CAPITALISING RESERVES 151

monopoly the public and the workers are fully justified
in being suspicious and examining the source from
which high dividends ^re produced.

Such being the reason why this outburst of
capitalisation of reserves first began—since in these
days all capitalists and those who have to manage
capital feel that they are working under criticism,
which is not only jealous and suspicious (as it should
be), but is also too often both ignorant and preju-
diced—it is interesting to note that the movement
which was so started has been stimulated by its
very exhilarating effect on the market in the shares
of the companies concerned. Why this should be
so it is difficult at first sight to say. What happens
is merely this—that a company, let us suppose, for
the sake of simplicity, with a capital consisting
wholly of 3,000,000 Ordinary shares, has accumu-
lated out of past profits, or out of premiums on new
issues of shares, a reserve fund of -£1,000,000. Its
net profit has lately averaged £400,000, and it has,
year by year, distributed £300,000 in the shape of
a 10 per cent, dividend to its shareholders, and
put £100,000 into its reserve fund, which is repre-
sented on the other side of the balance-sheet by
buildings and plant and a certain amount of first-
class investments. If the directors now decide to
capitalise that £1,000,000 of reserve fund, the only
effect is that each shareholder will He given one new
share for every three which he holds in the existing
capital, the reserve fund will be wiped out, and the
ordinary capital will be increased from £3,000,000 to
£4,000,000, None of the shareholders will be in