War-time financial problems

THE EARNING POWER 153

represented by a larger or smaller number of shares,
or by shares of a larger or smaller denomination, or
by a reserve fund upon which they have a claim
when all other claims have been settled inakes no
difference whatever as a matter of academic fact.
Apart from the sentiment of the matter, there is no
reason why ordinary capital should have any nominal
value.

As to the earning power of the company, that, of
course, is not affected one whit by the process. The
earning power of the company is all in the assets—
the plant, machinery and other property—plus the
elusive qualities which are bound up in the word
" goodwill/' representing the selling power, organisa-
tion, and the expectation of future profits. The
capitalisation of the reserve simply affects the manner
in which the liabilities of the company are arranged,
and the existence of a reserve fund merely means
that the Ordinary shareholders have a claim to a
larger amount than their nominal holding in case
of liquidation. It does not matter in the least
whether this larger claim is handed to them in the
shape of a certificate, since the nominal amount of
their claim has nothing whatever to do with the
amount that their claim realises to them annually in
the shape of dividends, or in the event of liquidation,
from the realisation of the company's assets.

In fact, the capitalisation of reserves is sometimes
criticised by economic purists as a retrograde step
because it seems likely to encourage the directors to
be extravagant in the matter of dividends. In the
example which we supposed above of the company