What is capital?

Capital is as old as tools. When a savage took some of his time to make a stock of arrow heads he was accumulating capital: he was putting work and time not directly into food but into tools by which to get a larger supply of food than he could get without them. Taming a horse or an ox to do work was accumulating capital. Getting an education is sometimes spoken of as accumulating capital, for the education will help one to earn a larger income than he could earn if he did not take time to study. In the Middle Ages and down to the time of the Industrial Revolution, the weaver who had a loom had so much capital. The farmer who owned cattle, horses, tools, had this much capital. But to build a large factory and stock it with machinery, and to buy the wool or cotton needed would evidently call for more capital than was required before the invention of the machine. It did not need very much capital in the old days for a man to start a stage route and carry passengers, but to build a railroad and equip it required a large expenditure which must be met before the railroad could be useful. After the factory is once built or the railroad is ready, it is, of course, enormously more efficient, but the construction of it demands that much more time and work be put into tools or machinery. Practically all the iron that is mined is made into machines and tools and represents, therefore, capital, by which we may get a better living. We get some idea of how our capital is increasing if we see how fast the amount of iron used is increasing. In 1800 the world produced 825,000 tons; in 1870, 11,900,000 tons; in 1905, 53,700,000 tons; in 1911, 134,150,000 tons. There are perhaps between three and four times as many people now in Europe and America as there were one hun

dred years ago, but more than sixty times as much iron is used.

The increased use of gold and silver has been very Money as convenient in this increase of capital. In the early capital days a man could not conveniently pile up a great stock of wheat nor could he conveniently accumulate great numbers of tools. If, however, he could exchange his surplus for gold or silver, he could have his accumulation in a convenient form. Gold and silver could be used to pay workmen or to buy raw materials. A man who could accumulate a large amount of gold with which he could employ men to build or to weave or to transport goods could, in this way, unite their energies and their strength just as the king could unite the energies of the men under his command.

But in recent times business men not only use money The use of and in this way get the advantage of combining the credit strength of many; they use credit. If I wish to build a factory and do not have the money with which to buy lumber and pay workmen, I can still do it provided the man who has lumber to sell and the workmen who have labor to sell will wait for their pay until the factory is running. Of course, they cannot do this unless they themselves have at least a supply of food and clothing sufficient to last until my factory is doing business. Very likely the workmen may not have this. There is still another way out of the difficulty. If my neighbor, or some one else who knows me, has a supply of food, or, what is the same thing, of money, which he will loan me, I can then pay the workmen and build the factory. The great factories and railways and businesses of today are very largely carried on by some form of credit. Men make plans for building automobiles or some other article for which they believe there will be

Banks as agencies of credit

a demand. They go to banks or other sources and borrow money or arrange for credit. In this way, the earning power of an invention or of a large number of men is organized, or, as we may say, capitalized. The capital required to build a great steel plant is between twenty and thirty million dollars. The United States Steel Company, which owns several mills and a great amount of iron ore, was capitalized at about a billion dollars. The great railways have capitals of hundreds of millions.

As suggested above, banks are the great agencies for bringing together those who have money to lend and those who wish to borrow money. They can supply credit for almost any enterprise, from the establishment of a new grocery store to the building of a great factory or railway. There are three main kinds of banks. Savings banks are the simplest. They receive the savings from a great many small depositors. They loan these to the railroads, to cities and towns, or to those who have real estate, for long periods upon very good security.

In the second place, there are investment banks which make a specialty of investing large sums of money profitably and safely. Their investments usually take the form of the purchase of stocks and bonds, and therefore they perform the second function of supplying the railroads and great industrial concerns with capital. Furthermore they are the medium through which savings banks and insurance companies invest in the securities of the large corporations. For they keep in touch with the stock and bond market and so are able to make more advantageous investments than are directly accessible to the small local savings banks.

Third, there are the commercial banks. The na

A

tional and state banks are usually of this sort. They loan money or give credit for short periods, and usually help the merchants and manufacturers. miller wants to buy wheat. He expects to sell flour and then get money with which to pay for the wheat, but the farmer may not want to wait. The bank loans the money with which to buy the wheat, and expects to get it back when the flour is sold. The importance of such commercial loans can only be appreciated when we know that this bank can loan money on short time notes far in excess of its actual cash deposits by giving borrowers checking accounts. The cash which a bank has on reserve to meet the demand of those who wish to cash checks need be only 12% or 18% of the total of the checking accounts of the bank's customers.

The

corporation

as owner

and

manager

Its

atrength (1) from union

I

CHAPTER XVI

THE CORPORATION AS A MODE OF

COOPERATION

N the beginnings of the Industrial Revolution a factory might be built by one man; a small steamship or even a short railway might be owned by one individual; but as larger and larger factories were built, as railroads connecting distant points and costing vast sums were planned, it was soon found to be far safer and more convenient for many persons to unite and form a corporation to own and manage such a great plant. "Corporation" is from the Latin word meaning body.

It may be regarded as a new type of coöperation. Cities, as we have seen, were bodies of people living together and coöperating for defense, for trade, or for religion. Dwellers in modern cities coöperate, i.e., for fire protection, water supply, disposal of sewage, maintaining streets, support of schools, and care of health. Cities are called public corporations and are granted charters by the state which give them power to act as a body. Churches, colleges, and societies for mutual benefit may be incorporated as private corporations, not for profit. Banks, railroads, manufacturing companies are corporations for profit. The members of such corporations do not need to live near together, or to speak the same language, or to be of the same religious belief or social class. They may be scattered