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 of a committee of the shareholders who are called directors, who are paid comparatively small fees for the usually rather nominal supervision which they exercise over the more highly paid work of the managers and staff, and for guiding the financial policy of the company with regard to dividend distributions and so on. The capitalist is either a creditor or a shareholder in the company which is formed by public subscription to carry on the industry in question; all that he does is to lend to industry the money which is essential in order that the industry may acquire all the tools, machinery, buildings, raw materials and other equipment necessary for carrying on the work, and to pay the wages of the wage-earners and managers during the initial period before the company's operations have produced something that can be sold to supply money for wages, the purchase of further raw materials, and the upkeep of the plant. The business of management is carried on by highly paid experts, and the capitalist's sole claim to a share in the earnings of the company is based on the fact that he has provided the money which was essential for its beginning and for its further growth. He earns his reward first by placing this money at the disposal of industry instead of spending it on his own immediate enjoyment; and secondly by risking the loss of part or the whole of his money if the industry should fail.

Capital Financing.—A highly ingenious machinery has been developed for the provision of money for industry and commerce by the process of investment in the securities of public companies, and for the turning of these securities back into money by their sale in markets known as stock exchanges. Joint stock companies are formed either to carry out some new enterprise, or work some new process, or to take over an existing business which has hitherto been carried on by private partners. An appeal is therefore made to the public to subscribe to the securities into which what is called the company's capital is divided. As so often happens in these matters of business, great confusion arises owing to the use of the same word in different senses: the capital of industry has hitherto been referred to in the course of this article as the tools, buildings, and other equipment by which industry works; but the capital of a company generally means the money that it receives from those who subscribe to the securities that it offers. If we take the case of a company formed to work a coal mine, and suppose that the original promoters consider that £2,000,000 will be necessary for them to make a proper start on the enterprise, then these two millions will be the original capital of the company, subscribed to it by investors who receive, in return for their money, securities which give them claims upon it for interest, dividends and repayment either at a fixed date or in the event of the company's liquidation. These claims take the form of securities issued by the company. They would probably be divided into several categories; there will be a debenture stock, perhaps carrying mortgage rights and entitling the holders to a fixed rate of interest, and most probably to repayment in full or at a premium at some future date. In case of default in payment of their interest or repayment of the sums promised at the due date, the debenture-holders would be entitled to take over the property and put it in the hands of a receiver. They are thus not shareholders in the company but its creditors, and, strictly, securities issued in this form of a mortgage or debenture are not part of a company's capital but its debt. Ordinary business parlance, however, usually includes mortgages and debentures as part of capital. The share capital is usually divided into preference and ordinary, the preference shareholder being entitled to a fixed rate of interest which has to be paid to him before the ordinary shareholders receive anything. This preference right among English companies is usually what is called cumulative, that is to say, if the preference dividend is not paid in any year all arrears have to be paid before the ordinary shareholders receive any return on their investment. In America, however, where the term "preferred" rather than "preference" is more usual, this cumulative right is not so common as it is in England; in some cases also preference shareholders are entitled to a further participation in profits after a certain rate of dividend has been paid to the ordinary shareholders. The ordinary shareholders as a rule take what is left of the profits after the claims of debenture-holders and preference shareholders have been satisfied. If the company is successful they thus earn higher rates on their investments than go to the holders of other forms of securities. If the company fails they receive little or no profit, and the claims of the mortgage and preference shareholders have to be satisfied in full before the ordinary shareholders get any of their capital back in case of liquidation. Almost infinite variations, however, are performed on the theme of capital arrangements, with income debentures, cumulative ordinary shares with a fixed rate of dividend, deferred shares, founders' shares and so on. And some companies issue no securities except ordinary shares or stock.

By this ingenious system the amount of risk involved by industrial investments can be varied to suit the taste of the individual investor, but generally with the result that the less risk he takes the less return he is entitled to on his investment. The holder of a debt which is a first charge on a long-standing and well-managed industrial or transport concern comes as near as he can to eliminating risk altogether from an industrial investment. It consequently follows that this kind of security is originally issued and is dealt in on the markets of the world on terms which give their subscribers or purchasers a comparatively low rate of interest. The preference shareholder, who is not as well secured as the debenture-holder, but ranks before the ordinary holder, also stands midway between them in the matter of risk and the matter of return. Before the World War, for example, if a well-known English brewery company were appealing to the public for subscriptions it would probably have been able to issue its debenture stock in return for a promise of 4% to 4%, its preference shares on the basis of 5% to 6%, while its ordinary shares, if they were to expect a ready response from the public, would have had to show a probable return of 7% or 8%.

When the prospectus has been issued and the public subscription has been carried out, the securities offered are then quoted on the Stock Exchange at prices which will vary with the opinion held concerning the present and prospective prosperity of the company, and also in accordance with the general rate ruling for the use of money, which varies like the price of everything else in accordance with supply and demand. At a time when there is a great demand for capital for the development of new and old enterprises all over the world the rates that have to be offered in order to tempt subscribers will be forced up by competition, and consequently the price of existing securities will tend to fall owing to sales by their holders, who are tempted by the more alluring rates offered by new ventures. If, on the other hand, enterprise is slack and new creations of capital are comparatively rare, then the pressure of accumulating savings for investment in existing securities will force their prices up and so lower the rate of return which an investor may expect.

By this means capitalism has devised a highly efficient machinery through the mechanism of the Stock Exchange by which anyone who has lent money to industry, as conducted by an ordinary joint stock company, is able in normal times to realize his holdings and turn them into cash by sale on the stock markets. If the company in which he has invested has been successful and is fulfilling, or more than fulfilling, the anticipations held out in its prospectus, he will be able to sell his holdings at a comfortable profit, especially if he is an ordinary shareholder. The prices of securities with a fixed rate of interest or dividend naturally fluctuate less than those of the ordinary shares, but even in their case the success or failure of the company has a very considerable influence upon the price for which they would be sold. Many popular securities have a world-wide market and can be dealt in in all the financially civilized countries; and this development of securities readily marketable at publicly quoted prices has been a great assistance to the growth of international banking.

Freedom of Enterprise.—By the development of this machinery it is possible for the association of small contributions by a large number of people with comparatively small means to carry out enterprises on a colossal scale, and to pour the stream of investment into all the countries of the earth, fertilizing its backward