Baltimore and Ohio, New York in the New York and Erie, and Massachusetts in the Western railroad. Virginia early adopted the policy of taking three-fifths of the share capital of all railroads within its borders, and Louisiana similarly subscribed to the extent of one-fifth. For a short time Ohio subscribed to one share for every other subscription for twice that amount to the share capital of railroads within the state. Few Northern states, however, gave aid in the form of share subscriptions. The loan of credit was the most widely used form of state subsidy in all parts of the country. Massachusetts authorized loans to the amount of over $11,000,000 to eight railroads; New York, of over $8,000,000 to nine railroads. During the reconstruction period in the South, legislatures voted away the credit of their states to an extent which ultimately gave but little range for choice between repudiation and insolvency. States have also guaranteed city bonds issued in aid of railroads; they have advanced loans out of special funds and out of the general treasury. Some of these loans bore no interest. Other forms of state aid were: direct appropriations to pay the expense of surveys, interest payments on railroad bonds, surrendered claims, and grants of land. Texas, which retained its public lands upon annexation to the United States, granted over 32,000,000 acres to railroads and internal improvements, chiefly railroads. Most of the state constitutions now forbid any loan of state credit, and many of them forbid state subscriptions to the shares of corporations. Over half, also, forbid local aid of any sort.

National Subsidies.-National aid to railroads began with a provision in the tariff of 1830 for a drawback upon duties paid upon imported railroad iron; and from 1832 to 1842 complete exemption was allowed upon rails. In this way the railroads had profited to the extent of nearly $6,000,000 by 1843 when the system was abolished. Beginning in

1835 congress granted to certain railroads rights of way through the public lands, and in 1853 the privilege was made general. In 1850 congress granted lands to Illinois, Alabama, and Mississippi, to encourage the construction of a line of railroad from Mobile to Cairo and from Cairo to Chicago and Galena. The Mobile and Ohio and the Illinois Central were the final recipients of this bounty. With the act of 1850 began the system of congressional land grants to railroads through the medium of the states as trustees or agents of the transfer. As the railroads extended out into the territories, they received grants of land directly from congress. Altogether there were seventy-nine land grant railroads, and the lands within the limits of the original grants amounted to nearly 200,000,000 acres. This total has been reduced by forfeitures to less than 160,000,000 acres, title to nearly 110,000,000 acres of which has been established. The Northern Pacific alone received an acreage of about 44,000,000; an amount equal to the combined grants of the Union Pacific, Central Pacific, and Southern Pacific. The Atchison system received 17,000,000 acres; the Illinois Central, over 2,500,000 acres; and the Mobile and Ohio, over 1,000,000 acres.

Loans of Credit.-Congress also granted direct financial aid by loaning $64,623,512 to six railroads to encourage the construction of a through line to the Pacific. The Pacific railroad acts of 1862 and 1864, besides granting large tracts of lands from the public domain, provided that thirty-year United States bonds be delivered as sections of the line should be completed. These bonds were secured by mortgage upon the railroad property. In accordance with these laws, $27,236,512 was received by the Union Pacific, $25,885,120 by the Central Pacific, $6,303,000 by the Kansas Pacific, $1,970,560 by the Western Pacific, $1,628,320 by the Sioux City and Pacific, and $1,600,000 by the Central Branch Union Pacific.

CHAPTER III

CAPITALIZATION: ORIGINAL AND SUPPLEMENTARY

pose.

Need for Exact Definition of "Capital."-If one should ask a merchant, a manufacturer, or a banker how much capital he had when he began business, there would be no uncertainty as to what was meant by the question. Nor would there be any difficulty in understanding what was meant if one were to inquire as to the amount of capital now invested in the business. But when we come to consider the subject of corporate capitalization, we are confronted immediately with a confusion of terms; every one who undertakes to contribute to the discussion gives to the word "capital" such meaning as may best serve his purAn attempt was recently made to ascertain what ideas of capital were entertained by the students in a course on corporation finance in a well known graduate school of business administration. With a balance sheet of about thirty items before them, one member or another of the class identified as capital items, the entire list of assets and liabilities with the exception of "short term notes." This, no one could reconcile with his notion of capital. The result of the test is noteworthy as showing a general lack of definiteness of concept among economists and among students who have received their instruction from economists. So long as there is so much confusion in matters of definition, there can be little exact thinking about the subject.

Confusion of Ideas.-A concrete illustration of the utter disregard for any well defined concept of capital may be found in almost any railroad balance sheet. If the question were asked as to what items represent the capital of the corporation, it would be impossible to answer from

the evidence available. It is probable that most persons would look to the liability side of the account, and specifically to the item "capital stock;" some might add the "funded debt"; others might go still further and include the surplus. A few would probably confine their attention to the assets side of the account, and attempt to determine what specific resources represent the capital investment. These several points of view would necessarily create nothing but confusion in any general discussion as to what was the original or present capitalization; whether the concern is adequately capitalized or overcapitalized; whether the invested capital is amply protected; whether dividends have been declared out of capital; whether dividends represent fair return to the shareholders; or as to any other question relating to the capital of the corporation. Many of these assumptions do violence to any well considered view of the purpose and function of capital. To conceive of capital as a liability does not admit of the consideration of many of the commonest capital relations-it affords no basis for either investment or administrative judgment. Yet this is no reason why information about capital may not be found on the liability side as well as the asset side of the balance sheet.

A Definition Submitted.-To be consistent and logical in the assembling and classification of the data and experience of business, it is submitted that capital must be considered as a resource; that the capital of a railroad or other corporation must be considered as included in the general category of "assets." Using the terms in the sense commonly accepted by persons whose business is not incorporated and by the courts in the interpretation of the law of corporations, it would be confined to those assets of the corporation which have been provided and which are intended for continuing, productive use. This is the sense in which

it is used throughout this work, whether the discussion relates to original acquisition of capital or to management of capital. But for the purpose of obtaining and representing facts about capital it is assumed that liability accounts as well as asset accounts may be used: asset accounts to tell the story of the results of capital expenditure and pertaining to the result of administration of properties; liability accounts to tell the story of the methods of financing and of the issue and retirement of obligations entered into to obtain capital.

Capital as an Instrument of a Going Concern.-Accepting the definition that capital is the assets of the corporation which have been contributed for continuing use, a number of questions are constantly before those interested pertaining to these assets. What amount has been contributed for capital use? What properties have been acquired and what are now possessed which may serve the continuing uses of the company as a going concern? What is the relation of such properties to the amount of capital contributed? What is the difference to be accounted for?

If we are to know what properties the company owns that may be continuously used, we must eliminate from the list of assets, all things acquired or possessed which are intended for consumption, and all which in the regular course of business are intended for conversion or sale at a profit. But cash in hand obtained from the sale of shares or credit obligations must be considered as capital; also the property purchased with those funds. A working fund, whether provided by shareholders or set aside by the board of directors out of the proceeds of sales of shares or of bonds, is capital. Any application of money funds or credit funds to the acquisition of resources intended for continuous, productive use is an act of capitalization and an appropriation of funds to capital purposes. The