excluding corporate holdings of securities. The gradation of these figures indicates in a measure the relative reserve resources of these countries, since the amount invested in securities represents more directly than some other forms of investment the surplus savings of the country over and above the economic equipment for meeting immediate needs.

The statistics presented by M. Neymarck represent the ownership of securities, rather than the country where the enterprises they represent are established or incorporated. It becomes interesting, therefore, to determine what proportion of the $26,400,000,000 assigned to Great Britain represents British investments abroad, and what proportion of the $19,500,000,000 assigned to France represents the ventures of her capital in Russia and other foreign lands.

In the case of Great Britain, a careful estimate, made by Paul Dehn, in a book devoted largely to inquiries of this sort, puts her foreign security holdings in 1902 at $5,950,000,000. This is considerably below other estimates. Sir Robert Giffen, as far back as 1885, put English investments abroad at $10,067,400,000. The discrepancy is partly due to the fact that the figures of Dehn are based on the income tax returns for foreign investments, while the higher estimates include capital invested in all forms of enterprise in foreign countries, much of which is not represented by securities in the actual custody of Englishmen in England. A still more recent estimate, published in the Quarterly Review, puts British investments abroad and in the colonies at about $12,400,000,000 in 1897 and $15,700,000,000 in 1906, from which it is estimated that a revenue is derived of $700,000,000. This estimate seems somewhat excessive, although it is borne out in a measure by the enormous balance of merchandise imports into Great Britain. The allotment made by these figures to British colonies and dependencies is about $8,150,000,000 and to foreign countries $7,550,000,000.

The amount of foreign securities listed on the French Bourse is, of course, no index of the amount owned in France, since whole issues of the Russian and other governments are quoted in Paris, of which large amounts are distributed in other countries. Several careful efforts have been made, however, by comparing the securities deposited in trust at the Bank of France, and by other means, to ascertain the amount of foreign securities actually owned in France. The conclusion reached on this subject by M. Neymarck is that the aggregate of such securities in 1900 was 31,200,000,000 francs or about $6,240,000,000. Of this amount about $4,520,000,000 was in foreign government bonds and similar obligations, and $1,720,000,000 in shares and bonds of corporations. Divided by countries, securities are estimated to be held in France issued in Russia, to the amount of $1,600,000,000; Egypt and the Suez Canal, $540,000,000; Spain and Cuba, $500,000,000; Austria-Hungary, $500,000,000; Turkey, $400,000,000; the Argentine, Brazil, and Mexico, $400,000,000; Italy, $340,000,000; England and her dependencies, $240,000,000, Portugal, $200,000,000; Belgium, the Netherlands, and Switzerland, $200,000,000. It is also computed that securities belonging to foreigners residing in France absorb about $640,000,000 of the total held in France, reducing the amount of foreign securities in the hands of French citizens to $5,600,000,000.

The last figure does not differ radically from the estimate of Dehn, who puts French holdings of foreign securities at $5,712,000,000, German at $4,641,000,000, and Belgian at $120,000,000. The Belgians, however, are large investors on their own account of French and German money which is driven to Brussels under the operation of the high taxes and stringent bourse laws which prevail at Paris and Berlin.

What of the earning power of the properties represented by this great mass of paper titles? Here again final statistics

are not easy to obtain, but the known rules of earning on investments will keep us from going far astray. The cases in which payments of dividends and interest were computed for the corporations of the United States in 1905 showed dividend payments of $840,018,022 and interest payments of $636,287,621, making a total of $1,476,305,643. The computed average of dividends was 3.995 per cent, and of interest rates 4.71 per cent. In Europe the return upon invested capital is usually lower than in America, so that it probably would not be safe to compute the earnings upon $75,000,000,000 of securities at a rate above three per cent, or $2,250,000,000. With an allowance at the rate of four per cent for Japan, amounting to about $60,000,000, we find total dividend and interest disbursements in these countries of nearly $3,800,000,000, —an amount equal to the entire gold money stock of the world as recently as 1892, and to nearly two-thirds of that stock at the present time.

The manner in which issues of corporate securities and their earning power have increased in the last two decades is an index of the rapidity with which saving goes on under the existing mechanism of industry. Nearly all investments in securities represent capital saved by the investors beyond their current consumptive needs. Not all savings go into securities, because some go into the extension or foundation of enterprises conducted by individuals and private partnerships. But a change has been going on, from the system of private partnership to corporate organization. The change has not been due to accidental causes, but has been a natural evolution. It has followed the rule of evolution, that the surplus of free capital saved in a country from time to time has permitted the creation of corporate enterprises at a rapidly increasing rate, because corporate enterprises are more likely than individual enterprises to represent savings for new objects. In other words, the growth in corporations for transportation, manu

facture, and trading is the result of saving by individuals towards a fund which is in the main a surplus fund for the creation of new enterprises. This consideration explains in a measure the absorption of private partnerships into corporations. Those who have conducted such private partnerships have been enabled in many cases to retire with the proceeds of the conversion of their enterprises into the corporate form, because other persons not related originally to such enterprises had made savings which they were willing to invest in corporate shares. From this point of view the remarkable increase during the last few years in the number of corporations issuing securities is the logical outcome of the accumulation of surplus capital seeking investment, and is, therefore, a more accurate measure of the increase in such capital than might at first seem apparent.

This consideration does not necessarily imply that the ratio of increase in negotiable securities is the ratio of increase in the entire wealth of the country. It is rather the ratio of increase of the surplus fund than of the primary fund required in any civilized country for the maintenance of homes, farms, and the implements of personal industry. Only after a community is equipped with these latter things can it begin to set aside savings for great corporate enterprises, designed to reduce still further the amount of labor required to obtain a given result. This fact, that investments in securities represent a surplus above the bare cost of subsistence of the community, has been illustrated by the present writer elsewhere in the following terms:

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"This growth in the volume of capital has been the phenomenon of our generation. It has been a growth of astonishing rapidity, because the increase in the investment fund has been much more rapid than the increase in the total capital of the community. This has resulted from a simple process of mathematical increment. If an agricultural producer in 1850 1 Wall Street and the Country, pp. 4-6.

had an annual producing power which might be expressed by $350, of which $300 was necessary to supply his actual physical necessities, he would have a surplus of $50, to be made a part of the investment fund of the community. If ten years later, in 1860, he had increased his producing power by one-seventh, his total annual product would be $400; but the effect would be felt upon the investment fund of the community, not merely by the increase of one-seventh, or about 15 per cent, in his total product, but by an increase of 100 per cent in the net product. Assuming that his actual needs were still supplied by $300, he would have $100 for investment where he formerly had $50. If by 1880 his annual producing power had increased still further by one-fourth part of its efficiency in 1860 to a total of $500, the surplus funds seeking investment in the market would have risen by another 100 per cent within twenty years, or by 400 per cent within thirty years."

This view of the subject may be put in another form by stating that the capital invested in stock companies at the present time is largely for objects which did not exist several decades or a century ago. The primary wants of a community, like food, clothing, and shelter, are those which absorb the first efforts of its members. It is only when they have a surplus above these pressing needs that improved methods of transportation, like the railway, of communication, like the telephone, or of distributing risks, like life and fire insurance, can be created.

The most important corporations of the present time, absorbing the largest amount of capital, and having outstanding the greatest volume of obligations, are the results of wants which were not felt or could not be gratified before there had been a large surplus of savings above current needs. As Bagehot put it, in discussing the growth of capital: "A citizen of London in Queen Elizabeth's time could not have imagined our state of mind; he would have thought that it was

of no use inventing railways (if he could have understood what a railway meant), for you would not have been able to collect the capital with which to make them."

A glance at the list of the corporations which represent the thirty-five billions of capital thus absorbed in the United States will show that a very large proportion carry on enterprises which were not thought of a century ago, as the steam railways, $12,500,000,000; street railways, $3,000,000,000; telegraphs and telephones, $750,000,000; electric light and power plants, $725,000,000; and gas plants, $765,000,000. Even under the classifications which do not deal so obviously with new enterprises, analysis would show that a large percentage of them, as in manufacturing enterprises, are also producing things which were not produced in commercial quantities in earlier times. On the other hand, some enterprises which were not in early days managed by corporations, like the slaughter of beef, the packing of meat, and the manufacture of iron and steel, have passed to some extent from the control of individuals and small firms into that of corporations. In many lines of manufacturing also, as of cheap watches and jewelry, carpets, writing and newspaper stock, while the wants filled are not absolutely new, the application of improved machinery by large corporations has permitted a great extension of the market by permitting manufacture at prices within the reach of those who would not have had the means to acquire such articles before the adoption of modern corporate methods of producing them.

Our present equipment in the comforts of life would hardly have been possible without the mechanism of machine production which depends upon the stock company. Through the corporation form of organization, it has become possible for the rivulets of small savings to blend in a broad stream, whose great power is directed by captains of finance and industry. Among the advantages claimed for negotiable securities by an eminent French

economist in a recent publication are:1

(1) By dividing properties into coupons of moderate value, they permit the investment without difficulty of sums as low as one hundred dollars or even twenty dollars.

These securities, therefore, correspond to varying degrees of fortune, and one's savings may thus be applied profitably as they accumulate without waiting until they reach a large amount.

(2) The larger part of these securities are quoted on organized markets, like the stock exchanges. The market fluctuations are the subject of daily quotations, immediately reproduced in the journals, which enable the capitalist and even the smallest investor to follow the fluctuations of his fortune and safeguard it. He is warned by the variations in the quotations of the opinion which the capitalist holds of the securities in which he is interested.

(3) Thanks to these daily or frequent quotations, the investor is able to negotiate his securities whenever he feels the need or desire, at rates which are not mysterious or uncertain. He can scarcely be deceived, at least as to the leading securities, by intermediaries. While the fluctuations are frequent, they are least over a brief period and under normal conditions - of no great range.

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(4) The cost of buying and selling securities is modest. This is of more importance perhaps in Europe than in America, in view of the heavy taxes levied in Europe upon real estate transfers; and the distinction has been diminished to some extent in the United States by the heavy tax laid by the New York legislature in 1905 upon the sale of stocks, even of low nominal value.

(5) The revenues from negotiable securities, at least the principal ones, are paid at fixed periods and at numerous public places. Bankers and trust companies assume the obligation to pay them at all principal points.

(6) The owner of securities may always 1 Paul Leroy-Beaulieu, L'Art de Placer et Gérer sa Fortune. Paris, 1906.

retain them under his own eye, either in his own strong box or in a safe deposit box. He thus escapes undesirable scrutiny of his possessions, as well as reduces to a minimum the risks of fire and theft. If he prefers, he may, however, intrust the collection of his dividends at a trifling commission to a bank, which will, without trouble to him, carry them to the credit of his account.

(7) Negotiable securities, at least the principal ones, are acceptable in the settlement of dowries as the equivalent of money, and may be divided conveniently by heirs without being marketed.

Amplifying the advantages of securities over other forms of property, the French author points out that those that are regularly quoted permit a man to determine the known value of his property, whereas if it is in lands or houses, the real value may be ten or twenty per cent below the figures at which he puts it. Lands or houses also cannot be easily subdivided; and if the proprietor has need of money, even to only a tenth of the value, he is obliged to sell the whole property or to pledge it for mortgage, which advertises his position to the public.

These obvious practical advantages of the negotiable security as an investment grow out of certain fundamental distinctions in its character from other forms of property. While investing in a property which is in itself fixed in character, the owner of a negotiable security is not himself bound, as he would be in a private partnership, to keep his capital employed in this particular investment until a purchaser can be found for the entire plant. The negotiable security has the peculiar quality of representing the application of capital in a permanent manner to productive enterprise, while at the same time leaving such capital in a form capable of transfer as to ownership almost as simply and directly as the transfer of deposits in a bank. What is really fixed capital in an economic sense becomes transferable in the hands of the holder of shares, almost as readily as if it were free

capital in the form of money. This advantage in the form of holding property has afforded an outlet for the employment of the great savings of the modern industrial era, which would have been found clumsily and with difficulty under the system of investment in individual enterprises or by private partnerships.

Those negotiable securities which represent the property of a joint stock company usually possess another peculiar characteristic in permitting investment by small capitalists without the assumption of too large a risk. This quality arises from the legal principle of limited liability. If the small capitalist could invest in a railway in the same way only as in an unlimited business partnership, involving liability of his entire property for the default of the railway corporation, he would hesitate long before he would make such an investment. He would reflect, if he were familiar with economic history, upon the unfortunate experience of the shareholders in the Scotch banks, who, in the crisis of 1879, lost their entire fortunes, even where they were small holders, because they were liable individually for the entire debts of the institution in which they were partners. To guard against such risks, and to invite capital from hoards into productive use, civilized states have sanctioned, in regard to the ownership of corporations, the principle of limited liability. By this principle the securities held by an individual represent on his part a liability limited to the amount actually invested, or in some cases (as in the case of national banks in the United States) a further limited liability in the form of a definite pro rata assessment. As the result of this limitation, the investor is enabled to calculate when he makes the investment the maximum of potential risk which he assumes.

Without some such device it would have been difficult to induce the owners of savings to contribute to the great funds of capital which have revolutionized modern industry and commerce by permitting the creation of enterprises far be

yond the means of an individual. Incidentally the security of such investments has been made stronger by another principle of corporation law, that corporations have an artificial body and continuous life, not dependent upon the health or life of a single individual. This gives a permanency to such an investment, and a degree of security which cannot be found in this form in an individual partnership, whose organization may be completely changed by the death or withdrawal of one or more of the partners.

Negotiable securities, then, constitute one of the most important parts of the mechanism of modern finance. By their aid manufacturing upon a great scale has become possible, cheapening and multiplying the essential comforts of civilized life; all parts of the earth have been bound together by bands of steel or floating ocean palaces; the inventor, the manufacturer, and the banker have been enabled to transfer the resources of the older countries to new and untried lands.

It is not surprising that in the distribution of such a vast amount as one hundred billions of dollars in this fascinating and flexible new form of wealth, chiefly the product of our own generation, mistakes have been made, dangerous risks have been taken, and the manifold possibilities of wealth concentration and ease of transfer involved in the issue of securities have translated themselves in the dazzled eyes and minds of promoters into direct wealth creation. That the state should intervene to establish rules for converting property into this facile form, and to protect investors alike against intentional fraud and self-deception, is natural and proper; but in the long run it is the evolution of the new system itself in the hands of those who have created it - the pioneers in industrial and financial development-which must be depended upon to purge it of weaknesses, to give solidity, steadiness of value, and certainty to its creations, and to perfect still further one of the most potent factors in the progress of modern society.