions. 
 
 The bond is ordinarily a charge on a specific piece of 
 property, — naturally the property should be as valuable, if 
 not more so, than the amount of the bond issue. Prac- 
 tically every issue of preferred stock in the new industrials 
 was covered by the tangible assets of the company, even 
 where there was no specific mention of this limitation in the 
 certificate of incorporation. What was embodied in prac- 
 tically every certificate of incorporation was the require- 
 ment that the consent of three-fourths of the preferred 
 stock holders should be given to any increase of the author- 
 ized preferred issue or to any mortgage, which would 
 naturally take precedence over the preferred stock. These 
 provisions as they appear in the Certificate of Incorporation 
 of the Continental Can Co. are typical : 
 
 (4) The amount of preferred stock shall not be Increased nor shall 
 any stock having any preference or priority over said preferred stock 
 be issued unless such increase or such issue shall have been previously 
 authorized by the consent of at least three-fourths in interest of the 
 then issued and outstanding stock of the Company of each class 
 (both preferred and common) given separately, in person or by proxy, 
 at a meeting specially called for that purpose. ... (9) No mortgage, 
 lien or encumbrance of any kind upon any part of the real or personal 
 property, assets, effects, undertaking or goodwill of the Company, 
 shall be created or be valid or effective unless the same shall have 
 been previously authorized by the consent of the holders of at least 
 three-fourths in interest of each class of outstanding stock of the 
 Company (both Preferred and Common) given separately in person 
 
SEVEN PER CENT PREFERRED STOCKS 57 
 
 or by proxy either in writing or at an annual meeting or at a special 
 meeting called for that purpose; but this prohibition shall not be 
 deemed or construed to apply to, nor shall it operate to prevent, the 
 giving of purchase money mortgages, or other purchase money liens 
 on property to be hereafter acquired by the Company, or the 
 acquisition of property subject to mortgages, liens and encumbrances 
 thereon then existing, nor to the pledging by the Company as security 
 for loans made to it in the regular and current conduct of its business 
 or notes or accounts receivable or other liquid assets or of any stocks, 
 bonds, or other securities owned by it. 
 
 If the tangible assets did not depreciate in value, the 
 preferred issues would always be covered by specific 
 property. Some companies not only restricted any in- 
 crease in the issue of preferred, but attempted to make sure 
 that the preferred issue should bear a certain relation to the 
 tangible assets. They forbade any dividends on the com- 
 mon stock unless the preferred bore a certain definite 
 relation to the assets. In the Certificate of Incorporation 
 of The Brown Shoe Company, it was stated: 
 
 In no event shall any dividend whatsoever be paid or declared on 
 the Common Stock, unless the net quick assets of the Company and of 
 its subsidiary corporations as disclosed by the then last statement or 
 report of the Company, certified by certified public accountants of 
 good standing, shall have been at least eighty per cent (80 %) of the 
 total amount of preferred stock then outstanding, and the total amount 
 of the net tangible assets of the company shall have exceeded the 
 amount of preferred stock by one million dollars. 
 
 In the Fisk Tire Company, no dividends could be 
 declared on the common stock unless the net quick assets 
 of the Company were at least equal to one hundred and 
 twenty-five per cent of the par value of the first preferred 
 stock of the Company outstanding. In the Willys-Over- 
 land Company of 19 12, no dividends could be declared 
 on the common stock unless the net quick assets were equal 
 to one hundred and twenty-five per cent of the outstanding 
 preferred; in the Willys Company of 1916 the net quick 
 assets were to be one hundred and ten per cent of the pre- 
 ferred before any dividends over six per cent could be 
 declared on the common. In the M. Rumely Company, 
 the net quick assets were to exceed the preferred stock, 
 and in the Loose Wiles Biscuit Company, the net quick 
 assets were to be equal to one half of the preferred stock 
 
58 THE CAPITALIZATION OF GOODWILL 
 
 before any dividends on the common were allowed. The 
 purpose of these provisions seems to have been the desire 
 to assure the preferred stock holder of the company's 
 ability to pay him the par of his investment and even a 
 premium added thereto in case of liquidation. In those 
 cases where the net quick assets were to be sufficient to 
 cover the preferred issue, he was assured of a speedy 
 payment of his claims. 
 
 In all these provisions, however, there was one feature 
 which complicates the matter somewhat. The restriction 
 upon the payment of dividends on the common stock was 
 not only intended to assure the preferred stock holder of the 
 mortgage value of his investment but also to make certain 
 the continuance of his dividends. The preferred issue was 
 limited so that there would not be too many claimants for 
 the funds available for dividends; and the declaration of 
 dividends on the common stock was also limited so that 
 there would be a large enough fund available for preferred 
 dividends to be paid in the future. In the majority of 
 cases the provisions of the certificates of incorporation 
 were intended to dispel the fear which might otherwise 
 have attacked the preferred investor, — the fear that the 
 company would distribute more to the common stock 
 holders than was consistent with safety. 
 
 Certain other provisions found in the cases of these 
 preferred stocks look also primarily to the protection of 
 the dividends of the preferred stockholder. In the Under- 
 wood Typewriter Company and in the May Department 
 Stores Co'mpany, salaries were limited to $60,000 a year. 
 In the first case this amount could be increased if the net 
 earnings passed the million mark; but even then only to 
 the extent of six per cent of the earnings. In the May 
 Department Stores Company this limitation was to last 
 for three years; thereafter, the amount to be paid in salaries 
 could be increased by a sum equal to one-half of one per 
 cent of the sales. In the Henry Sonneborn Company, too, 
 such a limitation on the amount available for salaries 
 was incorporated in the provisions intended to protect the 
 
SEVEN PER CENT PREFERRED STOCKS 59 
 
 dividends of the preferred stock holders. In the Julius 
 Kayser Company there could be no expenditure (in cash, 
 stock, bonds, debentures, or otherwise) in the aggregate 
 exceeding $200,000 for the purchase of additional mills or 
 properties, or in otherwise adding to the corporations exist- 
 ing fixed capital assets, unless at the time of the authoriza- 
 tion of such expenditure the net quick assets of the corpora- 
 tion were equal in amount to the par value of the first 
 preferred stock outstanding, plus the amount of such 
 expenditures.^ In the Brown Shoe Company the issue of 
 the full amount of authorized preferred stock was con- 
 tingent upon the earnings being twice the preferred divi- 
 dends. In the Owens Glass Bottle Machine Co. the vote 
 of the preferred stock holders was not necessary in order 
 to increase the issue; but no new preferred stock could be 
 issued unless the earnings for the last year or the average 
 earnings for three years were equal to two and one half 
 times the dividends on the preferred stock, including that 
 which was to be issued, and unless the outstanding pre- 
 ferred issue plus the new preferred issue was less than 
 seventy-five per cent of the net assets of the company 
 including the assets to be acquired from the issuance of 
 the additional preferred stock. 
 
 Whether or not the mortgage feature of a bond is valuable 
 because it pledges a specific property, it certainly constitutes 
 a valuable weapon in the hands of the bond holders, who 
 have a contingent right of foreclosure. The preferred stock 
 holder was given a somewhat similar weapon. With few 
 exceptions the preferred stock holder, like the bond holder, 
 had no vote in the affairs of the company.^ However, if 
 there was any default in the payment of preferred dividends, 
 the preferred stock holders were given voting power. In 
 some of the earlier industrials, for example. Underwood 
 Typewriter, May Department Stores, Studebaker, the 
 preferred stock holders were to assume control after two 
 quarterly defaults; in the majority of cases four quarterly 
 
 5 Otherwise two-thirds of the preferred votes had to consent to such 
 expenditure. 
 
 8 Exceptions were Loose Wiles, Goodyear, Pettibone Mulliken. 
 
60 THE CAPITALIZATION OF GOODWILL 
 
 defaults were necessary, although in Rumely only one 
 default, and in Armsby as many as eight defaults were to 
 precede the assumption of control. In some cases the 
 preferred stock holders were to vote as a class, with the 
 common stock holders voting as a class, after the specified 
 number of defaults. In the great majority of cases, how- 
 ever, the preferred stock holders were to take over the 
 entire control of the company, in case of its inability to pay 
 their dividends. 
 
 It seems reasonably clear that, except in those cases where 
 the contrary is distinctly stated, the directors have the 
 right to sell the assets of the corporation without the con- 
 sent of the stock holders. In some cases, this right was 
 modified. In the Underwood Typewriter Company the 
 preferred stock holders had the right to assume control after 
 two consecutive defaults in quarterly dividends; but their 
 right of disposal of the property was limited by a provision 
 which made it impossible for the directors of the corporation 
 to sell any part of the assets without the consent of three- 
 fourths of all outstanding capital stock of the company, — 
 each class of stock voting separately. Thus, the common 
 stock holders could have prevented the dissolution of the 
 company. Furthermore, in those cases where the default 
 in a certain number of quarterly dividends gave the pre- 
 ferred stock holders only a joint control with the common, 
 the assent of the common stock was necessary before any 
 disposal of the assets was possible. But in the great number 
 of instances the preferred stock holders were to assume 
 the entire control after the specified defaults, and would 
 thus be in a position to effect a sale of the cornpany through 
 the directors whom they elected, unless the directors were 
 restricted by some provision of the certificate of incor- 
 poration. 
 
 It is probable that the common stock holders in most 
 cases would have voted against dissolution, since the pre- 
 ferred stock holders were entitled to the par value of their 
 holdings and in most cases a premium, before any other 
 distribution of assets to the common stock holders was 
 
SEVEN PER CENT PREFERRED STOCKS 6 1 
 
 possible. The practice with respect to the payment of 
 premiums was of two kinds. In the case of Emerson- 
 Brantingham, upon dissolution, voluntary or involuntary, 
 the holders of the preferred were entitled to be paid in 
 full $115 per share and unpaid accrued cumulative dividends 
 thereon, before anything was paid to the holders of the 
 common stock. However, the more common provision 
 was that which is exemplified in the following quotation 
 from the Pettibone-Mulliken certificate: "In the event of 
 any liquidation or dissolution or winding up of the Corpora- 
 tion the holders of record of the First Preferred Stock shall 
 be entitled to be paid in full the par amount of their shares, 
 and, in the event of any voluntary liquidation dissolution 
 or winding up caused otherwise than by bankruptcy or 
 insolvency, a further amount equal to fifteen per cent of 
 such par amount, and all accrued dividends." The theory 
 was that in case of difficulty and involuntary dissolution 
 the preferred stock holder was entitled to the par value of 
 his investment ; but in a voluntary dissolution which might 
 be the result of a desire on the part of the common stock 
 holders to get rid of the preferred stock, the preferred stock 
 holders were to be paid a premium. This premium varied 
 from ten to twenty-five per cent of the par value, and 
 coincided with the redemption price offered by the com- 
 pany when it called in the preferred for the sinking fund. 
 Perhaps the most characteristic of the bond features 
 which was engrafted on the preferred stock was the sinking 
 fund provision. The bond is a debt of a company. Except 
 in the case of certain special classes of securities, for 
 example, railroad bonds, the investor had usually demanded 
 that provision should be made in the loan contract for the 
 extinction of the debt from earnings. Either a certain 
 amount of the bonded debt is paid each year until all of 
 it is wiped out, or provision is made for the accumulation 
 of a fund which eventually will retire the entire issue. 
 Poth of these methods of amortization were used in the 
 different preferred issues. Practically all of the companies 
 here considered were required to provide a specified sum 
 
62 THE CAPITALIZATION OF GOODWILL 
 
 of money each year to be used in the retirement of the 
 preferred stock.'' In those cases in which immediate re- 
 demption was required, it was provided that if the stock 
 could not be purchased in the market below a certain price, 
 known as the redemption price, shares were to be called in. 
 Usually a certain proportion of each preferred share holder's 
 holdings was to be called for redemption. In very few 
 cases was redemption by lot provided for. In Rumely Co., 
 Manhattan Shirt Co., Armsby Co., Continental Can Co., 
 National Cloak and Suit Co., and Jewel Tea Co., the 
 method to be used in calling for redemption was left to the 
 judgment of the directors.^ 
 
 One of the simplest serial redemption provisions was 
 that of the B. F. Goodrich Company. 
 
 The Company shall annually, out of the surplus profits of the Com- 
 pany, if sufficient, after all cumulated and defaulted dividends (if any) 
 upon said preferred stock shall have been paid, or set apart, acquire by 
 redemption or purchase thereof in such manner as the Board of Directors 
 may determine from time to time, but at not to exceed $125 per share 
 plus accrued and unpaid dividends thereon, at least three per cent 
 (3 %) of the largest amount in par value of said preferred stock that 
 shall have been at any one time issued and outstanding. If less than 
 the said amount of preferred stock shall be acquired by the Company 
 in any year the deficiency (before any dividend on the common stock 
 shall be paid or set apart) shall be made good out of the surplus profits 
 in subsequent years. 
 
 Three per cent of the preferred issue was to be withdrawn 
 each year until after thirty-four years the preferred stock 
 was all to be wiped out. 
 
 In a few companies, a specified sum of money was to be 
 set aside each year, but the use of this money or of all of 
 it for the immediate purchase and retirement of preferred 
 stock was not imperative. For example, in the certificate 
 of incorporation of Julius Kayser and Co., it was provided 
 that the company was to put aside $200,000 each year, 
 and to spend $150,000 of the fund in the redemption of 
 preferred stock. In the Brown Shoe Company and in 
 
 ^ The only exceptions were some of the early industrials, e.g., the 
 United Cigar Manufacturers. 
 
 8 The Henry Sonneborn Co., when it was necessary to wipe out a 
 certain amount of preferred, asked the preferred stock holders to state 
 the price which they would take for their holdings. 
 
SEVEN PER CENT PREFERRED STOCKS 63 
 
 Cluett-Peabody either 2| per cent of the preferred issue 
 was to be retired annually, or a sum of money sufficient 
 to redeem such a percentage of the issue was to be put aside 
 each year until after four years when, the aggregate of 
 these sums being large enough to purchase 10 per cent of 
 the issue, it was to be applied immediately to the purchase 
 and retirement of preferred stock. Whether the com- 
 pulsory retirement of preferred stock each year or the 
 accumulation of a sinking fund — ^which was in extreme 
 cases available for preferred dividends and, perhaps, even 
 for actual business purposes in many industrials — ^was 
 preferable from the preferred stock holder's point of view 
 may be questioned. The compulsory retirement of the 
 preferred stock was the usual method. 
 
 There are many evidences in these provisions that the 
 preferred stock was looked upon as a form of indebtedness 
 which it was the duty of the company to discharge as 
 rapidly as possible especially if times were good. In prac- 
 tically every company no dividend could be paid on the 
 common until the "Special Surplus Account" or the "Pre- 
 ferred Stock Sinking Fund," as it was variously called, 
 had been provided for. Furthermore, no dividend over 
 4 per cent on the common was allowed in Underwood, May, 
 Kayser, Studebaker, Woolworth, etc., unless there had been 
 accumulated a considerable reserve over and above the 
 special surplus account. In the case of Emerson-Branting- 
 ham, Willys-Overland, Jewel Tea, and others, somewhat 
 higher dividends (6 and 7 per cent) were allowed; but 
 before any dividends beyond this rate could be paid an 
 additional surplus was necessary. In some of the companies 
 put out by William Salomon & Co. there was one very 
 interesting type of provision. In these companies, if any 
 dividend above a certain per cent was declared, the amount 
 of the installment paid to the sinking fund had to be in- 
 creased. In the Pettibone, MuUiken Company, if any 
 dividends in excess of six per cent were paid upon the 
 common stock, then the payment to the first preferred 
 stock sinking fund next payable after the declaration of 
 
64 THE CAPITALIZATION OF GOODWILL 
 
 such dividend was to be increased by a sum equal to the 
 amount of dividends in excess of six per cent so paid upon 
 the common stock. Emerson-Brantingham and Rumely 
 had similar provisions. If the sinking funds of the new 
 industrials were not kept up in times of depression the 
 obligation was in most cases cumulative and the deficit 
 had to be made up in subsequent years before any dividends 
 on the common stock could be paid. In some cases these 
 special surplus accounts were even available for preferred 
 dividends in times of emergency ; but it was always provided 
 that there should be subsequent compensation for such 
 withdrawals. 
 
 The review of the preferred stock provisions, which has 
 been given, is sufficient evidence of the fact that the invest- 
 ment bankers, the lawyers, and the owners looked upon the 
 position of the preferred stock holder as highly analogous 
 to that of a bond holder. But there were important 
 differences between the bond and the preferred stock. A 
 summary recapitulation of the likenesses and of the dis- 
 similarities of the two classes of instruments immediately 
 leads to important conclusions. First, the size of pre- 
 ferred issues in some cases was restricted, as in bond issues 
 by the tangible assets of the company. But the desire to 
 limit the amount of preferred stock so as to be able to pay 
 the preferred dividends was as strong a factor in this 
 provision as the desire to keep the size of the issue within 
 the value of the property of the corporation. Second, the 
 requirement that the consent of three-fourths of the pre- 
 ferred stock holders should be necessary to any mortgage 
 suggests the first mortgage feature of the bond; but the 
 requirement of such consent to any increase of preferred 
 stock seems to show that what the preferred stock holder 
 was as much interested in was the fact that he had a prior 
 lien on earnings. Third, the preferred stock holder like 
 the bond holder had no voting power in the ordinary 
 affairs of the company. However, if he did not receive a 
 certain number of his quarterly dividends he had the right 
 to vote. Thus, this contingent control was the weapon 
 
SEVEN PER CENT PREFERRED STOCKS 65 
 
 he might use whenever he was not paid his dividends. 
 Bond holders will not always sell the property; and seldom 
 do they do so advantageously. Preferred stock holders 
 were not always given the power to sell the corporation; 
 but contingent control might prove as effective as the 
 possibility of foreclosure in the case of the bond holder. 
 Fourth, the amortization provision was a very character- 
 istic bond feature, but the greater flexibility in application 
 was characteristic of preferred stocks. 
 
 The preferred stock provisions underwent an almost 
 continuous development. The first two industrials of this 
 class were the United Cigar Manufacturers and Sears 
 Roebuck. In the case of the United Cigar Manufacturers, 
 there were no quasi-bond features attaching to the preferred 
 stock beyond the provision that the dividend should be 
 cumulative. There was a greater complexity in the provi- 
 sions of the Sears Roebuck preferred ; but it was not until 
 later that the standard provisions were developed. The 
 preferred stock holders were looked upon as a type of 
 partners in these earliest companies, and in the absence of 
 any provision for retirement, they remained partners. 
 Subsequently, the United Cigar Manufacturers Company 
 found it disagreeable to be forced to retain these partners 
 after they could have dispensed with them. The preferred 
 stock provisions in the incorporations that followed evi- 
 denced a change in attitude on the part of the owners and 
 bankers. Preferred stock holders came to be considered 
 as a lenient type of bond holder. Sears Roebuck at first 
 planned to issue bonds, but they were shown the advantages 
 of preferred stock and the desirability of being able to put 
 off a dividend payment if necessary. The provisions for 
 amortization in any issue of industrial bonds would have 
 been severe; whereas preferred stocks could be retired in 
 good times and kept out in times of depression. 
 
 The writers who have argued that these industrial cor- 
 porations did not have large enough values in tangible 
 assets for bond issues were certainly in error. Sears Roe- 
 buck, B. F. Goodrich, Deere, Studebaker, F. W. Woolworth 
 
66 THE CAPITALIZATION OF GOODWILL 
 
 — all these businesses might have issued bonds instead of 
 preferred stock. As a matter of fact, Deere and Studebaker 
 did have small bond issues. It was not the lack of assets, 
 but the variability of earnings which turned the scale in 
 favor of preferred. These industrials, from their very 
 nature, showed great fluctuations in earnings. The greater 
 elasticity of the preferred stock was preferable to the rigid 
 requirements of the bond. Instead of six per cent bonds, 
 seven per cent preferred stock was issued. It was better 
 to pay an extra one per cent for money when it could be 
 borrowed on easier terms. The easier terms consisted in 
 the possibility of letting a few dividend payments slip by, 
 or in neglecting the sinking fund temporarily. 
 
 From the investor's point of view the preferred stock 
 was practically as good as the bond. Conclusive proof of 
 this is offered by the fact that those bonds which were put 
 out by similar companies sold on about a six per cent basis, 
 which was practically the basis on which the better pre- 
 ferred stocks sold. The interest on a bond in an industrial 
 with great fluctuations in earning power might have received 
 more immediate attention than the preferred dividends, 
 but this prompt payment might have been detrimental 
 even to the bond holder's ultimate interest. The preferred 
 stock holder's position was practically as good as that of 
 the bond holder except for the fact that he had no absolute 
 mortgage on the company's assets. The possibility of 
 contingent control and the prior lien on assets was not 
 thought of primarily as a mortgage right; it was merely a 
 weapon, and constituted a safeguard of a kind no different, 
 for example, from that which results from the election of 
 honest directors. Those preferred stocks which carried 
 with them the greatest potential rights to effect dissolutions 
 probably sold at no higher prices than those which had the 
 smallest amount of contingent control. 
 
 Naturally, the subject of bond issues in these industrials 
 is not of great importance. The difficulty of the Rumely 
 Company when it was unable to meet its interest obligations 
 was evidence of the danger of a bond issue for a new com- 
 
SEVEN- PER CENT PREFERRED STOCKS 67 
 
 pany with great fluctuations in earning power. Studebaker 
 converted large outstanding liabilities into an issue of 
 $8,000,000 of 5 per cent serial gold notes, which were 
 retired rapidly. This bond issue occurred only a year 
 after the original flotation and was the result perhaps of 
 the under-capitalization of the preferred issue. There were 
 no reasons, other than technical ones, why Studebaker did 
 not issue more preferred stock rather than bonds. Stern 
 Bros, changed a bond issue into one of preferred stock, but 
 merely for reasons of taxation. Deere and Co. had a bond 
 issue before the preferred stock flotation, and retained it 
 after the flotation. 
 
CHAPTER VII 
 
 The Success of the New Industrial Corporations 
 
 A valuable judgment as to the success of these flotations 
 would require as its basis a longer experience than is avail- 
 able. A record of only a few years, affected by such an 
 abnormal influence as the European War, makes the task of 
 generalization difficult and of doubtful value. There are 
 at least four different points of view from which their suc- 
 cess might be appraised. The owner, the banker, the 
 investor, and the public undoubtedly had different opinions 
 as to what constituted success. In many respects there 
 was agreement, but the conflicts of interest were numerous. 
 
 The owner's primary interest was the net profits. After 
 incorporation, as before incorporation, he was interested in 
 having his business make more each year. Provided he 
 held the common stock or a part of it, he wanted large 
 earnings. It made little difference whether those shares 
 represented large or small portions of the business; the 
 more the business made, the more he received. The 
 assumption was that the man who managed the business 
 held the bulk of the common stock. The bankers, in 
 many cases, as has been said, tried to enforce this, if only 
 for a limited number of years. If the man or men who 
 managed the business did not own any considerable part 
 of the common stock, the owner (in the sense that he is 
 defined here) did not really exist, as an independent factor. 
 Of course, the owner may have had a great temporary 
 interest in the price of the preferred stock, if he wanted to 
 unload a block of his preferred holdings. But generally 
 speaking, the actual earnings over and above all preferred 
 dividends were the owner's principal concern. 
 
 The banker, too, was interested in earnings, because 
 they affected the securities which he had created. The good 
 
 68 
 
SUCCESS OF THE NEW INDUSTRIAL CORPORATIONS 69 
 
 reputation of the preferred stocks, which he had sold his 
 customers, was a matter of great importance to him. 
 Upon their safety and their dividend paying regularity 
 his reputation rested. Furthermore, inasmuch as he had 
 received common stock bonuses in return for his work, 
 he had a direct interest in the price of the common stock. 
 The banker's interest was, thus, closely allied to that of the 
 investor. However, the buyer of preferred or common 
 stocks may at times have had a very different point of 
 view from that of the banker. The buyer of preferred 
 stocks may not have considered only regularity of dividends ; 
 he may have bought for a rise. The bankers and the buyers 
 of common stock may have had very different ideas as to 
 what policy was proper with respect to common dividends. 
 
 How the flotation of these companies on the stock ex- 
 change affected their earnings is not an easy question. In 
 some cases the increase in net profits after incorporation 
 was due to an accounting technicality. If a business used 
 any of the proceeds from the preferred to pay debts on 
 which it had been paying interest, its earnings for dividends 
 were increased since the interest paid before incorporation 
 was subtracted, whereas no part of the preferred dividend 
 was deducted in computing profit. It might be conjectured 
 that the new method of financing, made possible by these 
 flotations, may have brought about an increase and even a 
 greater stability in earnings. On the whole, however, those 
 companies, from which the owners withdrew the proceeds 
 obtained from the sale of the preferred, showed as great 
 and even greater success than the others. 
 
 The companies which had the least success were the 
 agricultural implement companies. (See last two tables 
 at the end of this chapter.) Some of them had issued bonds 
 before the general spread of the new form of capitalization 
 but not to the same extent as in the subsequent period. 
 These companies had had great fluctuations in earnings 
 before 191 1 and 1912 ; but the greater possibility of market- 
 ing securities after flotation may have helped to bring on 
 the disasters which they suffered.^ 
 
 1 See appendix i. 
 
70 THE CAPITALIZATION OF GOODWILL 
 
 One bad effect of the flotation of these businesses, which 
 was indirectly prejudicial to the owner's interest, was the 
 belief in certain cases in the necessity of declaring and 
 paying common stock dividends, which were not earned. 
 In 1914, when Brown Shoe had no justification whatsoever, 
 a dividend of 3 per cent was declared on the common stock. 
 Manhattan Shirt declared a dividend in 191 5, after three 
 years of steady fall in earnings. The May Department 
 Stores Co., in the same year continued a dividend of 5 per 
 cent when its earnings offered no justification for such a 
 policy. The need of a good showing and the publicity 
 attendant upon these dividends probably suggested a degree 
 of generosity which a private corporation would not have 
 considered. 
 
 The effect of the advertising value of these flotations 
 on the earnings was believed to be considerable. In the 
 report of Loose Wiles for its bad year 191 5, the president 
 of the company exhorted each stock holder to become a 
 patron and "rooter" for the Sunshine biscuit. The effect 
 of being listed on the stock exchange on the businesses of 
 Woolworth and Kresge may seem inconsequential; never- 
 theless, those in a position to know believed it a matter of 
 some value. In the case of B. F. Goodrich, of Sears Roe- 
 buck, and of Underwood Typewriter, the flotation was said 
 to have furnished effective advertisement. 
 
 A study of the actual earnings of these companies before 
 flotation, as given in a preceding chapter, shows that the 
 most successful businesses from the point of view of the 
 owner were those whose earnings were stabilized either 
 because they satisfied varied demands or depended upon the 
 supply of no one particular raw material. The chains of 
 five and ten cent stores and Sears Roebuck were the most 
 successful industrials because they were not seriously 
 affected by any one local or particular disturbance. (See 
 tables at the end of this chapter.) No one section of the 
 country, no one raw material, no one demand was able to 
 do them injury. These conditions were not altered by the 
 reincorporation of the companies. The May Department 
 
SUCCESS OF THE NEW INDUSTRIAL CORPORATIONS 7 1 
 
 Stores was too small a chain not to have been affected by 
 the local difficulty which the Pittsburgh store encountered. 
 The Brown Shoe showed decreases in earnings because of 
 the fall off in the local demand, and B. F. Goodrich because 
 of the decline in the value of its inventories of raw material. 
 
 There was another class of persons who held common 
 stock besides the owners and the bankers, namely, the 
 investors. As has been explained, the owner was not 
 ordinarily so vitally interested in the actual value or yield 
 of each particular share of common stock, but the banker 
 and the buyer of such stock did have that interest. As 
 far as dividends on these common stocks were concerned, 
 there were not a great many paid. The price of the 
 common stocks, however, rose in most cases with the 
 natural increases in earnings; and most of them shot up 
 to high figures after the outbreak of the European War. 
 On the whole, these industrials paid their preferred divi- 
 dends but few of them showed any regularity in dividends 
 on the common. 
 
 The effect of the capitalization on the subsequent history 
 of these common stocks is very interesting. Other things 
 being equal, a conservatively capitalized common stock 
 was naturally more valuable than a less conservatively 
 capitalized one. But those companies which had compara- 
 tively large common issues at the time of incorporation 
 (that is, companies which showed a small percentage earned 
 on the common) were less tempted to declare dividends 
 even though their earnings might have increased as rapidly 
 as those of the more conservatively capitalized companies 
 that did declare dividends. These did not pay dividends 
 partly because the dividends which they could have de- 
 clared would have been insignificant. Thus, the money 
 was returned to the business and expansion was possible. 
 Of course, Studebaker had a bad year in 1913; but after- 
 wards the policy of not paying common dividends brought 
 good results, whereas Willys-Overland did a remarkable 
 business all along, but paid large dividends, some of which 
 perhaps ought to have been returned to the business. Hart, 
 
72 THE CAPITALIZATION OF GOODWILL 
 
 Schaffner & Marx showed only 3.9 per cent on the common 
 at the time of incorporation. In the first year thereafter, 
 even less was earned on the common, but as the earnings 
 improved they were not distributed in dividends. Nothing 
 was paid on the common until the small dividend of one 
 per cent in 1915. Hart, Schaffner & Marx was unable to 
 pay large common dividends, and thus kept the surplus 
 earnings in the business for purposes of expansion. This 
 raises the question as to whether those companies which 
 were less conservatively capitalized were not in the end 
 really better off. Of course, from the common stock 
 holder's point of view the absence of dividends was not 
 always looked upon so favorably. 
 
 An interesting illustration of the relation between capital- 
 ization and the payment of common stock dividends is 
 furnished by a comparison of Woolworth and Kresge. 
 Woolworth had a much less conservative preferred issue 
 than Kresge but a much more conservative common one. 
 Even though the earnings of Kresge advanced as rapidly 
 as those of Woolworth and at certain periods much more 
 rapidly, Woolworth paid much more in common stock 
 dividends. Kresge put all surplus earnings back into the 
 business and as a result showed a much more remarkable 
 expansion than Woolworth. From the point of view of the 
 common stock holder the Woolworth method of financing 
 was more advantageous in most respects; but from almost 
 every other point of view the Kresge method led to safer 
 and better results. (See tables at the end of this chapter.)^ 
 
 The apparently fortunate outcome of what was actually 
 often an over-capitalized common stock shows, on fur- 
 ther study, a definite relation to another circumstance. 
 Many of the companies which in 191 1 and 1912 had large 
 common stock issues pulled through because of the great 
 increase in earnings resulting from the European War. 
 Many companies, which would have been earning little or 
 nothing on their common issues and would have paid no 
 dividends, made great strides after the outbreak of the War. 
 
 2 See appendix iv. 
 
i 
 
 SUCCESS OF THE NEW INDUSTRIAL CORPORATIONS 73 
 
 B. F. Goodrich had had a difficult time after incorporation, 
 but the War brought it prosperity. And this is but one 
 example. It is an interesting question whether it was the 
 earnings on these common stocks or the dividends paid 
 which had most to do with the price for which they sold 
 in the market. Of course, the amount earned might have 
 had less effect on the prices for the common stock in any 
 year, as the report was usually not published until the end 
 of the year. Furthermore, many buyers who made no 
 extensive calculations were satisfied that where large divi- 
 dends were paid there must have been large earnings. 
 As a matter of fact, the prices of these stocks rose with the 
 increases in earnings and the increase in the earnings on 
 the common stock, but the effect of the actual payment of 
 dividends on the prices of the common stocks was far more 
 noticeable. The great increase in the earnings of Stude- 
 baker in 1914 had no effect on the depressed prices of the 
 common, but the dividend in 191 5, which, of course, was 
 the result of great progress in earning power, sent the 
 stock to a high level. Kresge and Woolworth common 
 showed the great influence of dividends on the prices of 
 these stocks in the market. Of course, dividends which 
 were obviously too large did not have the same effect. 
 The 4 per cent dividend paid by Cluett-Peabody in 1914, 
 clearly a bad year for that company, caused only a small 
 rise in the value of the common stock, which had never 
 before paid a dividend. Too large a dividend, which might 
 have hindered expansion and even have hampered the 
 regular business of a company deceived no careful investor. 
 Certain special circumstances explain why some of these 
 preferred stocks sold at a higher price than others equally 
 as good. First, the larger and better known the company, 
 the higher was the price of the preferred stock, other things 
 being equal. Kresge's preferred issue was more conserva- 
 tive than that of Woolworth. Yet Woolworth preferred 
 sold at a higher price than Kresge preferred.^ Second, 
 those preferred stocks which were listed on the New York 
 
 3 The low redemption price of Kresge (no) undoubtedly influenced 
 the selling price. 
 
74 THE CAPITALIZATION OF GOODWILL 
 
 Stock Exchange sold usually at a relatively higher price 
 than those on the smaller exchanges. 
 
 The failure of the preferred stocks in the agricultural 
 implement companies was noted in the preceding chapter. 
 It is enough to say that three of the six companies analyzed 
 were unable to pay all their preferred dividends. With the 
 exception of Maxwell and Loose-Wiles, there were few other 
 companies which were unable to meet the preferred dividend 
 requirements. Thus, on the whole, as far as dividends 
 were concerned, these new industrial preferred stocks were 
 successful. Furthermore, these stocks rose in value from 
 year to year. Just what where the most important factors 
 in the fluctuations of the preferred stocks is a difficult 
 question. The factors, however, which might have been 
 expected to have had an immediate influence on the price 
 of the preferred stock were the tangible assets, the earning 
 power, and the price of the common stock. Of course, the 
 tangible assets and the earning power in any year had less 
 influence on the prices of the stocks for that year from the 
 fact that the reports were not published until the end of 
 the year. Furthermore, the actual effect on the prices of 
 preferred stock was much less considerable than might 
 have been expected. The prices of preferred stocks seem 
 to have been influenced more by the prices of the common 
 stocks than by any other factor. The records of Kresge, 
 Woolworth, Goodrich, Goodyear, and Underwood Type- 
 writer are but a few of the many cases which illustrate this 
 point. 
 
 The banker was naturally interested in the preferred 
 stock in so far as his reputation depended to a large extent 
 upon the success of the preferred issue. The actual holder 
 of the preferred stock was the one most vitally interested. 
 The banker cared chiefly about the safety of the yearly 
 dividend and the absence of any material decline in the 
 price of the stock. But the holder might have anticipated 
 in addition an actual rise in value or an early redemption. 
 On the whole, bankers and preferred stock holders were 
 satisfied. With the exception of one industry and certain 
 
SUCCESS OF THE NEW INDUSTRIAL CORPORATIONS 75 
 
 Other sporadic cases, the preferred stocks paid their regular 
 quarterly dividends and rose steadily in value, as shown in 
 the following table :^ 
 
 Companies 
 
 Deere 
 
 Case 
 
 Rumely 
 
 Emerson- 
 
 Brantingham 
 B. F. Goodrich . 
 
 Goodyear 
 
 Studebaker .... 
 Willys-Overland 
 
 Maxwell 
 
 Woolworth .... 
 
 Kresge 
 
 Acme 
 
 Jewel 
 
 1912 
 
 1913 
 
 191S 
 
 1916 
 
 1917 
 
 100- 99 
 loi- 99 
 103- 98 
 
 102- 98 
 109-105 
 
 98- 90 
 loi- 99 
 
 I 18-109 
 105-100 
 
 100- 91 
 103- 90 
 100- 33 
 
 loi- 91 
 
 105- 73 
 
 105- 97 
 
 93- 64 
 
 99- 80 
 
 35- 18 
 
 I 15-109 
 
 102- 96 
 
 99- 91 
 95- 80 
 40- 21 
 
 76- 72 
 
 95- 79 
 102- 92 
 
 92- 70 
 
 96- 90 
 48- 22 
 
 118-112 
 105- 99 
 
 99- 85 
 90- 74 
 18- 2 
 
 114- 95 
 I 15-100 
 119-91 
 
 115- 95 
 104- 43 
 124-115 
 I 12-104 
 
 99- 89 
 90- 82 
 
 43- 30 
 
 116-110 
 
 I 14-108 
 
 117- 94 
 93- 65 
 
 126-123 
 12- 10 
 98- 93 
 
 I 13-104 
 
 loi- 91 
 
 88-75 
 37- 19 
 
 112- 9i« 
 108- 92 
 108- 85 
 100- 92 
 
 74- 49 
 126-113 
 
 113- 83 
 96- 92 
 
 112- 90 
 
 It would appear that the values of the preferred stocks 
 should have borne some definite relation to the values of the 
 tangible assets behind them. Even if such a relation 
 existed, it would have been complicated somewhat by the 
 redemption values of these stocks. For example, Goodyear 
 preferred stock, which up to 191 5 was much better secured 
 than B. F. Goodrich preferred stock, never sold above $105, 
 whereas B. F. Goodrich sold at $109. The redemption 
 value of Goodyear preferred was $115 while that of B. F. 
 Goodrich preferred was $125.^ 
 
 No very definite relation between the prices of these 
 stocks and their safety coefficients, that is, ratios of tangible 
 assets to the preferred stocks, seems to exist. The earnings 
 of the various companies must be taken into consideration. 
 The prices of the agricultural implement preferred stocks 
 reflected the general instability in the industry. The chain 
 store preferred stocks were apparently the most stable 
 investments. 
 
 * These prices were obtained from the Annalist and from Investors' 
 Manuals. 
 
 * Ex-dividend. 
 
 ^ See appendix ii. 
 
76 
 
 THE CAPITALIZATION OF GOODWILL 
 
 The ratios of the tangible assets to the preferred stocks 
 were as follows :® 
 
 Companies 
 
 Deere 
 
 J. F. Case 
 
 Rumely 
 
 Moline 
 
 Emerson-Brantingham 
 
 B. F. Goodrich 
 
 Goodyear 
 
 Studebaker 
 
 Willys-Overland 
 
 Maxwell 
 
 Woolworth 
 
 Kresge 
 
 McCrory 
 
 Acme 
 
 Jewel 
 
 1912 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 1. 19 
 2.20 
 
 145 
 
 4.80 
 1.80 
 
 I. GO 
 1.22 
 
 1.09 
 1.75 
 1-59 
 2.19 
 1.49 
 
 2.40 
 2.18 
 
 1.22 
 1.50 
 
 1.20 
 1.84 
 
 {') 
 2.20 
 
 .96 
 
 2.68 
 2.19 
 
 3-93 
 1.40 
 1.70 
 
 1.25 
 1.89 
 1.03 
 2.22 
 1.46 
 1.08 
 2.80 
 3.06 
 3.96 
 4.61 
 1.60 
 2.25 
 1.80 
 
 1.29 
 
 1-93 
 .99 
 2.23 
 1.46 
 1.60 
 1.25 
 349 
 4-85 
 5.35 
 1.86 
 
 340 
 1.95 
 1.05 
 149 
 
 1-25 
 
 1.98 
 .96 
 2.26 
 1-53 
 1.73 
 1-55 
 2.95 
 4-38 
 3.10 
 2. II 
 4.21 
 2.19 
 1.49 
 1.74 
 
 A very much more definite relation between the earnings 
 on the common stocks and the market prices of those stocks 
 is clearly discernible. The following tables show how 
 closely market prices and earnings were related. The net 
 earning on the common stocks were as follows :^ 
 
 Companies 
 
 1912 
 
 1913 
 
 I9I4 
 
 I9I5 
 
 I9I6 
 
 Per cent 
 
 Per cent 
 
 Per cent 
 
 Per cent 
 
 Per cent 
 
 12 
 
 8 
 
 — 3 
 
 3 
 
 19 
 
 17 
 
 6 
 
 2 
 
 14 
 
 10 
 
 13 
 
 10 
 
 -36 
 
 
 -165 
 
 — 
 
 10 
 
 2/10 
 
 9/10 
 
 4 
 
 — 
 
 3 
 
 - 9 
 
 -5 
 
 -5 
 
 5 
 
 I 
 
 5 
 
 6 
 
 12 
 
 125 
 
 74 
 
 59 
 
 58 
 
 36 
 
 6 
 
 4 
 
 14 
 
 27 
 
 26 
 
 — 
 
 — 
 
 — 
 
 53 
 
 40 
 
 — 
 
 — 
 
 12 
 
 16 
 
 21 
 
 12 
 
 15 
 
 20 
 
 23 
 
 20 
 
 9 
 
 II 
 
 II 
 
 13 
 
 16 
 
 7 
 
 
 
 z 
 
 z 
 
 z 
 
 10 
 14 
 
 I9I7 
 
 Deere 
 
 Case 
 
 Rumely 
 
 Moline 
 
 Emerson-Brantingham . 
 
 B. F. Goodrich 
 
 Goodyear 
 
 Studebaker 
 
 Willys-Overland 
 
 Maxwell 
 
 Woolworth 
 
 Kresge 
 
 McCrory 
 
 Acme 
 
 Jewel 
 
 Per cent 
 
 14 
 18 
 
 -36 
 10 
 
 8/10 
 
 14 
 62 
 
 9 
 21 
 
 31 
 17 
 17 
 5 
 II 
 
 25 
 
 • These figures were calculated from data in Moody's Manuals of 
 Industrials. 
 
 * Reorganization. 
 
 'These figures were obtained from data in Moody's Manuals of 
 Industrials. 
 
SUCCESS OF THE NEW INDUSTRIAL CORPORATIONS 77 
 
 The market prices of these common stocks were as 
 follows :^ 
 
 Companies 
 
 1912 
 
 1913 
 
 1914 
 
 1916 
 
 Deere 
 
 Emerson- 
 
 Brantingham 
 B. F. Goodrich. 
 
 Goodyear 
 
 Studebaker .... 
 Willys-Overland 
 
 Maxwell 
 
 Woolworth .... 
 
 Kresge 
 
 Acme 
 
 Jewel 
 
 loi- 89 
 
 n- 65 
 
 86- 60 
 
 49- 30 
 72-67 
 
 118- 76 
 89- 47 
 
 92- 13 
 
 69- 22 
 68- 15 
 
 443-279 
 
 36- 15 
 
 75- 50 
 
 I- 5 
 
 112- 81 
 
 83-58 
 
 18- 6 
 
 28- 19 
 
 250-150 
 
 36- 20 
 
 91- 58 
 
 3- 16 
 
 103- 89 
 
 105- 81 
 
 14-78 
 
 80- 24 
 340-191 
 195- 35 
 268- 84 
 
 92- 15 
 120- 90 
 260- 99 
 
 21- 14 
 
 80-^57 
 
 167-100 
 81- 35 
 99- 44 
 
 141-118 
 
 16- 10' 
 
 96- 67 
 69- 51 
 
 18- 7 
 
 14- 12 
 
 61- 32 
 
 281-136 
 
 no- 79 
 
 38- 24 
 
 61- 43 
 
 I 15-100 
 
 13- IOC 
 78- 31 
 58- 52 
 
 8 These prices were obtained from the Annalist and from Investors' 
 Manuals. 
 
 " Value of common reduced to a par of $10. 
 
CHAPTER VIII 
 
 A Social Estimate of the New Industrial 
 Corporations 
 
 It Is a well known fact that the larger a business becomes, 
 the greater is the need of some form of finance by flotation. 
 Small undertakings can finance themselves satisfactorily 
 through the commercial banks and from private sources, 
 whereas large undertakings usually must have recourse 
 to the public sale of securities. Perhaps because stocks 
 and bonds are long time instruments they were once con- 
 sidered proper only for quasi-governmental enterprises, 
 namely, railroads, public utilities, etc. As industrial enter- 
 prises have increased in size on account of the advantages 
 of large scale production, the method of flotation has been 
 employed more and more by industrial corporations. 
 However, it is doubtful whether it is socially desirable 
 that some of the businesses quoted on the exchange today 
 should be there. It would have been, perhaps, to the 
 interest of all concerned — investors, the bankers, and the 
 owners — had the stocks of such businesses not been sold 
 on the stock exchange. 
 
 One of the most important functions claimed for the 
 stock exchange grows out of the speculator's assumption 
 of risks and the resultant stabilizing effect on the stocks 
 of companies with great fluctuations in earnings. There is, 
 however, a limit to this doctrine. It is uneconomic for 
 a business which could have been financed from private 
 sources to impose large risks on the market, which is 
 always best off when the fluctuations in it are small. The 
 speculator, who is often as much gambler as student, is 
 thus tempted to assume responsibilities which could better 
 have been undertaken by the men who control the business 
 of the corporation. Furthermore, instability in the earnings 
 of an industrial corporation that affects only the common 
 
 78 
 
SOCIAL ESTIMATE OF NEW INDUSTRIAL CORPORATIONS 79 
 
 stock is far less dangerous and much less important than 
 an instability so great that the safety of the preferred stock 
 is threatened. Preferred stocks, generally speaking, are 
 reasonably safe investments; and a business which does 
 not anticipate paying its preferred dividends regularly and 
 easily has no right to sell such securities to the public. 
 The greater the stability of a business, the more justification 
 there is for shifting its risks to the market. 
 
 It may generally be said that the larger a business is, the 
 greater will be its stability. However, size, as it is well 
 known, is by no means the only element in stability. It 
 was shown in the foregoing chapter that those businesses 
 which catered to but a single demand and which depended 
 upon the supply of only one or two raw materials, were the 
 first to encounter temporary difficulties with disastrous 
 results. The experience of the B. F. Goodrich Company, of 
 the Brown Shoe Company, and of the Cluett Peabody Co. 
 furnish good examples.^ A company which finds the prices 
 of its raw materials rising often cannot recuperate by an 
 immediately increased price for the finished product. The 
 customary price, which the Cluett Peabody Co. or the 
 Loose Wiles Biscuit Co. had to maintain, could not imme- 
 diately be altered when the price of linen or the price of 
 sugar increased rapidly. Notoriously unstable businesses 
 like the agricultural implement companies should never 
 have been brought into the market. On the other hand 
 the most successful companies have been those which 
 catered to varied demands, that is, Woolworth, Kresge, 
 Sears Roebuck.^ The successful chain store company was 
 particularly suited to flotation. The difficulty with the 
 May Department Stores lay in the fact that the chain was 
 so small that a local difficulty affected the success of the 
 chain to a large degree. Companies with trade names 
 that appeal to the popular imagination were thought by 
 some bankers to be especially suited to public flotation. 
 
 One economic question which seems to have been par- 
 
 1 See appendix ii. 
 
 2 See appendix iv. 
 
80 THE CAPITALIZATION OF GOODWILL 
 
 ticularly interesting to the bankers was concerned with the 
 advantages of combining businesses as a basis of flotation. 
 It must be understood that a combination, such as those of 
 Woolworth or the May Department Stores, was very 
 different from a combination Hke that of the B, F. Goodrich 
 Company and the Diamond Rubber Co. In the cases of 
 Woolworth and May, businesses were combined which did 
 not compete with each other and which were but slightly 
 affected by the combination. There was a single manage- 
 ment, whereas before incorporation there had been a few 
 independent businesses. When B. F. Goodrich and the Dia- 
 mond Rubber Co. were combined, the healthful competition 
 which had stimulated salesmanship and the trade name of 
 the Diamond Rubber Co. were lost. When the banker who 
 had brought about the combination of these two companies 
 was to float a later combination of the same kind, he feared 
 the same difficulties which he had encountered in the B. 
 F. Goodrich Company. As Dewing has shown, few of the 
 industrial combinations obtained a sufficient control of the 
 trade to command prosperity.^ 
 
 The financial exigencies which were responsible for the 
 incorporation or reincorporation of these companies were 
 classified, and described at length in a former chapter."* 
 The owners, who invoked the financial aid of a flotation, 
 and the investors and the bankers, whose security holdings 
 were the results of these financial needs, naturally took great 
 interest in the purposes of these flotations and had definite 
 ideas as to how this new capital would be of advantage 
 from their own particular points of view. Certainly the 
 social estimate of the desirability of the employment of 
 these large amounts of capital must take into consideration 
 the interests of these agents in economic production, but 
 it will take into account other interests as well. The 
 personal motives of the owner are not hard to understand. 
 Here was a great business which he had built up, in most 
 cases, slowly and laboriously. As he was growing older 
 he felt that it was desirable to sell stock to those who were 
 
 3 Dewing, Corporate Promotions and Reorganizations, p. 565. 
 ^ Chapter iii. 
 
SOCIAL ESTIMATE OF NEW INDUSTRIAL CORPORATIONS 8 1 
 
 anxious to get it, and thereupon he withdrew his invested 
 capital. He did not want all his eggs in one basket, for if 
 danger befell his business his declining years might be 
 threatened with disaster. Of course, from an economic 
 point of view, much depended upon what other baskets 
 he chose for the eggs. Society is interested in the economic 
 employment of capital. One of the most important func- 
 tions of a bank is the transfer of capital from those who own 
 it, but who do not know how to use it, to those who need 
 it and know how to use it. Assuming that the owner who 
 withdrew his capital was as wise in appraising other ven- 
 tures as he had been in the promotion of his own and that 
 his business experience through many years had made him 
 even keener and more efficient, there is reason to believe 
 that the capital which he withdrew was reinvested econom- 
 ically. However, if, with advancing age, caution and con- 
 servatism suggested the reinvestment of the capital with- 
 drawn in government bonds, it is doubtful whether the 
 effects of such a flotation were economically beneficial. 
 
 Those businesses which were incorporated in order to 
 obtain working capital for expansion made, perhaps, the 
 most legitimate use of corporation finance from an economic 
 point of view. That this was recognized by the owners was 
 shown in practically every prospectus which made a definite 
 and open avowal of the purpose of procuring working 
 capital for expansion. Expansion by means of the public 
 sale of securities is a recognized method of corporation 
 finance, but the question naturally arises as to whether 
 many of these new industrials really needed or were justified 
 economically in their use of the methods of corporation 
 finance to obtain this capital. It was explained earlier in 
 the chapter that those businesses which were small and 
 which were lacking in stability had less justification for 
 throwing risks on the stock market than those which were 
 larger and more stable. Furthermore, the smaller busi- 
 nesses should have been able to finance themselves in the 
 usual way through the commercial banks if they had good 
 credit. The great expenses of the flotations must also be 
 
 6 
 
82 THE CAPITALIZATION OF GOODWILL 
 
 considered. There is one other consideration of interest 
 with regard to those businesses which obtained capital for 
 expansion. Where a business borrowed money in the 
 market instead of in the bank, or when it Hquidated its 
 outstanding liabilities with the borrowed capital, its credit 
 was perhaps increased with the bank. A further issue of 
 securities in a market which was acquainted with the 
 company was also usually a possibility. Thus, the question 
 arises as to whether these flotations did not allow and 
 whether they might have even encouraged a too rapid 
 expansion. The charter provisions with regard to the 
 preferred stock^ and with respect to borrowing in general 
 as well as the publicity afforded by the annual statements 
 were the most effective restrictions on the possible tendency 
 towards a too rapid expansion. It was a common belief 
 that the banker, who was usually a director, actuated by 
 self-interest, wisdom, and conservatism, furnished a check 
 on any policy of unwarranted expansion. As a matter of 
 fact, the bankers usually had little control after the flotation 
 of the stock. The charter provisions were their only 
 weapons and safeguards. The banker who financed a 
 business before its public sale had in many respects a much 
 more effective control of it than he could have after if it 
 had been financed by the marketing of its stock. 
 
 ^ Given in full in chapter vi. 
 
APPENDIX I 
 Introduction 
 
 The four industries in which the capitalization of in- 
 dustrial goodwill has been most noteworthy are the farm 
 implement industry, the rubber tire industry, the auto- 
 mobile industry, and the chain stores. For this reason 
 brief analyses of the rise, spread, and success of stock 
 flotations in these industries have been prepared. These 
 analyses furnished material for a number of the conclusions 
 reached in the foregoing chapters. The data for these 
 analyses were obtained from Moody's and Poor's Manuals 
 of Industrials, the Annalist, Investors' Manuals, and from 
 other original sources. 
 
 Although some knowledge of accounting is indispensable 
 for a thorough comprehension of these analyses, only a few 
 terms need be explained for the general reader. 
 
 By "Sales" is usually meant "Net Sales," i.e., "Gross 
 Sales," with deductions for "Outgoing Freight," "Dis- 
 counts," and "Allowances." 
 
 By "Investment" is meant "Capital Stock," "Bonds," 
 and "Surplus," with deductions for "Goodwill" and "Out- 
 side Investments." "Short Term Notes" would have been 
 included if their duration could have been ascertained. 
 
 By "Tangible Assets" is meant "Capital Stock" and 
 "Surplus," with deductions for "Goodwill." 
 
 By "Profit" is meant the accountant's "Gross Profit," 
 i.e., profit and interest. In some places "Profit" refers 
 to the accountant's "Net Profit," i.e., gross profit with 
 bond interest deducted (as in the profit earned on the 
 common stock). 
 
 The Farm Implement Stock Flotations 
 
 I. The Reasons for the Preferred Stock Flotations 
 
 The M. Rumely Co., together with the companies which 
 it absorbed in 191 1 (the Gaar Scott Co., the Advance 
 
 83 
 
84 THE CAPITALIZATION OF GOODWILL 
 
 Thresher Co., and the J. I. Case Threshing Machine Co.), 
 were the most important threshing companies in the in- 
 dustry. These large thresher companies stated at the 
 time of their flotations in 191 1 and 1912 that they desired 
 to develop the manufacture of other kinds of farm imple- 
 ments, particularly tractors and portable engines. The 
 Emerson-Bran tingham Co., which had confined its output 
 to "walking, riding, and engine plows, disc plows, harrows, 
 pulverisers, seeders, planters, middle breakers, cultivators, 
 listers, alfalfa renovators, stalk cutters, mowers, and rakes," 
 acquired two new platits in order to develop a business in 
 "tractors, threshers, hay stackers, hay presses, corn shellers, 
 etc." The Moline Plow Co., which had manufactured 
 wagons and plows, acquired by means of its second preferred 
 stock the Adriance, Piatt and Company, a large binder 
 plant. The John Deere Plow Co., which had always been 
 one of the most important plow manufacturing companies, 
 developed under the name of Deere and Co. into the most 
 important independent "full line" company. 
 
 In the Report of the Bureau of Corporations (March 
 1 913) on the International Harvester Company, it was 
 stated (page xx) that since the organization of the Inter- 
 national Harvester Company in 1902 new competition had 
 begun to appear, "especially from certain large plow and 
 tillage-implement makers, whose fields have been invaded 
 by the combination, and who likewise have arranged to 
 estabHsh a 'full line' — that is, a large assortment of the 
 chief kinds of farm implements. This new competition is 
 apparently of great significance. However, in 1911 the 
 International Harvester Company still had about 80 per 
 cent of the production of binders, 78 per cent of the pro- 
 duction of mowers, and 72 per cent of the production of 
 rakes." 
 
 Apparently the flotations of preferred stock by the inde- 
 pendent companies represented the means by which they 
 were enabled to develop "full lines" or, at least, new fines. 
 The International Harvester Co. had invaded their fields, 
 and they desired to wage offensive warfare. 
 
APPENDIX I 85 
 
 In addition to this motive, there was probably another 
 which influenced the threshing machine companies (J. I. 
 Case and M. Rumely) to issue preferred stock. Parts of 
 their preferred stocks were used to wipe off bonded in- 
 debtedness and other liabiUties. This was particularly 
 true of the J. I. Case preferred stock, which was to be 
 used " to redeem and cancel all the outstanding bonded debt 
 ($2,300,000), and along with bills receivable ($9,405,643) to 
 retire the bills payable ($5,425,000) as well as for increases 
 in plant and manufacturing facilities ($1,200,000)." The 
 M. Rumely Company had $1,000,000 of bonded indebted- 
 ness which was wiped off by the preferred issue. The 
 threshing machine was an expensive machine, and was 
 usually bought on credit and paid for by installments. 
 Thus, a threshing machine company had great difficulty 
 in financing itself inasmuch as it had to extend so much 
 credit. It should be noted, furthermore, that the Moline 
 Plow Co. also desired to retire its floating indebtedness. 
 
 2. Case, Deere, Rumely, Emerson-Brantingham, and 
 Moline Before igi2 
 
 The preferred stock flotations of the farm implement 
 companies occurred in 191 1 and 191 2. A comparison of the 
 accounts of the five independent companies in 19 10 and 
 191 1 will serve to estimate their success before their re- 
 incorporation. 
 
 1910 
 
 Ratio of Gross Profits Ratio of Net Profits 
 Companies to Gross Sales (%) to Gross Sales (%) 
 
 Deere 13** I2« 
 
 J. I. Case 16 12 
 
 M. Rumely 10 5 
 
 191 1 
 
 Deere I3" ^2 
 
 J. I. Case 18 12 
 
 M. Rumely I5 '3 
 
 Emerson-Brantingham — lo 
 
 « Estimated. 
 
86 
 
 THE CAPITALIZATION OF GOODWILL 
 
 3. The Success of the Farm Implement Flotations 
 
 The earnings of these companies on their investments 
 between 19 12 and 191 7 show that they failed to obtain 
 the success they anticipated in 191 1 and 1912. Their 
 reports, however, were better on the whole in 191 7 than in 
 the previous years. 
 
 The profits on investment were as follows : 
 
 Percentage of Profit Earned on Investment 
 
 Companies 
 
 1912 
 
 1913 
 
 1914 
 
 191S 
 
 1916 
 
 1917 
 
 Rumely 
 
 10 
 
 10 
 9 
 
 19(b) 
 
 7 
 
 7 
 
 12 
 
 8 
 
 Loss 
 
 4 
 6 
 6 
 
 .6 
 3 
 9 
 9 
 
 4 
 
 I 
 
 4 
 
 10 
 
 8 
 
 5 
 
 Emerson-Brantingham .... 
 Moline 
 
 3 
 10 
 
 Deere 
 
 12 
 
 Case 
 
 13 
 
 4. The Preferred Stock of the Farm Implement Companies 
 
 The relations of the preferred stocks to the tangible 
 assets for the five companies were as follows : 
 
 Tangible Assets Divided by the Preferred Stock 
 
 1912 
 
 1913 
 
 1914 
 
 191S 
 
 1916 
 
 1. 19 
 
 1.09 
 
 1.20 
 
 1.25 
 
 1.29 
 
 
 1.75 
 
 1.84 
 
 1.89 
 
 1.93 
 
 2.20 
 
 1-59 
 
 (c) 
 
 1.03 
 
 .99 
 
 — 
 
 2.19 
 
 2.20 
 
 2.22 
 
 2.23 
 
 1.45 
 
 1.49 
 
 1.45 
 
 1.46 
 
 1.46 
 
 1917 
 
 Deere 
 
 J. I. Case 
 
 Rumely 
 
 Moline^ 
 
 Emerson-Brantingham 
 
 1.25 
 1.98 
 .96 
 2.26 
 1-53 
 
 The preferred stock issues, thus, were conservative. 
 Apparently no great amounts of money were put back in the 
 business as the increases in the foregoing percentages were 
 not great. However, the preferred stocks were not retired 
 (i.e., amortized) so generally in these companies as in the 
 case of most of the other industrials. 
 
 The prices of these preferred stocks were as follows:^ 
 
 ^ Loss. 
 
 * Reorganization. 
 
 1 Reports do not show exact amount of goodwill. 
 
 * Fractions omitted. 
 
APPENDIX I 
 
 87 
 
 Deere 
 
 J. I. Case 
 
 Rumely 
 
 Emerson- 
 
 Brantingham 
 
 Hig 
 
 ;h-Lo\i 
 
 100-99 
 101-99 
 103-98 
 
 102-98 
 
 Hig 
 
 :h-Lo\ 
 
 100-91 
 103-90 
 100-33 
 
 IOI-91 
 
 Hig 
 
 ■h-Lov 
 
 99-91 
 95-80 
 40-21 
 
 76-72 
 
 Hig! 
 
 ■h-Lo\ 
 
 99-86 
 90-74 
 18- 2 
 
 1Q16, 
 High-Low 
 
 99-89 
 90-82 
 43-30 
 
 191 7' 
 Hign-Low 
 
 101-91 
 
 88-75 
 37-19 
 
 The ratios of these preferred stocks to the tangible assets, 
 however, bore no definite relation to the market prices of 
 the stocks when the earnings of the companies fell off. 
 The preferred stock of Deere held up best, and that of Case 
 held up fairly well, but the industry's bad year of 191 4 
 seriously affected the market values of most all of these 
 stocks. 
 
 Case and Deere have always paid the 7 per cent preferred 
 stock dividends, but Rumely preferred paid nothing in 
 1914 and Emerson-Brantingham paid only sJ per cent. 
 The preferred dividends of these companies were as follows : 
 
 
 1912 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 1917 
 
 Deere 
 
 7 
 7 
 7 
 7 
 
 7 
 
 7 
 
 h 
 
 7 
 7 
 
 7 
 
 7 
 
 7 
 7 
 
 7 
 
 
 7 
 
 7 
 
 7 
 
 
 7 
 
 7 
 
 Case 
 
 Rumely 
 
 Moline 
 
 7 
 
 
 Emerson-Brantingham 
 
 5. The Common Stocks 
 
 The common stocks of most of these farm implement 
 companies were not traded in extensively on the stock 
 exchanges. The prices of the Deere and Emerson-Brant- 
 ingham common stocks were as follows: 
 
 1912, 
 
 High-Low 
 
 1913 
 High - 
 
 Low 
 
 1914. 
 High-Low 
 
 1915. 
 Hign-Low 
 
 1916, 
 High-Low 
 
 1017. 
 High-Low 
 
 Deere 
 
 Emerson- 
 Brantingham 
 
 101-89 
 77-65 
 
 92-13 
 69-22 
 
 18-6 
 
 14-7/8 
 
 21-14 
 
 18- 7 
 14-12 
 
 The earnings of these companies on their common stocks 
 throw light on the low prices of those listed and explain 
 
88 
 
 THE CAPITALIZATION OF GOODWILL 
 
 why they were so little traded in. The percentages earned 
 on the common stocks were as follows: 
 
 I9I2 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 12 
 
 -8 
 
 -3 
 
 3 
 
 19 
 
 17 
 
 6 
 
 2 
 
 14 
 
 10 
 
 
 
 3 
 
 -9 
 
 -5 
 
 -5 
 
 13 
 
 10 
 
 36 
 
 — 
 
 -165 
 
 
 
 10 
 
 2 
 
 I 
 
 4 
 
 1917 
 
 Deere 
 
 Case 
 
 Emerson-Brantingham 
 
 Rumely 
 
 Moline 
 
 14 
 
 18 
 
 I 
 
 -36 
 
APPENDIX II 
 
 The Rubber Tire Stock Flotations 
 
 I. The Rubber Tire Industry Before the Preferred Stock 
 Flotations in igi2 
 
 The rubber tire industry is an industry of comparatively 
 recent growth, and has developed simultaneously with the 
 automobile industry. The development of the automobile 
 would have been practically impossible had it not been for 
 the pneumatic rubber tire. The great expansion in the 
 rubber industry, furthermore, has resulted from the demand 
 for automobile tires. 
 
 In the Census of Manufacturing of 1914, figures for the 
 tire industry were first given separately. The development 
 of the combination in this industry, the United States 
 Rubber Co., preceded this Census by a number of years. 
 In the report of the Industrial Commission of 1901 the 
 dominant position of the United States Rubber Co. was 
 set forth. But the company developed its business in 
 other lines, e.g., shoes, belting, hose, etc. A comparison 
 of the figures in the Census of 1909 with those of the Census 
 of 1914 will show that the rubber industry grew rapidly in 
 these five years and that the increases resulted chiefly 
 from the development of the tire industry. 
 
 The development in the use of automobile tires in 1909 
 and 1 9 10 and its effect on the business of the tire companies 
 are shown by the following figures taken from the Fisk 
 prospectus : 
 
 Year 
 
 Automobile Casings 
 
 Automobile Inner Tubes 
 
 Bicycle Tires 
 
 1908 
 
 57.695 
 
 40,960 
 
 84,387 
 
 1909 
 
 78,259 
 
 59,077 
 
 103,085 
 
 I9IO 
 
 96,692 
 
 88,061 
 
 168,990 
 
 I9II 
 
 125,279 
 
 121,584 
 
 207,561 
 
 I912 
 
 221,826 
 
 198,925 
 
 240,623 
 
 89 
 
90 
 
 THE CAPITALIZATION OF GOODWILL 
 
 In 1902 the United States Rubber Co. and the Rubber 
 Goods Manufacturing Co. controlled nearly 60 per cent 
 of the industry, but by 1914 not much more than one-fourth 
 of the rubber manufacturing business was in the hands of 
 the United States Rubber Company.^ In 1914 the sales 
 of the United States Rubber Co. were about 85 per cent 
 as great as the combined sales of the three largest companies 
 (B. F. Goodrich, Goodyear, and Firestone), while in 191 7 
 this percentage was only about 67 per cent. The trade 
 names of the independent companies proved of great value. 
 
 The United States Rubber Co., furthermore, did not 
 increase its sales from 1910 to 1912, whereas the large 
 independent companies showed considerable increases prior 
 to 1 91 2. In the following figures the sales of 1910 are used 
 as a base : 
 
 Year 
 
 United States 
 Rubber Co. 
 
 B. F. Goodrich 
 
 Goodyear 
 
 Fisk 
 
 IQIO 
 
 100 
 105 
 
 95 
 
 100 
 106 
 192 
 
 100 
 
 139 
 264 
 
 100 
 
 I9II 
 
 IQI2 
 
 116 
 165 
 
 
 The United States Rubber Co. made a somewhat greater 
 margin of profit on sales than the other two companies for 
 which figures are available, i.e., Goodyear and Firestone. 
 
 2.. The Reasons for the Preferred Stock Flotations 
 
 The independents, B. F. Goodrich, Goodyear, and Fisk, 
 issued preferred stock apparently for the purpose of securing 
 funds for expansion. The Goodyear prospectus gives the 
 following as the purpose of the preferred issue: ''Of the 
 authorized issue of $5,000,000 Preferred Stock, $1,000,000, 
 was issued to retire a like amount of Preferred Stock 
 formerly outstanding, and the remaining $4,000,000 to 
 provide additional working capital to meet the growing 
 demands of the business." The reason for the B. F. 
 Goodrich flotations was the desire for expansion through the 
 
 ^The Rubber Goods Manufacturing Co. was controlled by the 
 United States Rubber Co. 
 
APPENDIX II 
 
 91 
 
 purchase of the Diamond Rubber Company. Apparently the 
 promoters had no idea of forming a combination in restraint 
 of trade or of attempting any kind of monopoly; the acquisi- 
 tion of the Diamond Rubber Company seems to have grown 
 out of the desire to gain the well recognized economies of 
 large scale production, 
 
 The entire proceeds from the preferred stock issues of 
 these companies were not used in every case for the purpose 
 of expansion. Apparently the owners of these companies 
 withdraw a part of their investment from the business when 
 their preferred stock was floated. 
 
 3. The Sales of the Rubber Tire Companies after the 
 Flotations of igi2 
 
 Following the flotations of 19 12, the sales of the inde- 
 pendent companies increased more rapidly than the sales 
 of the United States Rubber Co. In the following table 
 the sales of 1913 are used as a base: 
 
 Year 
 
 United States 
 Rubber 
 
 B. F. Goodrich 
 
 Goodyear 
 
 Fisk 
 
 IQI-l 
 
 100 
 lOI 
 
 138 
 191 
 
 100 
 121 
 140 
 180 
 221 
 
 100 
 
 94 
 III 
 
 194 
 
 100 
 
 IQI4. 
 
 117 
 
 IQiq 
 
 147 
 
 *^ 9 
 
 IQI6 
 
 210 
 
 I9I7 
 
 322 
 
 The sales of the United States Rubber Company were 
 larger than those of any of the independents, and therefore 
 the percentage of increase might have been expected to be 
 less rapid for the larger company. 
 
 4. The Profits of the Rubber Tire Companies 
 
 The ratios of the profits (gross profits before the deduc- 
 tion of interest) to the sales were on the average greater 
 for the United States Rubber Co. than for the other com- 
 panies. For the five years since incorporation, the United 
 States Rubber Co. averaged about 14 per cent on sales, 
 Fisk about 8 per cent, and the other companies about 12 
 per cent. The profits earned on sales were as follows: 
 
92 
 
 THE CAPITALIZATION OF GOODWILL 
 
 Percentage of Profit Earned on Sales 
 
 Year 
 
 U. S. Rubber 
 
 B. F. Goodrich 
 
 Goodyear 
 
 risk 
 
 Firestone 
 
 1909. . . 
 
 — 
 
 — 
 
 15 
 
 _ 
 
 — 
 
 I9IO... 
 
 18 
 
 — 
 
 15 
 
 — 
 
 — 
 
 I9II... 
 
 12 
 
 — 
 
 10 
 
 — 
 
 8 
 
 I912... 
 
 12 
 
 9 
 
 12 
 
 — 
 
 ID 
 
 I913... 
 
 II 
 
 6 
 
 6 
 
 5 
 
 10 
 
 I914... 
 
 14 
 
 10 
 
 20 
 
 7 
 
 17 
 
 I9I5.-. 
 
 15 
 
 21 
 
 14 
 
 10 
 
 17 
 
 1916.. . 
 
 13 
 
 13 
 
 II 
 
 8 
 
 13 
 
 1917... 
 
 18 
 
 13 
 
 13 
 
 12 
 
 8 
 
 The gross profits (i.e., profits and interest) on the invest- 
 ments for these companies were as follows:^ 
 
 Percentage of Profit Earned on Investments ^ 
 
 Year 
 
 B. F. Goodrich 
 
 Goodyear 
 
 Fisk 
 
 I9IO 
 
 I9II 
 
 I912 
 
 I913 
 
 I914 
 
 I915 
 
 I916 
 
 I917 
 
 7 
 16 
 36 
 24 
 26 
 
 72 
 31 
 64 
 17 
 29 
 29 
 36 
 41 
 
 9 
 15 
 29 
 
 19 
 21 
 
 Goodyear averaged more than 30 per cent, B. F. Good- 
 rich about 22 per cent, and Fisk, 18 per cent between 
 1912 and 1917. 
 
 5. The Preferred Stocks 
 
 The equity in the preferred stocks of B. F. Goodrich 
 and Goodyear, i.e., the preferred stock divided into the 
 tangible assets was as follows: 
 
 Year B. F. Gooodrich Goodyear 
 
 I9IO — 4.58 
 
 I9II — 4.10 
 
 I912 — 4.80 
 
 I913 — 2.40 
 
 1914 96 2.68 
 
 I915 1.08 2.80 
 
 I916 1.60 1.25 
 
 1917 1.73 1-55 
 
 ' The investment of the United States Rubber Co, was difficult to 
 determine because the amount of "goodwill" is not stated on the 
 balance sheet. 
 
 ^ Profit and Interest on Investment. 
 
APPENDIX II 
 
 93 
 
 The Goodyear preferred stock was the safest because of 
 the absence of water, but the redemption values were such 
 that the high points for Goodyear and B. F. Goodrich were 
 practically the same, as shown by the following figures: 
 
 
 1911 
 
 1912 
 
 »9i3 
 
 1914 
 
 1915 
 
 1916 
 
 1917 
 
 B. F. Good- 
 
 
 
 
 
 
 
 
 rich 
 
 — 
 
 109-105 
 
 105- 73 
 
 95-79 
 
 114- 95 
 
 116-110 
 
 112-91* 
 
 Goodyear. . 
 
 — 
 
 
 105- 97 
 
 102-92 
 
 I 15-100 
 
 — 
 
 108-92 
 
 Firestone. . 
 
 — 
 
 — 
 
 108-103 
 
 — 
 
 113-110 
 
 — 
 
 109-97 
 
 Fisk 
 
 — 
 
 — 
 
 — 
 
 — 
 
 108^ 
 
 — 
 
 
 United 
 
 
 
 
 
 
 
 
 States 
 
 
 
 
 
 
 
 
 Rubber 
 
 
 
 
 
 
 
 
 Co 
 
 I I 5-1 04 
 
 I 16-105 
 
 109- 98 
 
 104-95 
 
 IIO-IOI 
 
 I 15-106 
 
 1 14-91 
 
 6. The Common Stocks 
 
 The earnings on the common stocks of these companies 
 were as follows : 
 
 Percentage Earned on the Common Stocks 
 
 Year 
 
 United States 
 Rubber Co. 
 
 B. F. Goodrich 
 
 Goodyear 
 
 Fisk 
 
 IQIO 
 
 10 
 
 4 
 
 6 
 
 10 
 
 8 
 
 9 
 
 15 
 
 29 
 
 5 
 
 I 
 
 5 
 
 6 
 
 12 
 
 14 
 
 151 
 
 53 
 125 
 
 74 
 
 5? 
 
 58 
 
 36 
 62 
 
 — 
 
 TQII 
 
 — 
 
 TQT2 
 
 — 
 
 TQI'l 
 
 2 
 
 I9I4 
 
 TQI^ 
 
 xl 
 
 TQI6 
 
 16 
 
 I9I7 
 
 33 
 
 Goodyear showed the largest earnings because of the 
 absence of "goodwill"; the United States Rubber Co. and 
 Fisk showed about the same earnings on the common 
 stock; B. F. Goodrich showed the least because of the 
 large amount of "goodwill." These facts are reflected 
 somewhat in the pric es of the common stocks. 
 
 « Ex-dividend. 
 
 ^ At some closing during year. 
 
94 THE CAPITALIZATION OF GOODWILL 
 
 Prices of Common Stock 
 
 
 1911, 
 
 High- 
 Low 
 
 1912, 
 High- 
 Low 
 
 Low 
 
 High- 
 Low 
 
 H?gt 
 Low 
 
 1916, 
 
 High- 
 Low 
 
 H?gh- 
 Low 
 
 B. F. Goodrich. 
 
 Goodyear 
 
 Firestone 
 
 Fisk 
 
 48-30 
 
 86-60 
 67-45 
 
 68- 15 
 
 443-279 
 360-122 
 
 69- 51 
 
 28- 19 
 250-150 
 
 63- 44 
 
 80- 24 
 340-191 
 804-365 
 126- 60 
 
 74- 44 
 
 80-57 
 70-47 
 
 61- 32 
 281-136 
 
 150- 97 
 
 U. S. Rubber 
 Co. 
 
 67- 45 
 
 
APPENDIX III 
 
 The Automobile Stock Flotations 
 I. The Development of the Automobile Industry 
 
 The automobile industry increased more rapidly in size 
 and importance between 1904 and 1909 than any other 
 industry. From an industry of almost negligible impor- 
 tance in 1900, it became one of the nine most important 
 industries in the Census of 191 4 — with products valued 
 at over $500,000,000. Coincident with the great increases 
 in the size of the rubber tire industry between 1908 and 
 191 1 , the automobile industry also progressed rapidly. The 
 following figures, which are probably not entirely accurate, 
 show the development of the industry -} 
 
 Year No. of Cars Produced 
 
 1898 200 
 
 1900 2,000 
 
 1902 9,000 
 
 1904 20,000 
 
 1906 39.000 
 
 1908 55,000 
 
 1910 180,000 
 
 1912 300,000 
 
 1914 560,000 
 
 1916 1,300,000 
 
 Naturally a rapidly expanding industry, such as this 
 one, has needed capital, and has used the stock market as 
 a means to procure it. This industry developed after 
 the period of combination. The General Motors Co. was 
 formed in 1908; but this company, large as it was, up 
 through 1916 never produced much more than about 10 
 per cent of the total output of the industry. Ford, how- 
 ever, produced more than 35 per cent of the total output 
 of 1916; and seven companies produced more than 75 per 
 cent of the total production of a utomobiles in 1916. These 
 
 1 Obtained from the reports of the Association and the Census of 
 Manufactures. 
 
 95 
 
96 
 
 THE CAPITALIZATION OF GOODWILL 
 
 companies were : Ford, General Motors, Studebaker, Willys- 
 Overland, Chevrolet, and Maxwell. 
 
 The popularity of the cheaper variety of automobiles 
 and probably a decreasing cost of production are shown by 
 the following average prices paid for automobiles between 
 1904 and 1914: 
 
 1904 $1,382 
 
 1906 1,850 
 
 1908 1,621 
 
 1910 1,203 
 
 1912 1,000 
 
 1914 940 
 
 2. Reasons for the Preferred Stock Flotations 
 
 The preferred stocks of Studebaker and of Willys-Over- 
 land were floated in 191 1 and 1912. The Ford Co. is prac- 
 tically a closed corporation, and the reincorporation of 
 General Motors in 19 16 was not the result of the same 
 motives that were effective in the case of Studebaker and 
 Willys-Overland. Studebaker and Willys-Overland were 
 incorporated in 191 1 and 1912 for the purpose of acquiring 
 new capital for expansion. It was about this time that the 
 industry began to expand. 
 
 3. The Profits of the Automobile Companies 
 
 The ratios of the profits to the investments (i.e., the 
 percentage earned on investment) of automobile companies 
 between 191 1 and 191 7 were as follows: 
 
 
 191Z 
 
 1912 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 1917 
 
 Studebaker 
 
 11^3 
 
 9.9 
 I6.2« 
 
 7j9 
 
 7.5" 
 30.0 
 
 16.2 
 
 14.3 
 15.5 
 28.6 
 
 28.3 
 67.9 
 21.6 
 33.8 
 48.3 
 
 26.2 
 47.6 
 45.0 
 20.5 
 64.1 
 
 139 
 16.0 
 33.0 
 
 Willys-Overland 
 
 Maxwell 
 
 Packard 
 
 General Motors 
 
 54.1 
 
 These automobile companies, like so many others, pros- 
 pered remarkably during 1915 and 1916. In 191 7, how- 
 ever, there was a decrease in the return on investment, due 
 in part to the increase in investment in all cases except that 
 
 " Fiscal year. 
 
APPENDIX III 
 
 97 
 
 of Studebaker. The decrease in the sales of Studebaker in 
 191 7 explains the poor showing of this company in that 
 year. 
 
 4. The Equity in the Preferred Stocks 
 
 The automobile preferred stock issues were conservative, 
 as is shown by the ratios of the preferred stocks to the 
 tangible assets: 
 
 
 1911 
 
 1912 
 
 1913 
 
 19 14 
 
 1915 
 
 1916 
 
 1917 
 
 Studebaker 
 
 1.67 
 
 1.80 
 
 2.18 
 1.86 
 
 2.19 
 
 3-93 
 1.87 
 
 3.06 
 3-96 
 4.61 
 2.08 
 
 349 
 4.85 
 5-35 
 3.10 
 
 2.95 
 4-38 
 310 
 4.12 
 
 Willys-Overland 
 
 Maxwell 
 
 General Motors 
 
 The prices of these preferred stocks were as high as 
 might have been expected in view of their redemption 
 values. 
 
 1012, 
 
 High-Low 
 
 Higl 
 
 gh-LoM 
 
 High-Lov 
 
 IQIS. 
 High-Low 
 
 1916, 
 High-Low 
 
 Higl 
 
 ;h-Low 
 
 Studebaker .... 
 Willys-Overland 
 
 Maxwell 
 
 General Motors 
 
 98-90 
 101-99 
 
 83-70 
 
 93-64 
 99-80 
 
 35-18 
 82-70 
 
 92-70 
 96-90 
 48-22 
 95-70 
 
 I 19-91 
 
 115-95 
 104-43 
 136-90 
 
 I 14-108 
 
 117- 94 
 
 93- 65 
 
 98- 89 
 
 108-85 
 100-92 
 
 74-49 
 93-85 
 
 5. The Common Stocks 
 
 The percentages earned on the common stocks of the 
 companies were as follows : 
 
 
 1912 
 
 1913 
 
 1914 
 
 1915 
 
 Z916 
 
 191 7 
 
 Studebaker 
 
 5-9 
 
 3.6 
 38.0 
 
 14.2 
 
 11.7 
 38.0 
 
 27.4 
 52.5 
 15.6 
 82.0 
 
 26.1 
 
 40.0 
 
 20.9 
 
 170.0 
 
 91 
 21.0 
 
 Willys-Overland 
 
 Maxwell 
 
 General Motors 
 
 30.7 
 170.0 
 
APPENDIX IV 
 
 The Chain Store Stock Flotations 
 I . The Development of the Chain Store 
 
 The chain store dates back to about 1870. Between 
 1890 and 1900 it became a vital factor in American indus- 
 trial life. The chain stores have had a marked tendency 
 to reorganize our distributive system, by gradually replacing 
 the jobber and the broker and by introducing the advan- 
 tages of large scale production into retail business. In 19 16 
 there were six firms in Philadelphia operating 461 chain 
 stores. The chain stores have invaded many fields ; depart- 
 ment stores, shoe stores, hat stores, cigar stores, restaurants, 
 drug stores, grocery stores, and five and ten cent stores, etc. 
 
 Of all the industrial corporations considered, none have 
 been more successful than the chains of five and ten cent 
 stores. In 1879 the first of the F. W. Woolworth stores 
 was opened; from the surplus profits of that store another 
 similar store was opened. The success of those two stores 
 made possible the establishment of other stores in other 
 localities. In 191 5 Woolworth had 797 stores located in 
 every State except Arizona, and in forty-six Canadian 
 cities. The Kresge chain started in 1877, and had, per- 
 haps, an even more phenomenal growth. 
 
 The Acme Tea chain and the Jewel Tea chain were begun 
 in 1885 and in 1899 respectively. The Acme Tea Co. is one 
 of the chain stores for which Philadelphia has become noted. 
 In 191 8 this company had 441 stores in Philadelphia, and 
 also had stores in eighty cities and towns in the eastern 
 part of Pennsylvania and New Jersey. The Jewel Tea Co. 
 originally operated chain stores in Illinois; but in 1918 there 
 were 550 branches in all the principal cities of the United 
 States. 
 
 98 
 
APPENDIX IV 
 
 99 
 
 2. The Reasons for the Chain Store Flotations 
 
 The Woolworth flotation was brought out in the be- 
 ginning of 1 912, and the Kresge Flotation followed shortly 
 afterwards. These companies apparently had no par- 
 ticular need of new capital, nor did they have large debts. 
 The owners wanted to withdraw their investments, and 
 put their consolidated chains on the market. 
 
 3. The Sales and Profits of the Chain Stores 
 
 The sales of the five and ten cent stores have not in- 
 creased so rapidly on the whole as those of the grocery 
 chains, although the sales of the Kresge showed remarkable 
 growth. The following figures show the increases in sales 
 (1912 was taken as a base of 100). 
 
 
 1913 
 
 1913 
 
 1914 
 
 1915 
 
 1916 
 
 1917 
 
 Woolworth 
 
 Kresge 
 
 100 
 100 
 100 
 100 
 100 
 
 109 
 128 
 
 113 
 104 
 146 
 
 115 
 156 
 103 
 127 
 175 
 
 125 
 203 
 118 
 
 159 
 227 
 
 144 
 285 
 142 
 
 193 
 
 357 
 
 162 
 291 
 164 
 259 
 
 439 
 
 McCrory 
 
 Acme 
 
 Jewel 
 
 I 
 
 The volume of the sales of Woolworth resulted in a less 
 rapid percentage increase. Jewel Tea and Acme Tea 
 showed great absolute increases in 191 7; this was probably 
 due in part to their expansion after their flotations of 1916. 
 
 The ratios of profits (profits and interest) to sales show 
 that Woolworth and Jewel Tea probably derived more 
 benefit from their expansions than the other companies, 
 whereas the margin in the case of Acme was small. The 
 percentages of profits earned on sales were as follows : 
 
 191S 
 
 '913 
 
 X914 
 
 191S 
 
 1916 
 
 1917 
 
 Woolworth 
 Kresge. . . 
 McCrory . . 
 Acme .... 
 Jewel 
 
 8.9 
 6.4 
 6.7 
 4.1 
 11.7 
 
 9.7 
 6.5 
 
 7.2 
 
 5.9 
 7.9 
 
 9.2 
 
 71 
 
 6.2 
 
 4.2 
 
 14.9 
 
 9-9 
 6.2 
 
 6.3 
 
 3-5 
 
 17.9 
 
 lO.O 
 
 7.2 
 6.2 
 
 3-9 
 11.4 
 
 9.4 
 6.2 
 4.1 
 
 4-5 
 9.8 
 
lOO 
 
 THE CAPITALIZATION OF GOODWILL 
 
 4. Earnings on Investments 
 The returns of these companies were as follows : 
 
 1917 
 
 Woolworth 
 Kresge . . . 
 McCrory. , 
 
 Jewel 
 
 Acme 
 
 I9I2 
 
 I9I3 
 
 19 14 
 
 i9ii 
 
 1916 
 
 36.8 
 
 36.3 
 
 36.4 
 
 33-9 
 
 34.7 
 
 27.0 
 
 29.0 
 
 33.8 
 
 29.2 
 
 18.0 
 
 — 
 
 — 
 
 
 15.6 
 
 17.3 
 
 — 
 
 — 
 
 — 
 
 
 24.9 
 
 — 
 
 — 
 
 — 
 
 
 25.0 
 
 32.6 
 
 139 
 II.7 
 25.0 
 
 34-9 
 
 All of these chain stores earned large percentages on their 
 investments, except possibly McCrory. Woolworth made 
 exceptionally high returns on investment. Acme and Jewel 
 also earned large profits on investment. 
 
 5. The Preferred Stocks of the Chain Stores 
 
 The preferred stocks of the five and ten cent chains were 
 especially conservative. The ratios of the tangible assets 
 to the preferred stocks were as follows : 
 
 1912 
 
 191S 
 
 1916 
 
 1917 
 
 Woolworth . 
 Kresge . . . . 
 McCrory. , 
 
 Acme 
 
 Jewel 
 
 1 00.0 
 122.3 
 
 122.4 
 150.0 
 
 140.7 
 170.0 
 
 159.7 
 224.6 
 180.0 
 
 185.7 
 340.0 
 194.9 
 104.5 
 148.5 
 
 210.5 
 420.0 
 219.4 
 
 148.5 
 1 74. 1 
 
 The market prices of the preferred stocks were as follows: 
 
 
 1912 
 
 1913 
 
 1914 
 
 191S 
 
 1916 
 
 1917 
 
 Woolworth . 
 
 Kresge 
 
 McCrory . . . 
 
 Jewel 
 
 Acme 
 
 I 18-109 
 105-100 
 
 11S-109 
 102- 96 
 
 I I 8-1 12 
 105- 99 
 
 124-115 
 I 12-104 
 
 126-123 
 12-10* 
 
 I 13-104 
 98- 93 
 
 126-113 
 
 1 13/8-83/4'* 
 
 112- 90 
 96- 92 
 
 A higher price than the redemption value ($125) for 
 Woolworth preferred stock was reached in both 19 16 and 
 191 7. Kresge preferred stock would probably have risen 
 higher had it not been for the redemption value. The 
 value of these preferred stocks rose as the earnings were 
 accumulated to increase the assets and replace the goodwill. 
 
 * Reorganization (Par value $10.00). 
 
APPENDIX IV 
 
 lOI 
 
 k 
 
 6. The Common Stocks 
 
 The percentages earned on the common stocks of these 
 companies were as follows: 
 
 Woolworth . 
 Kresge. . . , 
 McCrory. . 
 
 Jewel 
 
 Acme 
 
 I9I2 
 
 I9I3 
 
 I9I4 
 
 1915 
 
 1916 
 
 12 
 
 15 
 
 20 
 
 23 
 
 20 
 
 9 
 
 II 
 
 II 
 
 13 
 
 5 
 
 16 
 
 7 
 
 — 
 
 — 
 
 — 
 
 — 
 
 10 
 14 
 
 1917 
 
 17 
 17 
 
 5 
 II 
 
 25 
 
 The comparatively large common stock issues of McCrory 
 and of Jewel Tea explain the smaller percentages earned on 
 those common stocks in 1916 and 1917. The companies in 
 this group, however, were not so much overcapitalized as 
 those in some of the other groups. 
 
 The prices of the common stocks were as follows : 
 
 I9I2 
 
 I9I3 
 
 I9I4 
 
 I9IS 
 
 1916 
 
 118-76 
 
 89-47 
 
 I 12-81 
 
 83-58 
 
 III 1 1 
 
 
 
 Cn On K> 
 
 1 11"!? 
 
 Cn vO vO 
 VO 
 
 I4I-II8 
 
 16- I0« 
 
 96-67 
 69- 51 
 
 I9I7 
 
 Woolworth 
 Kresge .... 
 McCrory . . 
 
 Jewel 
 
 Acme 
 
 155-100 
 13- 10* 
 
 78- 31 
 58- 52 
 
 These stocks show no close relations to the earnings on the 
 common stocks. 
 
 « Par value reduced from $100 to $10. 
 
INDEX 
 
 Acme Tea Company, 28, 45, 75, 
 76, 77, 98, 99, 100, loi. 
 
 Adriance, Piatt and Company, 84. 
 
 Advance Thresher Company, 83, 
 84. . 
 
 Advertisement, value of flotation, 
 20, 28, 70. 
 
 Agricultural Implement Compan- 
 ies, 22, 28, 30, 49, 50, 74, 79, 83, 
 
 84, 85, 86, 87, 88. 
 Ajax-Grieb Company, 44, 48. 
 Ajax Rubber and Tire Company, 
 
 46. 
 American Tobacco Company, 10, 
 
 . ^9. . . 
 
 Amortization, 65. 
 
 Annalist, 75, (note), 77 (note), 83. 
 
 Armsby Company of New York, 
 
 45, 46, 48, 60, 62. 
 Armstrong Investigation, 19. 
 Automobile Companies, 28, 40, 50, 
 
 95, 96, 97. 
 
 Baldwin's List of Early Incor- 
 porations, 16. 
 
 Banker, investment, 23, 24, 26, 27, 
 
 ^ 32, 33, 34, 68, 74. 
 
 Barnhart Brothers and Spindler, 
 44. ^ 
 
 Bond issues, 67, 69. 
 
 Bonus, II, 26, 27, 34, 35. 
 
 Brown Shoe Company, 25, 44, 
 
 ^ 46, 57, 59, 62, 70, 71, 79. 
 
 Burns Brothers, 45. 
 
 Burt Olney Canning Company, 
 29 (note). 
 
 Capitalists, 12, 15. 
 
 Case, J. I., 22, 32, 44, 75, 76, 84, 
 
 85, 86, 87, 88. 
 
 Chain stores, 98, 99, 100, loi. 
 Chesapeake and Ohio Railway, 54. 
 Chevrolet Motor Company, 96. 
 Claflin Company, H. B., 55. 
 Clothing Companies, 28. 
 Combinations, 10, 16, 17, 20, 28, 
 29, 80. 
 
 Commercial banks, 30. 
 Continental Can Company, 45, 46, 
 
 56, 62. 
 Cordage consolidation, 18. 
 Cordage pools, 16. 
 Cumulative feature of preferred 
 
 Stock, 55, 56. 
 
 Debentures, 31, 53, 54, 59. 
 Deere and Company, 22, 44, 65,66, 
 
 67, 75, 76, 77, 84, 85, 86, 87, 88. 
 Defaults in preferred dividends, 
 
 59. 
 Department stores, 49. 
 Dewing, Arthur Stone, 19, 80. 
 Diamond Rubber Company, 21, 
 
 80,91. 
 Dissolution, 60, 66. 
 Dividend policy, 71, 72, 73. 
 Dred Scott Case, 17. 
 
 Earning power, 41, 44, 45, 50. 
 East India Company, 53. 
 Emerson- Brantingham Company, 
 
 22, 44, 61, 63, 64, 75, 76, 77, 84, 
 
 85, 86, 87, 88. 
 Entrepreneur, 12, 13, 15, 38. 
 Expansion, 21, 25, 29, 30, 31, 32. 
 
 Firestone Tire Company, 90, 92, 
 
 93, 94. 
 Fisk Tire Company, 21, 25, 44, 57, 
 
 89, 90, 91, 92, 93, 94. 
 Five and ten cent stores, 21, 28, 
 
 73. 
 Ford Motor Company, 95, 96. 
 
 Gaar Scott Company 83. 
 General Motors Company, 95, 96, 
 
 97. 
 Goldman, Sachs and Company, 
 
 19, 20, 21, 32, 46. 
 Goodrich Company, B. F., 20, 21, 
 
 26, 28 (note), 30, 44, 62, 65, 70, 
 
 71, 73, 74, 75, 76, n, 79, 80, 90, 
 
 91, 92, 93, 94- 
 Goodwill, II, 13, 27, 40, 41. 
 
 103 
 
104 
 
 INDEX 
 
 Goodyear Rubber and Tire Com- 
 pany, 21, 25, 46, 59 (note), 74, 
 76, m, 90, 9i» 92, 93» 94- 
 
 Greene, T. L., 54 (note). 
 
 Griffin Wheel Company, 45. 
 
 Hart-Parr Company, 44, 46, 48. 
 Hart, Schaffner and Marx Com- 
 pany, 28, 44, 46, 71, 72. 
 Hupp Company, 44. 
 
 Indebtedness, liquidation of, 21, 
 
 25, 29, 30, 31, 32. 
 Interest, 12, 37, 38. 
 International Harvester Company, 
 
 9,84. 
 International Shoe Company, 44. 
 Interstate Commerce Act, 17. 
 Investment value of industrial 
 
 stocks, 14. 
 Investors' Manuals, 75 (note), 
 
 77 (note), 83. 
 
 Jewel Tea Company, 28, 45, 62, 
 63, 75, 76, n, 98; 99. 100, loi. 
 
 Joint-stock companies, 15. 
 
 Jones Brothers Tea Company, 
 47 (note). 
 
 Kaufman Department Stores, 44. 
 Kayser, Julius and Company, 9, 
 
 25, 44. 59. 62, 63. 
 Kelly-Springfield Tire Co., 44, 46, 
 
 48. 
 Kelsey Wheel Company, 45. 
 Kirschbaum, A. B., 44. 
 Kresge, S. S., 21, 28, 30, 44, 70, 72, 
 
 73 (note), 74, 75, 76, 77, 79, 98, 
 
 99, 100, 1 01. 
 Kress, S. H., 44. 
 
 Lake Superior and Mississippi 
 
 Railroad, 54. 
 Leather consolidations, 18. 
 Limited liability, 16, 54. 
 Loose Wiles Biscuit Company, 25, 
 
 45. 48, 57, 59 (note), 70, 74, 79. 
 
 McCrory, 22, 28, 44, 76, 99, 100, 
 
 lOI. 
 
 McElwain Shoe Company, 44, 46, 
 48. 
 
 Manhattan Shirt Company, 32, 
 
 44, 46, 62, 70. 
 Maxwell Motor Company, 44, 48, 
 
 74, 75, 76, 77. 96, 97- 
 
 May Department Stores, 28, 30, 
 , 44, 58, 59, 63, 70, 79, 80. 
 Mediaeval guilds, corporate ideas 
 
 in, 15, 27. 
 Moline Plow Company, 22, 25, 32, 
 
 44, 76, 84, 85, 86, 87, 88. 
 Monopoly, 15, 16, 17. 
 Moody's Manual of Industrials, 
 
 43 (note), 76 (note), 83. 
 Mortgage, 53, 59, 64. 
 
 National Cloak and Suit Com- 
 pany, 45, 62. 
 
 New York Stock Exchange, 12, 19, 
 28, 43, 46, 73, 74. 
 
 Northern Securities Case, 10, 18. 
 
 Overcapitalization, 13, 72. 
 Owens Bottle Machine Company, 
 
 45. 46, 48. 59- 
 
 Packard Motor Car Company, 96. 
 Panic of 1893, 18. 
 Panic of 1907, 31. 
 Partnership, 9, 15, 19, 47. 
 Peabody, Cluett, 34, 44, 63, 73, 79. 
 Perpetual succession, 15, 20, 27. 
 Pettibone Mulliken Company, 45, 
 
 59 (note), 61, 63. 
 Pierce, Butler and Pierce, 44. 
 Poor's Manual of Industrials, 43 
 
 (note), 83. 
 Preferred dividends, 12, 39, 75. 
 Preferred stocks as investments. 
 
 Pro 
 
 14, 79. 
 fit, 37. 38. 
 
 Promoters, 17, 23, 24, 27, 33, 34. 
 
 Railroad preferred stocks, 54. 
 Redemption value of preferred, 
 
 61, 75. 
 
 Rich Man's Panic, 19. 
 Risks of capitalist, 13, 38. 
 Rubber Goods Manufacturing 
 
 Company, 90. 
 Rubber Tire Companies, 89, 90, 91 
 
 92, 93, 94- 
 Rumely, M., 22, 26, 30, 44, 57, 60, 
 
 62, 64, 66, 75, 76, 83, 85, 86, 87, 
 88. 
 
 Salary limitation, 58. 
 
 Salomon and Company, Wm., 21, 
 
 22, 44, 48, 63. 
 Scott, W. R., 15 (note), 16 (note), 
 
 53 (note). 
 
INDEK 
 
 105 
 
 Sears Roebuck Company, 9, 12, 
 19, 28 (note), 45, 46, 65, 70, 79. 
 
 Second preferred stock, 11, 48. 
 
 Seven per cent preferred stock, 
 9, 12. 
 
 Sherman Anti-Trust Law, 10, 17, 
 18,29. 
 
 Sinking fund provision, 61, 62, 63. 
 
 Sonneborn Company, Henry, 32, 
 58, 62 (note). 
 
 Spicer, 55. 
 
 Standard Oil Company, 10, 17, 19. 
 
 Stansfield, Frisbie, 44. 
 
 Starch consolidation, 18. 
 
 Stern Brothers, 32, 67. 
 
 Stevens, W. H. S., 16 (note). 
 
 Stock dividends, 72. 
 
 Stock exchange, 9, 78. 
 
 Studebaker Motor Company, 9, 
 25, 28, 44, 46, 49, 59, 63, 66, 67, 
 71. 73, 75, 76, 77, 96, 97. 
 
 Syndicate, underwriting, 23, 33, 
 
 34. 
 
 Tangible assets, 40, 44, 45, 49, 50, 
 
 51, 56, 74, 75, 76. 
 Tires, rubber, 21, 28, 30, 49, 50. 
 Trade names, 79. 
 
 Trusts, 10, 16, 18, 28. 
 
 Underwood Typewriter Company 
 
 28 (note), 45, 46, 58, 59, 60, 63 
 70, 74-. . 
 
 Underwriting syndicate, 23, 33, 34 
 United Cigar Manufacturers, 12 
 
 19, 62 (note), 65. 
 United East India Company, 16 
 United Five and Ten Cent Stores 
 
 29 (note). 
 
 United States Rubber Company 
 
 9, 89, 90, 91, 92, 93, 94. 
 United States Steel Corporation, 9 
 
 Voting power, 27, 47, 59, 60, 64. 
 
 Walker, A. H., 17, 18 (note). 
 Walker, Francis, 38 (note). 
 Watered stock, 26. 
 Willys- Overland Motor Company, 
 
 9, 44, 57, 63, 71, 75, 76, 77. 96, 97- 
 Withdrawal of capital, 21, 25, 29, 
 
 30,31,32,42,43. 
 Woolworth, F. W., 9, 21, 22, 26, 
 
 28, 30, 44, 46, 63, 65, 70, 72, 73, 
 
 74, 75, 76, 77, 79, 80, 98, 99, 100, 
 
 lOI. 
 
VITA 
 
 Kemper Simpson was born in Chattanooga, Tennessee, 
 April 7, 1893. He attended the public schools of Baltimore, 
 and received the A.B. degree from the Johns Hopkins 
 University in 19 14. He then entered the Department of 
 Political Economy for graduate work. 
 
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