corporation in connection with canal building, although the great era of canal transportation came after his time-from 1780 to 1815. The corporation was almost universally used as a means of assembling the large capital required for canal construction. It is significant, from the point of view of the capital-raising function of corporations, to note that the canal companies did not conduct transportation; the canal barges were run by individual boatmen. The use of the corporation was here dictated solely by capital-raising requirements. This was also true of the turnpike companies. With the development of railway transportation after 1830 the use of the corporation was greatly extended. While in the case of the railroads the corporation was early used both as a capital-raising and as an operating device, the capital-raising feature was of primary importance. It was manifestly impossible to raise the funds required by individual or partnership means. As with the old trading companies, not only was the volume of capital required very large, but the risks assumed were likewise exceptional. The fourth stage is that of the extension of the corporate form of organization to producing, manufacturing, and mercantile enterprises. Although the corporation was used to some extent in ordinary business in both England and the United States before 1800, it was not until after the development of efficient and cheap transportation systems that it became the dominant form of organization in manufacturing and mercantile lines. During the earlier years of its history the factory system did not require very large aggregations of capital, for the simple reason that markets were narrowly circumscribed, owing to the inadequacy and the great cost of transportation, as also to the decentralization of wealth and population. The volume of output that could be sold by any single plant was thus definitely limited. Under these conditions only a few thousands of dollars of capital was required for the largest business establishment; individuals and partnerships found no serious handicap in financing such enterprise. But while the early factories did not require large capital, in view of market limitations, their development gave rise to an insistent pressure for wider markets, in order to make possible a larger and more profitable scale of industrial enterprise; and this undoubtedly hastened the development of efficient transportation. The widening of markets that resulted from the development of modern transportation facilities gave in turn a tremendous impetus to the enlargement of the size of business undertakings: Given cheap transportation to the markets of the world, there was almost no limit to the profitable size of the business unit. By 1845 railroad transportation had definitely proved itself, both in England and in the United States; and before 1860 it had succeeded in linking the great Middle West with all the markets of the world. The second half of the nineteenth century then witnessed a gigantic effort on the part of industries to expand the scale of their productive operations to a point where they could take full advantage of the world-markets that were available to them. Cheap transportation meant reduced costs for the laying down of goods in distant markets. And the enlarged output made possible by widened markets still further reduced the cost per unit and made possible a competition over everwidening areas. This tremendous growth in the size of the producing unit, and also in the size of the commercial and distributing businesses concerned with the marketing process, made the use of the corporation as a capital-raising device just as indispensable here as it was in foreign trading, finance, insurance, and transportation. Where during its earlier history the factory required a capital of perhaps a few thousand dollars, the large-scale business enterprises of the present necessitate capital accumulations of hundred of thousands, millions, and even hundreds of millions of dollars. Thus did the changing structure of industrial society, with its ever-increasing size of business undertaking and everenlarging capital requirements, gradually extend the scope of corporate industry, until today the corporation is the domi nant form of business organization. Without minimizing the advantages of the corporation as an operating agency, it may be repeated that intrinsically and historically the corporation is a capital-raising device. We shall see in the following and in other chapters that this changing industrial structure, with the development of the corporation, has called into existence most of the financial institutions that function in the economic system of today, and has profoundly modified the problems of organization and control of all of them. QUESTIONS FOR DISCUSSION I. Is the corporation to be regarded primarily as an efficient form of organization for the conduct of a business once established, or primarily as an efficient instrument for raising capital? Is it either exclusively? 2. What advantages do shares of stock and bonds afford as a means of raising capital? 3. Why should both bonds and stock have been developed? 4. What is the purpose of issuing different kinds of stock and bonds? 5. Without bonds and stock it would be impossible for an individual of moderate means to diversify his investments. Why? Indicate the probable results of such a situation. 6. In what way, precisely, is the ready transferability of bonds and shares an inducement to investment? 7. What would people do with temporarily idle funds in the absence of an opportunity to invest in readily marketable securities? 8. Indicate how the perpetual existence of a corporation might facilitate the raising of capital. 9. What is the significance of the limited liability principle from the viewpoint of capital raising? Has it any significance from any other point of view? 10. What opportunities for investment existed in England before the extensive development of the joint-stock company? 11. Have we had speculative manias since the time of which Macaulay wrote? (See pp. 186-87 below.) Do plenty of opportunities for conservative investment always deter people from indulging in speculation? 12. During that period of English history when corporations were not granted the limited liability principle, did they possess any advantage over partnerships in the raising of capital? Were they subject to any comparative disadvantages? 13. Why was it so difficult to enforce the Bubble Act in England? 14. How do you account for the hostility to the principle of limited liability that was manifest in England until the middle of the nineteenth century? 15. Suggest some of the probable industrial consequences of the refusal to permit limited liability in England between 1825 and 1856. What were the outstanding industrial requirements of this period? 16. Do you know of any classes of corporations today whose liability is not limited to the individual shareholders' contributions? 17. Outline the different stages in corporate development and indicate why each new stage developed. 18. Has Adam Smith's prophecy come true? What did he overlook? 19. Are there any great divisions of economic activity that are not at the present time characteristically organized on the corporate basis? If so, what? Is this likely to be a permanent state of affairs? CHAPTER XII CREDIT INSTRUMENTS The borrowing or credit operations of modern society are evidenced by written documents, drawn up in legal form, and known as credit instruments. As has already been noted, the term "credit" is often loosely employed in such a way as to give the impression that credit is a form of currency. It is not credit, however, that is used as a form of currency; it is rather the instruments which are the written evidences of antecedent credit operations that serve as media of exchange. In the present chapter we shall consider the various types of credit instruments which are employed in modern credit operations and discuss the development of certain legal principles which have made possible the effective use of these instruments in transferring the ownership of wealth. As is indicated in the diagrams on pages 134 and 136, the capital of modern businesses is usually divided into two classes, fixed and working. The financial instruments that are used in evidencing the loans made in the raising of fixed capital are usually called investment credit instruments; while those evidencing borrowed working capital are known as commercial credit instruments. Let us consider the various types of instruments that fall within each class. I. INVESTMENT CREDIT INSTRUMENTS The three principal types of investment credit instruments are bonds, stock certificates, or shares, and short-term notes. An explanation is perhaps necessary for designating a share of stock as a credit instrument; for from a certain point of view a shareholder is legally not a creditor of the corporation but a joint owner in the enterprise. He receives income from his shares only in case the earnings are sufficient to permit or warrant the payment of dividends. The bondholder, on the |