Railroad Finance

By Frederick A. Cleveland; Fred Wilbur Powell | Go to book overview

CHAPTER III
CAPITALTZATTON: ORIGINAL AND SUPPLEMENTARY

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 purpose. An 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

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