if Ur 'iM' L 'mi ■' • ' ' t i I. 'ill''' u ' !' t' rrir (1-76 Cforttfll Slam ^rtjoal Hibrarg Cornell University Library HG 4011.C76 1923 v.1-3 Financing an enterprise,. 3 1924 024 857 439 .N ««-'-r;. Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924024857439 FINANCING AN ENTERPRISE Volume I — The Enterprise " II — The Organization " III — ^The Financing FINANCING AN ENTERPRISE HUGH R. CONYNGTON Chairman of the Board, The Ronald Press Company; Formerly Editor Business World; Vice-President Chickasaw Asphalt Company VOLUME I THE ENTERPRISE FIFTH EDITION Second Printing NEW YORK THE RONALD PRESS COMPANY 1923 Copyright, 1906, 1907, 1909, 1915, 1921 By The Ronald Press Company All Rights Reserved Xv^me^^ To the Memory of HARVEY LEE SELLERS MY FRIEND OF MANY YEARS, WHO GAVE MUCH TO THE MAKING OF THIS BOOK, AND WHOSE WARM HEART, READY HAND, AND FINE COURAGE HAVE BEEN TO SO MANY A HELP AND AN INSPIRATION PREFACE Under proper conditions it should be possible to finance any really good enterprise. As a matter of fact numerous enterprises are financed that cannot be designated as "good," and many are financed that are not only destitute of merit but absolutely fraudulent. While all this is true, failures to finance enterprises are con- stantly occurring even where the enterprises have real merit and the conditions are fairly favorable. Such failures can be ascribed only to a disregard or ignorance of the principles and procedure of successful financing. The object of the present work is to set forth these principles as clearly as may be, to outline the require- ments of a successful enterprise, to suggest methods of procedure, and to point out the mistakes more commonly made. All this, while naturally applicable to the financings or re- financings of the larger and more stable undertakings, is not primarily intended for their use. Such enterprises can employ the services of technical experts in every line and command the attention of investment bankers. But the great multitude of enterprises to be financed are neither large nor stable. On the contrary they are small, undeveloped, or speculative — they lack the funds to employ experts and the qualities to attract invest- ment bankers, and it is for such enterprises that the present work has been written. The author must confess to much sympathy with these lesser enterprises whose promotion is so frequently undertaken by men unskilled in financial matters; by men of little experience; by men greatly in need of money — those enterprises unable to secure the able, expert advice and assistance which smooth the financial way of the better established or more fortunate undertakings. These small financings are, in fact, quite as important to the future wel- VI PREFACE fare of the country as those of greater immediate moment, for they make up in number what they lack in individual amount, and it is from these small and often doubtful beginnings that the great enterprises grow. Standard Oil was at one time a struggling enterprise — strug- gling, it is true, to strangle its competitors, but nevertheless struggling; the Bell Telephone, one of the great commercial or- ganizations of the country, was at its inception smaU, scorned by the business man, and of dubious future; the National City Bank, one of the great financial institutions of the world, was in its early history comparatively unimportant. To smn up the matter briefly, we must have the acorn before we can have the oak. As the effective presentation and successful financing of an enterprise are not possible unless the points of view of both the man with the enterprise and the man with the money are known, the present volume treats its subject, so far as may be, from the standpoint — often widely divergent — of both parties. At the same time the work is written for the use of the man with the enterprise, and is neither designed nor intended to serve as an investor's manual. When any practical work is pubHshed, and especially one on a financial subject, those who use the book naturally and rightly wish to know from what knowledge or experience it has been written. In response to this demand the author may say that for some fifteen years he was engaged in legal work coimected more or less directly with the financing of enterprises — work which brought him in contact with a very wide variety of promotions, with almost every phase of promotion procedure, and with all the ordinary — and some very extraordinary — methods of raising money. Since then, though not connected with promotion work, he has maintained his interest in current financing. From this general knowledge he has written. When the first edition of " Financing an Enterprise" was pub- Hshed in 1907 it was, for business reasons, jssued under the name PREFACE vu 'lE rancis Cooper." The reasons that required this nom de plume — for nom de plume it was — no longer exist, and the author, under his own name, very willingly assumes the responsibilities that such authorship involves. The fact that a work on practical finance has achieved a fair publishing success under the heavy handicap of anonymous authorship seems to indicate that it does meet some need. The author trusts that these gleanings from experience will prove helpful to those into whose hands these volumes may come and save some of them at least from the costly and disastrous mistakes so common when enterprises are to be financed. He may add in conclusion that while he is not now engaged in pro- motion work, either directly or indirectly, he is still much inter- ested in promotion problems and is desirous of making the present volumes of the greatest possible assistance to those who must solve these problems. He will therefore greatly appreciate any criticisms, suggestions, or experiences from those "in the field" which may help to make future editions more complete and more generally useful. Hugh R. Conyngton. New York City, May 15, 1921. CONTENTS VOLUME I— THE ENTERPRISE Part I — Conditions and Methods of Financing Chapter Page I Introductory 3 Status and Requirements of Financing Fraudulent Financing Stock-Selling Swindlers The Speculative Investment "Scotching" the Swindling Stock Salesman The Enterprise and Its Promoter What Enterprises Can Be Financed Requisites of Successful Financing II Conditions of Financing The Work of Financing — Conditions vs. Theory When Financing Is Easy When Financing Is Difficult The Opportunity for the Good Enterprise Reputation as a Basis for Financing Ideal Conditions for Financing III Methods or Financing i8 The Gradual Development Method Objections to the Plan of Self- Development A Successful Self-Development Venture Making a Start The "Help Yourself" Booth Expansion of the Business A Wrong Financial Plan Side-Line Development A Successful Side-Line Effort Modifications of the Side-Line Plan Advantages and Limitations of Side-Line Development Borrowed Capital Dangers of Borrowed Capital Financing by Means of Credit Moneyed Partners Usual Plan of Financing X CONTENTS Part n — ^The Enterprise Chapter Page IV A Sound Enterprise 35 Requisites of Success An Unsound Enterprise Legitimate Speculative Development The Wayside Inn An Unsound Quarry Proposition An Ailing Sanitarium A Useless Railroad Why Unsound Enterprises Are Selected for Financing Results of Financing Unsound Enterprises Enterprises Dependent Upon Public Favor for Success Floating a Breakfast Food Forcing a Breakfast Food on the Public Testing the Enterprise V Efficient Management 46 Importance of Efficient Management A Socialistic Experiment Intellect vs. Organization Inefficiency of Unorganized Effort Requirements of Good Management Unseen Losses of Inefficient Management A Valuation of Good Management A Case of Bad Management Good vs. Bad Management Good Management in the Newspaper Field Difficulty of Securing Good Management Self-Confessed Managers Methods of Securing Managers Financing Value of Good Management VI Sufficient Capital 62 Results of Inadequate Capital Reasons for Inadequate Capital — Deficient Estimates Estimating Capital Requirements Failure of Capital "en Route" Providing for Adequate Capital Secondary Financing — Cost Providing Capital for Expansion Meeting Increased Capital Requirements VII Relative Status of Undertaking, Management, AND Capital 73 Good Management Capital and the Undertaking The Capitalistic Position The Capitalistic Demands CONTENTS XI Part III — Investigation of an Enterprise Chapter Page VIII Importance of Investigation 8i Wm it Pay? For Whom Investigation is Important Reasons for Inadequate Investigation Results of Inadequate Investigation A Loss that Should Have Been Avoided Investigation Prevented by Conditions When Investigation is Refused Investment as a Gamble "Grub-Staking" Investments — The Keely Motor Keely's Demonstrations Keely Motor Financing Financing a Swindle — The Sea Water Gold Process IX Investigation or an Unincorporated Enterprise. 95 Scope and Purpose of an Investigation Fundamental Features of an Enterprise 1. Basis of Enterprise 2. Title 3. Output 4. Environment and Conditions of Operation X Investigation or an Incorporated Enterprise — The Investor's Questions 109 Purpose of the Investor's Questions Outline of Investor's Questions The Financial Statement XI Investigation of Non-Speculative Enterprises . 120 Speculative and Non-Speculative Enterprises Investigation of a Store Location Investigating the Transmutation of Metals An Asphalt Development Investigation of a Fire-Brick Property XII Investigation op Speculative Enterprises . . 134 Speculative and Semispeculative Enterprises The Paige Typesetting Machine The Linotype The Uncertain Element in Tj^jesetting Machinery Speculative Enterprises Mining Prospects — Speculative Possibilities Valuation of Mining Prospects Investigation of Mining Prospects xii CONTENTS Chapter Page Speculative PossibiKties of Oil Investigating an Oil Property Statement of Conditions Estimating the Value XIII Investigation op Speculative Enterprises — In- ventions 147 Speculative Possibilities of Inventions Speculative Features of the Telephone Speculative Features of the Phonograph Inventor's Estimates Financing an Inventor's Estimates Result of Financing an Inventor's Estimates How the Invention Should Have Been Handled Investigation of Inventions The Question of Demand The Question of Efficiency The Question of Workability The Question of Patent Protection The Final Decision Part IV — ^Protection of an Enterprise XIV Necessity and Methods of Protection . . . 165 The Competition of Business Why Protective Measures are Necessary Methods of Protecting Business Interests Purpose of Protective Measures Selection of Protective Methods Special Methods of Protection Efficiency as a Building and Protective Measure Taking Advantage of Opportunity XV Monopolies 172 Creation of a Monopoly The Kimberley Diamond Fields The Kimberley Monopoly Regulating Diamond Prices The Asphalt Monopoly Building up the Asphalt Monopoly Monopolizing an Open Market The Standard Oil Monopoly Standard Oil Methods The German Chemical Companies Monopoly The Up-Building of the German Chemical Companies Quantity Production — "Dmnping" Price Manipulation Patent Protection for German Products Buying Their Way Chapter CONTENTS Propaganda to Discourage Competition The End of the German Chemical Monopoly Conditions Permitting Monopolistic Control Non-Monopolistic Undertakings XlU Page XVI Patents i88 Nature of Letters Patent Patent Requirements Amateur Patent Applications Patent Procedure Delays in Patent Application Drafting the Patent Application Character of Patents Multiclaims and Multitudinous Patents "Follow-Up" Patents Nature and Limitations of the Patent Attacks on Patents Patent Litigation — The Goodwin Film Patent Litigation — ^The Selden Patent XVII Trade-Marks, Trade-Names, AND Copyrights . . Trade-Marks Definition Nature of the Trade-Mark Selecting a Trade-Mark Registering a Trade-Mark Importance of Registration Term of a Trade-Mark Establishing a Trade-Mark Value of Trade-Marks Persistence of a Trade-Mark Patents vs. Trade-Marks Trade-Names The Trade-Name and its Protection Trade-Names as Trade-Marks — Protection of a Product "Lost" Trade-Names Unfair Competition 20S Copyrights Nature of the Copyright XVIII Protecting a Process 221 Patent vs. Secret Process DiflBculty of Defending Process Patents Balancing the Probabilities Trade-Mark Protection for Process Products Patent vs. Secret Process — Determining Conditions Combining Patent and Secret Process XIV CONTENTS VOLUME n— THE ORGANIZATION Part V — Shaping up the Enterprise Chapter Page XIX Experimental Work and Model-Making . . . 231 Utility of Experimental Work Experimental Work and Patent Applications Cost of Experimental Work Paige Typesetting Machine Dishonest Machinists Charges for Experimental Work Experimental Work by Contract Experimental Work When Funds are Limited Selection of a Machinist Scale of Experimental Work Extravagance in Experimental Work Edison's Experimental Work The Liberty Motor XX Expert Assistance — ^Technical 247 Place of the Expert The Technical Expert Practical Value of Expert Assistance When Expert Assistance is Necessary Cost of Expert Assistance Selecting the Expert The Expert's Examination The Expert's Report Arrangement of Report Reliability of Expert Reports » Conservatism of Expert Reports The Technical Expert as a Promoter XXI Expert Assistance — Accountants 264 The Accountant in Financing Functions of Accounting Recording Functions of Accounting Accounts as the Executive's Guide Accounting for the Smaller Undertaking The Accountant as an Investigator Scope of the Accountant's Investigation Accountant's Charges Trading on the Accountant's Reputation The Auditor's Report XXII Expert Assistance — Attorneys ...... 273 When the Attorney Is Needed Why the Attorney Is Needed The Attorney in Negotiations Using the Other Man's Lawyer CONTENTS XV Chapter Using the Other Man's Lawyei^-A Promoter's Contract Using the Other Man's Lawyer — An Inventor's Contract When an Attorney Is Not Needed Selecting an Attorney Selecting a Patent Attorney Attorneys' Fees The Lawyer's Work Relations Between Attorney and Client Page XXIII The Corporate System 283 Forms of Business Organization Variation of Corporation Laws Formation of a Corporation Nature of the Corporation Management of the Corporate Aflfairs Authorized Capital Stock Shares of Stock Stockholders Relation of Stockholders to Directors Common Stock — Preferred Stock Cumulative and Non-Cumulative Dividends Stock Certificates Payment for Stock — Liability on Unpaid Stock Treasury Stock Corporate Bonds Majority Control General Advantages of the Corporate Form Part VI — Capitalization of an Enterprise XXIV Laws Apfecting Corporate Capitalization Nature of Capitalization Laws Limiting Capitalization Laws Requiring Payment of Stock Organization and Franchise Taxes Federal Tax Laws General Effect of Laws Bearing on Capitalization 299 XXV Conditions Affecting Capitalization .... Functions of Capitalization The "Value Idea" in Capitalization Effect of the "Value Idea" in Capitalization Value Variations Between Capital Stock and Corporate Assets Inaccuracies in Value Capitalization Value as a "Building" Basis Increasing Capitalization to Attract Capital Increasing Capitalization to Provide for Contingencies Sales Requirements as a Basis of Capitalization Classification of Capitalization 308 XVI CONTENTS Chapter XXVI XXVII Capitalization Not Based on Value .... When Value Is Unknown A Bridging Capitalization Changing Capitalization to Meet Conditions Temporary Capitalizations Capitalization of Close Corporations Capitalization to Conceal Profits Capitalization Based on Policy or Expediency Capitalization Based on Present Values — New Enterprises Capitalization in Ordinary Lines of Business Stock Salaries and Allotments Capitalization of a Purchased Business Capitalization with Promoter's Profits Included Capitalization for Future Needs Capitalization with Payment to Promoter Included Concealing Payments to Promoters Allocation of Stock Between the Enterprise and Capital Promoters' Demands Capitalization as Affected by Method of Financing Capitalization in Established Lines — a Coal Company Capitalization of a Contract Page . 318 326 XXVIII Capitalization Based on Present Values — Good- Will 340 Nature of Good- Will Personal Good- Will Professional Good- Will Commercial Good- Will Evanescent Good- Will Trade-Mark and Trade-Nama Good- Will Establishing and Transferring Trade-Mark Good- Will Capitalization of Good- Will XXIX Capitalization Based on Present Values — Good- Will (Continued) 349 Court Appraisals of Good- Will Calculation of Good- Will Capitalization of Good- Will — Methods Capitalization of an Incorporated Partnership Good- Will Represented by Common Stock Capitalization of Anticipated Good- Will XXX Capitalization Based on Profit Probabilities Nature of Profit Probabilities Effect of Capitalizing Profit Probabilities 3S8 CONTENTS xvu Chapter XXXI Page 366 Stock Prices as Affected by Capitalization Earning Power of Inventions Capitalization of Franchises Capitalization Based on Profit Possibilities Profit Possibilities Profit Possibility Capitalizations Capitalization of Oil Possibilities Capitalization of Mining Possibilities Large Capitalizations — Selling Appeal Capitalization of General Speculative Possibilities Discoveries in Unknown Fields XXXII Excessive Capitalization 376 Evils of Excessive Capitalization Causes of Overcapitalization 1. Fraudulent Overcapitalizations 2. Capitalization to Meet Promotion Requirements 3. Overestimates of Value 4. Avaricious Overcapitalization Part VII — Special Corporate Adjustments XXXIII Shares Without Par Value 38s XXXIV Capitalization as an Apportionment of Interest Capital Stock as a Measure of Corporate Values History of Shares Without Par Value Nature of Shares Without Par Value Preferred Stock in No-Par- Value Capitalization Text of Law Permitting Shares Without Par Value Foreign Corporations with Shares of No Par Value Advantages of No-Par- Value Shares Disadvantages of No-Par- Value Shares A Working Opinion of Shares Without Par Value Fixing the No-Par- Value Capitalization No-Par-Value Capitalization Determined by Sales Requirements Capitalizing an Oil Company Valuing No-Par- Value Shares Special Adaptations of Corporate Mechanism — Preferred Stocks and Bonds; Protection of Minority 401 Problems of Business Organization Preferred Stocks and Bonds Preferred Stock in Corporate Adjustments Dividends Voting Rights XVIU CONTENTS Chapter Page XXXV Protection of Principal Redemption Loan with Bonus Bonds with Special Rights Bonds and Notes with Stock Conversion Privilege Protection of Minority Majority Rule Minority Representation on Board of Directors Minority Representation — The Voting Trust Classification of Stock Equal Control by Means of Classified Stock Cumulative Voting Specified Majorities Specified Majorities for Board Actions Stock Not Full Paid Special Adaptations or Corporate Mechanism- Protection OF AN Inventor 418 The Inventor's Problems The Close Corporation Capitalization for Exploitation Pull Payment of Stock Stock Control Equality of Control Maintaining an Equality of Control A Preferred Stock Proposition Preferred Stock Conditions Preferred Stock with a Bonus of Common Stock Preferred Stock vs. Bonds Methods of Maintaining Company Control Assignment of Patent to Trustee Reservation of Royalties Contract Provisions Shares without Par Value VOLUME m— THE FINANCING Part VIII — Preliminary to Presentation XXXVI Preparation for Presentation . 437 Financing as Affected by Stage of Development Problems of Patent Protection Problems of Mechanical Development Manufacturing Problems Marketing Problems Financing an Undeveloped Enterprise Financing a Partially Developed Enterprise Financing a Commercial Proposition Commercial Development of Invention by Inventor The Financing Point CONTENTS XIX Chapter Page XXXVII Presentation Conditions Importance of Proper Preparation Physical Conditions Preparing an Invention for Presentation Preparing a Mine for Presentation Most Effective Preparation for Presentation Overpreparation — False Representations The Proposition — Promoters' Profits .... Nature of the Proposition The Owner's Proposition The Proposition as Affected by the Plan of Presentation Proposition Details Promoters' Profits Propriety of Promoters' Profits Promoters' Relation to Corporation Promoters' Improper Profits General Doctrine as to Promoters' Profits Methods of Concealing Profits — Protection by Owner The Double Option Fictitious Options A Case of Concealed Profits 45° XXXVIII Commissions and Bonuses To Whom Commissions Are Payable 1. Commissions on Sales of Property 2. Commissions on Sales of Stock or Interest 3. Payment for Indirect Financing 4. Payments for Introductions Amount of Commission The Flat Price Promoter vs. Financier Commission Agreements Bonuses 460 XXXIX Underwriting Nature and Purpose of Underwriting Advantages of Underwriting Underwriting vs. Direct Sale Underwriting Procediu-e Underwriters' Compensation Profits of Underwriting Requirements of Successful Underwriting Underwriting Agreements Status of Underwriting Part IX — ^Private Presentation of an Enterprise 471 XL Presentation — ^Among Friends Methods of Presentation Private or Public Presentation? 48s XX CONTENTS Chapter Page Private Presentation — Friends or Strangers? Precautions to be Observed in Dealing with Friends Advantages of Financing Among Friends When Financing Among Friends Is Difl&cult Financing Among Friends — Methods The Basis of Appeal — Local Interest The Basis of Appeal — Individual Interest The Basis of Appeal — the Co-operative Idea Breaking the Ice Requirements of a Friendly Presentation XLI Presentation — ^Among Strangers 498 When Financing Must be Done Among Strangers Presentation by Letter The Letter Presentation in Operation Requirements of Letter Presentation Problems of Financing Among Strangers — A New York Presentation Provision for Personal Expenses Requirements of a New York Presentation "Placing" the Promoter New York Conditions Letters of Introduction XLII Presentation — ^Among Strangers (Continued) . . 510 Advertising for Capital Financial Agents and Their Methods Reaching the Stranger by Letter Reaching the Stranger by Personal Visit Possibilities of the " Unintroduced " Presentation Promoters and Their Methods Finding a Reliable Promoter Bankers and Brokers as Promoters Professional Men as Promoters Arrangements with Promoters What the Promoter Does Part X — Public Presentation of an Enterprise XLIII General Conditions 523 Public Presentation as a Means of Selling Stock Nature of the Small Investor Demand The Small-Investor Appeal The Small-Investor Appeal in Operation Restrictions on Public Presentation Blue Sky Laws Methods of Public Presentation General Cost of Raising Money by Public Presentation I. Cost of Raising Money by Canvassing CONTENTS XXI Chapter Page 2. Cost of Raising Money by Newspaper and Magazine Advertising 3. Cost of Raising Money by Mail Order Methods How the High Cost Works Out Why the Method is Used Who Pays the Piper? XLIV Stock Salesmen 538 The Work of the Swindler How It Is Done The Oil Swindle Selling Stock by Telephone Legitimate Salesmanship Selling Methods Stock-Selling Organizations — For Single Enterprises Stock-Selling Organizations — Permanent Contracts for Sales of Stock XLV Newspaper and Magazine Advertising . . . $53 Present Conditions General Requirements of an Advertising Campaign The Advertising Campaign Cost of Starting an Advertising Campaign Advertising Campaign Procedure Inducements to Secure Names Handling "Prospects" FoUow-Ups "Clinching" Devices XLVI Mail Order Methods . . . 562 Nature of the Mail Order Appeal Possibilities of Mail Order Work The Small Investor Advantages of Mail Order Methods Mail Order Procedure The Circular Letter Follow-up Letters Subscription Helps Mailing Lists Resume Part XI — The Prospectus and Other Presentation Papers XLVII The Prospectus — ^Working Details 579 Presentation Papers The Prospectus Preparation of Prospectus XXll Chapter Page CONTENTS Prospectus Writers Cost of Prospectus- Writing What the Prospectus- Writer Does The Printed Prospectus Style of Printed Prospectus The Typewritten Prospectus Illustrations in Prospectus Charts and Graphs in the Prospectus Arrangement of Prospectus XLVIII The Prospectus — Subject Matter Sgo Presentation Requirements Representations and Misrepresentations Prospectus Omissions Style of Prospectus as to Subject Matter Beginning the Prospectus — OflScial Names Prospectus Openings The Direct Opening The Related Opening The Unrelated Opening Subject Matter of Prospectus An English Point of View Prospectus Details The Prospectus Ending Selling Helps XLIX The Prospectus — Form 604 The Speculative Prospectus A War-Time Appeal An Appeal Based on Personal Qualifications An Argumentative Appeal A Human-Interest Appeal An Elaborate and Artistic Presentation Paving the Way The Revelation An S.O.S. Call L Other Presentation Papers 621 Requirements of a Clear Presentation The Letter 1. Inquiry-Bringing Letters 2. Introductory Letters 3. FoUow-Up Letters The Financial Statement Profit and Loss Statements The Brief Statement Patent Substantiation Expert Reports Other Supporting Papers CONTENTS xxiii Part XII — Special Features of Promotion Chapter Page LI Promoters and Financiers 633 The Promoter and His Work Promoter's Profits The Theory of Successful Promotion Promoting Practice vs. Promotion Theory Investment Bankers LII Promotion By-Ways . . 639 Stock-Selling Concerns Capital-Raising Concerns Capital-Raising Procedure "Patent Sharks" Exactions of the Capital-Securing Concerns Professional Promoters The Entangling Promotion Contract The Assertive Promoter Impecunious Owner-Promoters Fraudulent Promoters Promoters' Expectations and Vagaries Financing an Enterprise VOLUME I THE ENTERPRISE PART I CONDITIONS AND METHODS OF FINANCING CHAPTER I INTRODUCTORY Status and Requirements of Financing There is no phase of business activity of greater dramatic interest than the financing of enterprises. There is no other phase of greater importance to the progress and welfare of the world. The miracles worked by Aladdin and his wonderful lamp are surpassed by those of the financiers of today. A new fertilizer is put on the market, and two blades of grass grow where but one grew before; an automatic loom is developed, and one man does the work of twenty; an aeroplane is perfected, and man outflies the birds. The basic enterprise exists, inert and useless; over it the financier waves his golden wand; it is vitalized, becomes productive, and the whole world is better fed, clothed, warmed, and sheltered. But there is perhaps no phase of business activity in which a "knowledge of the art" is more essential; in which mistakes are more common or more costly. Its work must be done in strict accord with established rules and principles. Entirely apart from the fraudulent schemes which draw so heavily upon the resources of the country, tens of millions of dollars are annually lost or frittered away through the ignorance, the inexperience, the general lack of ability, or the almost criminal indifference of would-be financiers. Case after case can be cited where thousands and hundreds of thousands of dollars have been raised for the development of enterprises and have been expended in entire good faith without increasing the present worth of the under- taking a dollar. Honesty of purpose was there, but some vital element was lacking. Some essential requirement had been dis- regarded, and whenever the promoter or financier departs from 3 4 CONDITIONS AND METHODS OP FINANCING the basic principles of sound finance, whether through intent, through ignorance, or through error; whenever he floats enter- prises unsound or not worth while, enterprises too scantily fi- nanced, or poorly managed; disaster awaits him — or his enterprise — and the world is the poorer for what he has done. Fraudulent Financing It may also be said that there is no phase of business activity in which the impostor and swindler are more active. The annual loss to the country through fraudulent stock-selling schemes has been roughly estimated at over $120,000,000. What it really is cannot, of course, be told but the estimate can hardly be excessive. This prevalence of swindling operations obtains here because no other phase of business activity offers such opportunity for fraud. The stock-selling impostor is a psychologist who knows and plays on the weakness of human nature. Mankind likes to take a chance. It is the romantic impulse, the rebellion against order and conservatism. To the poor driven mass of humanity the occasional risking of something on some issue, no matter how quixotic, is the color and thrill to light the drabness and dullness of life. And the outcome of the gamble matters little in terms of satisfaction. It is pleasant to win, but better to lose than never to know the explosive sensation of having something at stake. . . . Here is epitomized the mind of a large part of the American public. People who work hard for small pay, see no light ahead, and do not understand how to save, are natural chance takers. A few dollars out of a month's earnings do not matter. They may be risked on the most outrageous gambles, the most impossible speciilations. Bets — for they are no more — are put down on oil wells in Timbuktu, pirates' treasure in the Caribbean, the hoard of the temple of Quetzalcohuatl, the gold dust from the loins of El Dorado, under the waters of Guata- vita, the mines of the moon, and the pot at the end of the rainbow. The public lends its money in small individual amounts, but enormous totals, to all such fancies and does not often complain if there is no yield.' ■ W. C. Crosby and E. H. Smith, Saturday Evening Post, February 14, 1920. INTRODUCTORY 5 But the appeal goes further. The comparatively small class "who work hard for small pay" are not the only victims of the stock-selling swindler. Nowadays the masses have money and something must be done with it. The savings bank with its modest 4 per cent per annum is not attractive. The idea that $100 of his earnings deposited in the savings bank will in a year's time bring him $4 in interest does not appeal to the man who is making $6 to $10 a day. The suggestion of the stock salesman that $100 invested in his oil leases may in six months' time bring him in $1,000 or $10,000, or even make him independently rich, does appeal. True, he may lose even that which he had, but meanwhile he has had a "run for his money," and he prefers the elusive but rose-colored vision of the oil scheme to the somber security of the savings bank. For most of these small investors, through ignorance of the possibilities or because of lack of invest- ment opportunity, there is no middle course. The following quotation from a recent letter to a financial publication^ puts the matter very clearly and also brings out another of its phases : I am a locomotive engineer on the shady side of 60 — ^43 years in the service. I have had my pay raised twice in two years. Now I ask my- self, "How much can I save? Where shall I put it?" I go to the president of a national bank and a judge of the court and say, " I have a little money I can save every month. Where shall I put it?" They say, "Put it in the Savings Bank." But I can only get 4 per cent there. I ask them, "Do you put your money in the Savings Bank? " "Oh, no." "Why not?" "Don't get mterest enough." So there you are. Stock-Selling Swindlers The desire for larger returns — even though they entail a larger risk — is human nature and, until the risk becomes too large, is good business as well. But it is difficult for the man of small ' Financial World, October 4, 1920. 6 CONDITIONS AND METHODS OF FINANCING means to purchase the fairly safe dividend-paying stock — stock from which he can get a fair return on his money, and at the same time an attractive possibihty of profits from an increase in its selling price. The dealer in worthless stocks is very familiar with these conditions and is always ready to turn them to his own profit. There exist so-called banking houses with fictitious names, invest- ment companies, incorporated fiscal agents and the like who stand ready to distribute worthless securities at an exorbitant commission. Very often the enterprises have a sound economic basis, such as the manufacture of candy or automobile trucks, but are incorporated in such a flamboyant manner, and the stocks offered to the investor at such prohibitively large commissions, that the enterprise is doomed to failure no matter how plausible it may appear. The fact that the enterprise has to some extent an economic basis often gives the ad- vertising material distributed by these fictitious "banking houses" or "investment bankers" a very plausible ring. And furthermore there is usually some clever writer in the organization who acquires a devilish skill in preparing circular advertising matter well suited to deceive the credulous pubUc. For these reasons the fraud perpetrated by these fictitious investment bankers is usually more artistically exe- cuted than is the case when the corporation, or its promoters, seek to distribute the securities by one of the more direct methods heretofore described. The conunissions exacted by these swindlers are usually enormous, representing the major part of what the public pays for the securities. ' The Speculative Investment What shall be done about it? The writer just quoted — an authority on finance — says : The question naturally arises as to the proper means of selling securities of highly speculative enterprises if successful direct selling requires the use of methods now frowned upon because used by swindlers. One observation is surely true. The highly speculative enterprise should not be backed by the general public. It requires too 3 Dewing, "Financial Policy of Corporations.* INTRODUCTORY 7 much investigation and discrimination. The chances of loss are too great. For this reason the stock of a highly speculative enterprise, no matter how meritorious in itself, should not be advertised for indis- criminate investment. It should be backed in the early stages by a man or group of men of wealth who have the time for a careful and exhaustive investigation and who, should their investment prove a loss — as it probably wiU even after the most painstaking investigation — are able to stand the sacrifice. But to take the savings of hard- working men and women to develop a speculative imdertaking, no matter how meritorious in itself and honestly managed, is little short of a social crime. While every right-thinking person must heartily agree with this general sentiment, it is not practicable, even though it were desirable, to keep speculative offerings from the general public. Also, from the individualistic standpoint, it overlooks the very trait of human nature that makes the field so productive for the swindler. "Mankind likes to take a chance" and the average working man, clerk, or bookkeeper can afford to risk $io, I50, or even $100, in a legitimate speculation with just as much propriety as the wealthy man can afford to risk $10,000, $50,000, or even $100,000. If the working man denies himself the pleasure of a parlor chair, a Victrola, or perhaps an automobile, to indulge in the pleasure of investing the money in an oil company, a mining proposition, or a new invention, who shall say him nay? Eventu- ally he will probably lose his money, but likewise, by reason of wear and tear or other contributing causes,he will eventually lose his chair, his Victrola, or his automobile. In either case he has had value received for his money and in the case of the specula- tive investment — if the scheme is an honest one — he will on rare occasions receive the wonderful returns of his vision. And on those rare occasions when he does profit from his speculative investment — and here is where it differs from ordinary every- day gambling — no one else has lost because of his gain, but the world is the richer by a "gusher," a producing mine, or a useful invention. 8 CONDITIONS AND METHODS OP FINANCING " Scotching " the Swindling Stock Salesman It is not the province of the law to repress the speculative instinct — to it the world largely owes its progress — and so long as the small investor is informed as to the actual facts concerning the offered undertaking and understands that the investment is speculative; so long as he is not induced to invest in "gold brick" securities on the representation that if not Liberty bonds they are just as good, or a little better; so long as he does not invest more than he can afford to lose, and has an honest "run for his money," there is but little to be said. It is to the attainment of these fairer and more honest conditions in speculative financings that the law and individual effort should be directed. Make it easier for this investing pubHc to purchase the safer stocks and bonds — educate it to discriminate between invest- ments and speculative offerings— teach it to look more to the standing and ability of the men behind the offering — hold these men behind the offering far more strictly, more severely, and more promptly to account for the representations they make, and also for those they should, but do not make — let the banks refuse to either loan money or discount notes in connection with the pur- chase of speculative stocks — enact Blue Sky laws that will really bar the swindler and the swindling scheme, and, this done, let matters take their course. Meanwhile, as some of the cleverest brains in the coimtry have misdirected their energies in stock-seUing schemes of fraudulent nature, let the salesmen of honest stocks and good bonds — ^which are safe, and pay almost twice the interest that the savings bank does — and the promoters of legitimate speculative offerings, study the methods of these salesmen and give the people something both really good and attractively presented. "The bogus stock sales- man is a wily individual. He is a marvel of resourcefulness. Salesmen in legitimate lines could learn much from him if they would study his methods. Blocked at one point, he tries another way, and keeps on trying until he finds a thoroughfare." * * Arthur McClure in Printers' Ink. INTRODUCTORY 9 The Enterprise and Its Promoter An enterprise as contemplated by the present work is any undertaking that may be financed. It may be an invention, a mine, a business, a consolidation, a combination, or any other form of business activity; it may be a new or development oppor- tunity; it may be a going concern or the resuscitation of a mori- bund business, or it may be merely the salving of a financial dere- Uct. If there is a proposition on the one side, seeking money from the other side, for its development or operation, it is an enterprise as here considered. A promoter is anyone seeking to secure money for an enter- prise, and, unless he is an owner, usually with the expectation of being paid, in cash or in " kind," for his services in so doing. What Enterprises Can be Financed As to what enterprises can be financed, it may be said broadly that money may be raised for anything capable of attractive pre- sentation. The nature of the enterprise — ethical considerations apart — is of minor importance, its successful financing whether for its own operations or for the benefit of its promoters being mainly a matter of preparation and presentation. Financings of an astonishing nature are known to everyone interested in such matters. The author recalls one instance where an invention, untried and unpatented, and existing only on paper, secured financial support in cash to the extent of nearly $40,000. Further, a large portion of this amount was placed in the inventor's hands without restriction, and all this solely on the unsupported state- ments of this same inventor as to the value and conditions of his invention. Here the man presenting the enterprise honestly be- lieved the statements he made and was able to imbue others with his belief, but this belief, as shown by results, was purely a matter of faith — not of works. Nor is this an exceptional case. It is a matter of common ob- servation that investors will, if properly encouraged thereto. lO CONDITIONS AND METHODS OF FINANCING lend their financial assistance just as freely and even more cheer- fully to some impossible schemes for the extraction of gold from the waters of the sea, to the drilling of a wild-cat oil well in far- off doubtful territory, as to the establishment in their midst of a solid, well-tried, and profitable industry. Requisites of Successful Financing The promotion of illusive schemes, such as those just referred to, occasionally brings the promoter's career to an abrupt termi- nation in the penitentiary, and for this, as well as for more ethical reasons, is to be condemned. But the methods adopted in the presentation of such swindling enterprises evince much knowl- edge of human nature and their results are surprising — so much so, that, these methods, as already intimated, should be studied and used as far as proper in the promotion of honest undertakings. It must be recognized that "beauty unadorned" is not al- ways appreciated in the financing of an enterprise. A badly constructed model, crude in appearance and defective in opera- tion, may prove all-sufl&cient for a successful financing. So also, a bald statement of facts without comment or elaboration may, if the facts are sufficiently good and the men behind the enterprise financially strong, be effective and the best presentation that could possibly be made. Usually, however, an enterprise so pre- sented gets no further than its presentation. Something more attractive is needed if it is to be financed. Dr. Johnson recognized this necessity when in offering the Thrale Brewery for sale he made the impressive statement that it was not merely the ma- terial assets that he was offering, but in addition to these "the potentiality of riches beyond the dreams of avarice." Just how far verbal gilding may be carried in promotion with- out overstepping the bounds between legitimate statement and false representation, is sometimes a question. There is, however, no question but that an enterprise to be financed may be made or marred by the manner and method of its presentation. CHAPTER II CONDITIONS OF FINANCING The Work of Financing — Conditions vs. Theory To the inexperienced, the financing of any good enterprise does not seem a difficult matter. Indeed, to those unfamiliar with the "industry" it appears quite as difficult to find a good enter- prise as to find the funds for its flotation. There is money a plenty in the world; it cannot be left idle; it must go into something, and, therefore, if one has a meritorious enterprise, it should be as easy to sell an interest in that as to sell any other possession of material value. That this is not an uncommon impression is shown by the constant inquiry in entire good faith for reliable concerns engaged in the work of financing enterprises — concerns through which the man with a good undertaking may finance his enterprise, just as he would sell a house through a real estate agent, or his crops through a commission merchant. Nor is this impression entirely confined to those unfamiliar with the industry. An authoritative writer on finance, discussing the flotation of a new invention says: "Quite generally the promoter will try to interest some capitalist in the invention who will supply the money necessary to start the company; less often the stock will be offered to the public. . . . In such cases, the invention is probably of little value, as a pro- moter will find no difficulty in securing private capital if the inven- tion promises to be of merit. ^'^ Theoretically, this easy financing is entirely possible. In fact, it does exist for the fortunate enterprises which can meet the exacting requirements that such financing demands. For the ordinary friendless enterprise, however, there is no royal road to " Dewing, " Financial Policy of Corporations," save as to italics. II 12 CONDITIONS AND METHODS OF FINANCING the financed condition. Such undertakings, even though good, are usually floated with difficulty, and, while concerns do exist for the announced purpose of financing enterprises, they are, too often, far more active and successful in securing money from their clients than for them. When Financing Is Easy For this failure of theory, the imfortunate conditions imder which enterprises are usually presented must be held responsible. The truth of this is shown by the very ease with which an enter- prise is financed when the conditions are favorable. A successful business man of proved integrity takes up some new enterprise — usually something closely connected with or related to his own business — looks into it carefully, and then with a sound and well- matured plan of operation, of which efficient management and sufficient capital are essential features, annoimces his intention of investing his money in it and invites his business associates to do the same. If the enterprise is suitable and the time is right he will dispose of this offered interest with ease — with much greater ease than he could negotiate the sale of his house or find a pur- chaser for a surplus stock of goods. Just how easy it all is when the conditions are favorable is well illustrated by the newspaper clipping which follows describing the financing of an oil company. Chicago, Dec. 31. — One of the quickest deals ever put across was consummated here today. A. J. Belcher of New York called a dozen of his friends together at one of the big dubs and in thirty minutes they subscribed $100,000 to be used in sinking two wells in Webb County, Texas. ^ Such rapid-fire financing is not, however, so unusual as the foregoing quotation would seem to indicate. It is found whenever the conditions are right— and not infrequently they are right. As tersely expressed by a representative member of a highly " Texas Oil Ledger, January 8, 1921. CONDITIONS 13 successftil group of oil men: " We don't have to ask people to come in with us : we let them in." The experience of the farmers in a country district not a him- dred miles from New York shows this same ease of financing under proper conditions. The farmers of the neighborhood had quar- reled with the dairy concern to which their milk was sold. The price paid was inadequate — or so it seemed to them — and they declined to send their milk to the company's creamery until the price was raised. The company refused to pay more and the milk was withheld. Some of it went to far-distant creameries, some to the pigs, some to waste, but none of it to the creamery. The deadlock was ruinous to both the creamery and the farmers, but neither would yield. Finally, the president of the local farmers' association — himself a successful farmer — proposed to his associates that they lease the creamery and run it themselves. The suggestion was received with approval and he was authorized to close the lease if it could be had at a fair figure. He called upon the representative of the creamery and made his proposition. The representative came back with the suggestion that instead of leasing they buy, offering the creamery to them for $50,000. This price was considerably below the original cost price of the creamery, but seemed a large sum for the farmers to raise. The president of the farmers' association, however, got the offer in writing, called a meeting the same day, laid the proposition before the assembled members, and recommended the purchase. He took subscriptions then and there to the amount of $10,000, arranged for further subscriptions among the farmers of the neighborhood, secured aid from the local bank, and in three days had obtained the needed funds. The creamery is now in success- ful operation under the management of the farmers themselves. When Financing Is Difficult In the majority of cases, however, such favorable conditions do not exist. Successful business men, as a rule, are fully occu- 14 CONDITIONS AND METHODS OF FINANCING pied with their own pursuits and have no time to interest them- selves or others in new hues of industry or novel mechanisms. They are already profitably busy and usually take up only such enterprises as come to them in the course of business. For this reason perhaps a majority of the enterprises brought forward for financing are in the hands of young or inexperienced men, overly enthusiastic and sadly lacking in judgment; of inven- tors, often mentally .ill-balanced and wildly impractical; of un- successful business men warped by their reverses and snatching at straws; of adventurers without money or reputation and anx- ious only to turn a penny without regard to the means employed. To this must be added the further facts that men are too fre- quently but "indifferent honest" and, speaking generally, too anxious for the success of their particular undertakings to be pre- cise and exact in their representations. Also it must be borne in miiid that their undertakings — " touched up" to appear as "gold- en opportimities" — are too often, doubtful, defective, or even impossible, and that their terms are apt to be as remarkable as their offerings, not uncommonly requiring the proposed capital- istic victim to put in all of the necessary fimds, take a small in- terest in return, and leave to the owners or promoters the control of both enterprise and money. When all this is taken into consideration, the hesitation of the man with money even to investigate, much less to embark in "im- accredited " enterprises, may be readily understood. All this misrepresentation, chicanery, and extravagance of statement and demand, react to the very great injury and dis- advantage of legitimate propositions. It explains much of the difficulty of financing and should be very clearly understood by the man who has an enterprise which requires financial help. Indeed, it may be said in defense of the capitalist, that, while he very frequently does take advantage of the ignorant, the unsus- picious, or the necessitous inventor or owner, he is at least as much simied against as sinning, and that for every man with an enter- CONDITIONS 15 prise who has been "frozen out" or harshly treated by his financial backers, it would be possible to discover a hundred men with money who have been drawn into unprofitable or impossible undertakings by misrepresentation, or suppression of facts, or by even more flagrant fraud. The Opportunity for the Good Enterprise To turn from the standpoint of the promoter to that of the investor, it may be said that the profitable and fairly safe invest- ment of money is usually a matter of real and serious difficulty. Savings banks now offer 3>^ to 4>^ per cent; first-class city real estate mortgages pay 6 to 7 per cent; the usual good bonds and gilt-edged stocks about the same; Liberty bonds can now be bought to yield 5 per cent and more; and good preferred stocks may be had to yield 8 per cent. All these are reasonably safe, but are not large revenue-producers. If better rates are desired, a certain added risk must be taken and even then really good investments are not to be picked up every-where. Established enterprises, as a rule, offer the investor but little more than the prevailing interest rates. If then a mate- rially larger rate of profit is desired than that of the gilt-edged security, an investment in some more or less unknown, unde- developed, or speculative enterprise is the only resource. For this reason, if the man with money to invest has not yet reached the age or the time when the small returns of the safe investment allure him, he is rarely so occupied, so indifferent, or so difficult of access that the right kind of enterprise, properly presented, will not command his attention. Whether it will secure his money de- pends upon the ability of the presentation and the strength of its attractions for him. Opportunities for more or less speculative investments are offered the investor in abundance, but the majority of these are as risky as they are — according to the statements of their pro- moters — ^profitable. Under these circumstances, if the man with I6 CONDITIONS AND METHODS OF FINANCING a really good enterprise and a fair proposition can approach the people with money and convince them that his enterprise is sound, that, if it is to be under his control, he is capable of manag- ing it successfully, that his standing and integrity are such as to justify their trust, and that the returns to be reasonably expected are sufficient to warrant the business risk involved, he will have no trouble in securing all the money he ought to have. Reputation as a Basis for Financing Of all these requisites, a reputation for success and for honesty is perhaps the most important. The majority of business men when considering an investment outside their immediate lines of business, cannot take the time and trouble and incur the expense involved in the proper investigation of an offered enterprise, even were they capable of so doing. Neither are they able, after investment, to supervise their interests so closely as to protect themselves against dishonest management or — equally bad from the standpoint of results — inefficient management. This being true, the average man would rather entrust his investments to a friend in whose honesty and ability he has confidence, merely on the strength of his statements, than to a stranger, or to a man of doubtful integrity or unknown ability, even after the most searching investigation of which he is capable. It must be confessed that there are numerous startling and remarkable exceptions to this general rule — cases where men give up the savings of years to persuasive strangers of whom they never heard before, and of whom very frequently they never hear after; gold bricks are purchased not only in rural neighborhoods, but with even greater freedom in the city of New York; extrava- gant, heavily capitalized, and widely advertised enterprises con- tinue to reap astonishing returns from subscriptions to stock if not from actual operation; Ponzi and his 50 per cent in ninety days is not yet forgotten by his confiding chent^le, and the enu- meration might be continued indefinitely and most unprofitably. CONDITIONS 17 These curious and shady happenings are, however, abnormal. They are the "sports" of the financial world and, while they are not unconamon, the ordinary man can hardly expect, and the honest man will not wish, to profit by anything of the kind. On the contrary, in the promotion of an enterprise, as in its later conduct, honesty properly fortified by ability and a knowledge of business procedure must still continue to be the best policy, and it is on the uninflated and solid basis of good reputation and fair representations that the best financing is and must continue to be done. Ideal Conditions for Financing To sum up, the ideal conditions for financing require: 1. An enterprise — (a) Basically sound. (b) Worthwhile. (c) In the best condition its state of development will permit. (d) Attractive to those who are to be asked to invest. 2. A practical and well-matured plan of operation providing for— (a) Honest and capable management. (b) Adequate working capital. 3. A fair and attractive offer. 4. A presentation timely, adequate, and convincing — (a) To men with money to invest. (b) By a man who commands their respect and confidence. tJnder such conditions the financing of an enterprise is easy. The more widely they are departed from, the more difficult the financing becomes. CHAPTER III METHODS OF FINANCING The Gradual Development Method The usual method of financmg an enterprise and the one dis- cussed at length in the present volumes is that of interesting men who have money. There are, of course, other methods which may be followed on occasion. The simplest of these is when the owner or promoter invests his own money in his enterprise. Much of the difficulty of financing is avoided by the adoption of this plan, but unfortunately it is not always practicable. Next to this method, comes the safe and cautious plan of gradual development — the actual up-building of the enterprise, first from whatever small funds are available, then from the re- turns of the enterprise itself, eked out perhaps by funds secured from some other source, until the infant enterprise becomes a self- sustaining and profitable undertaking. The method of gradual development and particularly of self- development from the profits of the enterprise itself is, of course, absolutely inapplicable to the up-building of those very numer- ous undertakings where large purchases, investments, or installa- tions are an essential preliminary to operation. Also there are cases in which the method is entirely inadvisable because of the slowness of the procedure — as in the development of a patent with but a limited period to run, or in the up-building of a business where competition can be overcome or prevented only by quick and briUiant success, and the many other enterprises in which " time is the essence" of the undertaking. Where, however, the "natural growth" plan of development is applicable, it is ideal. It avoids the risks, the mistakes, the ex- pense of costly experiments, and the premature development more i8 METHODS 19 or less characteristic of all fully financed enterprises in which the managers are inexperienced or where the nature of the business is new and not fully understood. It is the step-by-step method. A man developing an enterprise in this way begins on a small scale, and his expenditures are necessarily limited. This is pleasantly pictured by a recent writer: There is a manufacturing company now a prosperous leader in its field that once had "its day of small things" when it had to struggle for its place in the world. It was owned by two partners both actively at work. The senior was in those early days content with plain brick walls and cheap second-hand furniture in his office. His associate used to joke with him claiming to have a more expensive outfit be- cause the junior partner's desk cost seven dollars and the other but six dollars. There were no rugs or carpets. Most of the clerical work was done by the two partners.' Under such circumstances, experiments are, as a matter of necessity, cautious, carefully watched, small in cost, and quick iti results — be they good or bad. If good, the particular line of effort is pushed; if bad, it is abandoned without serious loss of either time or money. In either case the facts of the particular experiment are determined in the course, perhaps, of a few days or weeks at the cost of a few dollars; while in a more pretentious venture the same results would be demonstrated no more satis- factorily at a cost of hundreds or thousands of dollars, and months or even years of time. During the period of early growth the business itself becomes for its owner a school of business administration in which he goes through a course of thorough training — a course which gives him a grasp of the business and an understanding and control of its every detail that could in no other way be acquired so thoroughly and satisfactorily. As a result he frequently attains a degree of .success in his own business and in the business world hardly pos- 'Redfield,"The New Industrial Day." 20 CONDITIONS AND METHODS OP FINANCING sible under any other system of development. The enterprise grows into prosperity, and when this point is reached is so firmly rooted and grounded on all sides that it is proof against every competition and the severest industrial storms. Objections to the Plan of Self-Development Developing an enterprise from within may be said to be the primitive and natural method. Examples of its successful appli- cation date from long before the time of Dick Whittington and his cat, are numerous and well known, and supply the basis for many a well-meant homily of more or less doubtful commercial soundness on the wisdom of making haste slowly. On the other hand, there are, as intimated, serious objections to the plan. Any business undertaking involves risk and these risks are intensified when capital is severely limited. The danger from this source is stated by a well-known financial writer as follows:^ One of the great weaknesses of American business life is the start- ing of business on insufficient capital. Two carpenters and builders who have saved a few hundred dollars decide to become their own bosses, and by some scheming get a piece of land. They persuade friends to agree to lend them a certain amount on the building when completed, and lay their plans carefully and figure dosely. Some- thing goes wrong; the weather is bad; the work is delayed; strikes and liens not reckoned with interfere; the result — failure. They lack capital; and lacking it, lose out. They cannot carry their loan. The author draws a true picture. The possibilities of the cloth should always be carefully considered before the coat is cut — or attempted to be cut. The spirit behind the attempt of the unlucky builders is, however, entirely commendable, is distinctly American, and the daring and ambition that led the builders to make their unsuccessful attempt will lead them to try and try again until with better laid plans and more favorable conditions they win through to success. " Albert Atwood, " Industrial Handbook." METHODS 21 A Successful Self-Development Venture A striking and pleasing illustration of the self-development plan is to be foxmd in the Mary Ehzabeth candy shops. Some fifteen years ago, Mary Elizabeth Evans, then a girl of sixteen, with her widowed mother and three younger children, was living on a farm near Syracuse, N. Y. The death of their grandfather had thrown them on their own resources. The problem of money for the purchase of clothes, for education, and the many other requirements of a growing family, was very difficult. The task of solving the problem devolved on Mary Elizabeth. To meet this situation, Mary Elizabeth possessed two valuable personal quahfications, neither as yet recognized by her as a business asset. She was a born candy-maker and a born execu- tive. In addition, she was desperately anxious to increase the family income. But what to do she did not know. Her attitude was one of "watchful waiting." Making a Start Her opportunity — though as yet unrecognized — came in the form of a party given by an old family friend in Syracuse. This friend, knowing that the Evans children often made candy at home, suggested to Mary Elizabeth that she bring some to the party. So — happy as most children are to make candy — Mary Elizabeth readily agreed. Then, the thrilling possibiUty occurred to her that this might be the longed for "way out." The candy was made with anxious care, packed in a neat box, and labeled in her own handwriting with the now familiar legend, " Mary Eliza- beth's Candy." The candy made a distinct hit. It looked good, it tasted good. Not only was it delicious but it was different from anything the guests had tasted before. Inquiries soon drew from the willing hostess its story, together with an opinion that orders would be gladly received. The guests werfe enthusiastic, and practically every one of them put in an order for a weekly box of Mary Elizabeth's candy. 22 CONDITIONS AND METHODS OF FINANCING This was the starting point of the Mary Elizabeth business. The candy was made at home and deHvered C.O.D. by the chil- dren. The little trade thus established began to grow, but slowly because of the dif&culty of making new connections. Possible patrons could not be expected to employ detectives to ferret out the source of supply. Or, even if they knew where the candy came from, it was difficult for them to place orders, and Mary Elizabeth soon saw that some more effective method of distribu- tion was essential if the business was to be really worth while. The " Help Yourself " Booth At this critical time Mary Elizabeth learned that a booth suitable for the sale of candy could be rented in the arcade of the University Building in Syracuse, a central and desirable location. The rental was within reach and the opening attractive, but how was attendance to be provided for? Mary Elizabeth herself had the candy-making to look after; the other children were too young; a paid attendant was beyond their means. An implicit trust in human nature finally solved the problem. The customers must serve themselves. The booth was rented, neatly fitted up, and stocked with an attractive display of candy, every box plainly labeled with its price. An open cash-box was provided and suitable signs noti- fied the passers-by to help themselves, and put the money in the cash-box. Change to the amount of $2 was placed in the box, and the new venture was launched. The success of the "Help Yourself" booth was immediate. The excellence of the candy, the attractiveness of the display, the entire novelty of its method, brought a liberal and increasing patronage. The daily contents of the cash-box sometimes ran as high as $15. Customers, neighboring tenants, and even the news- boys who sold papers in the arcade, vied with one another in the protection of Mary Elizabeth's property and the promotion of her business. METHODS 23 Expansion of the Business The success of the booth soon supplied the funds and the basis for a larger and more convenient candy shop located near the arcade. This store, always conducted on the principle of giving value received, of always meeting the demands of its patrons, of being a little different from other stores, was as successful on a larger scale as the booth had been, and from that time on the Mary Elizabeth record is one of a successful undertaking. The Mary Elizabeth business is now large and prosperous. Its candy stores and tea rooms are located in half a dozen differ- ent cities. The rental for one of these alone — the Fifth Avenue store in New York City — amounts to over $50,000 a year, and the annual "turnover" of the various establishments runs far up in the hundreds of thousands of dollars. Mary Elizabeth is still at the head of the establishment, and still conducts it on the same general lines laid down in the early history of the undertaking. A Wrong Financial Plan In striking contrast to this history of self-financing success is another instance known to the writer, but not to fame. Some years before Mary Elizabeth made her start, an inventive genius skilled in food preparations discovered a new and attractive pre- paration of chocolate — a soluble chocolate, different from any- thing else on the market at that time, convenient for use, and as good a foundation for a profitable business as could be desired. The inventor, through illness and attendant business reverses, was himself unable to put any large sum of money into the de- velopment of his invention, and the question of how it should be handled was the first consideration. As will be seen, the prospective enterprise was one that lent itself admirably to the personal development plan. The few hun- dred dollars necessary for a modest start could have been provided by the owner himself; the expenses could have been met by the returns from the business; it would have become readily self- 24 CONDITIONS AND METHODS OF FINANCING sustaining as it grew; and the presumption is a fair one that had the owner followed the method of self-development he would now be the possessor of a nation-wide and profitable business. The owner of the enterprise, however, decided against the method of personal development. A quick and brilliant success was his ideal, and for this a considerable amount of ready capital was required. After due deliberation he fixed on $100,000 as the amount needed to put the preparation on the market. Then, instead of devoting his time and energy to the building of the busi- ness, he devoted himself to a campaign for money. The results were most unfortunate. Begun over twenty years ago, the campaign continued up to a recent date. The time has been lost, the enterprise and its owner have been harassed by a steadily growing indebtedness, similar preparations have long since entered the market, and the inventor is now appar- ently further from the realization of his hopes than he was at the beginning. It is but fair to say, however, that in this case the inventor lost several good opportunities of financing his undertaking, through unreasonable exactions. Also, had his proposition been reason- able, the funds required might have been secured and the business have reached substantial success in a very much shorter period than would have been possible \mder the slow method of personal development. Moreover, this quicker success would probably have created a monopoly that might not have been possible imder a slower growth. Side-Line Development A modification of the personal development method, some- times followed with excellent results, is the gradual up-building of a new enterprise as a side hne, or as an incident of the main business. That is, the owner who is already occupied in his own business continues in the employment in which he is engaged and from which he derives at least a support, giving the new venture METHODS 25 only such time, attention, and money as he can spare from his other work. It is obvious that the " side-line" method of business has limi- tations. The conditions that permit it are not frequently found. As a rule, success in any enterprise, and particularly in a new enterprise, requires the closest and most unremitting personal attention. There are, however, conditions under which it may be successfully employed and enterprises which may be worked up by this method, or by modifications of the method, to much advantage. A Successful Side-Line Effort A better example of side-line business building could hardly be found than the development of Montgomery Ward and Company of Chicago. Some fifty years ago Montgomery Ward was a clerk in a Chicago retail store. The store advertised special bargains from time to time in the local newspapers and, as usually happens, this brought in scattering mail orders. The store was not pre- pared to handle mail orders and found them a nuisance. At the same time it was deemed bad policy to decline to fill them. It might create ill-will. Finally, young Ward was told that if he would look after these orders and handle them satisfactorily he might have for his own any resulting profit. Montgomery Ward was quick to see the unusual opening. Here was an opportunity to build a business with capital and trade both suppUed, and without interference with his regular work. He accepted the proposition at once, took entire charge of the incoming mail orders, and handled them so well that there was a steady increase in the business, those who had bought once coming back time after time to buy again. The profits were satisfactory, and it finally occurred to Ward that it might pay him to print circulars announcing forthcoming bargains and to send these circulars to his mailing list, composed of the names of those who had already sent in maU orders. The success of the plan was iimnediate and the results so good that 26 CONDITIONS AND METHODS OP FINANCING Montgomery Ward shortly left his position with the store, rented a room of his own, and entered the mail order business under the name Montgomery Ward and Company. This was in 1872. During the early years of the business its growth was slow but gained momentum as time went on. In 1888 the business was incorporated and has since been conducted as a corporation. In 1919 the gross sales were over $100,000,000, with net profits in excess of $4,000,000. The gross sales in 1920 were even larger but, owing to excessive inventory depreciation, no profits were made. Modifications of the Side-Line Plan Various modifications of the side-line plan are found. Some- times two parties are interested in an enterprise, the one taking charge of the new work while the other retains his regular employ- ment to serve as a base of support, this latter giving to the new business such financial aid as his resources will permit and such personal attention as he may be able to divert from his regular occupation. Then, when the new enterprise is brought to the point of self-support, the " sustaining" associate, if he wishes, may safely withdraw from the old occupation, join his partner, and give his entire time and attention to the new business. Occasionally this plan is varied, the owner employing some- one to take charge of the new enterprise while he continues his regular work, merely supervising and assisting the new undertak- ing as he may be able. The chief obstacle here is the difi&culty of securing employees of sufficient honesty and ability to take charge of the business. When an enterprise is in the "day of Small things" and unable to pay attractive salaries, this difficulty is frequently insuperable. Advantages and Limitations of Side-Line Development When capital is limited, the advantages of side-line develop- ment — if at aU practicable — are obvious. In a new enterprise of METHODS 27 limited capital there is almost invariably a period of harassing imcertainty, sometimes quite prolonged, when outgo treads closely on the heels of income, and sometimes passes it, and the future of the whole venture trembles in the balance. If then the owner, or one of the owners, is profitably employed and able to supply additional funds as they are needed, the danger of failure is greatly lessened and the very knowledge that the ' ' base of supplies" is not in danger is in itself an element of strength and of success. On the other hand, while the side-line method of building up a business has its place and its advantages, it is, speaking generally, of very limited application. It can only be used imder certain con- ditions and the development of a new enterprise by the method is ordinarily slow. Also the business so conducted is almost certain to suffer, and perhaps faU, from lack of attention, and there is the further danger that the demands of the new business may become so exacting as to take more time and attention than can be rightly spared from the old occupation. And, finally, it may be said that in practice most side-line attempts are either failures or only very moderate successes. Borrowed Capital Another method of financing a business frequently employed is to borrow the money required, in whole or in part. This is pos- sible only where the personal standing or the collateral security of the borrower is such as to justify the loan, as it is seldom that a new enterprise is itself acceptable security for the money needed for its development. If the enterprise itself is sound, if the owner or the party in charge is a good manager, and a loan can be obtained on fair terms either from friends, from the local bank, or in the form of a credit for goods, the plan of borrowing has material advantages. The greatest of these is found in the fact that the control and ownership of the new undertaking are left in the hands of the original party. 28 CONDITIONS AND METHODS OF FINANCING When this form of financing is adopted a commission or some form of bonus must often be paid to secure the money needed, interest must always be paid on the loan, and the borrowed money itself must, of course, sooner or later be repaid. If, however, the enterprise is really successful, the interest payments, the in- debtedness, and any commissions paid are easily carried and cleared off in due time, and the whole amoimt given in interest and commissions for the use of the money is small compared with the profits of the business. It is also small compared with the interest in the enterprise that must be given to an associate if the needed money is secured in this way. Dangers of Borrowed Capital If, on the other hand, an enterprise ends in failure, the borrow- ing plan is disastrous — far more so than if the money were secured through a partner, or through the sale of stock, if the undertaking be incorporated, as an investment in the business. For this rea- son many people, well able to borrow money, prefer to obtain part or all of the needed funds for a new undertaking as an invest- ment in the enterprise rather than as a loan. In this case they divide the risk. While not looking for failure, they recognize its possibility in any new undertaking, no matter how good. There- fore they prefer to diminish their own interest in the enterprise and in the future profits, rather than to take chances of a disas- trous loss in case of failure. Also, while the interest on the money borrowed for the de- velopment of a sound enterprise is neghgible, there are definite risks and at times very real dangers connected with such financ- ing. Loans and interest payments have a tendency to become due at inconvenient times, or if left to run after they become due, may be called unexpectedly. Then, if not met, they may be used to the serious embarrassment of the enterprise. As a matter of fact loans are not infrequently made to owners of promising enterprises, with the definite hope or expectation METHODS 29 that they will not be able to repay the amount when due. In such a case the parties making the loan promptly foreclose and — as the owner is already in a difficult place financially and unable to protect his interests — buy in the enterprise at a tithe of its real value. The title to many a valuable undertaking has passed — never to return — in this way. In some financial circles to secure properties by foreclosure at bargain prices is regarded as entirely legitimate and even clever business. This fact that borrowed money may and frequently does give a basis for foreclosure with the loss of the whole enterprise, should be borne in mind when loans are made for the development of new enterprises, and a line of retreat always be kept open. Exten- sions may be provided for in advance, or sufficient time be ob- tained to permit the enterprise to pay out, or perhaps provision may be made to meet the loan from other sources if the necessity should arise. Financing by Means of Credit A common variation of the borrowing plan is the use of credit to start the new enterprise, which in this case is usually some line of established business. As in the borrowing plan, this requires good personal standing, and usually some little cash capital to serve as the basis of credit. A young man, for instance, has clerked in a hardware store until he has mastered the details of the business, has gained a reputation for fair business ability and, more particularly, reHability, and usually has saved a cer- tain amount of money. He then determines to start for himself. Sometimes his entire stock-in-trade is purchased on credit, but more commonly the young merchant will make a first pajonent, securing credit from the wholesalers for the balance. The re- mainder of his money is used for the purchase of equipment, for rent, advertising, and other prehminary expenses. He then de- pends on the proceeds of the business to meet his maturing ob- ligations for goods, and to carry the business. More goods must 30 CONDITIONS AND METHODS OP FINANCING usually be bought on credit, but if the new business is prosperous, the amount of credit will be gradually cut down, or the amounts purchased will be increased without increasing the credit margin proportionately. The method requires real ability — for self- denial as well as for the conduct of the business — and a capacity for hard work, but it is entirely practicable and a common method of starting new businesses. In speculative enterprises the credit method of financing is rarely available, unless the owners of the enterprise are able to put in a considerable amount of money themselves. In such case they should be able to secure credit for a material balance. For instance, if the undertaking is the development of a mine, and the owner has already sunk and timbered his shafts, he should, if the mine offers any real, demonstrable basis of confidence, be able to secure credit for part, at least, of the equipment needed. Here the work already done and the money already invested and to be invested furnishes the basis for credit. Even in this case the personal standing of the party asking credit must usually be thoroughly good if any material amovmt of money is involved. Moneyed Partners Another method of financing frequently practiced is that of taking in moneyed partners. This is merely selling an interest in the enterprise, and does not differ in principle from the usual plan of securing money as an investment in the enterprise — usually in the form of stock subscriptions. It has, however, some special advantages and disadvantages of its own due mainly to the peculiarities of the partnership relation. When any such arrangement is under consideration, it must always be borne in mind that a partner has all the rights in the business that the original owner himself has. If he sees fit, he can interfere in the management of the undertaking, run it into debt, or make trouble in many other ways. All this is of no great importance if the partner is known to be METHODS 31 the right kind of man — one whowill shoulder his part of any business burdens to be borne, and who can be depended upon to co-operate when needed and to do nothingwhennot needed. If, however, there is any doubt as to the character or the disposition of the prospective associate, the close alliance of a partnership should be avoided — preferably by the use of the corporate form of organisation. Another point to be considered when a financing partner is to be taken into an enterprise, is the fact that should the enterprise fail to reach the point of self-support before its funds are ex- hausted — a contingency that frequently occurs — and the moneyed partner cannot or will not supply further funds, the conditions are most unfavorable for securing them elsewhere. In a corporation, stock may be reserved for just such emergencies, or perhaps a special issue of preferred stock or bonds may be floated. In a partnership, on the contrary, there is usually no reserve of any kind that can be offered outsiders for additional money. If more money is needed, and the partners cannot supply the need, each partner should, of course, sacrifice a pro rata share of his interest in the business for the purpose of securing outside assistance. In practice, however, it not uncommonly happens that the "financing" partner declines either to increase his invest- ment or to sacrifice his interest for the purpose of obtaining money from others. Sometimes the moneyed partner refuses because he thinks that the management of the business has been faulty and that, therefore, the "working" partner, who is responsibile for this, should bear the burden of securing additional funds. At other times he dechnes from purely selfish reasons, thinking that the working partner's interests are sufficiently large to force him somehow to pull the enterprise out of its difficulties. On rare occasions help is refused because the financing partner hopes that the embarrassment of the business will work to his own interests, possibly enabling him to acquire the whole enterprise for a frac- tion of its real value. 32 CONDITIONS AND METHODS OF FINANCING In any such case the working partner must do the best he can. He may be able to borrow, or he may have to make very material sacrifices of his own interests to obtain the needed funds. If the enterprise is successful, he will be able to recoup himself. It is, however, far better to anticipate the possible need of more funds and provide for them in advance by suitable provision in the partnership agreement. It is better still to incorporate the under- taking and thereby avoid the sometimes disconcerting possibili- ties and responsibilities of the partnership. Usual Plan of Financing The usual and, speaking generally, the best plan of financing an enterprise is to incorporate it and to sell its stock or other securities. The corporation offers advantages, both for the owner of the enterprise and for the investor, found in no other system of business organization — so much so that there should be strong reasons in its favor to justify the formation of a partnership to conduct any enterprise of fair size. The use of the corporate sys- tem in connection with the financing of enterprises is discussed in detail in later chapters. ^ 3 Volume II, " The Orgaciutioa." PART II THE ENTERPRISE CHAPTER IV A SOUND ENTERPRISE Requisites of Success While the causes which make for the success or the failure of an enterprise are innumerable, three loom up as basic. For a real industrial or commercial success, there must be: 1 . A sound undertaking. 2. Efficient management. 3. Sufficient capital. If any one of these factors is entirely lacking, failure is sure. If any one is deficient, the difficulties of success are enormously increased. In any case the measure of success of an enterprise usually varies directly with the measure of sufficiency in which these essentials are found. These three basic requisites of suc- cess form the subject matter of the present and the two following chapters. An Unsound Enterprise Theoretically, the necessity for a sound undertaking as a basis for any commercial or industrial success will not be questioned. In practice, however, the number of failures due to the fact that the basic undertaking was so unsound as to be no adequate sup- port for the proposed industrial structure, is surprising. A strik- ing instance within the writer's knowledge may perhaps still be seen in a certain district of southern Oklahoma where mineral wealth abounds, and Nature, to make it easily accessible, has tilted the rock strata at an angle of nearly forty-five degrees. Here a vein of bituminous coal some two or three inches thick crops out at the top of a grassy hill. In that portion of the state fuel is scarce and a good vein of coal is a development proposition 35 36 THE ENTERPRISE of much interest. The little seam therefore rightfully enough attracted attention — the attention, it must be said, of men unused to coal mining. No preb'minary drilling or other investigation was deemed necessary. The coal was there; it could be seen; it could be picked out with the fingers; and on the easy assump- tion — which is usually true — that the thickness of a coal vein increases with depth, the matter was taken up and liberally financed by northern capitalists. A complete and excellent plant was erected on and about the outcrop, including expensive machinery for mining and handling the coal and for pumping out the water that would soon be en- countered; some thirty-five or forty comfortable houses were erected in the vicinity for the accommodation of the men; roads were laid out about the mine; a spur was run in from the line of railroad some seven miles distant; and a station, post-ofi&ce, store, and all the other necessary paraphernalia of a small village were installed. In short, nothing necessary for the economical and convenient operation of the property was neglected. As soon as the preliminary work had gone far enough to make it practicable, a substantial, well-timbered double-shaft was started down the incline of the little vein. After following the seam several hundred feet it was discovered that its thickness did not increase with depth, and that, so far as they had gone, there was not enough coal in the mine to operate its own hoisting en- gines. Then diamond drills were resorted to, with the result that the property was shown to be utterly worthless for purposes of coal mining. The whole enterprise was thereupon abandoned and practically the entire investment was lost. Worse still, the con- fidence of the capitalists whose money had been so ruthlessly and foolishly lost in this "hole in the ground" was shaken, not only as to this particular coal mining venture, but to the mining in- dustry of the whole countryside as well. The failure did in fact hold back the mineral development of that part of the country for several years. A SOUND ENTERPRISE 37 Legitimate Speculative Development Since the time of this ill-judged enterprise, this same region — southern Oklahoma — has seen very much larger amounts of money disappear just as completely and as irrecoverably in "dusters," i.e., unsuccessful oil wells. Most of this expenditure has been, however, legitimate. Millions of barrels of oil have been won from similar experimental wells that did strike oil. The dif- ference here is that investigation was carried as far as commer- cially possible— to the point where drilling alone could show whether oil was, or was not, in the particular locality. In the case of the coal development, no proper investigation had been made. The real conditions could and should have been discovered by an early and judicious use of the diamond drill at a tithe of the ex- penditure really made. The failure to do this can only be ascribed to ignorance or possibly to indifference on the part of the pro- moters. The capitalists were, however, also much to blame for not insisting on a proper investigation of the property before their money was sunk in premature development. The Wayside Inn It is not necessary to go so far afield, however, to find in- stances of enterprises basically unsound. They are the common — but in most cases unnecessary — everyday experience of busi- ness development. In a little village in the Ronduit Valley, not a hundred miles from New York, may be seen a large and attrac- tive hotel, pleasantly entitled the " Wayside Inn." Its accommo- dations would meet the needs of a population many times that of the village in which it was built. Yet there are no special features to draw patronage from the outside that would justify the exist- ence of such a hotel. It now stands an idle and empty failure. It is simply a case of an enterprise good in itself, but unsound there because it neither supplies a need, nor offers a required ser- vice. It cost its projectors over one hundred thousand dollars to discover the fact. 38 THE ENTERPRISE An Unsound Quarry Proposition In the little village of Pompton, hardly thirty miles from New York, may be seen the remains of an equally ill-fovinded enter- prise. In the mountains just back of the village is found a rough granite, coarse of feature, but pleasing in appearance. The stone is excellent for certain building purposes and has been quarried in an intermittent way for years. The property came to the notice of promoters who saw in it the foundation for a large and profitable industry. No investiga- tion or thorough testing was necessary. Had- not the quarries been worked for years? What more could the most skeptical desire? Accordingly the matter was presented to a man of wealth but no experience in Ijuilding stone. The proposition ap- pealed to him. It sounded substantial and attractive. A large investment was authorized and the work begun. A spur was nm in from the near-by railroad; a well-equipped power plant was installed; a large and commodious building for the handling and working of the granite was erected; machinery for cutting and shaping the granite was installed; adequate derricks and quarry machinery were purchased; houses for the men were erected, and active operations were begim. Then and not till then it was discovered that the granite was not suitable for general use and that the demand it could supply was very limited — not enough to justify the upkeep of the plant. This was demonstrated by tardy but very convincing tests and the plant was dismantled. An Ailing Sanitarium In the pleasant valleys of Virginia a curious example of an un- soimd enterprise may be seen. Directly over the well-known caverns of Luray stands a large sanitarium, constructed of brick and stone to last for generations. According to the traditions of the neighborhood it was built for the accommodation of patients suffering from tuberculosis, who might there inhale cave air — A SOUND ENTERPRISE 39 which, according to the promoters of the sanitarium, was pecul- iarly beneficial for that complaint. For reasons best known to themselves and their physicians, patients suffering from tuber- culosis did not care to inhale cave air. In consequence the project was basically unsound, the sanitarium— as a sanitarium — was a total failure and the building is now occupied, in part, as a private dweUing. A Useless Railroad To return to the Southwest, in one of the mining camps of that region the outcrops indicated ore bodies of great richness. At the solicitation of the mine-owners, the railroad completed its branch before the workings were opened in order to be in a position to handle the large business that would presumably foUow the develop- ment of the mines. The mining camp proved a failure because the ores contained too much sulphur to permit of their economical use, and the ore bodies proved too small to permit of the large smelter expenditures necessary to treat them. Not a carload of ore was shipped out of the camp. The railroad had expended upwards of $400,000 in money in building the line, yet, clearly, its property was worthless except as the rails could be taken up and relaid. '■ Why Unsound Enterprises Are Selected for Financing I. For Frattdulent Purposes. In some cases enterprises basic- ally unsound or seriously defective are selected for financing be- cause the real purpose of the promoter is to finance himself, directly or indirectly, and he cares little or nothing for the char- acter of his enterprise, provided only that it offers an attractive setting for his swindle. The purely swindling enterprise is usually easy to recognize, but occasionally enterprises are so skilfully disguised as to deceive even the elect. Of this kind were the trolley lines, widely financed in New England and the Middle States in the early years of igcx) ' Dewing, " Financial Policy of Corporations." 40 THE ENTERPRISE by men who merely wished to sell land along the right of way. The sale of their land was the measure of their interest in the undertaking — the fate of the trolley line was to them a matter of indifference. The result is seen in the many trolley lines in these states struggling to keep out of bankruptcy, operating imder receiverships, or not operating at all. 2. From Force of Circumstances. In other cases worthless enterprises are selected for financing because their soundness cannot be determined in advance, the only practical test being a more or less complete development. Thus the worth of a prospec- tive oil territory, in which the geological conditions are right and the indications good, cannot be conclusively proved save by ac- tual drilling. Similarly, some mechanisms cannot be properly judged until a full-sized working model has been constructed. In such cases the enterprise is a purely speculative one and, if handled as such, is sound as a purely speculative enterprise until and unless it is proved to be otherwise. The results alone can show whether a prize or a blank has been drawn. The method of determining this is an expensive one, but, as stated, for some en- terprises no other is possible. Generally speaking, however — and in all the specific instances cited in the present chapter — the value of a new enterprise may at least be approximated in advance. Where this is feasible, the exploitation of a radically defective undertaking indicates either ignorance, recklessness, poor judg- ment, or fraud on the part of the "man with the enterprise," usually coupled with "contributory negligence" on the part of the investor whose money is risked. 3. Mistaken Judgment. Occasionally it happens that an un- lucky mortal undertakes in all good faith to finance an enterprise improbable or impossible in itself, in which he engages from lack of judgment, of knowledge, or of investigation. He sinks his own and his friends' money in its development and is finally threatened with ruin because of the worthlessness of the vmdertaking. The temptation is then strong to postpone the day of reckoning by A SOUND ENTERPRISE 41 concealing material facts, to secure more money, and to push on in the hope that something may turn up to reheve the situation. The position is one that tends to turn an honestly mistaken man into an imposter. It is easily conceivable that the Keeley Motor discussed in a later chapter,^ was begun in good faith. Keeley may well have thought that he was on the brink of basic discover- ies in motor force. His own and his friends' money went into the enterprise and at that time there must have been some honest be- lief that the expenditure was justified. When, however, twenty- five years later Keeley's death revealed the nature of the opera- tions he was then carrying on, it disclosed a fraud pure and simple. Results of Financing Unsound Enterprises It makes little difference in the results, however, whether a defective enterprise is foisted upon investors through fraud, ignor- ance, or other disabilities of the promoter, or because of their own carelessness. They are separated as effectually from their money in the one case as in the other. Therefore, as a matter of common honesty, no pains should be spared by owner or promoter to prove the value of his enterprise so far as it can be proved before it is presented to the investor. As a matter of ordinary business prudence the man who is to invest his money should see that this has been done. Enterprises Dependent Upon Public Favor for Success In a certain class of enterprises a final feature of uncertainty and one hard to determine in advance is the reception that will be accorded the imdertaking by the public. Many such enterprises of this nature, basically good, have failed when it came to this crucial test. The subject matter of the enterprise may be apparently desirable and attractive, but in some way, or for some reason — often undiscoverable — ^it does not appeal. This may be because the matter is not presented properly or with ' Chapter VIII, ' ' Importance of Investigation." 42 THE ENTERPRISE due insistence and continuity, or it may be due entirely to the indifference of the public. The attitude of the pubHc is something that cannot be reliably foretold. It is a matter of judgment only to be proved or dis- proved by the event — by an actual " try-out" on a sufi&cient scale to be decisive. A difficult point in enterprises of this nature is to determine whether the failure — if failure it is — results from an imconquer- able indifference on the part of the public, or to inadequate pre- sentation of the subject matter of the enterprise. Thus in the case of the now well-known and widely used breakfast food, "Shredded Wheat," it was only perseverance and expenditure be- yond the ordinary that "put it over." Apparently the public would have none of it, but the inventor was insistent that the public ought to want it, regardless of its own ideas on the subject, and he never gave up until he carried his point. With the aver- age promoter the undertaking would have been a failure. Floating a Breakfast Food The discovery of shredded wheat as told in the Magazine of Wall Street,^ came about in the following manner. Henry D. Perky was interested in the building of all-steel cars and a costly plant erected by him for their manufacture was destroyed by fire just as it was ready to begin operations. Mr. Perky could not raise funds to replace the plant and was forced to abandon the undertaking. The nervous strain of this failure was great and he became seriously ill — so ill that his doctors told him he had but a few months to hve. This did not suit Mr. Perky, and instead of dying "as per specifications," he went to Denver, and there began ex- perimenting with a new kind of wheat food product— the fore- runner of shredded wheat. He tried this on himself alnd for a long time existed solely on his new food. It agreed with him, and he 3 October 2, 1920. A SOUND ENTERPRISE 43 recovered his health. He argued that if the new food was good for him, it would be equally good for others, and with the limited capital at his command began the introducfon of his shredded wheat. A small restaurant in Denver was purchased and here the inventor started a quick lunch service restaurant equipped with the wide-arm service chair designed by himself. He advertised the new "Natural Food," as he then called it, and business at the little restaurant was good. "There was only one way to get shredded wheat; one had to come to that particular restaurant and eat it off the wide-armed chairs." As the next step, the inventor constructed a small wheat- shredder much like a coffee-grinder, and proposed to sell these to the housewives so they might make their own shredded wheat. He discovered, however, that the housewives didn't want shredded wheat, and naturally would not buy his shredder. This was the first setback for the new product. Not discouraged by this failure, the inventor sold his restau- rant, and with a cash capital of $1,500 went to Boston to introduce shredded wheat to a reluctant public there. At the time he ar- rived a food fair was in progress. This was exactly in line, and Mr. Perky rented space and installed a wheat-shredder. Here his ability as a promoter showed itself, for he not only sold his shredded wheat, but he induced Boston capitalists to join with him in a new company — The Cereal Food Machine Company — for its wider exploitation. Forcing a Breakfast Food on the Public As the next step, Mr. Perky leased a small factory and began the manufacture of shredded wheat. "His output was away ahead of consumption. The public had a way of laughing at this newfangled food product. They called it 'baled hay.' The bread-bakers laughed at it and told him over and over again that he could never make a go of it. The deficit that soon began to 44 THE ENTERPRISE pile up against him was appalling. It was one thing to manufac- ture shredded wheat, but it was quite another to induce the public to accept it as a food." Mr. Perky thereupon started out as sales agent for his pro- duct. Among other selling plans he originated the advertising lectures. To make them more attractive, young women were trained as lecturers and demonstrators, and at one time Mr. Perky maintained a fully equipped college of domestic science. Meanwhile fimds were running low and the inventor-salesman found great difficulty in meeting his weekly pay-roll. A Wor- cester capitalist was persuaded to make a considerable investment in his enterprise, under condition that the factory be moved to that place. This was done and the manufacture of shredded wheat began on a larger scale. It was not long, however, before all the available storage space in the new plant was fiUed with shredded wheat which showed a tendency to stay in storage in- stead of going into active circulation. Mr. Perky employed a New York sales agent, shipping him two car-loads of the product. The salesman wired back protesting. Mr. Perky, however, shipped two additional car-loads and " went himself to New York, leased a vacant store on Broadway and setting up one of his shredding machines in the show window began to manufacture shredded wheat so that the passers-by could see how it was done." The direct effect of this effort was fairly good. The far more important result, however, was the interesting of the late Ogden Mills in the inventor and his enterprise. "Mr. Mills made a good-sized investment in the proposition and also contributed in the way of suggestions and advice. New machinery was invented for more economical methods of turning out the product, making the process largely automatic, which greatly reduced the costs, and a considerable sum was judiciously expended for advertising." Gradually the public began to wake up to the good features of shredded wheat. The consumption increased rapidly and in a comparatively short time the enterprise began to be profitable. A SOUND ENTERPRISE 45 Since that time the history of shredded wheat is one of con- tinued success. Two enormous factories have been completed at Niagara Falls, and a third is under way. The Canadian trade is supplied from a factory on the Canadian side of the Niagara River, and the West is supplied by still another factory at Oak- land, Cal. " The Shredded Wheat Company is capitalized for $10,000,000. There are no bonds. Its plant additions have been built out of earnings. It usually carries from two to three years' supply of wheat on hand. This last year's income tax was over $500,000." Testing the Enterprise Shredded wheat was, basically, all right, and Mr. Perky knew it was, but apparently the public did not want it. How many men would have had the patience and the determination to push on until the public indifference was overcome? How many other breakfast foods, perhaps equally good, have fallen by the way- side for lack of this bull-dog determination? And how many of them never would have succeeded regardless of any amount of pushing and pertinacity that could profitably be put behind them? While in some cases uncertainties will exist that can only be removed by the pragmatic test — by actual trial — this does not relieve the owner or the promoter, and the investor as well, from the responsibiUty of investigating every phase of the new under- taking so far as investigation can be profitably carried. A proper investigation will almost always ehminate the basically unsound enterprise and will remove more or less of the uncertainty from enterprises of any character. In Part III of the present work the investigation of an enterprise to determine, so far as may be, its soundness and desirabihty is discussed in detail. CHAPTER V EFFICIENT MANAGEMENT Importance of EflBlcient Management Efficient management is by far the most important single requisite of business success. An undertaking may be meritori- ous; its capital may be more than adequate, but if its manage- ment is poor, failure in greater or less degree is certain. On the other hand, even a poor undertaking, or a good undertaking crippled by lack of money, will, unless the handicap is too heavy, be brought to a successful issue by good management. Usually, the degree of success in any particular enterprise — ^within its possibilities — is determined by the ability of its management. A Socialistic Experiment A well-known efficiency engineer gives an interesting account of his experience with a socialistic colony. ^ A lady of wealth had given a square mile of land for its local habitation. This land lay in an island off the coast of California but near excellent markets on the mainland. The society was known as "The Brotherhood of Man" and there were two kinds of members — ^resident workers and non-resident contributors. The contributors furnished the needed capital, the resident workers were to start the various indus- tries upon which the permanent success of the colony would depend. Any contributing member might at any time change his status from that of a contributor to that of a worker. Or, if he died while working in the "outer world" his family could become members of the colony, be assured of a house and home, and a part in the general welfare "not according to greed or deed as in the outer world, but according to need." ' Harrington Emerson in Staff Bulletin 52. 46 EFFICIENT MANAGEMENT 47 The idea appealed to the efficiency engineer. It seemed to him "a rational assurance against disaster for me and mine." As he franklystates, however, he had no intention of becoming a resident worker so long as he had health and strength for the competitive struggle "in which I hoped by greed and deed to do far better for myself and mine than were I to become a worker in this island forest paradise. But what a favorable prospect for the colonists! " Intellect vs. Organization "Here were 640 acres of land, either fertile fields or great forests. In the sea were unlimited supplies of fish; along the beaches inexhaustible clam beds. There were deer and other game, rabbits and other fur-bearing animals." The coast Indians, not far away, enjoying much the same conditions, had lived for cen- turies in abundance. They were not rich because they did not care to save, but never poor because of the natural richness of the country. " How much better therefore the outlook for the colony with not only its specific land endowment but also with its collec- tion of skilled and ardent workers in the prime of life, with the splendid markets for all its surplus in the two neighboring cities." All the traditions of the white race were part of the endowment, and aU the accumulated knowledge of the ages was available. . . . How could there be failure? So fuU of hope, I was initiated by a most impressive ritual, I was given pass-words and taught grips and I took boat to see for myself the workings of the colony. I spent a week among them. . . . I found a number of fine men and fine women, also a few children. The men were for the most part interesting dreamers who had not made a business success in the competitive outer world. Some got up at 4 o'clock every morning and worked furiously all day, their wives cooking for all the workers. But there were other dreamers who had no taste for hard manual labor, who preferred to write books on social-, ism, who stayed up late to discuss and argue, and who lay abed imtil the middle of the forenoon and then expected the overworked women to prepare for them special meals. Some of these dreamers sulked when objection was made to their irregularity. 48 THE ENTERPRISE Inefficiency of Unorganized Effort Curiously enough, in this socialistic colony with all its intel- lectual and natural advantages, no provision had been made for organization, for discipline, for management. "If the colonists thought at all, which is doubtful, they resolved that there were to be no such drones and parasites as organizers, bosses, or accountants." As a result, the moneys which should have been invested in permanent improvements were spent as rapidly as they came in for food, clothing, and other current demands. As stated by the writer, " I perceived that even the immense natural endowments of land with its fertility, of Itmiber for buildings and for firewood, of inexhaustible sea supplies, of a market for every product, were not sufficient even for earnest men and women in their young maturity if there were no far-reaching plan, no organization, no iron discipline, no bookkeeping. . . . The Brotherhood of Man did not prove a success." Requirements of Good Management « Inefficiency in greater or less degree is so wide-spread as to be the normal condition in human activity. Good management — efficiency — that plans and gets the best results from men, mechan- isms, and the working hours, is rare. It requires a carefully planned and a co-ordinated organization, and organizing ability is not easily found. We talk about organization in a very matter of fact, ofihand manner, as if it were an easy simple thing. But we cannot have the goods and service upon which our lives depend without organization, yet how very few of us have the capacity for it! Human beings, materials, tools, equipment, working space and appurtenances must be combined. They must be brought together systematically and co-ordinated effectively to accomplish the desired object of providing what the world needs. The human beings in the organization are always the most important and difScuIt problems. Yet they are useless without tools and equipment, and the mech- anism cannot function and does not function until that force which EFFICIENT MANAGEMENT 49 we call management leads, guides and directs the whole combination. . . . Nothing starts until there is a management which creates a spirit, an atmosphere, a set of ideals, enthusiasm, inspiration, loyalty, orderliness and discipline. ^ Unseen Losses of Inefficient Management Bradstreet, reporting on the causes of business failure, as- cribes 32.5 per cent of the failures of the year 1920 to lack of efficient management. Here, the effects of poor management are so disastrous as to be clearly seen. In most cases the results are not so apparent. When a chauffeur drives over an embankment, smashing his car and killing its occupants, the fact is published to the world. When, however, he merely drives his machine into the curbing, damaging a wheel or a mud-guard and jarring its occupants, the world at large is not informed. Yet it is safe to say that the loss from the minor mishaps to automobiles which continually occur is, in the sum total, a hundredfold greater than that resulting from the more sensational and disastrous accidents which occasionally occur. So in the world of business; when inefficient management results in bankruptcy, the fact is given all publicity; when it merely results in losses, few, if any, know that anything is wrong. In considering the question of management, this should never be lost sight of — the fact that a failure to make the profits that might be secured by good management is as real a loss and as costly a blunder as to lose money actually in hand — that a man- ager who fails to increase profits when they might be increased, is losing money for the concern just as surely as is the manager who depletes its assets. Both lose money and it is only a question of amount. But the manager who fails to make money that might reasonably be made is perhaps the more dangerous so far as the future of the business is concerned, for his failure is difficult to discover. The books of account will — ^if properly kept — show ' Albert Atwood in Saturday Evening Post. VOL. I — 4 50 THE ENTERPRISE unfailingly any loss of capital assets, but they cannot show how much is lost through profits that might have been, but were not made, no matter how great their amount. It is through these unrecognized losses that bad management deals its heaviest blows to business. A Valuation of Good Management In speaking before a group of Wall Street financiers who were dis- cussing the possibility of obtaining the very large sum of money re- quired to carry out a project under consideration, a prominent banker said: " Gentlemen, this matter of money is the least thing we have to think about! There is only one problem. Where are we to find the man big enough to handle the job? I speak as a banker and not in my personal capacity when I tell you that if you will show me the right man to put through the plans we are discussing, you need not give the money a single thought." The financing of the project was to him a comparatively simple problem. The finding of the right kind of man to handle it was the difficult matter. ' The reorganization some years since of the Sulzberger Com- pany of Chicago afforded a striking recognition of this paramount importance of eflScient management. The Sulzberger Company was an old-established and at one time a very profitable packing house, ranking as one of the great packing houses of the country. At the time of the Great War, however, it had become decadent. As told by an authoritative writer on finance, ■• it had outstanding $8,000,000 of debenture bonds which matured June i, 1916. As the date of maturity approached, the money market was unfavor- able, making the refunding of these bonds difficult. In addition the company needed more money to carry on its business owing to the increased cost of raw materials, and "it lacked aggressive management." New York banking houses agreed in March, 1916, to assume responsibility for the company and to supply these requirements, provided that the group was allowed a syndi- 3 Gowin, " Developing Executive Ability." 4 Dewing, *' Financial Policy of Corporations." EFFICIENT MANAGEMENT 5^ cate profit on the refinancing and a substantial interest in the new company at a bargain price. These banking houses agreed to buy $12,500,000 of the Suk- berger bonds at 90 and $2,500,000 at 95. In return for this the Sulzbergers, who owned the entire common stock of the company — ^par value $20,000,000 — agreed to sell to the bankers $10,775,- 000 par value of stock for $601,500. This carried the control of the company. The bankers' first consideration was to find someone capable of managing the reorganized and refinanced company. Thomas E. Wilson, former president of Morris and Company, was selected for the position and "was to receive in part consideration for undertaking the management of the company, $1,500,000 voting trust certificates — i.e., common stock — and an option to buy $3,500,000 more at $10 a share (par value $100) within five years. Of the $1,500,000 stock to go to Thomas E. Wilson, one-half was to be contributed by the Sulzbergers and one-half by the bankers; of the option stock $475,000 was to be contributed by the Sulz- bergers." In other words, the financial considerations which induced Mr. Wilson to take over the management of the new company — which was renamed Wilson and Company — were as follows : 1. $1,500,000 face value of common stock which at the price the bankers paid was worth $5.50 per share, or $82,500 for the 15,000 shares. 2. An option on $3,500,000 face value of stock (35,000 shares) at $10 per share, pa3Tnent to be made at any time within five years. To show the practical working out of this arrangement, on November i, 1916, Mr. Wilson sold 7,000 shares of his common stock for $54 a share. With the proceeds he paid for the 35,000 shares he held under option, which gave him 43,000 shares with "a value of at least $2,150,000, and which were appraised by the 52 THE ENTERPRISE New York Stock Exchange on January i, 1919, at $3,140,000." During 1920, the stock of Wilson and Company ranged in price from a low of $46 to a high of $82.50 per share. A more concrete and striking illustration of the value of good management could hardly be given. The sound enterprise was there; the bankers were wilhng to supply all the money that could profitably be used; management alone was needed. Mr. Wilson supplied the management, but it came high — well up in the mil- hons. The results have apparently justified the payments made to Mr. Wilson. A Case of Bad Management Notwithstanding the importance of the managerial factor, there is often a singular indifference as to its character. An enter- prise will perhaps be selected and investigated with the greatest care. Money will be supplied freely for its development and operation. Everything up to this point is done in the best pos- sible way, but then the directors of the undertaking look around for a low-priced manager to put in charge. Worse economy could hardly be imagined. A few hundred or a few thousand dollars a year saved on a manager's salary may make all the difference between failure and success, and in itself be the very worst of management. In a business of any real importance, the annual loss involved in poor management, or in any management short of the best, quickly amounts to many times a good manager's entire salary. A good manager rarely, if ever, is paid more than a tithe of what he makes for his concern. An excellent illustration of the disastrous effects of bad man- agement is found in the experience of a co-operative grocery store started some years ago in a pleasant New Jersey town not far from New York City — a town noted for its prosperous and public-spirited people. A better place for such an imdertaking could hardly have been selected. The people received the sug- gestion of a co-operative store with enthusiasm. Subscriptions — EFFICIENT MANAGEMENT 53 limited in amount so as to secure the largest number of stock- holders — came in freely to the full amount required. All the requisites of success seemed assured. The enterprise was most promising, the directors of the new concern were successful men of business, and sufficient capital for its development was in hand. In addition to this the large number of stockholders of known buying power were pledged to the support of the new under- taking. The next step was the selection of a manager for the new grocery, and here the first false move was made. The directors of the enterprise decided that it should not be necessary to pay more than $20 a week for their manager. This was before the war had increased salaries so materially, but even then the amount de- cided upon was entirely inadequate. Capable managers are not numerous at the best, and when found are usually already firmly attached to some good business which objects strenuously to the loss of its manager. To "pry them off" requires some in- ducement really worth while. In the eyes of the directors of the new store, however, the managerial problem was so simple as to require little ability. The clientele was already secured in the persons of its stockholders; no advertising was required because these customers would come themselves and bring others with them; the terms were cash and the store would make no deliveries. All then that was required of the manager was the maintenance of an adequate supply of groceries to be handed over the counters to the customers as they came for them. Why should they pay a high price for " cut-and-dried " work such as this? A manager was finally found and engaged. He was probably as good a manager as could be had for the price, but the new enter- prise was in trouble almost from the day it opened its doors. The store was not always as clean and bright as it might have been, the stock of goods was not kept up properly, quality was not uni- form, prices paid for goods were apt to be higher than they should be, doubtful experiments were tried, customers did not always 54 THE ENTERPRISE receive proper attention. The result was much dissatisfaction among purchasers, and sales and profits below expectation. Evidently the manager was not the man for the place and the directors decided to try again, increasing the salary paid but still not to the figure that might have secured a good man. The results were much the same. Finally, as the outcome of experience, a manager of ability and experience was engaged at a salary of $40 a week. This was a fair salary for that pre-war period and at last the store was reasonably well managed. By this time, however, some years had elapsed and the store had alienated so much of the good-will with which it had started, and become so involved fi- nancially, that the new management was \mable to turn the tide. Finally, to avoid disaster, the business was sold with a loss to the stockholders of every dollar invested. Good vs. Bad Management A striking and well-known illustration of the differing results of good and bad management is afforded by the history of the A. T. Stewart department store of New York City. Founded by Mr. Stewart, it rose under his personal supervision from a httle "job- lot," hand-to-mouth establishment to the position of the largest and most popular department store in the country. It was known in every part of the United States — almost as well as New York City itself — and its proprietor became a multimillionaire. Upon Mr. Stewart's death the store was taken over by one of his associates not well versed in business affairs. As one of the first steps of the new management, the well-known and, from a business standpoint, immensely valuable name of A. T. Stewart was dropped completely. Other changes were made, and the course of the magnificent business was diverted from the upward to the downward grade, resulting finally in its financial involve- ment and the discredit and retirement of those in charge. The business then came under capable management in the person of John Wanamaker. The intervening regime was ignored, EFFICIENT MANAGEMENT 55 the new owner announcing himself upon the store signs and in his advertising as "Successor of A. T. Stewart & Co." The course and policy of the business were altered, its scope extended, more efficient methods were introduced, and the business responded from the day the changes were made. It never regained its posi- tion as the leading business of its kind in the country, but it now is one of the largest, best-managed and most successful of modem department stores. Good Management in the Newspaper Field A better illustration of the results of good and bad manage- ment could hardly be found than the history of the New York Times. Less than twenty-five years ago Adolp Ochs, its present publisher, was in charge of the Chattanooga Daily Times, a fairly profitable small-town publication. It had, however, apparently reached its limit, and Mr. Ochs decided to sell his Chattanooga paper and come to New York. Here the possibilities of the New York Times — which at the time was in debt to the amount of $300,000 and still losing money — attracted his attention. What Mr. Ochs did is best told in his own words :' The New York Times then had a net paid daily circulation of 10,000, its advertising patronage was small, its competitors prosperous and in strong financial hands. I was thought to be a bold man, with more money than brains; a "jay come to town" — and it was prophesied that my metropohtan career would be short, while speculation of aU kinds was indulged in as to whom and what I represented, and whose money was being sacrificed. Now, right here I wish to make a statement of interest to those of the curious who may wish to know how I came into possession of the controlling and majority interest of the New York Times. I shall make no new disclosures, for the facts were not only known at the time, but widely published, and they are as follows: The George Jones Estate sold in 1893 the name and good-will 5 From an address delivered before the National Editorial Association, June 21. 1916. 56 THE ENTERPRISE of the New York Times for $1,000,000 cash to the New York Times Pubhshing Company, a company made up largely of a number of very well-known men, actuated by the highest motives to preserve the Times as an independent Democratic newspaper. The panic of 1893 and insufficient capital proved too great a burden, and the company came to grief in 1896. It was then I became acquainted with the situa- tion and was encouraged to grapple with the problem that many well-known and experienced publishers declined to tackle. Perhaps it was a case in which fools rush in where angels fear to tread. Part of the simile is true, for I certainly had no "angel" with me. I organized a company under a new charter — the present New York Times Company — with 10,000 shares capital stock (par value $100) and $500,000 S per cent bonds; took up the million dollars of stock of the old company by giving in exchange 2,000 shares of the new company; paid the debts of the old company dollar for doUar with $300,000 of the 5 per cent bonds; and with some difficulty sold the remaining $200,000 of bonds at par for cash by giving to every purchaser of a $1,000 bond 15 shares of stock as a bonus. I sub- scribed for $75,000 of the bonds and received 1,125 shares of stock as a bonus, and — as was stipulated in the articles of the organization plan — ^I received 3,876 shares of the capital stock as compensation when three years after its organization the company was placed on a paying basis. The value placed on the shares shortly after I assumed ' the management was indicated by a sale of some of them at 10 cents on the doUar. So in this way I acquired the control, the majority stock of The New York Times Company (s,oor shares), as the result of my work and the investment of $75,000 in its bonds. And this majority and controlling interest, somewhat increased, I now own and possess, free, clear, and unencumbered in any shape, form, or fashion. Adding to my interest the shares held by others, there is nearly 90 per cent of the capital stock of The New York Times Company owned in the office of The Times by persons solely employed in producing The Times. I have never had any partners and there has never been anyone who had control of, or voice in my affairs, or who in any form could affect my entire freedom of action. We have been conducting a very large and rapidly developing business, having invested over $4,000,- 000 in real estate, and more than $1,000,000 in printing machinery. There has, of course, beeh much financing to do, but it has been done without, in any instance, by word or deed, by understanding or im- EFFICIENT MANAGEMENT 57 plication, involving the attitude of The New York Times toward any man or interest, any measure or purpose. . . . You may be interested in knowing what has been the practical result of applying the principles suggested at St. Paul twenty-five years ago for the publication of a newspaper in a great city. * Twenty years ago The New York Times, as I have said, had scarcely 10,000 daily circulation; today its net paid circulation ex- ceeds 325,000. The gross annual income of The New York Times in 1896 is now exceeded every month in legitimate income from adver- tisements and circulation. One of the greatest factors in achieving this result was not men- tioned — ^because not then fuUy appreciated — ^in the St. Paul catalogue of the qualifications required successfully to manage a daily news- paper. It was a great omission, as my years of experience have taught me, and I wish now to add it and give it the utmost emphasis by marking it "top of column": and that is, that the sticcessftd mana- ger should have the ability to judge and appreciate other men's qualifica- tions, to secure their assistance, and to win and retain their respect and confidence in his plans and good intentions. ... for then only he will secure the best service they are capable of performing, and his publi- cation will transmit this excellence to the reader and translate it into good-wiU. In other words, a newspaper's reputation is created in its own household. When Mr. Ochs took hold of the New York Times its value is indicated by the fact that it was sold for one-fifth of the capital stock of a new company whose only real asset seems to have been Mr. Ochs — and his value as a newspaper manager was not then so well known as it is today. At the present time the New York Times is financially a brilliant success and from the viewpoint of standing and influence ranks as one of the leading newspapers, not only of the city of New York, but of the civilized world. A more striking and significant example of the results of good management, following so closely as it did on the heels of bad management, would be hard to find. fi An address delivered by Mr. Ochs in 1891 before the National Editorial Association in which is given a very complete statement of the qualifications necessary for the successful management of a daily newspaper. 58 THE ENTERPRISE Difficulty of Securing Good Management To secure a good manager, while all-important, is not usually an easy matter. Enterprises are ever looking for capital; capital, even when most busily occupied, keeps a watchful eye on the industrial and business fields for anything a little extra good in the way of enterprises, but the efficient manager is constantly em- ployed and is not looking for new positions. Usually he is not averse to a proposition that will better his condition, but he is not waiting "in the open" for anything of the kind, and must be sought if he is to be foimd. At the inception of an enterprise good management is pecul- iarly desirable, but peculiarly difficult to secure. After rxmning a number of years, a business is usually officered and managed by a process of natural selection. Men of the required abiHty are secured from the outside as opportunity offers, and in the con- cern itself members of the force gradually work up to the respon- sible places for which their ability and experience fit them. The raw material of management is at hand, or comes to hand, and it is then merely the simple matter of fitting the right man into the right place. In a new business, however, there is neither time nor oppor- tunity for such deliberate discovery and hewing of managerial timber. The process of natural selection must from its nature be slow in results, and there is no means of trjdng out the manager before he is employed. His selection must depend, for better or for worse, on such information as may be obtainable, and his trial must be a practical experiment made at the expense of the business. Also in a new business the salary necessary to secure a really capable manager is not infrequently more than can be afforded, and again capable managers are not anxious to ally themselves with new businesses in which the difficulties to be overcome are so great and the need of good management so pressing unless the conditions and possibilities for them are really attractive. EFFICIENT MANAGEMENT 59 Self-Confessed Managers The difficulties of securing good management are often com- plicated by the very number of aspirants for managerial positions. Most of these are not qualified, but the man is a rarity who will admit even to himself that he lacks the highest order of executive abiUty. On the contrary, men who have never managed a suc- cessful business of any kind, and who could not run a corner newsstand with any degree of efficiency, will cheerfully offer their services for the most responsible positions. If through any chance the candidate for the manager's position has some claim for con- sideration, such as a large interest in the enterprise, or the recom- mendation of friends or relatives influential in the business, then, no matter what his lack of experience or ability, it will be a difficult matter to keep him out of an executive chair. As a matter of fact one of the most serious obstacles in the way of securing good man- agement is not infrequently this very difficulty of escaping the bad. Methods of Securing Managers The usual method of securing a capable and experienced manager for a new undertaking is to take him away from some similar business or enterprise in which he is already successfully employed and in which his ability has been demonstrated. This plan as a rule involves the payment of a higher salary than the desired official is already receiving, and even then is not always successful, as the amiable intentions of the new concern are fre- quently frustrated by a prompt counter-proposition on the part of the manager's own concern. Also there is a question of busi- ness ethics involved in the attempt to induce a trusted employee to leave one establishment for another, and especially when that other is a competing business. Within reasonable limits, however, the practice is common, is sanctioned by custom, and — ethical considerations apart — is undoubtedly good business. If the foregoing plan is not feasible, a successful manager may perhaps be found in some other line of business, preferably one in 6o THE ENTERPRISE which the problems encountered are much the same as those of the new concern. If this is done the quaUfications of the proposed manager should be investigated with great care. His success may have been due to his grasp of the details of his own business, rather than to his general executive ability, and in such case he might be an utter failure in another line of business. It should also be borne in mind, in all cases, that the organization of a new undertaking is a far more complex and difi&cult problem than its conduct when once in good running order, and that a man who can successfully carry on an estabUshed business may be totally unable to give an unorganized business a successful start. Another likely source of good executive material for a new enterprise is among the ambitious and rising employees of es- tablished businesses in the same or allied lines. In a large con- cern it is usually impracticable for all the members of the force to be advanced as rapidly or as high as their abilities justify. There are not always sufficient executive positions to go aroimd, and in such a case the more capable employees who are unable to secure promotion in their own establishment are anxious to find other employment where their ability will find fuUer and freer scope. Reliable information as to the qualifications and standing of an ambitious employee who is seeking to better himself may as a rule be obtained direct from his employers, who if they are broad-minded men are very willing to assist him to advancement even though at some loss to themselves. Such information, con- sidered in connection with the position the proposed manager is filling, the maimer in which his duties have been performed, and his general character and ability, should give a very fair idea of his executive worth and the likelihood of his achieving a success in the new position. Financing Value of Good Management Another phase of efficient management is its utility from the financial standpoint. If the enterprise is yet to be fiinanced, or is EFFICIENT MANAGEMENT 6l in need of more money, or temporary accommodation, the em- ployment of a manager known to be competent and successful is of most material assistance. Apart from any confidence which men with money may have in the abiHty of the manager to bring the enterprise to a successful issue, or as part of that confidence, the mere fact that he is willing to have his name coupled with the enterprise is a strong and convincing testimonial to its merits and probabilities of success. It is an incidental indorsement of more weight with the average investor than the favorable reports of half a dozen technical experts. It might also be noted by those with enterprises to finance that the successful manager is almost invariably a person of some means as well as ability, and that where the enterprise is such as to enlist his entire confidence he is usually quite willing to "take an interest." Where this is the case the indorsement is doubly strong. Such a subscription is not only an addition to the finan- cial strength of the enterprise and a potent argvunent for other subscriptions, but also amounts to a forfeit from the manager for the faithful performance of his duties and for his loyal and un- swerving support of the undertaking. CHAPTER VI SUFFICIENT CAPITAL Results of Inadequate Capital Capital as an essential of business success will not be ques- tioned. Speaking generally, an enterprise cannot be started with- out it. Even in the cases of self-developed businesses there is in every instance either capital, or an anticipation of capital that answers the same purpose. Mary Elizabeth had sufficient capital to make her first boxes of candy. Woolworth saved enough money to make his first small start. Montgomery Ward — ^with the permission of his employers— floated his business on their capital. In every case capital existed in some form or to some extent before the enterprise could be made to move. Not only must there be capital, but there must be adequate capital. Rarely does an enterprise pay from its inception. Usu- ally it is conducted for a considerable time at a loss. It must be operated and sustained until it reaches the point of self-support. Without adequate capital there is great danger that the new undertaking will be starved before it is capable of supplying its own financial wants. Bradstreet ascribes 32.3 per cent of the failures of the year 1920 to lack of sufficient capital. Inadequate capital throttles a business in many different directions. Salaries are too meager to secure the best help — goods cannot be bought in large enough lots to secure quantity prices — a full line is not carried — discounts cannot be taken — suitable office or store space cannot be afi'orded — advertising is s kim py and ineffective. The net result is the starving of the enterprise — either partial or complete. It must be a good enterprise, ably managed to overcome such a handicap. Complete failures are even more common, but are not usually 62 SUFFICIENT CAPITAL 63 so widely advertised. A mining engineer gives us a striking in stance of partial failure resulting from inadequate capital. ' The property was a prospect or undeveloped mine. Open cuts and shallow shafts disclosed pockets of lead sulphide ore averaging over four feet wide, and assaying from $50 to $60 per ton — a valuable ore. Several small shipments were made to the nearest smelter with very satisfactory results. The property was generally regarded as a good prospect with encouraging possibilities for the extension of the ore shoots below the surface. The owner was, however, unable to equip and develop the property himseK on an adequate basis. At the same time he would not agree to give a controlling interest to others who were both able and willing to put in the money required, and he was not sufficiently resourceful to devise and carry out some middle course that would be both fair and attractive to aU parties. He therefore decided to "go it alone." For over fifteen years he has made spasmodic and desultory at- tempts to develop the property. At no one time were his funds really adequate. As a consequence, while the total expenditures have been quite sufficient — had they been made intelligently and at one time — to prove the property, practically nothing has been accomplished. The veins, it is true, have been opened up at a depth of some 600 feet below the outcrop, and pay ore has been found there, but not enough work has been done to demonstrate the continuity of the ore bodies from the surface, nor to establish a reliable estimate of tonnage and average value. The net result is that the owner is nearly twenty years older than he was when he obtained possession of the prop- erty, has expended over $150,000 in preliminary development, and does not know yet whether he has a mine or only a prospect. If the venture had been adequately financed in the beginning, the value of the property shoidd have been determined in a year's time and for half the money. Reasons for Inadequate Capital — Deficient Estimates Theoretically, the necessity of adequate capital for the opera- tion of a new enterprise will be admitted, and yet enterprises are constantly started without sufficient operating funds. In many cases this is because the owners or promoters are tmable to secure ■ Harry J. Wolf in Magazine o] Wall Street, June 26, 1920. 64 THE ENTERPRISE the capital they need, but in still more cases because they fail to appreciate the requirements. Almost always there is a strong tendency to underestimate the amount necessary or desirable for the particular undertaking. The tyro in business, unaccustomed to matters of the kind, sits down, figures up the necessary expenses, as he sees them, allows a fair percentage for incidentals and mar- gin, and deems the matter settled. The experienced business man knows that at every step and stage of development and oper- ation expenses arise that are either unexpected or larger than expected — ^modifications of original plans, experimental work, ex- pert assistance, demands for additional equipment, costly delays, and along with it all endless extras that bring the sum total of expenditures far above anything that would at first sight seem possible. For a very simple illustration, suppose that the establishment of a small pubhshing business is under consideration. The inter- ested party has written a book which he is confident wiU fill a long-felt want, and in doing so fiU his own coffers. It wiU, he thinks, also serve as a foimdation upon which to build a perma- nent business. The book will contain, say, two hundred pages. He figures on an edition of three thousand copies boimd in plain cloth. As he can have the book bound in small lots as needed, he includes the binding of but loo copies in his calculation of the investment required. Foreseeing future editions, he wishes the book electrotyped. With the help of his printer he roughly es- timates the cost of getting it out as follows: Composition — 200 pages 10 pt. at $1 .50 a page $300.00 Electros — 200 at 85 cents 170.00 Paper — 20 reams book paper, 38 x 50 — 120 lbs. at 18 cents 432.00 Presswork — 6 32-p. signatures at $20 120.00 Presswork — i 8-p. signatures at f 10 10.00 Binding — 100 copies at 35 cents 35.00 Unforeseen expenses 100.00 Total $1,167.00 SUFFICIENT CAPITAL 65 As he plans to avoid office expense at first by using his home as selling headquarters, he deems the estimate adequate and liberal, covering practically all the expenditures required to bring the business to the point of operation and profitable returns from sales. Before sending his copy to the printer he very wisely decides to have it gone over by an experienced editor. He finds much quoted or special matter that is better printed in 8-point type. A number of footnotes are necessary. As a new author is apt to do, he makes many changes in the proof as it is received from the printer, and some few changes in the plates. Also a few charts and a few tables are introduced to make the text clearer; and the author decides to bring in his photograph as an attractive frontis- piece. When the printing is done he finds a number of errors that he overlooked in the proof which necessitate an errata sheet. He also decides that five hundred copies will be needed on the first binding. In practice his bill would come in about as follows: Composition: 180 pages 10 pt. at $1.50 $270.00 20 pages 8 pt. at $2.25 45.00 5 pages tabular matter at $4.50 22.50 6 pt. foot-notes 48 at 25 cents , 12.00 Index 7 pages 6 pt. (double-column) at $5.50 38.50 Title page 6.00 Table of contents and preface 11 pages at $2.50 27.50 Author's corrections: 60 hrs. machine work at $4 240.00 30 hrs. hand work at $3 90.00 Table of errata, 2 pages 6 pt. at I3 6.00 Electrotyping, 212 pp. at 85 cents 180.20 Drafting 3 full page charts at $6 18.00 Plate corrections 15 pp. at $1 each 15.00 Paper, 22 H reams, 38 x 48 — 120 lbs. at 18 cents 480.60 Presswork: 7 32-p. signatures at |i8 126.00 Errata sheet 3M 10.00 Author's photo, 3M at $10 30.00 VOL. I — s 66 THE ENTERPRISE Miscellaneous Items: Half-tone cut, author's photo $ 8.00 Coated paper for half-tone — 200 sheets 9-oo Tipping in errata sheet 15.00 Tipping in author's photo iS-oo Binder's stamps iS-°o Binding, 500 copies at 37 cents a copy 185.00 Folding 3,500 copies at 5 cents 175.°° Printed jackets — 3M at I20 60.00 Total $2,099.30 Editorial charge 150.00 $2,249.30 Before the book is on the market his investment has run more than $1,000 in excess of his estimate. Estimating Capital Requirements This tendency to exceed estimates is a characteristic feature in the development of every business imdertaking. For this reason, when the person making the estimate of capital required is not entirely familiar with the particular line of business, a considerable excess should be allowed on every important item over its estimated cost, and in addition a liberal percentage should be set aside for incidentals and operating margins. Beyond this, as a measure of prudence, the estimate should, if possible, be checked by someone familiar with the work. The amount of capital required for a new imdertaking natur- ally varies with the conditions under which it operates. In the case of an undertaking well within the field of established business and conditions, the preliminary expenses and operating require- ments can often be figured out to a nicety by one famihar with that business. Where the enterprise is outside the field of well-established business, or under new conditions, or contains expense possibilities which can only be discovered by actual de- SUFFICIENT CAPITAL 67 velopment or operation, as in the case of many inventions and mining prospects, capital requirements must be met by liberal estimates and still more liberal allowances for contingencies. Failure of Capital " en Route " A consideration of the greatest importance when determining capital requirements is the difhculty of raising further funds for an enterprise if the original funds are exhausted before the busi- ness reaches a condition of self-support. If through a miscalcu- lation or through any other cause the original capital proves insufficient and is exhausted before the enterprise has reached the self-sustaining point, the situation is peculiarly unfortunate. The failure to pull through is hard to explain, the enterprise is discredited, and the whole thing is looked upon as at least a "lame duck" if not a complete failure. Under such circumstances, those responsible usually try to struggle on without seeking financial aid — they do not wish to confess that they have made a mistake, and especially tliey do not wish to pay the penalty. They endeavor to pull through with the available resources, and in doing so the danger is always present that the undertaking will become so involved that it cannot be rescued from financial disaster. When an effort is made to raise additional funds for a stranded enterprise, such funds will only be secured with difficulty and on onerous terms. The conditions do not appeal to the man with money. The situation of such an enterprise is well illustrated by the following quotations from an "S. O. S." letter to stockholders recently sent out by the president of an embarrassed mining company. Since June ist, 1919, the company has issued $250,000 worth of bonds to pay up past indebtedness, defray running expenses, start 1,000 foot, three-compartment shaft and make changes in the power plant and null, but, owing to unavoidable delay, high prices of mate- rial and labor, the fund was exhausted before the shaft was completed 68 THE ENTERPRISE and the additions made to the power plant and mill. The new shaft is down 635 feet and it is estunated that the cost of finishing and timber- ing it to the 1 ,000 foot level and making the necessary crosscuts to the ore bodies at the 800 and 1,000-foot levels will be approximately ISOjOoo- Also, it has been necessary to borrow $37,237.50 during the last two months to carry on the work at the mine and pay the interest due June ist last on the bonded indebtedness; and the company's in- debtedness for accounts payable is approximately $22,000. A syndicate, composed of part of the ofiicers of the company and other interests, underwrote and took $150,000 worth of the first issue of bonds. . . . On May 13 th last there was sent to each stockholder of the com- pany a circular letter setting forth the ore estimates of the mines, based on reports of two mining engineers, the operating plan, proposed method of financing for future development of the mine, and notifjdng each stockholder of record of the issuance of an additional $150,000 worth of ten-year 7 per cent convertible bonds of the company for the purpose of continuing the development of the mine and driving of the new shaft. The bonds of the company were offered to the stockholders at an attractive price and upon liberal terms. Only one subscription of $97.00 was received and the management of the company is now per- turbed at the failure of the stockholders to subscribe for the additional issue of bonds. Work has been temporarily discontinued on the property, except that necessary to keep the water down. The borrowing capacity of the company has been reached and it is imperative that the stock- holders immediately subscribe for their quota of bonds so that the management will have the necessary funds with which to finish the work outlined herein. The editor of the financial publication in which this letter appeared tersely comments: "No more unfavorable factor can enter into any situation than that of inadequate funds, especially where the company is not a going concern." Providing for Adequate Capital To avoid the shoals of financial embarrassment with the re- sulting necessity of seeking financial aid on ruinous terms, suf- SUFFICIENT CAPITAL 69 ficient capital should be provided at the time an enterprise is launched, to carry it safely through to the self-supporting stage. If as much capital as is deemed necessary cannot be obtained at the time in cash or subscriptions, the launching of the enterprise should be deferred until the required amount can be secured, or its development should be so modified that the amoimt in hand will suffice for its requirements. Frequently the need of additional funds in the future is fore- seen and provided for at the time the enterprise is floated. Per- haps subscriptions to stock are taken payable in instalments, so that a continuing supply of new capital is coming in for a year or two after organization. Or perhaps preferred stock or bonds will be authorized but not be issued until the additional funds are needed. In the first case if the subscriptions are "firm," the requisite funds are assured. In the second case, if the condition of the enterprise is up to expectation, the prospect of selling the new securities should be favorable. There is no idea of failure, for the sale of the new securities is pursuant to and part of the organization plans. Secondary Financing — Cost When an enterprise does fall into financial embarrassment be- fore it has reached the point of self-support, it is, as intimated, apt to fare badly. An appeal may be made to the parties who have invested before — perhaps on the basis that self-interest will make them come to the rescue of the derelict. Hard luck stories, however, are not good money-getters, and if it can be done it is better to "resell" the early investors, i.e., so convince them of the very great value of the enterprise that they will gladly put in more money to bring it to a triumphant conclusion. If those already interested decline to throw good money after bad, some business man may perhaps be found who, by reason of his knowl- edge of the particular business, or by means of an attractive offer, can be induced to invest the amount required. Or per- 70 THE ENTERPRISE haps a small syndicate can be organized to furnish the requisite money. As already stated, any such secondary financing is always a matter of the greatest dif&culty, and if it is carried through, the "carrying" individual or syndicate usually demands, and per- force receives, payment that would under any other circumstances be out of all proportion to the service rendered. The enterprise is looked upon as fair game, and a controlling interest, or an even larger interest — depending upon the necessities of the stranded xmdertaking — is not considered unreasonable. When money must be had, the cost will usually be proportioned to the ur- gency of the needs. Providing Capital for Expansion The position of the enterprise which, while it has reached the point of self-support and moderate profits, requires more capital before further progress can be made, is not exactly favorable, but is still far superior to that of the stranded enterprise. Such a business is beyond the " dead-line" ; it has hf e and attractive possi- bilities. It is neither a suppliant nor a forlorn hope. The risks of investment are small, the prospects of profit good, and the raising of additional capital by the ordinary methods should not be a difficult financing problem. It is not unusual for the newer enterprises to reach this condition of non-elastic self-support. Some years ago a com- pany was formed in New York City for the express purpose of financing enterprises which had struggled along until the point of self-support was reached but were unable to get further without additional capital. Its terms were interesting. The enterprise to be financed must, of course, be basically sound and in fairly competent hands. Given this the financing com- pany would advance funds sufficient to enable the struggling enterprise to realize the possibilities that lay before it. For this help the financing company required certain supervisory SUFFICIENT CAPITAL 7^ rights during the time that its funds were in use, and demanded as its compensation: 1. That the money advanced be a hen on the whole enter- prise. 2. That the money advanced be repaid as soon as it coiild be done without injury to the business. 3. That the financing company, in return for the money ad- vanced, should participate for a term of years in the increased profits of the enterprise — 25 per cent being the usual requirement. The arrangement, though presenting some legal and operative difficulties, was not unfair and promised success. The company, however, retired from the field, though the same idea is being carried out by individual capitalists and by some of the invest- ment banking houses, with considerable success. In such cases terms vary according to the conditions. Not infrequently, if the situation is difficult, the control of the whole business is tempo- rarily — or in some cases permanently — taken over by the parties advancing the money. Meeting Increased Capital Requirements When a company has once achieved a real commercial and industrial success and is in profitable operation, any further fi- nancing offers no special difficulty. It is then only a matter of proper presentation. There is always a considerable amount of such financing going on, and during the last few years its volume has been very great. This has been due to the enormous increase in prices which marked the period of the Great War and continued for some time thereafter, throwing a heavy capital burden on every large business in the coimtry. Raw material and stock cost at least twice as much as they did before — the money tied up in inventories was at least doubled. If then the same volume of business was to be maintained — if the same stock of materials and goods were to be carried — a greatly increased capital investment 72 THE ENTERPRISE was unavoidable. The result was that almost every large corpora- tion of the country issued preferred stock, notes, or bonds, and these issues, whenever the corporation was deserving of confi- dence, were readily absorbed. The same thing occurred on a lesser scale with the smaller concerns and for the most part their increased capital needs were met with fair ease — in many cases from current profits, in other cases by borrowing until surplus accumulated sufficient to meet the capital needs, in other cases by the sale of securities. CHAPTER VII relative status of undertaking, management; and capital Good Management The relative importance of the three essential features of a successful enterprise — a soimd undertaking, good management, and sufficient money — vary greatly with the conditions. Even in the same enterprise they are held in varying estimation by the different parties concerned, according to their point of view. Theoretically, good management is at least as important to the financed enterprise as is the imdertaking on which it is based, or the money which floats it. Occasionally, in practice, good management receives equal recognition. Thus in the Sulzberger reorganization referred to in a preceding chapter, the question of management loomed large and the manager, when found, received an interest in the enterprise which shortly thereafter was worth some millions of dollars. It is seldom, however, that management receives any such recognition. On the contrary, the owners or promoters of the undertaking on the one side, and the men with money on the other side, get together and divide the enterprise and its prospective profits between them, and then look around for an able executive who can "pull the thing through." They may pay their manager a liberal salary; they may give him some percentage of the profits; or they may even go so far as to promise him an interest — or an opportunity to earn one — in the business itself. This, however, is the usual limit. As to any material part in the enterprise itself, the manager is literaUy not in it. He is a necessary part of the financed undertaking, and a most im- portant part, but he is usually thought of and fitted in afterwards; if he proves a misfit so much the worse for the enterprise. 73 74 THE ENTERPRISE Capital and the Undertaking The relative status of the owners of an enterprise seeking capital and the men who have capital to put into the enterprise vary with conditions. If times are uncertain, if money rates are high and loans hard to secure, if stock prices are falling and ex- change rates fluctuating widely, if the individual bank account is low, or if the enterprise itself is not of the kind that is then "in vogue," the men with money are indifferent and must be ap- proached with deference and with persuasive arguments. If, on the other hand, financial conditions are good and money is plenti- ful, and especially if the particular enterprise is timely, capital and the undertaking meet on far more equal grounds, and it is then diplomacy and bargaining ability that decide their relative status and the division of the spoils. Or if the projected enterprise is one of imusual attractiveness and is properly presented with its strong points brought into artistic prominence and its weaker features draping the far per- spective, the promoters can again meet the investors on fairly equal terms. If the parties presenting such an offering have some financial strength of their own so that they can meet the capitalist with the easy independence that inspires respect, they occupy the vantage groimd. Conversely, though the imdertaking be ever so good, if the parties presenting it are men of limited means and, as is so often the case, utterly unable to develop the undertaking themselves, or even hold it for any length of time, perhaps controlling it vmder a short option, the conditions for the men with the enterprise are exceedingly unfavorable. Then, as a rule, they must take what- ever proportion of the financed enterprise the capitalist is willing to allow them, which is not ordinarily excessive. It should also be borne in mind that the apportionment of interest between owner and investor varies greatly according to the method of financing. If interested in an enterprise, men of large means usually take it up in its entirety and supply or UNDERTAKING, MANAGEMENT, CAPITAL 75 arrange for all needed funds either alone or in combination with their friends or business associates. Under these circumstances they naturally expect to dictate terms. If, however, the necessary funds are to be raised by the accu- mulated contributions of a number of small investors, the condi- tions are different. There is usually a set proposition and as there is no concert of action among the subscribers and no individual subscription of enough importance to force a change in the pro- position, it is a case of "take it or leave it" — if these small in- vestors wish to get into the enterprise at all, they must come in on the proffered terms. Needless to say, these terms, arranged to meet the views of the owner or promoter of the enterprise, are far less advantageous than those secured by the larger investors. The Capitalistic Position While there is no general rule as to the division of interests between the parties controlling the undertaking and those con- trolling capital, it may be said that when the enterprise is presented to men of means, they look for, and generally get, a controlling interest in the enterprise. They may secure more, or when the undertaking is very attractive and is presented under unusually favorable conditions, may be willing to take much less, but the general expectation of the man with money is that capital shall control. This attitude of the capitalist is not unnatural. Money is essential. Without it nothing can be done in the industrial and business world, and it is not surprising if the capitalist, seeing the necessity and the power of money, greatly exaggerates its im- portance and places it above everything else. Apart, however, from any exaggerated respect for money, the capitalist has some justification for his attitude. Theoreti- cally the undertaking and the capital needed for its development and operation are equally important factors in any business or industrial project. They participate equally in the risks and, with 76 THE ENTERPRISE due regard to any differences in the original values involved, should participate equally in the profits. In other words the arrangement is a partnership of capital and property, and from this point of view should be governed by an equal partnership participation in profits. From the practical standpoint, however, the situation is very different. The enterprise is unproved, while capital is of an es- tablished and known value. The enterprise is the possibility; capital is the realization. Capital has a recognized standing in every country of the civilized world and may be converted into the local standards of value of any place by a simple operation in exchange. It is the substance of things only hoped for in the enterprise, and may be transmuted at any time on a fixed basis into food, clothing, houses, automobiles, and many other desir- able things. Capital is the garnered harvest; the undertaking is merely the soil of more or less unknown possibilities which must be plowed, sown, and carefully tended, and from which, if all the perils of flood, drought, frost, pestilential insects, and other destructive agencies are safely passed, a more or less plentiful harvesting of capital may at last be gathered. The Capitalistic Demands The hard-headed capitalist does not, ordinarily, base his de- mands upon any such reasoning as this. He merely recognizes the fact that money is "hard to get and heavy to hold" and that he has got it, and usually governs himself accordingly. The word "usually" is employed advisedly, as even capitahsts occasionally lose their mental balance and, with a cheerfulness and prodigality that is surprising, pour their treasured hordes into fantastic schemes or barefaced swindles. The owner of the ordinary enterprise does not, however, meet with any such open-handed reception. When he approaches with his proposition he runs counter to the capitalist on the hard- headed side and must show a reason for the hope that is in him, UNDERTAKING, MANAGEMENT, CAPITAL 77 and the reason must be a very sound one. If it appeals to the capitalist he will consent to consider the undertaking. If he finally approves of it, he will then agree to invest the least possible amount that will suffice to prove the value of the under- taking, and for this he wiU exact the utmost interest that can, under pressure, be extorted from the man in need of his money. As to the legitimacy of the capitalist's demand for the control of the enterprise, we can do no better than quote the reply of a capable New York financier to the parties who were seeking to interest him in a particularly promising scheme: "My money will make your business a success. You will not get it unless you make it worth my while and unless you give me control. I don't care to have other people spending my money." This puts the capitalist's position very briefly and clearly. From his point of view it is ordinary common sense, and the man with the enterprise must recognize the strength of the capitalist's position and govern himself accordingly. It should also be borne in mind that the capitalist is usually an able business man, familiar with the methods by which success is attained and, speaking generally, far better qualified to manage and direct the enterprise and its finances than is the original owner or promoter. His management and control should, of course, be under such suitable regulation and restriction as will protect all parties interested in the enterprise, but these regula- tions should not in any way interfere with its proper business management. If the capitalist is acting in good faith, he is usually quite willing to agree to all reasonable provisions for the protec- tion of his associates. If he is not, the man with the enterprise would better go further, for he can certainly fare no worse. PART III INVESTIGATION OF AN ENTERPRISE CHAPTER VIII IMPORTANCE OF INVESTIGATION Will It Pay? Possibilities of new commercial or industrial activity exist everywhere. A ledge of valuable marble is discovered in a Ver- mont pasture; a Texas farmer awakes some morning to find his property "suspected" of oil; a Nevada prospector stumbles on a vein of mineralized quartz; a salt deposit two thousand feet thick is discovered in Louisiana; a ledge of phosphate rock is found in Florida; an inventor devises an automatic receiving mechanism for wireless telegraphy; a capitalist lays his plans for the consoli- dation of competing railroad lines, the formation of a manufac- turing combination, or the development of a new industry. In many cases the original owners of these possibilities are either unaware that they possess an enterprise — or the basis of an enterprise — or are unable to finance or develop it if they know of its existence. The potential enterprise then lies dormant until taken up by some neighbor, friend, or outside promoter. These promoters may themselves secure the money needed for the project, or they may pass it along to other promoters, who in turn interest capitalists. These latter may develop the enterprise with their own funds, or may sell it outright, or perhaps capital- ize it and offer the stock to the pubhc. When any one of the thousand and one possibiHties of the business world is brought forward for financing, no matter by whom or in what stage of its progress or development, the first and most important question is: "WiU it pay?" The question can only be answered by investigation. This investigation, then, is obviously of the most vital importance to everyone interested, whether owner, promoter, operator, or investor. Upon its VOL. I — 6 8l 82 INVESTIGATION OP AN ENTERPRISE thoroughness, intelligent direction, and accuracy depend the safety of the investment — if an, investment is made — and to a very large degree the whole future of the enterprise. For Whom Investigation Is Important In this matter of investigation there is, when an enterprise is to be financed, a paralleling of interests of both owner or pro- moter and the prospective investor. The owner or promoter is desirous of capitalizing his enterprise at the highest legitimate figure and the prospective investor wants to "come in" at the lowest possible figure, and in these respects their interests are opposed. But in each case, before the financial aspect of the undertaking can be intelligently considered, both parties require the same basic information. No matter what the enterprise to be financed — the development of a mine, the exploitation of an invention, the combination of existing industries, or some other form of commercial activity, the owners or promoters cannot determine the value of what they have to offer imtil a very thor- ough investigation has given a basis of estimation, or, ia the case of a going concern or a combination of going concerns, until appraisals have been made and balance sheets and profit and loss statements have been worked out and so compared and combined as to supply the desired information. On the other hand the in- vestor cannot gauge the worth or the safety of the investment offered until he has in some way secured access to the same data. Both are vitally interested in the intrinsic worth of the enterprise and consequently in the adequacy and accuracy of the prelimin- ary investigation. Reasons for Inadequate Investigation Notwithstanding the importance and the very elementary necessity of a thorough investigation of any enterprise on which money is to be spent, enormous sums are lost every year simply because the investigations made in advance of investment are IMPORTANCE OF INVESTIGATION 83 inadequate or superficial. Fraudulent enterprises naturally avoid any investigations that would disclose their true character, but where there is no thought of fraud there is frequently an avoid- ance of investigation that might well arouse suspicion. Too often those promoting an enterprise are quite willing to take chances themselves and apparently think that what is good enough for them is good enough for their friends, or such portion of the investing public as they may be able to interest in the pro- ject. At other times investigation is omitted because of absolute indifference; more often, however, through ignorance of its necessity or of what should be done, or in deference to a mistaken economy, or perhaps because of an actual lack of the funds re- quired. Where the investment is comparatively small, as when an investor buys a few shares of stock, investigation is usually superficial or is omitted entirely because the amount involved is too small to justify the cost of an extended research. Results of Inadequate Investigation Examples of indifference, on the part of both promoters and investors, to the necessity of investigation are easily found. Frauds pure and simple are freely financed. Worthless mines are developed at great expense; inventions unprotected by patents are furnished with funds; factories are established to manufacture products for which there is scant demand, or are erected in places where raw material is not available or markets too distant for profitable operation; companies are organized to operate under licenses which convey little or nothing. Colonel Carter of Car- tersville is not the only one who has financed a railroad which, as characterized by an unfriendly critic, "began nowhere and ended nowhere. " ' A case in the writer's immediate knowledge — ^not to say ex- perience — ^is much in point. Some years ago an inventor of con- siderable reputation and achievement stumbled upon a principle. 'Instances are given in Chapter IV, "A Sound Enterprise." 84 INVESTIGATION OF AN ENTERPRISE new to him, in sound reproduction — something that was to rele- gate such crudities as the phonograph and kindred mechanisms to the scrap heap. The idea seemed reasonable and promising — so much so that when the inventor approached a few friends for money with which to construct experimental apparatus his pro- posals were promptly accepted. As soon as terms were arranged a machinist was employed and construction work began. All went well for a few weeks until one of the parties concerned — himself an attorney — found it necessary to look up patent matters in connection with another enterprise and thought it well while he was at it to see what had been patented in the line of their own undertaking. His investigation was brief, for he quickly ascertained that many years before Bell of telephone fame had discovered and fully patented the basic idea imderlying every- thing the little syndicate was striving to accomplish. The enter- prise then and there came to an abrupt conclusion. A Loss that Should Have Been Avoided In the case just cited no investigation had been made because the investors relied on the inventor, and at the worst the amount involved was small. In other words, they took chances and lost, and their only justification — if justification it was — lay in the fact that they could afford the loss. A case similar to that just cited, but having disastrous results, is given in a recent work on patents.^ An inventor, poorly in- formed as to the "state of the art, " i.e., the scope and nature of the work done in his particular field, had undertaken the solu- tion of an intricate mechanical problem. After much thought and study he became convinced that he had it solved. Afraid to communicate his discovery to others, or even to consult anyone else, he fitted up a workshop in his own room and began the con- struction of his apparatus. It took four years of time and his entire savings to complete the task, but the machine was gradu- ^Avram, ''Patenting and Promoting Inventions." IMPORTANCE OF INVESTIGATION 85 ally approaching perfection, so what did it matter? When his invention had reached, as he supposed, the patentable stage, he brought it to a patent attorney, only to discover that every essen- tial feature had been invented and patented years before. Investigation Prevented by Conditions Sometimes neglect of investigation is the result of conditions. An opportunity is offered to invest. Others are also aware of the opportimity. It must be seized at once or not at all. The wisest course in such cases is for the investor to put his money in his pocket and forget the enterprise. Too often the attractive possi- bilities are too much for him and his money goes — usually into a permanent and unproductive investment. The writer recalls a recent instance — what its ending will be is not yet known. In a certain section of a southern state, indica- tions of oil abound. Ponds are covered with oily scum; paraffin is occasionally foimd adhering to the reeds along their banks; here and there the water in the wells is so impregnated with petroleiun as to be undrinkable. A test well sunk a thousand feet imtil stopped by a broken drill tapped both oil and gas, though not in paying quantities. An interest in a large lease in this territory was offered to northern parties for a comparatively small sum. Before they had time to investigate the matter an offer for the same lease, entirely satisfactory to the owners, was made by other parties. The northern parties were notified that they must "put up " at once or the offer would be withdrawn. The latter decided that the chances were sufficiently good to justify the gamble and "put up. " At the same time they recognized that it was a gamble, and justified it on the grounds of the very large returns if they drew the winning cards. When Investigation Is Refused Occasionally it happens that the parties most interested — the owner, promoter, or even those putting money into an enter- 86 INVESTIGATION OP AN ENTERPRISE prise — will themselves object to a proper investigation. In some cases there is no direct refusal to investigate — it is simply thought to be unnecessary, or to be too much trouble, or too great an expense. In other cases, however, a proposal to investigate the merits of an enterprise is met with a deliberate and, on occasion, very emphatic refusal. Such a refusal may be due to one of several reasons. Fraud is the first and most obvious inference, but the inference is frequently at variance with the facts. Sometimes the refusal is due to a half-superstitious belief that luck will pull the thing through anyway; sometimes to a feeling hardly acknowl- edged by the parties themselves that they would rather have a good run for their money — or the money of their backers — and test the enterprise by actual development, than have it nipped in the bud by the unfavorable opinion of some hard-headed expert who might, of course, be mistaken in his opinion of that particu- lar enterprise. More frequently the refusal arises from the fear that an investigation of the enterprise, which may be an vm- patented invention, an unprotected process, or an unsecured property, may lead to its loss. Occasionally a refusal results from an honest belief that such investigation will not be a fair one, or will be conducted by improper or incompetent parties. In both these latter cases the refusal may be entirely justifi- able. Speaking generally, however, when proper investigation is refused or evaded, the enterprise should be viewed with deep distrust, and imless a satisfactory method for its investigation can be agreed upon, should be left severely alone. There are people — of the kind who are soon parted from their money — who enjoy the excitement of backing an uninvestigated proposi- tion, and their amusement should not be interfered with by other classes of investors. Investment as a Gamble Occasionally investments are made in an enterprise without investigation and as a gamble justified by the circumstantial IMPORTANCE OP INVESTIGATION 87 plausibility of the presentation and because of the very great possibilities of profit in case of success — as illustrated by the oil gamble referred to on a preceding page. Some years ago a chemist of considerable repute spent a term in jail as the result of just such an investment. He either had or professed to have a formula for the synthetical manufacture of camphor. In other words he claimed to be able to produce camphor in his laboratory by the combination of its chemical elements at a price far below the cost of the natural gum. He positively refused to divulge the secret of his process or to submit it to any test save that of actual manufacture. If his prospective backers would put up a plant he would produce the camphor according to specifications. A synthetical camphor produced in quantity and at a low price would be of great marketable value at any time, but particu- larly then when gum camphor was scarce and high in price. The chemist's claims were therefore received with respectful considera- tion and, though backed by nothing stronger than his own state- ments and the samples submitted, were deemed of sufi&cient probability to justify the construction of an experimental plant. A well-known firm of manufacturing chemists advanced $15,000 for the construction and equipment of a laboratory in which the process was first to be demonstrated and the manufacture of the camphor to be carried on thereafter. The demonstration, how- ever, never took place, as the chemist, instead of expending the money on the laboratory and in the production of the gum, diverted it to his own personal use. Whether he really was able to manufacture camphor synthetically has never been divulged. His backers took chances and the chances went wrong. " Grub-Staking " Investments — The Keely Motor Investors not infrequently take up the inchoate project of an inventor, discoverer, or prospector on a sort of "blind pool" basis, after very inadequate investigation, possibly amounting to nothing more than a general discussion of the matter with the 88 INVESTIGATION OP AN ENTERPRISE party presenting the enterprise. In many cases of the kind no investigation is possible — the work itself is really investigation — and the backers of such a proposition take chances that their hopes and expectations will be realized. Such an investment, while entirely legitimate, is purely speculative — a "grub-staking" proposition with the odds much against the parties putting up the money and wholly outside the realm of ordinary business. One of the most remarkable cases in comparatively recent years of such an investment is that of the notorious Keely Motor. It is the more remarkable because at any time a genuine investiga- tion would have disclosed its real nature and in the early stages have saved its backers hundreds of thousands of dollars. No better illustration could be given of the importance of investiga- tion. Keely was a Philadelphia carpenter and — the wages of car- penters then being modest — was in hiunble circiunstances. In the course of private investigations he professed to have dis- covered a new and mighty force which he had not yet been able to " control." He appealed for funds to enable him to effect this control. The funds were forthcoming and for over thirty years he drained money from a credulous public on this pretext, never showing any practical results and always refusing investigation beyond a certain point. Keely was quite willing at any time to exhibit the results of his alleged wonderful force or application of force, but any pro- posal for a real and thorough investigation was met by a direct and positive refusal or was side-tracked by a cloud of meaningless words and phrases seemingly held in reserve for just such occasions. Keely's Demonstrations Keely's work was carried on with great secrecy. His labora- tory was closed to everyone but himself and an occasional assist- ant. Demonstrations were given in adjoining apartments by means of tubes leading from the laboratory to the demonstration IMPORTANCE OP INVESTIGATION 89 rooms. There was alleged to be a close affinity between the mys- terious force and musical vibrations. Thus, when Keely struck a tuning fork it set a brass bowl revolving at the rate of 600 revo- lutions a minute. A violin bow rasped over a tuning fork would start the motor — the "Keely Motor" — to revolving rapidly, the power thereby produced, Keely said, being equal to a pressure of 25,000 pounds to the square inch. The new force was to revolutionize industry. According to Keely, "by the new system, to perfect which I am devoting all my time and my energies, dynamos will become a thing of the past and electric lighting will be effected by a polar negative disc independent of extraneous power to run it, other than that of sympathetic polar attraction, as simple in its construction, almost, as an ordinary typewriting machine." Keely's startling demonstrations aroused high expectations. As stated by a writer at the time, "The stockholders had sense enough to see that if Keely's stories were true nothing more could be desired, for the new force must at once supersede coal and all other means of producing power." In other words, one of the mighty forces which undoubtedly pervade the universe was to be harnessed and to be operated for the good of mankind, and this was to be done at no greater cost than that involved in the magic vibration of Keely's tuning fork. Keely Motor Financing Despite the nebulous, improved nature of the whole thing, the Keely Motor Company was organized in 1874 for the exploi- tation of the discovery, with a capitalization of one million dollars. It was, however, a stock- jobbing operation from the first. Com- paratively little cash went to Keely or the company, for the pro- moters took three-fourths of the stock themselves and promptly imloaded it on the pubUc, realizing large sums therefrom. The capitalization was later increased but the same fraudulent meth- ods characterized its financing; and while the public invested 90 INVESTIGATION OP AN ENTERPRISE hundreds of thousands of dollars in Keely Motor stock, compara- tively little of it was spent on practical work. In 1875, influenced by Keely's promises and marvelous demonstrations, the stock rose to nearly $600 a share. The work and the demonstrations went on year after year. As late as 1897 Keely's motor was inspected by the general manager of the Manhattan Elevated Railway, the chief electrical engineer of the Western Union Telegraph Company, and the mechanical engineer of the Metropolitan Street Railway Com- pany. " They were much impressed and declared that the force was a new one." Keely could not, however, "bring it to earth." Meanwhile Mr. Keely's backers, who were business men of the highest personal and financial standing, stood by him through disappointment and repeated postponement, never seeming to tire of pouring their money into the hopper of the mill that Keely's motor was turning. Finally, its nmning was stopped by the death of the principal actor. Then and not till then did the ap- parently unsuccessful inventor appear in his true character as a successful imposter. Mechanism in his laboratory supphed by well-known means all the power required for Keely's demon- strations. Financing a Swindle — The Sea Water Gold Process I. The Process. The history of the Keely motor merely em- phasizes the general proposition that where adequate investiga- tion or publicity is refused the enterprise should be avoided. There is always some way to demonstrate an honest and meritori- ous enterprise without injury to anyone interested. If this can- not be done, it is a fair assumption that something is wrong with the undertaking. The truth of this could hardly be better illustrated than by the unhappy experiences of sundry Boston capitahsts with the Electrolytic Marine Salts Company, organized something over twenty years ago for the extraction of gold from sea water — so IMPORTANCE OP INVESTIGATION 91 remarkable an instance of fraudulent financing as to justify some detail. At that time the possibilities of foreign exchange as a simple and effective means of separating the Boston public from its surplus funds were not realized. Therefore, when an adven- turer, one Jernagan by name, wished to enrich himself rapidly and without giving an adequate quid pro quo, he was forced to the comparatively clumsy scheme referred to. It is a scientific fact that gold exists in sea water in minute quantities, and Mr. Jernagan claimed to be able to get it out with profit. Jernagan's alleged process involved the use of quicksilver in open containers over which the sea water passed, the contained gold and silver as it came into contact with the quicksilver form- ing an amalgam. An electrical current passing through the mer- cury expedited the amalgamation. To demonstrate the working of this process, Jernagan proceeded to install a "plant" at Nian- tic, on the shores of Narragansett Bay. Here he built a long wharf out over the water. On this stood a little eight-by-ten house. A small island lay opposite and not very far away. From this island Jernagan and an associate — formerly a diver by trade — laid a wire across so that it was possible for a person clad in a diving suit and guided by this wire to go under the water between the island and the wharf no matter how dark the night. When this point was reached, Jernagan — who had been a minister before he became a swindler — confided to two of his former parishioners, both men of wealth, the startling news that he could recover gold, and incidentally silver as well, from com- mon sea water. His hearers were interested but incredulous. They were invited to come down to the bay and see for themselves. The invitation was accepted. 2. Investigation of the Process. To avoid any possibility of fraud the two investigators were requested to bring their own quicksilver, and to avoid publicity the test was made at night. The party proceeded to Niantic and, after dusk, made their way to the building on the wharf. Here Jernagan exhibited a lead- 92 INVESTIGATION OF AN ENTERPRISE lined box open at the top, in which the elusive sea water gold was to be caught. After carefully examining it and satisfying them- selves that it was all right, the visitors poured in their quicksilver. The box was then attached by platinum wires to a small battery and let down to the bottom of the bay, there to gather in the precious metals from the rolling waves. When morning came the watchers were prepared to swear that no mortal had approached the apparatus. Naturally, having only normal eyes and the night being dark, they could not see Jernagan's confederate, attired in his diving costume and guided by his wire, walking along the bottom of the bay till he reached their box, replacing their quicksilver with "salted" quicksilver of his own, and making his way back beneath the huge ice-cakes they heard grinding and crashing against the wharf. When the box was drawn up it was found that the quicksilver had eaten holes through the lead lining, and much of it had es- caped. Taking what remained, the watchers carried it themselves to an assayer, and waited until he tested it and announced that it contained gold to the value of about $4.50. Taking into con- sideration that much of the amalgam had escaped, this was not a bad result for one night's work with only one smaU battery and the very crude apparatus employed. 3. Financing the Electrolytic Marine Salts Company. After this "investigation," Jernagan's two friends were thoroughly satisfied of the practicability of his invention, and furnished money for him to carry on his experiments and to perfect his machinery. By the fall of 1897 Jernagan was ready to begin his public campaign, and in November of that year the Electrolytic Marine Salts Company was incorporated with a capital stock of $10,000,000, in shares of $1 each. This stock was by agreement to be sold, the proceeds going 45 per cent to Jernagan, 35 per cent to the company, and the remaining 20 per cent as commissions to the firm through which the sales were made. IMPORTANCE OP INVESTIGATION 93 The stock sold readily. A little was disposed of at 33 cents, but it soon rose to par, then went beyond, and before long was selling at $1.40 a share. Jernagan had selected for his officers and directors men of standing, well known in the New England states, and, as can be easily understood, with such names and claims to back the stock his announcements became irresistible. "One is at a loss," runs his prospectus, "to comprehend the enormous wealth thus floating in solution in the water. At the lowest estimate a cubic mile of sea water contains gold to the value of $65,000,000. It is probably nearer the mark to place it at $100,000,000. There is enough gold in the waters of Long Island Sound to pay off the national debt, and leave a larger gold reserve in the treasury than the government has yet possessed." 4. Operations of the Company. The new company installed a plant at North Lubec, a litle town on the shores of Passama- quoddy Bay, Maine. Jernagan explained that this spot was peculiarly suitable for his work, as the tide here rose from eighteen to twenty feet higher than anyivhere else on the United States coast, thus supplying at no cost a greater volume of water for treatment. When the plant was once in operation, the sale of stock was assisted by judiciously inspired newspaper stories and by the "practical" working of the plant, backed up by reports from the United States Assay Office at New York showing that large amounts of gold were obtained from Jernagan's amalgam. Before the end of July, amalgam containing between $15,000 and $20,000 worth of gold had been sent to the government office. Wide currency was given to these treasure shipments and the government report was published broadcast. As a natural result, money flowed in and the price of stock rose steadily. 5. End of the Sea Water Gold Fraud. The farce went on imtU the middle of July, 1898, when a million dollars' worth of stock had been sold, most of it above par. About this time Jernagan went to France, taking a large sum in cash with him. So far as known he is still there. The process has never worked since his 94 INVESTIGATION OF AN ENTERPRISE departure and the waters of the sea still retain their customary quantity of gold. In this case Jemagan gained his first important advantage when he satisfied two "credible" witnesses that his machine actually did recover gold from the waters of the sea. The demon- stration given was obviously inadequate and unsatisfactory and its acceptance by two men of standing was unwarranted and mis- chievous. It gave Jemagan the foundation, apparently firm, on which to build and he lost no time in making the most of it. Those who came after naturally took for granted that the reput- able names and material amounts of money loaned the new imder- taking were a justified indorsement of the scheme warranted by duly substantiated facts. In conclusion it may be said that ready acceptance of claims or statements without adequate investigation leaves the door wide open for the perpetration of just such deUberate frauds. It also makes possible the more or less imintentional frauds and the honest mistakes so frequent in the history of financing, resulting in the investment of large sums of money in worthless, deficient, or impossible enterprises. No matter by whom the enterprise is taken up, whether by the owner, inventor, promoter, or investor, nor for what purpose, its thorough investigation carmot be waived or neglected save at the most serious risk of failure and financial disaster. CHAPTER IX INVESTIGATION OF AN UNINCORPORATED ENTERPRISE Scope and Purpose of an Investigation The investigation of an enterprise should be undertaken pri- marily by the owner or other original party who is interested in its sale, financing, or development. When undertaken by the owner or promoter, investigation is usually for the purpose of ascertaining whether the enterprise gives sufiicient promise of profits to justify the time, trouble, and expense involved in its financing, development, or operation. Information in regard to the undertaking is equally impor- tant to those who are invited to come into it later, and unless these prospective investors are willing to accept the results already obtained it is probable that the enterprise will have to be investigated again — ^perhaps many times, as the conditions and interested parties change. The first investigations may not have been of sufficient scope or thoroughness, or may not cover addi- tions or developments, or it may be desirable to complete, extend, or verify the earlier investigations, or to make an entirely new and independent research. Any of these later investigations will usually extend further than those that have preceded them, for not only must they go over the ground covered by the re- searches already made, but must also include any changes in the original conditions. It is obvious that these different investigations, though con- ducted at different times and by different parties, have the same general end in view, i.e., the determination of the value of the enterprise. Here again we find the general information required by the promoter almost identical with that required by the pur- 95 96 INVESTIGATION OP AN ENTERPRISE chaser or the investor, though these latter usually include in their investigations the standing and abihties of the parties handling the undertaking. Because of the general paralleling of the infor- mation required by all the parties interested — or to be interested — ^in anything of the kind, the considerations of the present and the succeeding chapters will apply equally to a research made by the owner, by a promoter considering its financing, or by a moneyed man contemplating its purchase, its development, its operation, or an investment in its stock. The investigation considered in the present chapter applies only to the more basic features of the enterprise. Beyond this, such an examination usually includes any other features of im- portance peculiar to the particular undertaking. If company or- ganization, management, stock issues, and other matters of the kind come into the consideration, the scope of the inquiry is con- siderably broadened. The discussion of such investigations is taken up in the succeeding chapter. Fundamental Features of an Enterprise The general features common to all enterprises and to be covered in part or in whole in any investigation may be roughly classified as follows: 1. Basis of enterprise 2. Title 3. Output 4. Environment and conditions of operation A discussion of these features from the standpoint of investi- gation follows in the order in which they have been tabulated. Under each general classification the investigation should cover the indicated points. I. Basis of Enterprise (a) Is the basic undertaking sound and likely to lead to substantial success? AN UNINCORPORATED ENTERPRISE 97 This matter is considered in an earlier chapter.' It may seem almost too elementary a query to be included in an investi- gation, yet enterprises fail, time after time, simply because they are either not sound or are not worth while. The men who poured money into the Keely motor so liberally took chances and lost hundreds of thousands of dollars by their gamble. Not many years ago a New York concern sold stock widely in a South Afri- can diamond mine that existed only in the printed matter issued by the imaginative promoters. Gold mines very conveniently located near New York City have been announced and financed more than once on no soimder basis than a discovery of pyrites, or "fools' gold." Or even when the basis is sound enough in itself, it may not be sufl&cient or of proper character, condition, time, or environment for substantial success. For instance, the vast deposits of low- grade iron ore in New Jersey could not furnish a profitable basis for a great reduction plant, though the effort was backed by millions of dollars and was directed by Edison's inventive genius; nor would a coal mine in the interior of Labrador offer attractive possibilities for immediate development, though the quality and quantity of coal were entirely satisfactory and its ultimate value very great. (b) If the subject of investigation be a process or an inven- tion, will it do what is claimed for it? This is merely a different form of the preceding query. The question is sometimes a difficult one to answer, requiring the con- struction of a working model, or complete machine, or perhaps the development of the whole enterprise. For instance, a prac- tical process for recovering gold from the black sands of the upper Hudson has been sought for many years. The discovery of such a process was finally annoimced; the laboratory tests worked per- fectly, and it was the opinion of those who investigated the matter ' Chapter IV, "A Sound Enterprise." VOL. I — 7 98 INVESTIGATION OF AN ENTERPRISE that with the greater economies of operation on a commercial scale, the gold could be separated with a most satisfactory profit. Accordingly a plant was erected and the process worked, but the expected economies were not realized — there was no profit, and the gold in the black sands of the upper Hudson still awaits removal. (c) Are similar imdertakings in operation elsewhere? This query merely marks a step in the determination of the character of the enterprise. Frequently the soimdness and the advisability of a particular undertaking may be determined — or a determination may be helped — by a study of similar affairs in operation elsewhere. If the new undertaking is in the lines of recognized and well-established industries — as an ice plant, a flouring-mill, a lighting or power plant, water works, or a textile- mill — data are available to determine almost conclusively the advisability of launching the new enterprise and the probabilities of success. 2. Title (a) Is the title, whether through deed, patent, concession, assignment, bill of sale, or other transfer, good or sufficiently good to justify proceeding with the proposition? In considering the purchase of a piece of real estate no pains or expense is spared to investigate and determine the validity of the title. In the launching of a business enterprise the same care is not always observed. Defective titles to mines are always turning up; inventions are financed and their patents looked up later; interests are taken in contracts which afterwards prove to be worth little or nothing. While titles should always be looked up with the greatest care, doubtful titles or titles that are not perfect are sometimes the best that can be secured. For instance, oil and mining com- panies operated for years on governmental reservations in the AN UNINCORPORATED ENTERPRISE 99 West where no firm titles could be had. Later, through the opening of these lands for leasing, the companies were able to validate their titles, but until this was done their tenures were most uncertain. A specific instance of an imperfect title that was the best then to be had was the title of the New York and Bermudez Com- pany to the pitch lake in Venezuela — one of the valuable asphalt deposits of the world. The company based its claim to the prop- erty on a concession from the Venezuelan government. This was apparently a good title and ordinarily would have been all- sufficient. The government itself, however, complicated matters by either granting or recognizing other conflicting titles. The matter was further compHcated by a typical South American revolution, which brought in new rulers with more respect for ready cash than for vested interests. Plots, counterplots, judi- cial proceedings, and pitched battles between the company and the government forces followed. The company finally succeeded in estabhshing or re-establishing its rights, but at a cost of over half a million dollars. In all cases of doubtful or imperfect titles, those which exist must be carefully examined and weighed in order to ascertain whether or not they afford a sufficient basis for the required in- vestment, and also to determine whether a better title can be secured either then or later. (b) Is the nature of the holding satisfactory? An interest in real property may range from a short-term lease, or a partial conveyance, to a deed in fee simple. Oil and other mineral leases usually give nothing more than the right to the mineral under prescribed conditions, with such operating privileges on and in the property as may be necessary for the re- moval or handling of this mineral. In any particular case it must be determined whether the tenure under which the property is held is of a nature to justify the proposed operations. 100 INVESTIGATION OP AN ENTERPRISE In the case of an invention it may be held under an assign- ment of the patent or under a license granted by the owner of the patent; the patent may be broad and basic or it may cover some small and perhaps immaterial part of an already patented device; the license may or may not be satisfactory in its terms. In any case careful investigation is necessary to ascertain just what is carried by the particular instrument. Naturally, the validity, sufficiency, and generally satisfactory nature of the instrument by which the title or rights in the enter- prise are to be held will be the subject of careful examination or the instrument itself will be prepared by competent attorneys. Any investigation of a title or of holding instruments should determine, as a matter of course, whether the formalities neces- sary for their protection, such as the due filing and recording of deeds of transfer, have been observed. 3. Output (a) Is there a sufficient and profitable demand for the output? The output as here considered is anything to be sold or other- wise disposed of from which the revenues of the enterprise may be derived, i.e., the articles or materials produced by a factory, the gold or other mineral from a mine, the books or magazines of a publishing concern, the transportation facilities of a railroad system, the services of a telegraph company. Obviously an enter- prise cannot be profitable unless there is a sufficient demand for its output. Sometimes, however, it is difi&cult, if not impossible, to determine this point in advance. In many proposed under- takings — as was the case with the Bell telephone in the early days — the demand is the unknown quantity. (b) Is the output sufficient, or can it be made sufficient, to supply the expected demand? The output must, of course, be large enough for profitable operation or the enterprise will not be undertaken. But beyond /7 .' . ^ AN UNINCORPORATED ENTERPRIsi I lOI < this, if it is not large enough or sufl&ciently well sustaiile^ to meet the demand with fair adequacy, competition is invited or the demand itself may be discouraged and seek other sources of supply. In either case loss or total failure may result. A failure or insuf&ciency of output may be due either to in- adequate supply or to inadequate facilities. Thus a coal property may contain heavy veins of excellent coal, but the acreage be entirely insufficient to justify development. Or a canning es- tablishment might be located in a country that would not afford a sufficient supply of fresh fruit and vegetables to keep it profit- ably busy. On the other hand, some years ago a new telegraph company, using a rapid and excellent system of transmission, leased lines between Chicago and St. Louis and began commercial operation. Its rates were lower than those of the older companies, its local service was good, and patronage was readily secured. The leased lines were, however, defective and every few days were either transmitting badly or entirely out of commission. As a consequence the company was unable to give satisfactory through service, its business was killed almost as quickly as it was secured, and the effort was abandoned — a failure due entirely to inade- quate facilities. (c) Is the output of proper character or quality to meet requirements? If the enterprise be a mine or similar undertaking the quality of its output is fixed by natural conditions and cannot be changed. It then becomes necessary to ascertain whether this quality will satisfy the demands or conditions that are to be met. Thus a low-grade coal containing much sulphur and phosphorous might be quite good enough for ordinary fuel, but could not be used in the manufacture of fine steel. Or, on the other hand, a high-grade brittle asphalt, excellent for varnishes and paints, would not be at all suitable for paving. If the undertaking be the production of a manufactured article 102 INVESTIGATION OP AN ENTERPRISE or material, the output can usually be adapted to the needs of its market, unless fixed by some basic condition, such as the character of the raw materials supplied. For instance, a fine steel could not be produced from iron ores containing a high percentage of phosphorous, nor could fine china be produced from ordinary potters' clay. (d) Can the product be turned out at a figure that will make operation profitable or, from the other viewpoint, can a price be secured that will make operation with its necessary costs profitable? This is obviously an essential requirement of successful opera- tion and one that usually requires consideration of a number of contributing factors before it can be properly answered. Almost all the conditions discussed under "Environment and Conditions of Operation" bear directly on this cost of production. 4. Environment and Conditions of Operation (a) If the undertaking is a manufacturing enterprise, are the necessary raw materials obtainable in adequate quan- tities, at fairly uniform prices and suitably near at hand? If the raw material is not obtainable in adequate quantity, production will be intermittent and uncertain. If prices of raw material are subject to wide or sudden fluctuations, the cost of the finished product will be similarly affected and this will make sell- ing conditions diflScult. Also, either thp raw materials must be at hand, or the trans- portation facilities must be such as to render possible their de- livery as wanted, and in sufiicient quantity, and at a cost low enough to make profitable production possible. These conditions apply more particularly to those undertakings in which the new material or the finished product or both are heavy or bulky, and any long haul would involve heavy freights. It is obvious that a manufacturer of watch springs, no matter what his location, AN UNINCORPORATED ENTERPRISE 103 would be little concerned as to transportation charges on either his incoming material or outgoing product. On the other hand, brick kilns are almost always located on or near the beds from which their supply of clay is derived and in most cases are also close to the market in which their product is sold. When raw materials of various kinds are used in the same plant and these materials are obtained in different parts of the country, the question of location, so far as raw materials are in- volved, is one to be settled by a weighing of transportation costs and facilities. (b) Are water, fuel, or other sources of power and any other necessary materials and supplies obtainable at a reasonable cost or at a cost that will permit of profit- able operation? As in the case of raw materials, a manufacturing or a mining concern must have reasonably ready access to water, fuel, or power supply, and such other supplies and secondary materials as its operation may require. If not, the enterprise is seriously and perhaps fatally handicapped. (c) Can labor be secured at a reasonable cost, in sufficient quantity, of suitable character, and of reasonable efficiency? Are the general labor conditions good? At the present time if the undertaking requires large nimibers of workers, the demands of labor make these considerations fim- damental. In most parts of the country the resident population will afford a sufficient supply of unskilled labor. In cases where it is inadequate, and the location of the enterprise is fixed, as in the development of some remote mining enterprise, it must be imported from other parts of the country, with all the problems that this involves. Where the location of the enterprise is not fixed by natural conditions, the labor supply may be the deter- mining factor. In early days the great majority of the cotton- mills of the country were situated in the North — mainly in New 104 INVESTIGATION OF AN ENTERPRISE England— primarily because labor of the right kind could not be found in the South. Conditions have since changed and now some of the most profitable cotton-mills of the coimtry are located in sight of the fields from which their raw material is produced. When skilled labor is lacking, it may usually be brought in, or operations may begin on a limited scale with what skilled help is available and the output increased thereafter as local labor is trained or as skilled labor is obtained from elsewhere. The attitude of labor unions toward the undertaking must also be considered. In the main they are amenable to reason, but occasionally their demands are so vinconscionable and so far- reaching that they miUtate strongly against the establishment of a new enterprise in the neighborhoods dominated by such unions. Also, at the present time, the temper and attitude of the laboring man himself require serious consideration. Will he work eight hours a day, or merely put in eight hours' time? Will he be loyal — will he make the interests of the imdertaking his own? Too much should not be expected of the laboring man in this direction, but fairness and a reasonable attitude are important. In the troublous period immediately following the Great War, a Pittsburgh shop made a bid for the machining of a large number of automobile crank castings and secured the contract on a basis of $32.50 per casting. At this figure there was a fair profit. A rumor that could not be downed spread among the men that the proprietors were getting over $80 for every casting machined. The men were already somewhat disaffected. The profit seemed to them out of all proportion to the wages they were receiving. There was no open rebellion among them and no demands; but, in spite of everything the officials of the concern could do, the output decreased until the cost price of the machine work on the castings ran above the contract price. The machine-shop officials appealed to the parties for whom the work was being done and secured an increase to cover their actual cost, but the profit on the contract was gone. AN UNINCORPORATED ENTERPRISE 105 (d) Are markets readily accessible and are transportation facilities adequate, satisfactory, and reasonable as to cost? Accessibility to markets is a prime consideration in the loca- tion of any enterprise. Sale of the product at a profit is a sine qua non. Geologists who have been on the ground tell us that in the interior of Venezuela natural oil springs exist, flowing in some cases as much as twenty-five barrels a day. The world needs oil and needs it badly; but — if the story is true — this Vene- zuelan supply is going to waste simply because of its inaccessibility. It cannot with profit be brought to the place where it is needed. The matter of transportation must, of course, be considered from both the standpoint of incoming material and supplies and of outgoing product. Not only must rates on both be reasonable but capacity must be adequate. No matter how favorable the rates, if transportation caimot be secured when needed and to the extent needed, the profits or even the existence of the enter- prise may be seriously endangered. There were many exemplifi- cations of this in the winter of 1919-1920 — steel plants crowded with finished product but unable to make deliveries because of the shortage of cars; factories unable to continue operations because they could not get their steel, coal, and other supplies. The situation was abnormal, but it shows well the very serious condition when transportation is inadequate. Accessibility to markets does not, however, mean merely the existence of adequate transportation systems and reasonable freight rates. There must, of course, be both of these, but still further there must be a service that is honestly fair. Instances of enterprises that have been ruined by railroad discrimination are familiar to every business man. In these days of govern- ment regulation, rebates are not given and discrimination by transportation systems is neither so frequent nor so dangerous a practice as it was, but still the matter is one requiring careful investigation. I06 INVESTIGATION OF AN ENTERPRISE If water transportation is available it will probably be cheaper and for many purposes preferable to rail transportation and should be looked into even though rail facilities be at hand. If not needed at the time, it will serve as an insurance against pos- sible discriminatory treatment or failure of the service facilities of the railroad. Automobile transportation should also be con- sidered. With the improvement of the motor truck and the ex- tension of good roads this method of transportation is taking an important place. (e) What competition is to be encountered? Some few enterprises are so exceptional in character as to have no competition, or perhaps none so near or so severe as to require consideration. In other cases the market is so wide and so unsupplied that competition is not a factor. Usually, however, competition is more or less serious and weighs heavily when the establishment of a new undertaking is considered. Competition may be in two directions — it may affect the supply of the raw material, or the market for the sale of the finished product. For instance, it would be unwise to establish a canning factory in a district in which the garden and farm pro- ducts are already consumed by existing canneries. To do so would result in destructive competition for the supply of raw material. On the other hand, it would be imwise to establish an ice plant in a town already adequately supplied with ice, for there would be no profitable sale for the product of the new concern. Between these extreme cases there are, of course, numberless instances where competition in either direction is not so severe as to render operation of the new enterprise unprofitable, and then it is a question whether it is better to locate in the proposed neighborhood or in some other place where competition is less active. Competition must be considered both from the standpoint of that already existing and that which may come into existence AN UNINCORPORATED ENTERPRISE 107 later. Existing competition is first to be taken into account. It has the very material advantages of an established trade and income; it is on the inside, and the outlook for the new enterprise which is usually on the outside must be carefully studied. If the market for the finished product is so large that competition is only in the direction of raw material, the question is one easily settled by a study of the supply. If there is no question as to raw material, but the market is doubtful, the matter is much more difiS- cult, as it will require the study of a number of contributing factors. There should, of course, always be some definite reason for believing that success can be obtained in the face of competition. The market may be large enough for all, or the new product may have certain points of excellence or attractiveness in price that will enable it to win its place in the face of the already established product. Or, if it is equally good, perhaps the manner of presen- tation may be the winning factor, or perhaps an acquaintance among those to be served will carry the new undertaking to success. If it is decided that the existing competition does not consti- tute a serious menace to the new enterprise, the possibilities of future competition must then be taken into account. If the enter- prise is successful and other concerns can come in and secure exactly the same facilities, competition is usually to be expected and should be guarded against in advance. The protective measures may take several directions. The supply of raw materi- als may perhaps be so secured as to prevent the entrance of com- petitors; possibly other facilities may be so monopolized as to render competition very difficult; or the market may perhaps be so securely controlled by excellence of product, diplomacy, and skilful salesmanship as to reduce the danger of displacement to a minimimi. It is to be noted that the mere existence of other undertakings of a similar character in the location under consideration does not necessarily indicate harmful competition. Thus a number of siunmer hotels in an attractive country neighborhood or seashore I08 INVESTIGATION OF AN ENTERPRISE resort may be distinctly helpful, calling wide attention to the region in question, securing better railroad rates, adding to the interest, and contributing to the maintenance of stores, theaters, and trolley-lines. (f) Do any other local conditions exist which would affect the enterprise injuriously? Sometimes these local conditions take the form of unfriendly legislation and may be very serious. For instance, oleomargarin is a valuable product largely used as a low-priced substitute for butter. In these days of high costs it would seem reasonable that its production should be encouraged. Congress, however, in its desire to protect the farmers of the District of Coliunbia, has decreed that oleomargarin manufactured or sold in the District must be colored pink in order to differentiate it clearly from but- ter. The resulting product is unquestionably easily distinguished from butter, but its sale is difficult and the Congressional enact- ment has been disastrous to the industry so far as the District of Columbia is concerned. Perhaps unfavorable local conditions take the form of an un- friendly attitude on the part of the inhabitants. In many parts of the country a sanitarium for the treatment of tuberculosis would meet with such strong local opposition as seriously to en- danger its successful operation; a residential district would natur- ally oppose the location of a factory in its midst. Other local conditions requiring consideration may be of varying natures. Thus it is obvious that the vicinity of a boiler factory would not be desirable for the location of a "rest cure"; nor should a meat market be established in a vegetarian colony; nor would it be wise to attempt the establishment of a monopolis- tic trust in Russia. Unfavorable conditions are not usually so extreme as these; but if they exist, their nature and their bearing on the new enterprise should be studied before its location is definitely decided. CHAPTER X INVESTIGATION OF AN INCORPORATED ENTERPRISE —THE INVESTOR'S QUESTIONS Purpose of the Investor's Questions The "Investor's Questions" were originally prepared to assist in the investigation of an enterprise from the standpoint of the investor. They cover broadly the important points in regard to an incorporated undertaking upon which the investor has a right to be informed and upon which he must have information if he is to judge the offering intelligently. As these same points must be considered with even greater care by the parties who make the offering, the questions are brought in here. They will be found suggestive in both the investigation and the shaping up of an enterprise for financing. In the consideration of any particular undertaking, it is not probable that all the questions given will be found applicable. The answers to some will be obvious; others will not apply, or will be unnecessary. The questions must therefore be used with this in mind. Those that do not apply, or are not needed for the particular case may be ignored. If the information required by these questions, so far as they may apply, is incorporated in a prospectus together with any features peculiar to the particular enterprise, it can hardly be doubted that the presentation will be adequate. The questions as given apply to a going concern. For the investigation of a newly organized undertaking they must of course be modified to meet the conditions. Estimates must then take the place of most of the operating information called for by the questions. The questions refer to a manufacturing enterprise, but they are easily modified to apply to any other industry or business. 109 no INVESTIGATION OP AN ENTERPRISE Outline of Investor's Questions The following outline of the investor's questions concisely indicates their scope. While they cover the basic features of an enterprise as analyzed in the preceding chapter, they also go beyond this, taking up organization and operating features as well. I. Nature of the Enterprise II. Environment III. Corporate Organization IV. Present Conditions A — ^As to property B — ^As to operation C — As to finance V. Management A — Directors B— Officers VI. Operating Organization VII. Proposition VIII. Disposition of Money Secured DC. General The Investor's Questions I. Nature of the Enterprise 1. What is the undertaking? What does it comprise? 2. Is the basis of the undertaking sound? 3. Are similar undertakings in profitable operation, i.e., is the imder- taking one of proved profit? 4. What competition — ^present or prospective — ^will be met? 5. What special advantages does the present enterprise enjoy that will enable it to withstand or overcome competition if it exists or arises? 6. Is the margin between cost and selling price sufficient for profit- able operation? 7. Is the demand for the product or output permanent and sufficient for profitable operation? 8. Can the enterprise be conducted profitably under the existing conditions? AN INCORPORATED ENTERPRISE I" 9. Does it offer sufficient profit and development possibilities to be worth while? n. Environment 1. Is there any local or other opposition to the enterprise? 2. Is the supply of raw material sufficient, accessible, and satis- factory? 3. Is the supply of water, fuel, light, power, and other essentials of operation satisfactory as to quantity, quaUty, and procurement cost? 4. Are transportation facUities and service adequate and the rates reasonable? 5. Are the markets for the product accessible and capable of absorb- ing the output at a satisfactory price? 6. Is labor available in sufficient quantity and at a reasonable price? 7. What is the attitude of labor toward the enterprise, i.e., will the proper output be secured and is there danger of strikes? III. Corporate Organization 1. In what state was the corporation incorporated and when? 2. Are there any vmusual features in — (a) Charter? (b) By-laws? 3. What is amount of common stock and par value — if any — of its shares? 4. What is amount of preferred stock — if any — and par value of its shares? 5. Is the total capitalization reasonable? 6. What are the preferences of preferred stock? 7. Is the preferred stock properly protected as to assets, cumulation of dividends, redemption, and against further indebtedness? 8. Has the preferred stock any other protective or peculiar features? 9. How much stock is — (a) Issued: Common? Preferred? (b) Unissued: Common? Preferred? 112 INVESTIGATION OP AN ENTERPRISE (c) Held in treasury: ' Common? Preferred? 10. What values were received in exchange for the issued stock, i.e., what cash, property, or services? 11. Was any of the issued stock returned to the treasury of the company? 12. If so, what disposition has been made of it? 13. Who has stock control of the corporation? IV. Present Conditions A — ^As to Property 1. What property or rights are owned or controlled by the com- pany? 2. Are these properties or rights owned outright or held imder lease, license, grant, option, or on other tenure? 3. If rights are included in the company's holdings, on what basis are they held and how soon, if ever, do they expire, or are lost to the company? 4. If owned, are titles perfect? 5. If not owned, are the terms of holding reasonable, satisfactory, and safe, and are holding papers in due form? 6. How much was paid for these properties or rights — (a) Total amoimt? (b) In cash? (c) In company's securities? (d) In other ways? 7. What are the terms and amounts of any payments yet to be made for these properties or rights? 8. How are deferred payments, if any, secured? 9. What is the present estimated value of these properties and rights? 10. In event of liquidation, what would be the worth of the company's properties and rights? 11. Is the property well adapted to the company's purposes? What deficiencies, if any? 12. Is the property owned by the company in first-class condition, or will improvements be necessary in the near future? ' For distinction between unissued and treasury stock, see Chapter XXIII, "The Cor- porate System." AN INCORPORATED ENTERPRISE 113 13. If property comprises a factory, is its construction and equipment modem, in first-class operating condition, adapted to most efficient operation of the enterprise, and capable of ready enlargement? B — ^As to Operation 1. What articles or materials are produced? 2. What special operating difficulties, if any, have been encountered and how overcome? 3. What stock of materials and supplies is carried? 4. What is maximum output? 5. What is minimum output for profitable operation? 6. What has been yearly output and average cost of same for — (a) Past three years? (b) Current year? 7. What average price has been obtained for output for — (a) Past three years? (b) Current year? 8. What quantity of output now on hand? Usually carried? 9. How is output disposed of? 10. Is the demand steady? 11. Does the output meet the demand? 12. Could the demand and output be readily increased? 13. Could other lines be produced with profit? 14. Are operating conditions satisfactory or should they be im- proved? C — ^As to Finance^ 1. Are proper books kept showing all costs and all results of operation? 2. What debts, claims, fees, rents, royalties, or other payments not shown by the balance sheet and the profit and loss statement, are to be met or carried? 3. What officials and employees handle the company moneys? 4. Are the officials and employees handling the company moneys bonded, and, generally, what safeguards are thrown around the company's finances? ^ In this connection a balance sheet and a profit and loss statement should be supplied showing the company's past and present earnings, operating costs, and general financial conditions. Questions covering these points are therefore omitted. A simple form of finan- cial statement is given later in the chapter. VOL. I — 8 114 INVESTIGATION OF AN ENTERPRISE V. Management A — ^Directors 1. How many members on the board? Give names and addresses. 2. What is their past record and present business? 3. Are all members of the board active? If not, who are the inactive members? 4. Are the directors stockholders, and if so, in the case of each in- dividual, to what amount? 5. Have they paid for their stock in cash, property, or by services? 6. Are board meetings regularly held and attended? 7. What remuneration as directors do the directors receive? 8. Who compose the standing committees, if any, and what powers have these committees? B— Officers 1. Who are the officers? Give names and addresses. 2. What are their past records? 3. What are their special qualffications for the successful conduct of the present enterprise? 4. Do they work together without friction? 5. What compensation do they receive? 6. Is any increase in this compensation contemplated for the near future? 7. Are they interested in the enterprise beyond their salaries? 8. If so, how did they secure this interest, i.e., by purchase or in payment for services? 9. Are any of the officers members of the board of directors? 10. Are there any important executives not officers of the company, i.e., manager, controller, etc.? If so, give the same data for these executives as for officers of the company. VI. Operating Orgai^ization 1. What is the general plan of operating organization? 2. What are the general divisions of the business under this organiza- tion? 3. Who are the operating heads under this organization? 4. Are the company's operations under the present organization satisfactory? AN INCORPORATED ENTERPRISE 115 VII. Proposition 1. What is the general proposition? Is it a fair one? 2. If stock or bonds are offered, is the price reasonable? 3. How do these prices compare with any former prices? 4. If common stock is offered — (a) Is it fuU paid and non-assessable? (b) What dividends, if any, have been declared on the common stock? (c) What is present dividend rate, if any? (d) What proportion of profits will be reserved and what sur- plus maintained before dividends on this stock are declared? 5. If preferred stock is offered — (a) Does it vote? (b) What dividends have been paid on it? (c) Are any accrued dividends unpaid? If so, what is amount of cumulation? (d) Has any of the preferred stock been retired? If so, under what conditions? (e) Does any fund now exist for its redemption? (f) Do any bonds, notes, or other obUgations take prece- dence over the preferred stock? If so, give amounts and conditions. 6. If bonds or notes are offered — (a) What is their amount? (b) How are they secured? (c) Who is the trustee? (d) Under what conditions may they be foreclosed? (e) When and how are they to be discharged? (f) Are they bearer or registered obligations? (g) What interest do they bear, and when and how is this interest paid? • (h) Are there any peculiar provisions in the deed of trust affect- ing these bonds or notes? (i) Are there any other securities taking precedence? Vin. DisposmoN OF Money Secueed 1. What is the general purpose of the offering? 2. Does the money received go into the treasury of the company? Il6 INVESTIGATION OP AN ENTERPRISE 3. If any does not go into the treasury, to whom does it go and for what purpose? 4. Of the money going into the treasury — (a) What part goes to pay off existing debts, obligations, and claims? (b) What part, if any, goes for promotion expenses, commis- sions, etc.? (c) What part goes into active development and operation and how is this money to be applied? (d) Is the amount asked for sufficient to accomplish the desired results? IX. General 1. What is the previous history of the enterprise or the property or undertaking on which it is based? 2. If inventions enter prominently into the proposition — (a) What is the previous record of the inventor? (b) What are the special results of the invention? (c) What is its present condition, i.e., is it fully covered by patents; is it developed to the point of commercial operation, etc.? 3. Are there any company contracts or obhgations not mentioned in the answers to the foregoing questions by which the enterprise is now or wiU hereafter be affected? 4. By whom are the answers to the foregoing question made? The Financial Statement A financial statement should always accompany a complete report or statement of a going concern. Such statements fre- quently conceal — at least from the ordinary business man not trained in accounting — more than they reveal. A simple non- technical form of statement that will at a glance give the general financial status of the concern is very desirable. The following statement is commendable for its clearness and for the fact that it gives just what the average business man interested in the company would wish to know. This form of statement is used in reporting to its stockholders by a well-known manufacturing company. AN INCORPORATED ENTERPRISE II7 Standard Cement Manufacturing Company Financial Statement As of December 3 1, 1920 Assets Properties at Cost $ 5,318,469.65 Subsidiary Plants and Equipment 479,823.54 $5,798,293.19 Store and Warehouse Properties 906,813.72 Cash $ 1,445,281.28 Accounts Receivable 4,141,215.71 Notes Receivable 265,187.71 Inventories 7,042,781.71 Liberty Bonds 787,572.00 War Savings Stamps 832.00 Treasury Bonds 51,290.00 Insurance Deposits 71,019.69 Standard Employes Co-operative Associa- tion 10,000.00 Total Quick Assets 13,815,180.10 Investment in Standard Cement Manufacturing Company, Ltd., of Canada 1,620,149.40 Pension Funds Invested 175,005.44 Furniture and Fixtures and Machinery at other points than Factories 298,010.56 Stocks and Bonds 32,671.20 Mortgages Owned 6,333-96 Treasury Stock 1,000.00 Sundry Assets 57,667.82 Patents 100 $22,711,126.39 Il8 INVESTIGATION OP AN ENTERPRISE Capital and Liabilities Invested Capital: Common Capital Stock $ 6,000,000.00 Preferred Capital Stock 4,397,000.00 $10,397,000.00 Surplus and Reserves 7,385,846.37 Total Capital, Surplus and Reserves $17,782,846.37 Liabilities: Accounts Payable $1,386,700.73 Federal and State Taxes Accrued 885,631.79 Dividends Payable Febru- ary 10, 1921 166,947.50 Notes Payable 1,195,000.00 $ 3,634,280.02 Debenture Bonds $1,234,000.00 Mortgage Payable 60,000.00 1,294,000.00 4,928,280.02 $22,711,126.39 Quick Assets: *December 31, 1920 $14,913,738.11 December 31, 1919 13,818,620.85 Increase $ 1,095,117.26 Quick Liabilities: fDecember 31, 1920 $ 3,817,497-33 December 31, 1919 3,913,366.40 Decrease $ 95,869.07 Proportion of Quick Assets to Quick Liabilities, excluding debenture bonds — $3.91 to $1.00. Proportion of Quick Assets to Quick Liabilities, including debenture bonds — $2.92 to $1.00. Net Worth Net worth of the Company, December 31, 1920 $17,782,846.37 Book worth of Common Stock, per share 223.10 Common Stock earned in 1920, after deducting Federal Taxes 28.01% * Includes Canadian Quick Assets, t Includes Canadian Quick Liabilities. AN INCORPORATED ENTERPRISE 1 19 Earnings Net earnings of Standard Cement Manufacturing Company for the year ending December 31, 1920 $3,048,067.84 Less: Amounts set aside: For Contingent Fund $100,000.00 For Pension Fund 25,000.00 For Bad Accounts Reserve .• 25,000.00 For Federal Taxes 862,050.50 For Common Stock Dividends 600,000.00 For Preferred Stock Dividends 303,336.25 For Extra Compensation to Executive and Operating Committees 102,027.93 2,017,414.68 Amount Added to Surplus for 1920 $1,030,653.16 Profits of Canadian Company not included in above. We have expended during the year for maintenance and repairs on manu- facturing plants $331,754.93 and charged ofi for depreciation and displace- ments on manufacturing plants, machinery and equipment of branch houses, general offices, and showrooms $659,538.16. All bad and doubtful accounts and notes redeivable have also been charged oS. John H. Howaed Treasurer Chicago, Illinois February i, 1931 CHAPTER XI INVESTIGATION OF NON-SPECULATIVE ENTERPRISES Speculative and Non-Speculative Enterprises The scope and results of investigation in any particular case depend largely on the nature of the enterprise. For the purposes of the present discussion, enterprises are divided into two classes: (i) non-speculative enterprises, in which the uncertain qualities may be so far eliminated that the undertaking becomes one of ordinary business risk — foi risk there is in all business; and (2) speculative enterprises, in which the unknown quantities cannot be determined save by some considerable measure of develop- ment, and in which the risk is therefore greater — and in most cases vastly greater — than in the ordinary business enterprise. Obviously to justify such an undertaking the possibilities of profit must also be greater than in the ordinary business enter- prise — in other words, they should be commensurate with the risk. Some of these speculative enterprises are so utterly indeter- minate as to value, and so far removed from any ordinary business operations that their development can only be looked upon as gambling — as much so as betting on a horse race, or placing money on the turn of a wheel — gambling that no business man would indulge in as a matter of business. Others of a highly speculative nature aj-e still gambling, but gambling of a legitimate nature, the risks, while great, being justified by the profits in case of success. It may also be noted that — outside of manipulated operations and war-time profiteering — it is from these speculative ventures that come most of the sudden and dazzlingly brilliant rewards of the industrial and business world. NON-SPECULATIVE ENTERPRISES 121 Investigation of a Store Location Enterprises which merely involve the ordinary business risk may be investigated and their merits and possibilities determined in advance with fair accuracy. In many cases this is attained at small cost, and in the case of established lines of industry, by the simplest procedure. For instance, suppose the managers of a modern chain store system wish to open an establishment in a new city. The first and all-important point is the selection of a suitable store location, and for this purpose a survey of the city is made. In most cases the general neighborhood to be selected is determined by the nature of the business. For a meat market or grocery store of small size, a residential neighborhood is to be preferred; a cigar store would usually select a business section; while a confectionery store might be successful either in a business or residential quarter. The general survey would probably result in the selection of several tentative locations. The choice between these is made by a more careful consideration of the respective neighborhoods, this including rental costs, and by an actual counting and "sizing up" of those passing by the prospective locations in the course of a day. The location passed by the greatest number of persons is, of course, the most desirable, provided the character of the passers- by would make them purchasers of the wares to be sold. For instance, the thousands of clothing workers streaming by on their way to the shops in the early morning and hurrying back to their homes in the later day wouldnot be a desirable purchasing cHentele. Their number would perhaps be entirely sufficient, and in this day of high wages they would not lack in purchasing power, but they pass within too narrow time limits and, even had they the desire, are usually too hurried to stop and buy. The decision must be based not merely on the number of passers-by, but on the number of probable purchasers. When the proper location from the standpoint of general character and probable purchasers has been decided, the neigh- 122 INVESTIGATION OP AN ENTERPRISE borhood must be further considered from the standpoint of exist- ing competition and the possibility of securing suitable store space at or near the desired point. Or this investigation might be made at the time the neighborhood is being studied for its general suitability. This done, store space is rented and business is begun. When store space has actually been secured, the future of the undertaking is practically settled. The kinds of goods that should appeal to the purchasers in the new location are in stock; man- agers trained in other stores are available; the general plan of the store — its arrangement, its sales organization, methods, and policy — all are fully worked out, and the profitable operation of the new undertaking is a foregone conclusion. The only question then is, how great will be the measure of its success? On this point the following statement from the president of a well-known chain of stores is interesting : ' I am frank to say that the men in our real estate department who choose the location for our new stores have a foresight that is almost uncanny. It is not at all uncommon — in fact I may say it happens almost without fail — that they return from the selection of a location, and, with their report, turn in an estimate of the business we will do there during the first six months that often coincides within a couple of hundred dollars of the actual amount taken in diuing the first six months that store is in operation. As to the method of selecting locations, the same writer says of their real estate men: Their system is efficiency plus. In large cities they study carefully the general trend of traffic, they estimate the hours during the day when a certain number of people will pass a given spot, and they study such local conditions as proximity to manufacturing plants, factories, or other large enterprises. In the smaller cities they make an even more extensive survey, carefully choosing locations on streets that are popular thoroughfares where the masses are wont to congregate. They also make a close study of racial characteristics — a matter which ' Edward Wise in Administration, March, 1921. NON-SPECULATIVE ENTERPRISES 1 23 has a vital relation to the purchase of certain commodities. In decid- ing upon the location of a new store their calculations are made with such exactness that they rarely have to repeat the survey. Investigating the Transmutation of Metals I. The Proposition. When an enterprise has features new or outside the realm of established industry, the problem of investi- gation may be one of greater difficulty, requiring some modifica- tion of the usual methods for its proper solution. Also the maimer of investigation varies with the particular undertaking. The matter may perhaps be best illustrated by a discussion of meth- ods that have been employed in the investigation of specific enterprises. The first of these was nothing more nor less than the transmu- tation of metals, the party submitting the proposition claiming to have discovered new applications of natural laws enabling him to convert ordinary spelter, i.e., zinc, into high-grade brass at a total cost for labor and materials — at that time — of a cent or two per pound above the cost of the spelter. As the principal constituent of brass is copper, the claim if verified amounted to the profitable and commercial conversion of zinc into copper. Ordinarily, in New York business circles a proposition of such a nature would be dismissed with mild amusement. In this instance, the gentleman presenting the proposition was at the head of a small but success- ful manufacturing concern in which the metal he proposed to pro- duce was largely used, and his personal intelligence, ability, and commercial standing were such as to warrant a certain amount of confidence in his statements. Very handsome samples of the transmuted metal were sub- mitted for examination. Satisfactory explanations of the neces- sity for capital were forthcoming. The offer made was unusually fair and straightforward, involving no payment of any kind to the owner of the process except from profits. Finally the process it- self was vouched for so strongly and with such frank plausibility 124 INVESTIGATION OP AN ENTERPRISE that the matter was at last, with many misgivings, taken up by the New York concern to which it had been offered. The process was naturally a secret one, but the owner agreed to make any demonstrations required, provided only that the actual secret of the transmuting material should be retained by him until final contracts had been entered into. As soon as these had been executed, the process was to be revealed to some trust- worthy and competent person to'be mutually agreed upon. Then, under the supervision of these two, the manufacture would be begun at once, and as soon as an adequate output was secured the copper markets of the world would be controlled with resulting wealth to those in charge "beyond the dreams of avarice." 2. Points for Investigation. The proposition was "right," the conditions were reasonable, and the whole thing then hinged on the investigation of the process. The New York concern had undertaken, if the demonstration of the process was successful, to supply all the capital that might be required. In this case most of the factors were known and the investiga- tion at once narrowed down to the two points: (i) Could the transmutation be made? (2) Could it be made within the price named, or at a price that would make the process commercial? The value of the whole enterprise would be established if these two points were satisfactorily settled, and they were of such a nature as to permit of an absolute demonstration. It may have been a preposterous proposition but it was not a speculative one, as these two points could be readily proved or disproved. As a preliminary step the samples of the alleged transmuted metal were submitted to a well-known chemist for analysis. This step was out of the logical order, as an analysis would come in due course when brass was produced in the demonstration of the process. It was undertaken at this time merely as an incidental "bracer," for the benefit of the investigating parties, only neces- sary or desirable because of the very remarkable nature of the whole proposition. The results of the analysis fully confirmed all NON-SPECULATIVE ENTERPRISES 125 claims as to the grade of the brass, a good-sized nugget of copper being secured from the brassy samples submitted to the chemist. 3. The Demonstration. The investigation of the inventor's abihty to effect this interesting transformation was then under- taken. A preliminary demonstration at his laboratory in Phila- delphia was completely successful, beautiful samples of brass be- ing produced — apparently from ordinary spelter. Something less open to deception than this laboratory test was, however, essen- tial, and a formal demonstration was arranged for in a foundry near New York. To make this test the more complete and satis- factory, and to guard against fraud, the preparations were made, and the materials furnished — except the very small quantity of transmuting material necessary — by the investigating parties, the owner and discoverer of the process merely indicating the temperature of the furnace, the quantity and quality of the spel- ter, and the size and kind of crucible required. He even agreed to accept the assistance of one of the regular foundry helpers in place of his own trusted assistant. All this looked very fair and open. The arrangements were made as agreed, and at the ap- pointed time the owner of the process put in his appearance. The test was picturesque to an unusual degree. For the sake of privacy it was conducted in a small detached smelting-room used for experimental purposes, crowded with the apparatus and paraphernalia of the craft, and with its murky walls and bare beams blackened and discolored by age and metallic exhalations. As a matter of convenience the test was made after banking hours in the early gloom of a winter's evening; and in the half light which struggled through the grimy windows the scene was strangely medieval. Aroimd the simken furnace a little group of intensely interested spectators was gathered; and as, from time to time, the furnace covers were raised, the white-hot radiance streamed forth on their intent faces with dazzling brilliancy, producing light and shadow effects that would have delighted Rembrandt This, as the magician-in-chief added his materials, 126 INVESTIGATION OP AN ENTERPRISE stirred the molten mixture with his rod, and from time to time cast his mysterious powder into the crucible within, rose and fell, changed hue, and was obscured by dense and curiously colored fumes. Only the wand and the flowing robes of the alchemist were lacking to complete the effect. The scenic effects were, however, the only satisfactory results of the demonstration. Otherwise it was a complete failure. At the end of the operation the spelter was still spelter, and the magician-in-charge merely a warm and perspiring gentleman, much occupied in trying to explain the absence of results. The investigation practically ended there, and the whole matter was dropped. It subsequently transpired that the gentleman had been the victim of his laboratory assistant, who, through the medium of a hollow stirring rod, and for purposes not remotely connected with the perquisites of his position had surreptitiously introduced enough copper into the "home demonstrations" to produce brass. An Asphalt Development I. The Conditions. Another enterprise within the experience of the writer was the development of an asphalt deposit. The undertaking was entirely legitimate and well within the scope of ordinary business, but its investigation was rendered difl&cult by the dominated condition of the asphalt industry, the remote location of the deposit, the peculiar features of the material, the lack of asphalt experience on the part of those interested, and the impossibility of securing assistance from reliable technical experts. The "dominated" condition of the asphalt industry and some of the other difficulties encountered in this particular investiga- tion no longer exist in that industry, but the illustration is in- cluded here because it brings out clearly features and conditions that are frequently encountered when enterprises are undergoing investigation. NON-SPECULATIVE ENTERPRISES 127 The property was located in Oklahoma, and any clear reading of its title was at that time difl&cult. The deposit consisted of an immense perpendicular vein or lead of sandstone 50 to 200 feet wide, impregnated with asphalt. This vein was exposed on the surface, went down to unknown depths, and extended for a mile or so on either side of the point selected for investigation. It was developed to a very limited extent, the work done consisting of a large open pit 15 or 20 feet deep with a cross-cut of some 15 feet at the bottom. A small refining plant had been in operation on the deposit, but unfortunately was burned a few weeks be- fore the investigation was undertaken. At that time the production of asphalt was controlled by the Barber Asphalt Company with practically every competent as- phalt expert in the United States in its employ. Also the various concerns using asphalt were so closely allied, or tied to the " trust" that information was not only difi&cult to get, but when obtained was apt to be misleading. 2. Points to he Determined. Satisfactory terms had already been arranged with the owners of the deposit, and the principal points to be decided before the nature and value of the under- taking could be determined were about as follows: 1. Was the title good? 2. What existing demand was there for asphalt? 3. Was the material of a nature to meet this demand or any part of it? 4. Was the quantity of crude material sufficient to maintain commercial operations? 5. Could the crude material be refined on a commercial basis? 6. Could the refined asphalt be sold at a price to allow a satisfactory profit? 3. Preliminary Investigation. These points are not and, of necessity, cannot be arranged in exact logical sequence. They 128 INVESTIGATION OF AN ENTERPRISE are, however, all vital points, and were investigated simulta- neously in a preliminary and somewhat superficial way to deter- mine whether the probabilities were good enough to justify a more thorough investigation. In this preliminary work a personal inspection of the property convinced the interested parties that the quantity was likely to be more than sufficient, also that some modification of the refining process already in use would give a practical and economical method of separating the asphalt from the sandstone in which it was found. The matters of title, of demand, and of market were more difficult. The title came through the Chickasaw Indians and seemed decidedly doubtful. It was, however, passed, pending further investigation, upon the assurance of the owners — rein- forced by the statement of other responsible parties — that it was the best that could be secured, and that large and valuable coal mines in the general neighborhood had been operated for years under similar titles. The question of the market for the material could only be settled far enough to show that very large quantities of asphalt were used annually in the United States for paving, varnish, paints, and waterproofing, and that the price ranged from $20 to $200 and upwards per ton, depending upon the kind and quality of the asphalt, and the veracity and imaginative powers of the informants. The results of the preliminary research were deemed suf- ficiently favorable to the property to justify a more searching investigation. 4. Title and Quantity. The question of title was then sub- mitted to attorneys who reported that while it was not satisfac- tory, it was the best that could be had at that time; that it was the same as that of other mineral properties then being operated in the neighborhood; that it would probably hold, and if so could be perfected later when the mineral properties belonging to the NON-SPECULATIVE ENTERPRISES 1 29 Indians were formally opened for lease or purchase. It was de- cided to accept the title if the other conditions were favorable. To determine the question of quantity, the services of the state geologist of Texas — a personal friend of the interested par- ties — were secured. This geologist, after careful investigation and measurements, together with drilling to determine depths and a consideration of the general geologic structure, reported that the quantity was su£&cient to justify a large commercial development of the property. He also expressed his opinion that the asphalt was of excellent quality, but as he was not a specialist in this line his opinion was not looked upon as decisive. 5. Cost and Production Problems. As no other sandstone asphalt was being mined at the time, the investigation of the cost and method of producing refined asphalt could be established only by the erection of an experimental plant. This was next undertaken, and a small plant was erected on the site of the former works. This plant showed that the asphalt could not be produced profitably on a small scale at the prices then obtainable, but gave ample grounds for the belief that with a larger produc- tion the cost could easily be reduced to a point at which profits were possible. This plant also gave opportunity for improvements in the process and the character of the machinery employed, and furnished all necessary samples and material. It also gave the basis for a fairly reliable estimate of the cost of a larger commercial plant. While this demonstration of production methods and costs was in progress, many of the other important features were deter- mined, such as water and fuel supply, methods of mining the crude material, manner of handling the refined asphalt, etc. 6. Quality and Value. The determination of the value of the product was by far the most difficult feature of the investigation. The general asphalt industry was, as stated, in the hands of a strong monopoly which strenuously resisted invasion of any por- tion of the field and refused information of any kind, save such as would mislead. 130 INVESTIGATION OF AN ENTERPRISE As a simple and practical method of getting information as to the quality and value of the material, samples were sent to a num- ber of users of asphalt, who were asked if the material could be used by them and, if so, at what price. Much information was obtained in this way, almost all of it imreliable or unrelated and therefore worse than useless. Finally by dint of persistent effort and inquiry extending over a year, a general knowledge of the real situation was obtained. This information came from independent dealers, from the users of asphalt, from experts, from direct personal work, and from the employees or ex-employees of the monopoly. A few asphalt ex- perts were found who were willing to undertake investigations of the material and make at least partial reports, reliable so far as they went. Others were willing to give guarded information on special points and — checking one against the other — all this, in cormection with the accumulated information from the many different sources drawn upon, gradually pieced out a reasonably fair, full, and accurate knowledge of the whole situation. As to material, the final determination of the matter was that the asphalt was of unusual purity, much resembling the excellent asphalt known as "Bermudez," was quite suitable for paving and roofing, and, when refined to the proper point of hardness, excel- lent for paints and some grades of varnish. As to price, it was determined that the material could be produced at a cost of from $15 to $18 per ton, and that its sale price in moderate quantities would range delivered between $25 and $40 per ton according to condition, location, etc. As to the market, it was settled that a sufficient demand to justify development could be worked up for the material at these prices — prices which after payment of trans- portation charges left a satisfactory margin of profit. 7. The Results. All this was ascertained from what was prac- tically the investigation of the undeveloped property, as the Httle plant that was erected and the very limited sinking and drifting that were done could hardly be called development. At the con- NON-SPECULATIVE ENTERPRISES 13 1 elusion of the investigation, however, the parties having the property in hand were in a position to present their enterprise to capitalists with some reason for expecting a favorable considera- tion. This was done, and after much discouragement and many failures, strong and competent parties were found who agreed to take the property up, erect a fair-sized plant, and operate it on prescribed terms. These terms were reasonable, and the arrange- ment would have been consummated but for an unfortunate dis- agreement among the parties controlling the property. This effectually tied up the whole enterprise; shortly after the Httle plant was burned a second time, and the property remained for years unworked, deserted, and in a condition of most melancholy desolation. Investigation of a Fire-Brick Property I. The Property. The great difi&culty in the investigation of the asphalt property just discussed lay in the very effective op- position of the monopoly which then practically controlled the asphalt business of the coimtry. In an ordinary enterprise this difficulty would not exist. Expert assistance, as a rule, may be obtained with the certainty of full and reliable reports, the general conditions may be easily ascertained by direct investigation, and, where necessary, working tests can be made with but little trouble or expense. As an illustration of the investigation of an enterprise of this nature, the contemplated development of a silicate clay bed sup- posed to be suitable for the manufacture of refractory fire-brick may be briefly considered. This bed lies exposed in the side of a low bluff almost abut- ting on the railroad track. The title to the property is un- questioned, it can be obtained on reasonable terms, and the location and general character of the beds are such as to establish the fact that the quantity of clay is sufficient. Transportation is at hand at a fixed and satisfactory rate and the demand for fire- 132 INVESTIGATION OP AN ENTERPRISE brick is reasonably large and constant at a known and steady price. The only important points left for investigation before the value or the possibihties of the development can be reasonably well determined are: 1. The qualities of the clay. 2. The qualities of the product. 3. The cost of production. 2. Testing the Clay. The investigation necessary to establish these three points may be outlined as follows. The nature and value of the clay up to the point of the finished brick may be easily and cheaply settled by sending a sufl&cient quantity of the material to nearby brickyards. Here at small expense it may be worked, molded, and burned with the apparatus and equipment there in use. If these brickyards should decline to assist in the establishment of a possible competitor, more distant brickyards must be resorted to where an actual trial may be made. In such case the total cost would be more, but stiU very moderate. In either case a practical working test of the clay would be secured that would determine its behavior and the appearance of its product under conditions that hardly permit of error. In addition to this actual test, the nature of the clay and its products might also be determined — and should be determined as a check on the working test and as a general precaution — by ex- pert testing and analysis. In this way its exact composition may be ascertained; and, as the requisites of a good fire clay are well- known, the value of the particular clay for this purpose could be decided almost as positively as by a working test. There is no difficulty in finding competent chemists and engineers who make a specialty of such work, and their reports can be relied upon. 3. Testing the Product. The endurance and general value of the finished brick may, of course, be determined by an extended practical test and should be so determined so soon as possible. It may, however, also be ascertained and almost or quite as NON-SPECIJLATIVE ENTERPRISES 133 reliably by expert tests. By actual trial the expert can deter- mine with exactness the strength of the brick, its durability, resistance to heat, cold, and the other details of importance in this connection. 4. Cost of Production. The nature of the clay and the quality of the product having been settled, there remain only the cost of production and the cost of marketing to be considered. The pro- duction cost may be easily determined. The cost of digging the clay may be determined by estimate, checked by the cost figures of neighboring brickyards, or by actual trials. The problem is a simple one and the solution easy. The cost of manufacture also is a matter already well known, imless special difl&culties are encountered in the particular clay. If such difficulties exist they should be detected both by the working trials of the neighborhood brickyards and by expert analyses and investigations. If special difi&culties are found, the cost of manufacture should be deter- mined by working tests on a larger scale at the neighboring brick- yards. The local cost of fuel and labor are, of course, a mere matter of inquiry and, this settled, the only items of production cost still undetermined are any expenses of handling due to the particular location, which may be estimated by an expert with accuracy, as the whole matter is one of general knowledge. In this case every point requiring investigation is capable of being decided positively, and if the results are favorable, the enterprise should, as a matter of course, be successful. If, how- ever, uncertain elements are introduced, such as new and untested machinery, or a proposition to manufacture brick for street pav- ing from an imtried clay, or for the production of a new facing brick of a special form, texture, or color, the investigation is likely to be much more compHcated. A brick "proposition" bringing in some of these disturbing features is discussed in the following chapter. CHAPTER XII INVESTIGATION OF SPECULATIVE ENTERPRISES Speculative and Semispeculative Enterprises Speculative enterprises, as stated in the preceding chapter, are those in which the risk is greater than in the ordinary business enterprise. Oil developments in a new territory are excellent examples of a highly speculative undertaking. Dr. Butte, of the Texas State Railroad Commission, in a recent report on the oil industry in the state says: "Of the 1,051 companies that were organized to drill on the townsite of Burkburnett, less than fifty have paid any dividends, or even met their own expenses." Speculative enterprises may be divided into those of a semi- speculative nature and those of a purely speculative nature. The distinction is entirely one of degree. In the semispeculative enter- prises the uncertain quantities may usually be worked out at a comparatively small expense, or perhaps by partial development, while in the purely speculative enterprises a considerable measure of development must be attained before the real value of the undertaking can be determined. It is, naturally, the object of the owners or promoters of an enterprise of a speculative nature to bring it as quickly as possible to the basis of an ordinary business risk — that is, to develop it to the point where it passes from the realm of speculation and becomes an investment proposition. The Paige Typesetting Machine The history of typesetting machinery affords excellent illus- trations of the semispeculative enterprise. Here, in the early days, the only unknown quantity or uncertain element of the whole undertaking was the possibility of producing a machine that would rival the work of the hand compositor, or approach it 134 SPECULATIVE ENTERPRISES 135 closely enough for practical use. Everything beyond this was a matter of common expert knowledge. The possibiHty of an operating machine was, however, a debated question. Many printing experts believed it impossible. Mark Twain expressed this feeling very clearly in commenting on the typesetting ma- chine in which he became interested: "I knew all about type- setting by practical experience and held the settled and solidified opinion that a successful typesetting machine was an impossi- bility, for the reason that a machine cannot be made to think and a machine that sets movable type must think or retire defeated." The problem of producing a practical typesetting machine was undertaken by a number of inventors. The most conspicu- ous of these mechanisms was perhaps the Paige machine, which was brought into unusual prominence by Mark Twain's connec- tion with the enterprise, as well as by the ingenious intricacy and mechanical beauty of the machine itself. The most successful was the linotype . The one doubtful point when Mr. Paige began his work was his ability to construct a practical typesetting machine. The condition of the art was well known and there was no question as to the demand for such a machine. At the time Mark Twain became interested in Paige's work considerable progress had al- ready been made. The mechanical principles of the mechanism seemed sound, Paige's ideas appeared reasonable, and after in- vestigation the parties interested decided that the probabilities were in favor of success. As stated by Mark Twain, " Here was a machine that was really setting type and doing it with swiftness and accuracy, too." The history of this unfortunate undertaking is told in some detail in a subsequent chapter.' Its salient features were con- tinual demands for money, long delays, and heavy expenditures, resulting in the final completion of a machine which, while a mar- vel of mechanical ingenuity, would not stand the hard usage of '■ Chapter XIX, "Experimental Work and Model-Making." 136 INVESTIGATION OF AN ENTERPRISE everyday operation and was therefore an absolute failure — save as an object lesson. The Linotype The history of the linotype machine, on the other hand, affords a striking example of success. In this an entire departure was made from the principles employed in any typesetting machine previously attempted. The inventor took the ground — at that time entirely novel — that the successful machine must make its own type and do it in such a way that the ordinary difl&culties of mechanical tjT)esetting would be avoided. His idea was ap- proved and the use of movable type such as is employed in hand composition was abandoned. The line was adopted as the unit, the machine when operated setting type molds in place instead of setting type, and on the completion of a line of molds of the de- sired length, casting the now well-known linotype slug. This forms in one solid piece a complete "line of type" matter, and from this feature the machine derives its name. The plan was original and striking. Its execution was daring and brilliant. Details of the numerous mechanical difficulties that were overcome, and of the unfortunate differences between the inven- tors and constructors of the machine, are uimecessary here. It is sufficient to say that the idea was worked out to operative per- fection — first so that the machine could be profitably employed, principally on account of its rapidity, on rough newspaper work; then, as the mechanism was still further perfected, on book work; and beyond this, yet further, until now it is used in every branch of the printing industry. It has been and is a complete and strik- ing success, and the profits to those connected with it have mounted up into the millions. The Uncertain Element in Typesetting Machinery In the cases of both the Paige machine and the linotype, in- vestigation was conducted intelligently and as far as was possible. SPECULATIVE ENTERPRISES 137 Most of the conditions were known. The question of patents, while perhaps not absolutely certain, was sufficiently so to be left for future determination. In either case, as stated, the only mate- rial uncertainty was the construction of an acceptable operating machine. So even did the chances of the two machines appear before their completion that the backers of the linot5^e offered to exchange a half-interest in their machine for a half-interest in the Paige machine — an offer which, unfortunately for the Paige people, was refused. In both cases the possibihties of loss and profit were clearly recognized and accepted in advance. In the one case the matter was successfully worked out; in the other it was not. In the one case hundreds of thousands of dollars were lost — in the other millions were gained. In the case of the linotype, as soon as a practical operating machine had been constructed the whole enterprise was removed from the speculative class. Thereafter it was an investment enterprise depending mainly on good management — which was forthcoming in fair measure — and liable only to the risks of or- dinary business. It may be noted that at the present time if a new mechanism of the typesetting class were under consideration, the uncertain element might perhaps include the possibility of the particular design being worked out to operative perfection, particularly if it were a material departure in principle from the machines al- ready perfected, but would hinge more directly on the possibility of constructing a machine so comparable with existing machines as to make it worth while — to give it a place in practical printing — to enable it to make its way against present-day competition. Speculative Enterprises In the more purely speculative enterprises the uncertainties extend further than in the instances just considered — so far, in fact, that frequently the only way in which the value of the enter- prise may be conclusively determined is by actual development. 138 INVESTIGATION OP AN ENTERPRISE Thus, in the case of some mining and oil prospects, and of many inventions, the only satisfactory investigation is by an actual "try-out" — that is, by a more or less complete development. As a consequence such enterprises while usually holding out large possibilities of profit also involve a proportionately large measure of risk which can only be avoided by avoiding the enterprises. The investigation of an enterprise of this kind can only deter- mine the possibilities. If the possibilities are good, the develop- ment of the enterprise will presumably be undertaken and may result in success. If they are not good the enterprise should be let alone, as in perhaps ninety-nine cases out of a hundred it will be a failure. Mining Prospects — Speculative Possibilities The two great fields of speculative enterprise are mining and invention. In these modern days, however, science has seized upon the field of mining and has eliminated much of its former speculative attraction. Prospects, "grub-staking," strikes of rich ore, and the other unlimited possibUities of concealed riches in a mine still serve to keep up speculative activity, but as a rule any intelligent man desiring to engage in minin g — save as a pros- pector or small investor — secures the services of an expert and goes in on a strictly business basis. The general geological forma- tion is noted, surrounding conditions and neighboring mines are investigated, the particular mine is carefully studied, its possi- bilities are, by expert diagnosis and the diamond drUl, traced out and mapped, and the whole matter is brought down to the basis of prosaic system. When, however, we come to the prospect, much of the old romantic interest still survives. The expert is, as a matter of course, employed to investigate, and does his scientific best, but the information obtainable is so scanty and expert opinion so greatly at variance, that the whole matter is usually left well within the realm of speculative possibilities. SPECULATIVE ENTERPRISES 139 The following discussion of mining prospects and their investi- gation brings out with much clearness both the possibilities and the procedure when the realization of these possibilities is under consideration:^ There is no line of business in the world where greater differences of opinion are found than in the calculation of a prospect. This is due not only to the lack of definite information on which the valuation can be based, but also to differences in the experiences and attitudes of the different ones making the valuation. . . . When handled in the proper manner there is perhaps no line of business which ofiers and has actually delivered such large returns on the initial investment as in successfully developed prospects, and where the same amount of personal attention and experience has been used as is necessary in any ether line of business, the failures have been comparatively few. As a proof of this statement it is only necessary to look over the list of the fortunes in this country and see which of them were originally founded on an investment in a prospect. . . . Valuation of Mining Prospects " Hunches " are commonly supposed to be the basis for most opin- ions on a prospect, and to the uninitiated it often seems that they are responsible for the purchase of certain properties which have turned out to be big paying propositions. Luck also is credited with a great deal of this success, but in most cases where the "hunches " or luck has turned out to so good advantage it is noticeable that the man who did the buying with these factors in his favor was usually a thoroughly experienced man, with keen perception and good judgment, who knew the earmarks of a mine when he saw them. He is usually one who has spent years in and aroimd mines, and had made good use of his time and eyes in observing the points which go to make up a mine. . . . The task of valuation of a prospect would be easy if all surface showings or outcrops which resemble those of a producing mine posi- tively indicated the same mineral content, tonnage, and other factors as in the producing mine which they resemble, but if exceptions are considered as proving any rule, the exceptions to this rule would prove it oftener than the examples which are found agreeing with it. In other words, although the majority of producing mines do have out- 2 Geo. R. Fansett in Bulletin 78, Arizona Bureau of Mines, University of Arizona. 140 INVESTIGATION OF AN ENTERPRISE crops or surface showings which are comparatively similar ia their respective classes, it does not mean that a prospect having similar sur- face showings will necessarily develop into a producing mine. The common saying among miners that " all the rocks necessary to make a mine are present, but very Uttle, if any, mineral is present, " is only too true, and it is this factor which makes it difficult for any two men to form the same estimate of a prospect; the valuation may range from zero to a bonanza. This is particularly true with prospects which are located in re- gions where there has never been a producing mine developed, when nothing but the geological factors can be considered. If, on the other hand, there are mines which have produced or are producing near at hand in that section the task of valuation is much simplified, provid- ing the prospect lies in the same zone and has the same geological features as that of the producing mine. Much data from the de- veloped mine can be used in helping to form an opinion of the prospect and, as is commonly known, this fact has been responsible for the pur- chase and developmeni of some of the largest mines of the world. . . . Investigation of Mining Prospects Since the valuation of a prospect usually depends upon the value of the ore at or near the surface more than upon any other factor, the first thing to be done after a careful inspection of all exposed parts of the deposit has been made is the taking of samples. The method used and the handling of samples after they have been taken before they are assayed, as weU as the method used for measuring the width of the vein, were explained in Bulletins 63 and 66 of the Arizona State Bureau of Mines. The values obtained from the assays of these samples are used for making the calculations for the estimate, and for this reason each sample, when assayed, should be run either duphcate or triphcate, so as to eliminate any chances of error which might arise. At the time the samples are being taken it is good policy to take specimens of the rocks from the outcrop and from the surrounding rocks as well as the country rock. These are later used to make a study of the geology of the property, to determine the manner of ore deposition. The deposit is also surveyed at this time, a map being made from the survey to be used for recording the locations and values obtained from the assays of the samples. SPECULATIVE ENTERPRISES 141 If favorable results have been obtained from the assays, indicating that the prospect is worth further attention, it is then advisable to have complete chemical and metallurgical analyses run on the sam- ples, to determine if any unexpected valuable minerals are present and if the ore is amenable to reduction or treatment by the common or known processes at a price which will aUow the ore to be handled at a profit. This is very important, as often the values obtained from the ordinary assays may be high enough to indicate a bonanza, but when subjected to these tests the treatment may be found to be so difficult or expensive that at the time the tests are run the ore may be prac- tically valueless. Likewise from these tests the kind of treatment, the machinery and equipment necessary for doing the work can be determined and a close estimate of their cost can be made. AH of these matters have considerable bearing on the valuation and most certainly should be taken into consideration to prevent costly mistakes. . . . If, in the judgment of the party making the valuation, the prop- erty offers sufficiently favorable evidence for further investigation, factors which are of a more certain and definite nature are then taken into consideration; the costs of the necessary equipment, machinery, buildings, tools, supplies, and other necessities along this line can be fairly closely estimated. A close study of the water, fuel, timber, transportation, climatic and health conditions should be made, as weU as an investigation of the general and local governmental regula- tions and the rigidity with which they are enforced. The costs of erecting the necessary machinery, timbering, mining, road building, the supply and kind of labor available for this work, as well as the kind of management which is expected to handle the development, represent a few of the different matters which have to be taken into consideration, all of which have more or less bearing on the success of the enterprise, and which if not duly considered, may make a poor investment appear like a particularly good one. . . . Speculative Possibilities of Oil The realm of oil with its hidden stores of crude petroleum and reservoirs of natural gas, has largely escaped the deadening influ- ence of modern science and system. Every wild-cat well is a "shot in the dark," with wonderful possibilities. A twenty- thousand barrel well is easily within the prospector's range of 142 INVESTIGATION OF AN ENTERPRISE vision. If he strikes oil it means that milHons are his. If instead he strikes a "duster," it means that he has lost even that which he had. Nevertheless he is ready and anxious to try again as soon as he can beg, borrow, or otherwise accumulate enough to make the attempt. The fascination and the speculative possibilities of oil, the gambling spirit it arouses, and a certain phase of the psychology of promotion are brought out strongly in the quotation which follows describing the excitement attending the "drilHng-in" of a prospective oil well near Benavides, Texas. It was purely a wildcat proposition, for at that time there was no important pro- ducing oil well within 300 miles of Benavides and no very good reason for supposing that one would be found in that location. The thing that caused and stimulated the excitement over this well was the confidence that was shown by the company in the success- ful outcome of the project. The weU reached a depth of 3,490 feet several weeks ago, and the report was immediately noised about that oil had been struck. At first oil men and speculators paid little atten- tion to this report, but when the company began cementing the hole, laid a pipe line from the well to Noleda, on the raUroad, erecting load- ing racks and a steel storage tank, it was taken for granted that aU this would not be going on unless oil had either been struck or was about to be found in big quantities. It was then that the real excite- ment began, and it soon reached a point the like of which was never before witnessed in any wild-cat locality. The inpouring of oil operators, lease speculators, get-rich-quick promoters and others who belong to the tag-end of the industry con- tinued for several days until the town was filled to overflowing and many of the visitors were forced to seek accommodations elsewhere pending the outcome of the "driLing-in" operations. From Laredo, San Antonio, Houston, Corpus Chris ti, and the oil towns of the more northern part of the State interested spectators came by the himdreds. Scores of them made the journey in automobiles. The rush far ex- ceeded anything ever before witnessed in the history of wild-cat pros- pecting in Texas. Then came the climax. Announcement had been made days in advance of the resumption of drilling operations that the work of SPECULATIVE ENTERPRISES 143 putting the finishing touches on the well would begin at a certain time. With the stage all set and the great crowd of spectators grouped around the derrick the drill was started again in the bottom of the 3,490-foot hole. "It's going to be a gusher, boys," yelled a man who had paid $25,000 for an oil lease on 100 acres of land close to the hole. " I'U give you $50,000 for your lease, " challenged a new oil million- aire from Wichita Falls. "Nothing doing," was the reply. Contrary to original expectations, the drill did not get down to the sand where oil was beheved to exist in big quantities until two days after the work was resumed. Instead of the delay diminishing the excitement, it grew hour by hour. Hundreds of thousands of dollars were paid for the oil rights to land within a radius of 10 to 15 rmles of the wild-cat well. Leases close around the hole sold readily for $350 an acre, while as far distant as 12 miles practically all the land was leased for varying prices, but none lower than $5 an acre. . . . More than 48 hours after drilling was resumed in this wild-cat hole the sand was reached and a small showing of oil was obtained. From a commercial standpoint, the well was a failure. . . . It is estimated that the owners of land who leased their properties for Is to $250 an acre made several million dollars out of the bottom- less boom. ^ In this case it is difficult to avoid a suspicion that the few thousand dollars spent in cement, pipe hne, and storage facilities may have been a profitable investment. Investigating an Oil Property Even in oil we find most careful investigation so far as investi- gation can be profitably carried. The experienced oil man — who is usually the successful oil man — employs a geologist to deter- mine the possibilities of the field and the best locations for his prospective wells. He also employs his own experience gained in other costly efforts, to assist the geologist. He gets as near proved ground as he can for his test wells and he indulges in "wildcat- 3 Manufacturers Record, February iz, 1930. 144 INVESTIGATION OP AN ENTERPRISE ting" when it is the only way and when the indications are favorable enough, in his opinion, to justify the risk. The following outline of procedure is that of the up-to-date suc- cessful executive who carefully considers every side of a proposition before investing the money of his company in expensive ventures which may prove unprofitable. Assume that a well has been drilled in a new part of Oklahoma, with an initial production of 200 barrels per day. An 80-acre tract near this well is offered at $200.00 per acre. The executive imme- diately consults his geological and production departments regarding the possibilities of production being obtained, the probable size of the wells and the cost of operation. The geological department makes a careful detailed survey of the area surrounding the discovery well, mapping the surface structure, and, as far as possible, indicating the probable subsurface structure, basing the latter opinion on informa- tion gained from similar conditions in other pools in the vicinity and from any dry holes that may have been drilled in the area imder consideration. Statement of Conditions The report shows that the discovery well is located structurally on top of a dome covering about 1,000 acres and that the producing sand was encountered at a depth of 3,200 feet. The 80-acre tract imder consideration is about halfway down the dip on the dome, and the probabilities are that wells of 100 barrels initial production will be developed. The production department estimates that a well of that depth will cost $50,000.00 (the actual average cost of a well of this type in 1919 drilled by one of the large companies was $47,134.48), and that it wiU cost 70 cents per barrel to lift the oil. The production engineer compares the conditions indicated by the new well with a similar condition existing in the old and better known fields and finds that on an average a well in the Mid-Continent field produces 32.3% of its ultimate production in the first year, and that a well in this assumed locality will, with an initial production of 100 barrels per day, produce during the first year 9,500 barrels of oU. The royalty on a lease is usually one-eighth delivered to the pipe line free of cost. The lifting cost is, therefore, appHed to the gross barrels lifted. The gross production and local taxes amount to 4% of the net oil. SPECULATIVE ENTERPRISES 145 Estimating the Value The value of the acreage is as below: Expenses first year, exclusive of overhead: Drilling $50,000.00 Equipping 5,000.00 Lifting 9,500 bbls. at 70 cents 6,650.00 $61,650.00 Income first year: Gross production 9,500 bbls. Less: Vs royalty 1,188 " Net production 8,312 Less: 4% taxes 333 Net barrels 7,979 " at $3.50 27,926.00 Loss first year $33,724.00 As 9,500 barrels is 32.3% of the total production of the well, the total production would be 29,400 barrels, or, deducting the oil already produced, there are 19,900 barrels to be produced during the life of the property. Gross bbls. in ground 19,900 Less: Vs royalty 2,487 17,413 Less: 4% taxes 696 Net barrels 16,717 16,717 bbls. at $3.50 $58,509.00 Less: Lifting cost 19,900 bbls. at 70 cents 13,930.00 l44,S79-oo Less: Loss first year 33,724.00 Gross profit on one well $10,855.00 From the above gross profits the portion of the bonus for the lease and the overhead expense chargeable to the well must be paid. Interest on the investment must also be charged. It is evident that VOL. I — 10 146 INVESTIGATION OP AN ENTERPRISE the purchase is not warranted. This is an exact review of a problem presented to the writer by a client. . . . In the example given if the sand had been 1,800 to 2,000 feet in depth, the lease would have been profitable. If such had been the case the drilling cost would only have been one-third the cost of a well 3,200 feet deep. If the tract had been better located it would have made weUs of 200 barrels initial capacity and the purchase would have been advisable. . . . The above methods are used by practically all the successful companies in the oil business. * * Mawiy B&tesin Maeanine of Iht New York Petroleum Exchange, November, 1920. CHAPTER XIII INVESTIGATION OF SPECULATIVE ENTERPRISES- INVENTIONS Speculative Possibilities of Inventions In invention we find the whole field still untouched by the cold hand of science. Here until the new device is fairly well crystallized the trained expert is at a discount. No matter how penetrating his intellect nor how great his ability, he cannot block out the inventor's brain and announce the values in sight. He cannot even make a reliable prediction as to what will be accom- plished by the inventor, or, save in the most obvious of cases, by his invention. Whenever the design is unique or conditions are new, the best of machinists or mechanical engineers can do but little more than guess — and frequently they do not even guess intelligently. Nor is the uncertainty at an end when the vision of the inven- tor has crystallized in tangible form — when the invention emerges a completed and presumably a usable mechanism. Especially is this true when the purchasing public is the arbiter of its fate. Then the decision is hard to foretell. After all has been said, one must conclude that the exploitation of a new invention, intended to meet a general demand — ^like a new col- lar button, a new hairpin, or even a new camera — is at best a mere gamble. The psychology of the "people" is so complex that the value they wiU place on a new article is absolutely unpredictable; the pubUc buys because a new device or a new toy takes its fancy, whether if be automatic cameras or automobiles. The best that the promoter can do is to distribute his risks by giving a variety of new inventions a chance to show their power of attracting the public demand and in- . vesting in each at first only enough to test the probable market. The successful promotei of such enterprises gradually acquires skill in 147 148 INVESTIGATION OP AN ENTERPRISE interpreting the probable market for the article from the first signs of the public's attitude toward it. But even with the most consum- mate skiU at his command, such promotions are mere gambles. ' Speculative Features of the Telephone The early history of the telephone is a striking illustration of this uncertainty as to the public reception of a new invention. Who could foretell its future? The nearest existing device, the telegraph, was a working success but there was no real basis here for estimating the field or the future of the telephone. The design and the purposes of the new device were entirely beyond all ex- perience and the estimates of its value were absolutely divergent. The majority opinion, very freely expressed, was that the tele- phone would never come into general commercial use. It is doubtful if any, even of its friends, foresaw in it one of the com- mon necessities of business and social life. The objections urged against it — that it was only a toy, that it would be a nuisance in the office, that messenger and office boys were entirely adequate as a means of communication, and that generally the idea was visionary — are all familiar to the older generation. So valid did these objections appear at the time that great difficulty was ex- perienced by Bell and his associates in ffiiancing the invention. Not even the experts were anxious to invest in the new enterprise — an enterprise in which, as numerous prospectuses have since informed us, "every dollar originally invested has increased a thousand fold." In the case of the telephone there was no question as to the ability of the mechanism to transmit speech. The doubtful point was whether the people wanted it to transmit speech — whether the facilities already in use, the mail, the telegraph, the messenger boy, and the personal visit were not all-sufficient. Obviously, the majority of those best qualified to judge thought that the telephone had no place in modern business life. The ' Dewing, "Financial Policy of Corporations." SPECULATIVE ENTERPRISES— INVENTIONS 149 hundreds of millions of dollars now invested in the telephone show that they were badly mistaken. Only a practical test could have demonstrated the fact. Speculative Features of the Phonograph Take another instance along the same general lines, but with a very different termination — that very interesting invention, the phonograph. Here from the first a strong impression prevailed — which it may be said should have been reaHzed — that the inven- tion had a brilliant and immediately profitable future. The his- tory of the telephone was apparently to be repeated and there was a rush of investors, both experts and ordinary people, to participate in the rich returns. History was repeated, but it was not the history of the telephone. The first attempts to introduce the phonograph were failures, and the majority of the original participants lost every dollar invested. In this case the inventor and those interested believed, and not without reason, that the phonograph and the kindred devices that soon after made their appearance would find their wide and profitable field of usefulness in the business world. They were to be employed in the ofiice as an assistant to, or substitute for, the stenographer. So thoroughly were the promoters of the invention convinced of the correctness of this position that they actually discouraged the employment of the machine for amusement pur- poses on the ground that such use would cause it to be looked upon as a toy and retard its introduction in its best and most profitable field — the business ofl&ce. In the financing and first exploitation of the phonograph, com- parisons were constantly made between it and the telephone, with the idea that the phonograph was a somewhat parallel invention that would come into general business use in much the same way. Likewise, pursuing the same policy as the telephone company, the phonograph was to be leased, not sold. But for some reason the phonograph did not take with business men — ^probably be- 150 INVESTIGATION OP AN ENTERPRISE cause it was not so well adapted to their use as it could and should have been. Be this as it may, from the standpoint of business use the invention was a dismal failure. A few lingered in ofl&ces here and there to show that there was some virtue in their com- mercial application. Later, perfected machines, better adapted to the requirements of the business man, were introduced with considerable success and are now widely used. As its history has shown, the easiest, the largest, and the most profitable field for the phonograph and the related machines was and is in the world of entertainment. Also it has shown that the leasing idea was wrong. At the present time mmierous compan- ies with many millions of dollars of invested capital are engaged in the manufacture and sale of sound-reproducing machines, and of records to be used with these machines, and their profits have been eminently satisfactory. It is in this direction that the few of the original investors who really profited by their connection with sound-reproducing machines have made their money. It is somewhat difl&cult to explain the mistake. Even Edison with his prophetic vision seems to have concurred in the fatal blimder. Apparently those interested were so sure that the phonograph, in some unexplained way, paralleled the telephone, that they followed its methods of exploitation blindly and without the intelligent consideration that would have at least suggested that entertainment was the easier, the wider, and the more profit- able field. Their experience should emphasize the fact that in the realm of invention investigation should be more rigid than in almost any other field. There is risk enough at the best. Every feature of uncertainty should be removed as far as possible so that the risk that still remains shall be reduced to its lowest and clearest terms. Inventor's Estimates In considering a new invention, the estimates of the inventor himself are but rarely rehable and are to be accepted not at aU, SPECULATIVE ENTERPRISES— INVENTIONS 151 or with much caution — ^not necessarily because of any intention to deceive on his part, but from the nature of the case. An inven- tor is naturally an optimist; a pessimist does not have the cour- age of invention. The inventor then, an optimist to begin with, ignores adverse conditions, is ever on the look-out for favorable indications, is watchful for facts that coincide with his theories, is oblivious of those that do not, and stakes his time, his money, and his efforts on the successful outcome of his design and of its value when perfected. Under such circumstances, the inventor is, to say the least, not an unbiased judge of either the merits or the value of his invention. His opinion may be useful, but it should never take the place of the most searching investigation that can be made. It is, of course, always possible, though not probable, that a proposed mechanism will do all that its inventor claims for it. It is also possible that it may prove so entirely new in operation and imique in construction that patent protection is merely a matter of application. All this may be true, but it must be re- membered that the wisest of men, Solomon, who was himself quite willing to take chances on occasion, expressed doubts as to the absolute novelty of anything, and his father, David, in a some- what heated generalization, intimated that false representation is common to all men. As a matter of fact, to venture money on the unsupported anticipations of inventors is even more reckless than "bucking the tiger," cornering wheat, or staking one's all on a wild-cat oil proposition. Financing an Inventor's Estimates An illustration of the results likely to follow any such unwise investment is afforded by the history of a company organized some years since. This company based its very liberal expecta- tions of profit on the merits of a newly invented and somewhat extraordinary apparatus for the manufacture of building brick. As conservatively estimated by the inventor, this mechanism — 152 INVESTIGATION OP AN ENTERPRISE or, to be more accurate, this train of mechanisms — was to mold, dry, bake, and deliver ordinary building brick of fair average quality at the astonishing rate of not less than 525,000 each day. The net profits of the company on this operation — as figured by the inventor — were to be at least $5 on each thousand of brick, giving a total daily net profit on each and every machine of not less than $2,625. If the mechanism had been properly proved these figures would indeed have been impressive, and the enterprise itself would not have been in the speculative stage. As a matter of fact, nothing in the way of investigation or demonstration had been undertaken by either the inventor or his associates. The mechanism itself then existed only in the form of neat designs on tracing paper; also with a fine disregard of ordinary business pro- cedure, patents had been practically ignored. Apparently the inventor reasoned that the mechanism, having been invented by him, could not fail to operate in accordance with his intent, and that for equally good reasons it would undoubtedly receive the fullest measure of patent protection whenever he found time to make appHcation. At any rate, acting upon some such belief and armed only with his designs and a large brick which he used for purposes of demon- stration, the inventor attacked a credulous public, and so success- fully that, with no further investigation than an inspection of the inventor's brick and a consideration of his statements, over $10,- 000 in cash was placed in his hands for immediate expenditure. This was followed by further subscriptions until between $30,000 and $40,000 was staked on the success of the somewhat mythical machine. Result of Financing an Inventor's Estimates At this point it occurred to a prospective investor that it might be wise to find out what basis the inventor had for his claims, and the possibility of the proper patent protection of the SPECULATIVE ENTERPRISES— INVENTIONS 153 mechanism. He discovered the real conditions, which were made* pubhc, and had a very disheartening effect upon the newly or- ganized company. Subscriptions ceased and shortly thereafter the whole undertaking lapsed into a condition of innocuous desue- tude. The investment of money in the instance just cited was reck- less to a surprising degree. The expenditure might have been fully justified if it had first been devoted to an investigation of the mechanism, and then, if the results of this investigation were favorable, to its proper protection and development. Most inventions do require money to protect and perfect them, and large sums are frequently and necessarily expended for this pur- pose. In the case of the brick company, however, the major portion of the funds subscribed was expended in the testing and leasing of convenient clay beds, the erection of docks, kilns, and buildings, and a thousand and one things necessary for the general business of a brick company, the construction of the apparatus meanwhile awaiting the completion of the setting in which it was finally to blaze forth in all its splendor. How the Invention Should Have Been Handled The inventor of the illusive brick machine was apparently honest in his belief and his statements, and personally benefited but little from the money entrusted to his care. This was, how- ever, no reason for omitting ordinary precautions. As already intimated an inventor's beliefs are always liable to be biased and a most rigid investigation should have been conducted. This should have been devoted to the machine itself, as the general condition of the brick industry was already weU known. The first step should have been an investigation as to patents. This whole matter might have been safely left in the hands of patent attorneys, and if their report showed that the mechanism was patentable and that no seriously conflicting patents or claims existed, the construction of a demonstrating machine might have 154 INVESTIGATION OP AN ENTERPRISE •been begun with reasonable safety. At the same time formal patent applications should have been filed at once. It is always possible in such a case that prior and conflicting applications might already be filed in the patent ofl&ce which — as applications for patents are not open to examinations — could not be discov- ered or be drawn out in any way, save by means of the patent application. If serious conflicts developed in the patent oj0&ce the construction work on the machine would, of course, be sus- pended until these conflicts were overcome, or satisfactorily settled in some other way. The amount and scale of construction work would depend largely on circumstances. The subject is discussed at some length in a subsequent chapter.^ Speaking generally, good business policy dictates the smallest mechanism that will give a practical test. In the case of the brick machine a fuU-sized construction would probably have been required. This construction, however, need only have covered the critical parts of the mechanism, that is, the parts that were different from existing mechanisms. As soon as construction had proceeded far enough the ma- chine might be tested with clay brought in for the purpose. Such testing would probably be sufficient to prove the principles in- volved, and, if the results were satisfactory, justify the construc- tion of a more complete machine on an operating scale. Should there, however, be any lingering doubt as to the practical working of the machine, the matter might be settled by installing the model in some brick-yard and operating it there for such length of time as was necessary. Usually long before the completion of the working model, patents would have been granted, or so many claims allowed that these public trials could be safely made. As soon as the machine was thoroughly tested and its patents secured, the whole nature of the enterprise would be changed. The more speculative or uncertain elements would be removed and the enterprise be brought to the basis of an ordinary business " Chapter XIX, "Experimental Work and Model-Making." SPECULATIVE ENTERPRISES— INVENTIONS 155 risk. With a demonstrated machine capable of producing good brick at a cost materially below that of any competing machines, the enterprise would become both safe and attractive and would justify the investment of any reasonable amount of money for development and operation. Investigation of Inventions The proper investigation of mechanical patents and patent- able devices, and the determination of their values, is usually a matter of much difficulty. Many uncertain elements are in- volved, depending to some extent upon the point which the in- ventor has attained before the investigation is begun. The invention may perhaps exist only in the mind of the in- ventor, or in more or less crude sketches. Sometimes the inven- tor will have constructed a small working model of the device or of its essential features. Sometimes his patents will have been secured. Occasionally he will have gone still further and con- structed a working machine on a commercial scale. The method of investigation will be governed largely by the stage to which the invention has been carried. When the invention has merely reached the stage of a design more or less completely worked out by the inventor, or even if a model has been constructed, the first inquiry is usually as to the general value of the device. Perhaps inquiries as to its patenta- bility might be instituted at the same time. Modified by the conditions of any special case, the investigation would take the following form: 1 . Is there a demand for the invention, if it is to be sold to the user, or its output, if it is to be operated? 2. Will the invention operate as intended by the inventor? 3 . Will it operate better or cheaper than other similar devices ? 4. Can it be given efficient patent protection? 5. Are the values determined by the preceding inquiries sufficient to justify the undertaking? 156 INVESTIGATION OP AN ENTERPRISE The Question of Demand Where the invention is of a standard machine, or an improve- ment of a standard machine, such as a typewriter, a reaper, an automobile, or an aeroplane, or some mechanism to produce a standard product, such as a loom, a brush-making machine, or a refrigerating plant, this first question of demand may be passed without investigation. It is obviously sufficient, provided the new machine possesses enough merit to control its fair share of the market. On the other hand, where the device is obviously unnecessary or impractical, the matter wiU end with this first query. Thus in a "non-refiUable" bottle, which was patented before the Great War familiarizea us with unusual devices for destruction, a car- tridge or small bomb was to be inserted in such manner as to ex- plode and blow the neck of the bottle to fragments when the cork was drawn. The device would imdoubtedly prevent the further use of the bottle but it did not meet with popular approval. While instances of inventions that are equally impractical or useless are numerous, the records are also full of patent applica- tions for mechanisms which, while designed for purposes suffi- ciently useful, could not possibly work on the proposed mechan- ical principles, or for useful mechanisms that might be made to work, but that would be inferior to other mechanisms already in operation. Furthermore there may be inventions in which the design it- self is so unique or the conditions under which it is used so differ- ent from those usually existing, that the estimate for the demand for it or its product, and consequent value, can, at the best, be little more than intelligent speculation. The telephone, phono- graph, wireless telegraphy, automobile, and aeroplane are all cases in point. Generally, however, inventions are sufficiently well within the boundaries of ordinary conditions to permit a fairly intelligent estimate of their probable demand and of their general value SPECULATIVE ENTERPRISES— INVENTIONS 1 57 if successful. Of course any such estimate is not intended to be final, and in practice is frequently far from correct. It is merely intended to indicate roughly whether a demand exists or can be created, sufficient to justify the further investigation of the device. In some cases, however, this preliminary determination of the demand will be so carefully made or be so satisfactory as to be final. In estimating the demand for an invention conservatism is most essential. It is here that the inventor is prone to err. Pos- sible users are to him probable users, and to him the number of probable users is the measure of sales. Nowhere else is the man of experience so badly needed as when such estimates are to be made, and very frequently the estimate of such a man is based on noth- ing more tangible than a feeling or belief. He thinks " we ought to sell about 10,000," and his " thought" is quite as likely to be right as the most elaborate estimate. An estimate is difficult when it must be based on the uncertainties of popular favor. The Question of Efficiency If the demand for the invention is decided in its favor, or must be deferred for later investigation, the next point concerns its efficiency. Will it do the work, and will it do the work better than other devices — has it special points in which it excels? If it caimot meet the competition of existing devices, it is obviously barred. The puzzling feature here is frequently foimd in the fact that a new mechanism will probably do the work better in some respects than existing mechanisms, but no better or possibly not so well in other respects. The probabilities must then be balanced to determine the prospects of success. If the mechanism will do the work as well as existing devices and the demand is large, and particularly if it is in the field of standard machinery, the new device may have a considerable future in spite of its lack of special excellence. For instance, at present at least two of the larger typewriter companies are per- fecting — or have perfected — ^portable typewriters, in spite of the 158 INVESTIGATION OP AN ENTERPRISE fact that there are already several very excellent portable type- writers on the market. It is practically certain that the new machines will meet with a good sale, provided they measure up fairly well with those already in the field, and at the same time they will not seriously affect the sales of the earlier machines. In such a case the sales organization counts for almost as much as the excellence of the machine. While all this is true if any large measure of success is to be at- tained, a new mechanism should in some way surpass the mechan- isms already in the field. A lower cost, enabling it to undersell competitors, or stronger structure, enabling it to outlast them, or some marked excellence of its output or of its operation, should ordinarHy exist to justify the entrance of a new competitor into an already well-filled field. The Question of Workability In many cases the operating excellence of a newly designed mechanism can only be determined by the construction of a model in whole or in part. There are cases where the principles involved in an invention are so simple, or so clear, or the mechanism em- ployed is so familiar, that its value is obvious, but when this is not the case an actual trial is necessary to demonstrate its prac- ticability. For instance, an inventor has designed a new farm tractor which, he thinks, has points of excellence over any other tractor on the market. There is a growing and profitable demand for such tractors, and the first question therefore is answered. The points to be determined then are the possibility of efl&cient patent protection and the excellence of the tractor itself as compared with other tractors. The matter of patent protection is discussed in the following section. The excellence of the tractor itself is a matter to be determined, first, by expert examination, and, second, and more important, by actual test. SPECULATIVE ENTERPRISES— INVENTIONS 159 The new tractor may be cheaper to build, easier to handle, more economical to operate, more certain in operation, or more durable than its competitors. It must, at least, measure up to its competitors fairly well in all these important details, or it is not worth putting on the market. To be really desirable it should have one or more material points of real superiority. Should it excel on all points it would be very desirable and could be financed and marketed without difl&culty. An engineering expert famiHar with internal combustion en- gines and the general problems confronting tractors of the kind could easily pass upon the basic principles involved and give a reUable opinion as to the working utility of the new mechanism. Nothing, however, would take the place of an actual and ex- haustive field test. For this purpose a full-sized tractor should be built and it should, if possible, be tried out in direct comparison with its competitors. The results of such a test, together with special tests for durability, dependability, etc., should then deter- mine conclusively the place to which the new tractor may reason- ably aspire. The Question of Patent Protection The investigation of patents will probably have proceeded simultaneously with the general investigation of the invention. Here the investigator unskilled in patent matters can do but little himself and the research must be entrusted to attorneys versed in patent affairs. In fairly simple matters an investment of $io to $25 with some capable patent lawyer will secure a search for conflicting patents and a fairly reliable opinion as to the patenta- bility of an invention. Also not infrequently the same lawyer — having patent applications in view — will, without additional charge, give an expert opinion as to the general merits of the particular invention. The search to determine whether the device may be patented I60 INVESTIGATION OF AN ENTERPRISE will bring to light any other similar inventions already patented, which may, in whole or in part, conflict with the invention under consideration, and therefore prevent its full patent protection. Occasionally a supposedly new invention is found to be abso- lutely barred from patent by these prior patented inventions. Again when applications for patents are made, other pending applications for similar devices, or for devices conflicting in part, may be discovered. Then, unless these interferences are decided in its favor, the invention is again barred in whole or in part. Usually, however, even if conflicting patents or applications exist, they may be overcome, or modifications of the device may be made so as to avoid the conflicting claims, or some arrange- ment may be made for the use of the conflicting patents, or fea- tures will be found in the new invention that do not conflict, and these may be sufficiently valuable to justify proceeding with the mechanism. In any such case of partial success, the value of the invention is naturally seriously lessened. In fact it is but a por- tion of the undertaking as originally contemplated. Sometimes an invention is barred from patent in part by prior patents which have expired. In such cases, the invention may still be worth putting on the market without patent protection on the special features. It might even be marketed without patent protection of any kind. It would then simply enter the field in an open competition, the best device to win. An inventor, for instance, has designed a new alarm clock — one which combines easy adjustment, certainty of operation, con- trol of the character of the alarm signal, i.e., loud, soft, long, short, continuous, intermittent, aU this combined perhaps with a lumi- nous dial and general excellence as a timekeeper. Such a clock properly priced and properly pushed would be successful without much regard to competition or patent protection. The demand already exists and is already fairly well met, but is so large and continuous that there is plenty of room for a new and desirable mechanism. The whole matter is one of the excellence of the SPECULATIVE ENTERPRISES— INVENTIONS l6l mechanism itself combined with salesmanship. Patent protection cuts but httle figure. In most cases, however, when an invention is investigated it is found to be patentable in whole, or to such an extent that its development is worth while, if the other features involved are sufficiently in its favor, and in that case the general consideration of the enterprise is in order. The Final Decision At this stage of the investigation the demand for the new de- vice, or its output, its operative value, and its patentability will all have been determined as accurately as the conditions will per- mit. The material facts, as far as procurable, are before the interested parties and they must then determine whether the enterprise shall be abandoned, or shall be pushed on to industrial operation. In many cases the information on which action must be based is, of necessity, woefully insufficient, as in the case of the tele- phone. The action must nevertheless be taken, but will lack the sound foundation desirable in commercial imdertakings. The enterprise if taken up is then purely a speculative one, with the usual great risk and, presumably, the large compensating reward in event of success. PART IV PROTECTION OF AN ENTERPRISE CHAPTER XIV NECESSITY AND METHODS OF PROTECTION The Competition of Business An eminent military commander, well-qualified to express an opinion, is credited with the terse but forceful characterization — " War is hell." The truth of his statement is generally admitted. It is also admitted that business competition is a form of war. The reason for the clean-cut separation that so often exists be- tween the private and the commercial life of the man of business is not clearly apparent. Just why the kindly, helpful pater-famil- ias of home life should, in so many cases, by the brief transition to his office be converted into a business barbarian of dis- tinctly predatory habits — hard, unscrupulous, and commercially cruel — is one of the anomalies of modem civilization. All that can be said is that such is the nature of the game " as it is played." Possibly the conditions give zest to business. Be this as it may, as most of us have to play the game, we should, even if we do not choose to be commercial savages, play with a clear recognition of the fact that some of our competitors at least, prefer the " back to nature " part and that our actions must be regulated in ac- cordance with this condition. But !^x-Secretary Redfield says, "I wish emphatically to pro- test against the idea which prevails too much today that the business world is largely a world of pltmder. . . . the business men of America are, with rare exceptions, upright and high- minded men, respecting the rights of others, conscious of their duties to their fellows, seeking prosperity through service rather than through selfishness, and with personal consciences never so active, and with public ideals never so high as today."' ' "New Industrial Day." 165 1 66 PROTECTION OF AN ENTERPRISE Why Protective Measures Are Necessary Granting the general correctness of this pleasant optimism, a glance at the court calendars is convincing proof that there are yet in America many men of business who could not qualify under Ex-Secretary Redfield's generalization. Further it must be remembered that no man leaves his door unbarred at night if there is one doubtful character at large in the community. It is also true that, in practice — and rightly enough, too— these same men of character and high ideals employ the most able lawyers they can find to protect their interests as against those of others, and in their dealings with these others, hedge themselves about with every precautionary measure — memoranda, contracts, es- crows, indorsements, penalties, and guaranties — that their law- yers can devise. It must be remembered, too, that opinions as to what is right and what is wrong frequently differ widely; that, entirely apart from considerations of character, honest mistakes are always liable to occur and that business precautions are taken as much to guard against such differences of opinion, mistakes, and misimder- standings as against actual dishonesty. Speaking generally, man's memory is too fallible and too easily misled to entrust to it alone important business data and undertakings. Contracts must then be made in writing not only that we may enforce them if they be not voluntarily performed, but also that both parties to them may understand — and understand alike — the terms of the undertaking. Even with this precaution, misimderstandings are frequent, owing to the ambiguity of the language employed. It is to be borne in mind also that many protective measures are necessary to put possible trespassers "on notice" and to pre- vent invasion or infringement from lack of knowledge. A granted patent is notice to the world that the invention it protects has been made and that the inventor claims the exclusive right to its manufacture, use, and sale. The same idea obtains in the regis- try of a trade-mark. As a matter of fact a trade-mark could be NECESSITY AND METHODS OF PROTECTION 167 held successfully without registry, but no good business man would leave a valuable trade-mark without such protection. Its registry gives no rights that did not exist before, but it is the formal and authoritative notice to all concerned that the particu- lar mark is pre-empted. It is the "ounce of prevention." With- out it unintentional infringements would inevitably occur, and, entirely apart from the advantage it gives in event of litigation, the rightful owners by giving proper notice in the form of regis- tration not only save themselves from the expense and annoy- ance of unnecessary litigation, but also save others from the expensive mistake of adopting — in good faith — trade-marks already in use. Methods of Protecting Business Interests As a matter of practice, the proper protection of a business enterprise is of the greatest importance, not only on account of the dishonest practices occasionally to be encountered, but also, as already suggested, as a matter of notice, and to avoid the unde- sirable results of the differences, the mistakes, and the careless- nesses that are continually encountered. In other words, the business man must hold and defend what he has by every means at his command. The better the defense, the better and more effectively may he go forth to wage his own commercial warfare. The more formal protection of business interests, as far as may be, from competition and imfair or dishonest attacks, is effected by various methods. For mechanical devices, the patent is usually relied upon. Certain processes may be patented, or, in cases where such governmental protection is not available or is inadequate, they are sometimes held most successfully as secret processes. The registry of trade-marks is somewhat akin to the patent in its protective nature and is used to safeguard those dis- tinctive names and insignia through which a particular concern is brought distinctively before the pubhc, or its goods are differen- tiated from those of similar character that may be exploited by 1 68 PROTECTION OP AN ENTERPRISE other concerns. The principle of fair trade is often invoked to protect a concern from unscrupulous competition. These various protective measures commonly employed in business to safeguard the particular enterprise, are discussed in this and the succeeding chapters of Part IV. There are, of course, numberless other ways in which business interests are guarded against destructive assaults — the greatest and most inclusive of which is able and aggressive management. Some of these methods are referred to later in the present chapter, but they are too many and too varied to be given detailed consideration. Purpose of Protective Measures All of the protective measures employed in business have one end, the creation so far as may be of a monopoly. If a patent is taken out, its one purpose is to secure to the patentee the exclu- sive right to the manufacture, use, and sale of the mechanism patented. A trade-mark registry is useful in preventing others from using that particular device and thereby handicaps competi- tion. A process is kept secret in order that its owners alone may manufacture and sell the particular product. In some cases a complete monopoly is estabhshed, and in all cases the success of the protective efforts is gauged by the greater or less " exclusive- ness" secured. The more nearly a monopoly is approximated, the smoother the commercial pathway of the enterprise, and, governed by the possibilities of the particular line of business, the greater its rewards. Selection of Protective Methods In most cases the proper method of protecting a particular business interest is clearly indicated by the conditions. If the patent, the trade-mark, or the copyright appHes, that particular method will be used as a matter of course. It is sometimes possible with much advantage to utilize sev- eral of the usual protective methods for the safeguarding of a NECESSITY AND METHODS OP PROTECTION 169 single product. For instance, a new chocolate preparation, if the nature of the process permits of separation, might be partially patented and in part held as a secret process. Still further to guard the product, it might be sold under the protection of a registered trade-mark and in a package distinctive in form and color; and finally its sale would naturally be conducted under the trade- name of the concern by which it is manufactured or distributed. Such protective measures, if properly used, should effectually bar any competitor from selling that preparation under any trade-mark and from selling any other preparation under that trade-mark, and generally from availing himself in any way of the product or its distinguishing marks to the injury of the rightful owner. Where the nature of the enterprise will not permit of such methods of business protection, or where they are not sufficiently protective, other means must be found or devised that will pre- serve the undertaking from too destructive competition and at least enable it to maintain its own. This must be done in many lines of business — and especially retail business — where the avail- ability of the more formal protective measures is greatly restricted or entirely wanting. In such cases, the integrity of the business must be preserved by a careful observance of the laws of supply and demand, by judgment in the selection of a location, discretion as to the character, quality, and quantity of stock, fair treatment of employees, able salesmanship combined with honest and courteous handling of customers, and general business intelligence and ability. Even in such cases, certain lines or articles may perhaps be protected by patents or trade-marks, or be held as secret processes, and the trade-name itself, i.e., the name under which the concern does business, occasionally becomes, if not the equivalent of a monopoly, at least a protective feature of great value. Special Methods of Protection Beyond the incidental protection suggested, the field is an open one in many fines of business, and, barring initial inequaUties I70 PROTECTION OF AN ENTERPRISE as to capital and natural abilities, the fight is a fair one with no favors. In such case special efforts must be made to gain and hold trade. Thus a retailer may advertise so extensively and persistently that his less noisy and less aggressive competitors are lost in the turmoil. They are still there but so completely overshadowed that the blatant advertiser gains many of the ad- vantages of exclusive sales rights in that location. Or a manufac- turer may so improve his machinery or processes, or so better his facilities, or otherwise manage so well that he routs his competi- tors by supplying more or better goods for the same money, or the same goods for less money. Efficiency as a Building and Protective Measure It is to the ability to supply more or better goods for the same money that the chain store owes its remarkable growth. Such a store is usually started with ample capital and its purchases are made in large quantities and for cash, enabling it to buy its goods at from lo to 15 per cent less than the same goods cost its com- petitors. It also sells for cash, so that any loss from bad debts, together with the cost of keeping accounts, is eliminated. It can therefore do business on a smaller margin of profit than the ordin- ary credit-asking and credit-giving retail store. Add to this its tried and effective system of store organization under which each unit in the chain is in charge of a capable manager, trained in his duties, held to strictest accountability and, for the most part, sharing in the profits, and it is not difficult to account for the great success of such stores. So successful is this partial form of monopoly that there are today — it is said — ^no less than five thousand different "chains" in this country and seventy-five thousand individual stores. Taking Advantage of Opportunity In the case of the chain store success has been won by actual bettering of the routine operations of business. Occasionally NECESSITY AND METHODS OP PROTECTION 17I some commercial genius discovers an industrial line of low resist- ance, some opportunity for exceptional profits, something which has been neglected or overlooked, or opened up by changing con- ditions. Instead of blazoning forth his discovery to the world and to his competitors, he carries on a "still hunt" — reaching his market or consumers in the most unobtrusive way he can devise, and enjoying, perhaps for years, his semimonopoly because those who would otherwise be his competitors have no idea that he has any business worth competing for, or which they could undertake with profit to themselves. An instance where changing conditions opened an opportunity was afforded some years since by an abandoned zinc mine in the Ronduit Valley. This mine was worked many years ago with fair profit. In the course of its operation a large dump of "tail- ings" accumulated which contained a considerable percentage of zinc, as the processes used had only partially recovered the metal. With faUing prices, the mine gradually became unprofitable, the owners quarreled among themselves, and it was closed. For many years it remained unworked and entirely neglected. Then came the Great War with its insistent demand and high prices for metals of every kind. One of the resident owners of the mine investigated the modern processes of zinc extraction and found that the old dump could be worked over at a substantial profit. He was not apparently one of the upright and high-minded men " seeking prosperity through service, rather than through selfish- ness," for, without even consulting the other owners of the mine, he quietly installed the necessary machinery, and worked over the larger part of the dump, meanwhile pocketing very hand- some profits. About this time the other owners woke to the fact that there was something going on. The result was Htigation which summarily stopped further operations and relegated the mine to its former condition of innocuous desuetude. The ethics of the first owner's operations are open to question, but the profits are not. CHAPTER XV MONOPOLIES Creation of a Monopoly A commercial monopoly is created by a more or less complete control of a market, and this market control may be secured by control of the product — or whatever the subject matter of the monopoly may be — or by means of some material advantage over competitors. The Kimberley Diamond Fields An excellent example of a monopoly secured by control of output is found in the Kimberley diamond fields of South Africa. The great bulk of the diamond supply of the world comes from these fields. Formerly the mines were in the hands of a number of small owners, operating independently and as each man saw best, without regard to the law of supply and demand, or any other economic principles. Their only anxiety was to secure and realize upon the largest possible output of diamonds in the shortest possible time. This very natural proceeding entirely overlooked the oppor- tunity for combination existing in the Kimberley fields. Instead of the peace of mind, large profits, and other comfortable features of a monopoly, there was the most active competition and over- production, until the diamond market was glutted, prices fell dis- astrously, and the whole business was thrown into a state of demoralization. The enormously important fact that the greater part of the world's supply of diamonds came from these few acres of blue clay had not been perceived as yet by anyone capable of ending the disastrous competition by a consolidation of the war- ring interests. 172 MONOPOLIES 173 The Eimberley Monopoly About this time Cecil Rhodes and his associates appeared upon the scene. Whatever their shortcomings in other directions, they were unquestionably men of great business abiUty and they quickly saw the monopolistic possibilities of the Kimberley dia- mond fields. Without hesitation they stepped in, purchasing, absorbing, compelling as best they might, until all the rival owner- ships were consolidated. They then systematized the business, abolished all competitive operation, put the mines under one capable management, regulated production and prices, and from a confusion of warring elements and competing mines, evolved one complete and smoothly operating mining unit. The following quotation from a recently issued statement of the De Beers ConsoHdated Mines, Ltd. (Kimberley), gives an ofl&cial accoxmt of just what was done and of the holdings and present status of this very complete monopoly. Its incursion into the apparently imrelated fields of explosive production, coal mining, and the holding of cattle ranches was, in part at least, a resultant of the Great War. De Beers Consolidated Mines, Ltd. (Kimberley), was registered in the province of the Cape of Good Hope in the Union of South Africa on the 13th of March, 1888. The company owns the mines of De Beers, Kimberley, Wesselton, Dutoitspan and Bultfontein, and practically the whole of the Koffyfontein Mine. The company owns the Cape Explosive Works, Limited, one of the largest individual producers of explosives in the world, and has a controlling interest in the Premier (Transvaal) Diamond Mining Company, Limited. It has also ob- tained pre-emptive rights over all diamond mines found in the lands of the Southwest Africa Company, Limited, and in the territories of the British South Africa Company, and owns important coal mines in the Union of South Africa, and large cattle ranches in Rhodesia. The company controls about eighty per cent of the world's output of diamonds. It has never been the practice to attempt to make any estimate of the amount of diamond yielding ground other than that which has 174 PROTECTION OF AN ENTERPRISE been actually blocked out. Consequently, the published accounts make no mention of the reserves of blue ground which exist and which it is believed may, for practical purposes, be looked upon as illimitable. The ascertained figures as published do, however, indi- cate that at the present rate of exhaustion of the blue ground, there is about seventeen years' supply actually in sight. Regulating Diamond Prices When the organization was completed, the Kimberley com- bination controlled — as it still controls — the diamond markets of the world. By increasing the output, or by allowing a larger por- tion of the output to go on the market, its managers can at any time lower the price of diamonds in every civilized coimtry of the globe. By restricting the output, they can, within limits, raise the price of the gem wherever it is bought or sold. The market is in their hands, and the whole problem hinges on the proper pro- duction to secure the best results — the greatest profit for the owners of the mines. The proper regulation of supply to demand in such a case requires careful study and a consideration of many factors. In- creased production means lower prices for the output and larger operating costs. Decreased production means higher prices, within limits, and lower operating costs, but also means smaller demand. Also, if the price were raised imduly by curtailed pro- duction, the activity of the other diamond-producing regions of the world would be promptly and powerfully stimulated, or per- haps new fields might be discovered, all resulting in increased competition and a loss of profit to the Kimberley mines. The following very frank statement from the 191 9 report of the company clearly outlines its policy and the results: "The diamond market is in a very sound and strong condition, and prices have advanced materially primarily owing to the limitation of sales to market requirements, a policy which your directors have consistently pursued, and of which the company and all other producers reap the benefit." MONOPOLIES 175 The Asphalt Monopoly Another example of a monopoly arising originally from the control of the source of supply was, for a number of years, afforded by the Barber Asphalt Company, controlling the great pitch lake of Trinidad and supplying asphalt principally for paving pur- poses. The history of the company is interesting not only be- cause of the features of monopoly which first brought it into prominence, but also because of the aggressive ingenuity with which this original monopoly was perpetuated and protected by an a'^tificial market control long after it would, in the ordinary course of events, have been broken by the inroads of competition. As a matter of fact the material known as "Trinidad asphalt" is not peculiarly adapted for paving purposes. The crude as- phalt, as taken from the lake, contains but 50 to 60 per cent of asphalt. The remainder of the constituent materials — desig- nated as "trash" by competitors — is the debris which has, in the course ot ages, fallen or blown into the lake and become incor- porated with the asphalt. A large proportion of this foreign material is organic matter seriously detrimental to the lasting quahties of the asphalt. The crude material taken from the lake must therefore be refined before it can be used for paving pur- poses, but this refining process does not entirely remove the or- ganic matter. Also the refined asphalt does not contain enough natural asphaltic oil to make it suitable for paving purposes, and therefore a certain amount of heavy petroleum residuum must be added to give it the necessary life and " staying" quality. Paving was the only reaUy important use open to the Trinidad asphalt at this time, and there were the serious obstacles noted above to be overcome before it could be used for this purpose. All these problems were solved, and the original promoters of the enterprise deserve much credit for the persistence and intelligence of their study of the crude product and for the excellent paving material that they finally succeeded in producing. 176 PROTECTION OF AN ENTERPRISE Building Up the Asphalt Monopoly As soon as the problem involved in the preparation of Trini- dad asphalt for paving purposes was fairly well solved, the Barber Asphalt Company was formed, and in it the control of the pitch lake was vested. The management of the company then pro- ceeded to build up one of the strongest monopolies of its day. Other asphalts, better adapted for paving purposes than the Trinidad, were in use at that time, but they were of European origin and somewhat costly on this side of the Atlantic. Also for various reasons they had not made a favorable impression when first used in this country. They were not, therefore, serious com- petitors of the Barber Asphalt Company which proceeded to make the asphalt paving business its own. The American public was carefully and systematically educated as to the merits of this pavement, and the name of the Barber Asphalt Paving Company and Trinidad asphalt were so closely associated with the whole industry that the mere mention of asphalt paving at once sug- gested both the names of the company and its product. Also, in spite of the fact that the Trinidad asphalt lake was and is Crown property belonging to England and merely held by the American company under lease and royalty, the Barber Asphalt Company managed with much astuteness to create the impression that it was a purely American enterprise — and with some truth, for the asphalt was never successfully used in any foreign country — and that for this reason its product should be given preference over any foreign asphalt. It may be mentioned that at this time other and purer Amer- ican asphalts, such as the Bermudez, the California asphalts, the sand and limestone asphalts of the interior states, etc., were being produced and used for paving to a limited extent. This competition, however, only spurred the Barber people to higher flights of imagination — so much so that in their Hterature, at least, the defects of their material became excellencies neither to be found nor reproduced in any other asphalt. MONOPOLIES 177 As stated in the advertising of that day, such impurities of the Trinidad asphalt as could not be removed by the refining pro- cess were natural additions essential to its excellence and not to be replaced in other asphalts by artificial additions; further, that the heavy oil added to the Trinidad was superior to the natural oils of the other asphalts. In short, it would appear that the powers above had perceived somewhat tardily the necessity and importance of asphalt pavements, and, as no provision had been made therefor in the original creative process, had prepared the Trinidad Lake asphalt for this purpose, and that any doubts cast upon the excellence of the material so supplied bordered closely on the impious. This argument was ingenious, but the Trinidad Company did not stop here. By unremitting and well-rewarded missionary work among the local politicians of all places where asphalt pav- ing was to be laid, or likely to be laid, they not only succeeded in convincing these local politicians of the marvelous qualities of Trinidad asphalt, but in committing them definitely to the fur- therance of the designs of Providence in the matter of its use. So well done was their work that almost every municipality of the coimtry which advertised for asphalt paving inserted a pro- vision calling for either Trinidad asphalt or for an asphalt of similar composition, which could not, of course, be procured from any other source than the pitch lake of Trinidad. As a result of this well-directed and imaginative effort, Trinidad asphalt held its own in the face of the most strenuous competition for a long term of years, and it is still in general use. The whole enterprise is interesting as showing the strength of a monopoly once established and the lengths to which it can be carried in the face of distinctly unfavorable conditions. Monopolizing An Open Market The monopolies thus far considered are monopolies by virtue of their control of production. This naturally carries with it VOL. I — 12 178 PROTECTION OF AN ENTERPRISE control of the market, but only as an incident of production con- trol. Monopoly may, however, as already stated, be based on market control when production is not directly controlled, or where no control of production exists save that conferred by market conditions. An example of this is the French govern- mental monopoly in tobacco, based entirely on its arbitrary con- trol of the market. Usually, where a monopoly is not due to direct control of the product, it has been brought about by virtue of strategic location, superior facilities, or abler handling. Occasionally, however, a market is monopolized by methods that can only be described as improper. A curious instance of a market captured and held by the method of approach is afforded by the operations of a New Eng- land company which manufactures brushes — ^hair brushes, horse brushes, tooth brushes, paint brushes, and every other kind of brush that can be used in or about the household. These pro- ducts are not sold in stores but direct to consumers through a nation-wide organization of peripatetic salesmen. Each sales- man has his own wagon, his own exclusive route — which he covers three or four times a year — and his own clientele. The brushes are good, the prices right, and the purchasers prefer to buy from the salesmen rather than from stores where they pay as much or more for inferior brushes. The business is well managed and well maintained. No advertising is done and few city-dwellers know that the business exists, but the general result is a turnover of some millions of dollars annually, ivlth most satisfactory profits. Though nothing in the nature of a natural monopoly exists, for all practical purposes the trade is held as securely as if one did. The Standard Oil Monopoly The development of the Standard Oil Company affords a remarkable example of the creation of a monopoly without any natural conditions favoring its creation. Here the situation was MONOPOLIES 179 the reverse of that of the Trinidad lake asphalt monopoly, for the oil monopoly instead of being based at the beginning on control of the product and then changing until it became based on the control of the market, began by securing control of the market until it attained such size and strength that it was practically enabled to control production and did control it for many years. Petroleum is found in almost every part of this country and in practically every part of the world. Its distribution is so wide and the quantities found are so enormous that at first sight it would not seem to offer any possible opportunity for the creation of a monopoly — certainly no better opportunity than coal, salt, copper, iron, or a dozen other of the most extensively used and widely distributed necessaries of life. During his early connection with the oil business it is unlikely that Rockefeller had any idea of establishing the complete and all-embracing monopoly that he did, or had any conception of the magnitude of the work he had undertaken. Nor is it at all prob- able that any such combination of interests as he and his asso- ciates effected could at that time have been brought about by fair means. The guiding minds — or the operating heads — of the future monopoly did not stop to consider ethics. They saw the goal before them and went to it by the most direct route regardless of the rights of others. They were apparently convinced that their career of profit and domination had been arranged by Provi- dence — a pleasing conviction to which the monopolistic mind is peculiarly susceptible — and that nothing should be allowed to stand between them and the success for which they were destined. At any rate, they did not allow anything to stand in their way. The business morality of the times permitted it, laws to prevent it were either non-existent or non-effective, and by a system of deliberate and cold-blooded commercial brigandage, admirable for its detailed and comprehensive character and for the intelli- gence and persistence with which it was carried out, but inde- fensible from the standpoint of morality and the fellowship of l8o PROTECTION OF AN ENTERPRISE men, they built up one of the greatest, most profitable, and most powerful monopolies that this country has ever seen. Standard Oil Methods The first organization of the Standard Oil Company was char- acterized by a close centralization of power, by the ability of the men connected with it, and by the unscrupulous character of its operations. Its first real hold on the oil business was secured through special freight rates and then by the iniquitous rebate system whereby its rivals were forced unwittingly to contribute to its power and to their own ultimate destruction. Oil cannot be sold without being shipped, and on every barrel of oil shipped by its competitors the Standard Oil Company received a substantial payment. As a result, the organization not only reaped the profits of its own business, but levied toll on the business of everyone who ventured to enter the oil field as a competitor. The details of the rise of the Standard Oil are too weU known to require recounting. It is sufficient to say that by rebates and discriminating rates, by controlling production, by controlling the means of piping, storing, and refining oil, by controlling every- thing connected with oil, by buying, crushing, absorbing, and destroying competition of every nature, the artificial monopoly first created was transformed into a natural monopoly practically controlling the entire petroleum output of the country — so much so that the Standard Oil regulated the price of oil at its own dis- cretion, subject only to some extent to the natural laws of supply and demand — laws which even the Standard Oil Company was not able entirely to overthrow, though it juggled with them greatly to its profit. At the present time Standard Oil has lost much of its monopo- listic character. The conscience of the country has reached a point where the unscrupulous practices that built up the mon- opoly are no longer permitted, and restrictive laws have brought about the dissolution of the former organization. Handicapped MONOPOLIES l8l in this way the rapid development of both the demand tor and the supply of petroleum has exceeded the abihty of the Standard Oil Companies to control, and powerful independent companies are now working side by side with, and actually co-operating with Standard Oil. The German Chemical Companies Monopoly ' A monopoly characteristic and more iniquitous than that of Standard Oil was built up in this country before the World War by the great chemical companies of Germany engaged in the manufacture of coal-tar dyes and kindred products. Fostered by the German government not only because of the economic value of the industry, but because of its immense importance to the country in case of war, these companies attained an enormous and impressive development. In 19 14 the plant of one of the largest of these companies, Badische Anilin und Soda Fabrik, covered 500 acres of land with a water-front of a mile and a half on the Rhine; its buildings occupied 100 acres, and over 10,000 workmen were employed. The capital of the company was 54,000,000 marks increased in 1916 to 90,000,000 marks. Other companies were of equal or comparable size and six of these powerful com- panies were closely united in one gigantic combination, or "car- tel." The actual investment in the works of these six companies was estimated at not less than $400,000,000. The total assets of the five great American chemical companies which, the better to withstand destructive competition, merged in 1920 imder the name Allied Chemical and Dye Corporation, were at that time a little less than $224,000,000. The profits of the united German companies were pooled, and while each factory maintained an independent administration, every company was informed as to the processes and experiences of the others. Also when tariff obstacles rendered it advisable to ^ The material relating to the Gerrran chemical monopoly is taken almost verba timfrom the report to Congress o{ A. Mitchell Palmer, then Alien Property Custodian. l82 PROTECTION OP AN ENTERPRISE manufacture their products in other countries, this was done by common action and at common expense. The Up-Building of the German Chemical Companies The advantages enjoyed by these chemical companies were the cumulated results of many favoring conditions. As far back as the middle of the nineteenth century, the practical application of chemical science began to occupy the attention of the best scientific and industrial minds of Germany. The many natural advantages combined with the national conditions and character- istics led to rapid advance. Labor was cheap, docile, and stable, and the German habit of mind was peculiarly fitted for chemical research work. Scientific attainment was directly and strongly encouraged. Men of science, and particularly research workers, were more highly regarded than in other cotmtries, and the government by conferring honors and titles did everything pos- sible to exalt the position of the successful scientist. To enable them to do their part, the universities were at an early date provided with the most elaborate and advanced equip- ment for research work, and attracted to themselves an extraor- dinary proportion of the ablest yoimg men of the nation. They accordingly turned out trained technical men in such numbers that highly skilled service was always available to the German chemi- cal manufacturer at an extraordinarily low cost. In this respect he had a marked advantage over the manufacturers of any and every other coimtry in the world. Nor was the chemical manufacturer slow to realize and utilize these conditions. In the great establishments the research labo- ratories became large and highly efl&cient institutions; their fa- cilities were placed at the disposal of research chemists from universities — often men who had no cormection with the dye in- dustry whatever; to meet the needs pointed out by the industrial leaders, armies of plodding, but nevertheless skilful chemists, completed hundreds of thousands of separate researches. The MONOPOLIES 183 result of all this was the accumulation of an immense mass of scientific data which usually afforded a quick and easy solution to each industrial problem as it arose. The importance of this research branch of the industry is hard to overestimate. It kept the German chemical manufacturer in the forefront of progress — always somewhat ahead of his competitors in other countries in the way of new processes and products. Quantity Production — " Dumping " The improvements in processes brought about by all this research laid heavy emphasis on the low cost of quantity produc- tion. This, however, carried on by semicompeting houses, led to overproduction. Home prices were kept up by the German tariff and other governmental policies. It was then to the advantage of the manufacturer to produce far more than he could sell in the home market, even though his export trade were carried on at some loss, for by doing so he could use processes so economical and manufacture on such a scale that his profits on home trade were largely increased. Accordingly, German dyestuffs began to appear in every country of the world at prices which domestic manufacturers could not meet. The inevitable result was that in country after country the domestic manufacture was destroyed or stifled in its cradle. As soon as this had been accomplished, it was no longer necessary for the German exporters to sell at or below cost, so prices were immediately raised and handsome profits realized both at home and abroad. Price Manipulation For the most part this manipulation of prices occurred in branches of the chemical industry other than the manufacture of dyes, for the simple and sufficient reason that in this country, at least, the dyestuff industry never reached a point where it re- quired much discouragement. When, however, in 1910, the first determined effort was made in this country by the Benzol Pro- 1 84 PROTECTION OP AN ENTERPRISE ducts Company to establish the manufacture of an important German product — anilin oil — on a large scale, the German hand was immediately shown. The price of German anilin oil then averaged ii^ cents. As soon as its manufacture was fairly under way by the American company, the German importers commenced to cut the price. Apparently no definite figures were made by the Germans, but they adopted the simple policy of offering any customer of the new concern anilin oil at less than the price he was paying. The new company struggled on as best it could, which was not very well. Its operations were conducted without profit. It was, however, supported by a group of men of exceptional insight and determination and it survived imtil the war eliminated this imfair and destructive competition and enabled it to establish its business on a firm foundation. Confronted with such conditions there was but little encour- agement for any American house to enter the field claimed by the cartel. Patent Protection for German Products Another important aid to the success of the German export trade in dyes and pharmaceuticals was the advantage taken of the patent laws of this and other countries. Owing to the immensely greater number of research chemists engaged in this work in Germany than elsewhere, far more patentable inventions in or- ganic chemistry were made by the Germans than by the chemists of any other nation. In the United States they took out patents by the thousands. The Bayer Company alone acciunulated ap- proximately 1,200 such patents which were placed in the hands of one of its subsidiary companies. The Badische had about 500 such patents, and each of the other members of the cartel held patents by the score. As there was substantially no effort (with small exceptions) by any of the German concerns to manufacture in the United States, these patents were obviously obtained and held in order to prevent the formation of an American dye indus- MONOPOLIES 185 try and to make impossible importation from other countries. With the aid of these patents, especially the product patents, the German cartel could and did exclude all importations of compet- ing dyes in the most important classes. Buying Their Way But the cartel did not rely entirely on these technically legiti- mate methods. Secret processes, multitudinous patents, dump- ing, and destructive price-cutting, were all well enough in their way and would have seemed to be all-sufficient. But the thoroughgoing methods of the cartel did not stop here. Bribery was resorted to without hesitation whenever anything was to be gained thereby. The head dyers of the various mills and other chief customers of the dye manufacturers were subsidized in many ways, direct and indirect. It was easy for the head dyer to ma- nipulate the complicated processes of dyeing in such a way that any particular colors would produce wretched results. It would then be an easy matter for the dyer to get the manager of his mill to try the dyes of another manufacturer, and with the exercise of a little care the new dye would be sure to produce satisfactory results. Propaganda to Discourage Competition Besides the obstacles, legitimate and illegitimate, thus placed by the Germans in the way of the establishment of an American industry, there was apparently considerable organized propa- ganda intended to discourage American attempts. Apparently it was the duty of every good German chemist in the United States to spread the doctrine of the invincibility of the German chemical industry, the almost insuperable difficulty of the pro- cesses involved in the manufacture of many important dyes, and the hopelessness of securing the necessary technically trained men and skilled labor outside of Germany. So well was this done, and so real were the obstacles confronting the American chemist 1 86 PROTECTION OP AN ENTERPRISE that, prior to the Great War, the German dye-makers encoun- tered but little serious competition in this coimtry. The End of the Get man Chemical Monopoly The net result of all this energy, ability, unfair and dishonest practice, and chicanery, directly aided and abetted by the Ger- man government and protected in this comitry by thousands of product patents, was a complete, unscrupulous, and powerful monopoly. With true German thoroughness it neglected no method or opportunity of establishing and maintaining its as- cendency. It controlled almost completely the American dye- stuff trade with annual sales of $25,000,000, and controlled absolutely the sale of many pharmaceutical preparations, such as aspirin, salvarsan, and novocaine, of enormous value. This formidable and sinister monopoly and the power of the cartel in this country was brought to a sudden and disastrous end by the Great War — a war which the cartel itself had been in- directly instrumental in bringing about. It has lost its patents, its prestige, and its power. It is, however, stiU in existence, and many of the conditions which led to the original establishment of the monopoly still exist. The formation of a powerful Ameri- can combination in the chemical industry, and particularly in the dyestuff branch of the industry, is therefore timely and significant. Conditions Permitting Monopolistic Control Such a monopoly as that established by the Standard Oil Company or the German chemical companies was forced and largely illegitimate in character. Numberless instances of natural and entirely legitimate monopoHes are, however, to be found, as where a coal mine is opened in such a location that it can secure better rates to its particular market than can any competing mines; or where a clay bank is discovered from which can be made a brick superior to anything else in the vicinity; or where a MONOPOLIES 187 peculiar soil is found that will grow a certain kind of vegetable or fruit in greater perfection than elsewhere. Other legitimate monopolies of a local character may be arti- ficially created, as where a brickmaker discovers that a few brick plants in his neighborhood occupy all the available clay beds, and by a combination of forces secures a practical monopoly of the brick business in that neighborhood; or where a coal operator, securing the exclusive right in his territory for a new and very economical apparatus for channeling coal, drives his competi- tors out of business by cheaper production. Noa-Monopolistic Undertakings In most cases, however, the advantages enjoyed by a particu- lar enterprise are not sufficient to constitute a monopoly, but only sufficient to render the undertaking more profitable to its owners than are other similar but less favored enterprises. For instance, a coal vein may be so favorably located for mining that its cost of production is a few cents less per ton than that of its competi- tors, giving it a better profit but not sufficient advantage over the other mines in the neighborhood to drive them out of business and create a monopoly. Or a pottery may be so situated as to secure an advantage in freight rates over its rivals, thereby enhancing its profits but not to such an extent as to enable it to crush out others and build up a monopoly for itself. In conclusion it may be said that in every profitable business, conditions must of necessity exist that give it an equality with or a superiority over its competitors, and that every business success where competition must be met, depends upon and will be ac- curately measured by the ability with which every possibility of excelling this competition is discovered and developed. Every undertaking cannot have a monopoly as the basis of its operations, but the best business success requires as near an approximation to a monopoly as the conditions will permit. CHAPTER XVI PATENTS Nature of Letters Patent The Constitution of the United States authorizes Congress "to promote the progress of science and useful arts by securing for hmited times to authors and inventors the exclusive rights to their respective writings and discoveries." It is in pursuance of the power so granted that "letters patent" are now issued. These "letters patent" give in terms to the patentee, his heirs and assigns, for a period of seventeen years, the exclusive right to make, use, and sell the invention covered by the patent. If the inventor does not apply for a patent, he, of course, may still make, use, and sell his invention to an imlimited extent, but so can anyone else, leaving the inventor or the owners of the inven- tion no monopoly therein nor any rights in the invention superior to the rights of others. Herein Ues the value of the patent. It gives the inventor the exclusive right to do what he wishes with the patented mechan- ism or process. If he chooses, he may absolutely refuse to per- mit the use of his invention by others, nor need he use it himself unless he so desires. He may, if he will, play the part of " dog in the manger," and for the allotted period of the patent the courts will sustain him in the role. A patent is thus in the nature of a monopoly. At the same time it is a monopoly granted by the people of the United States for a good and valuable consideration. The grantee has invented or discovered something useful — something of value to the people —and as an inducement for the disclosure of what he has invented or discovered, and a reward for the good work he has done, the people give him the exclusive right for a specified term of years 1 88 PATENTS 189 to make, use, and sell it, and during that term he may do with it as he will. Nor is this unreasonable for, speaking generally, a patent "lays no burdens upon the people except that of remaining for a while without that which they never yet enjoyed,"' and at the end of the term the patent becomes the property of the people and the inventor's exclusive right is at an end. Patent Requirements The broad idea of the patent as outlined above is simple. When, however, we come to the practical application of the principles involved the matter becomes much more complex. Thus to secure a valid patent the invention must comply with certain prescribed requirements as to nature, novelty, and utility. It may be granted only to the inventor or one claiming title through him. The application must be drawn up in prescribed form. The description of the mechanism or process to be pat- ented must be such as to enable anyone familiar with the art to which it relates to construct the mechanism or to repeat the proc- ess with the results claimed by the applicant. Matter may not be interpolated for the sake of concealment or to mislead the public. The claims may not be too broad or they will not stand, nor should they be too narrow or they will not properly protect; they must not be vague or they will only lead to litigation, nor should they be too precise or they will limit the scope of the patent. If the appHcation for a patent contains improper sub- ject matter it wiU be summarily rejected. If it is merely in im- proper form, the patent ofl&ce wiU require that it be redrawn. If the applicant avoids all pitfalls and errors, and pays the prescribed fees — ^$15 when the application is filed and $20 when the patent is taken out — and the application is found to be in the prescribed form, and the invention or discovery proves to be patentable, and there are no prior applications, patents, devices. ' Robinson on Patents. 190 PROTECTION OF AN ENTERPRISE or processes conflicting therewith within the knowledge of the patent office officials, the patent will be granted. Amateur Patent Applications It is taken for granted that a patent attorney will be employed when a patent is to be secured. Theoretically, his services are not essential. The inventor may obtain a copy of the rules and pro- cedure of the patent office with forms and suggestions, and pre- pare and file his own application. Occasionally this is done, but in such cases the caustic comment that a man who is his own lawyer has a fool for his client, usually applies. The patent officials do not smooth the way for such appUcants. It is no part of their busy life to unravel the complexities of amateur patent applications. Generally such papers are returned time after time for the correction of the numerous defects characteristic of such documents, until the applicant wearies of his task, or con- cludes that the patent office is in league with the patent attorneys, or realizes at last that the matter is one requiring expert knowl- edge, and thereupon secures, as he should have done at ffirst, the services of a patent attorney. Where the invention to be protected is of any material value, the only possible excuse for an amateur application is an inability to pay the attorney's fees, and these fees are usually so moderate — or will be made so if the position is explained — that the inven- tor would do better to devote his time to raising them than to waste it upon the preparation of his appUcation. If an amateur application is finally worked through, the re- sulting patent is viewed with suspicion by all intelligent investors. On the other hand, the mere fact that a patent was secured through capable attorneys adds to its strength and its value. Patent Procedure The first step in securing a patent is usually a search or ex- amination of the issued patents in the particular line to deter- PATENTS 191 mine whether the invention or any of its features have been already patented. This search made by the inventor's attorney is in most cases a simple and inexpensive matter, costing perhaps but $5 or $10, and in a well-equipped office requiring but a day or two, or even less time, to complete. In more complicated cases more time is, of course, required and the cost may run up to larger figures, depending entirely upon the amount and difficulty of the work involved. The general patentability of the invention will probably have been passed upon by the patent attorney before this preliminary search is undertaken, and the only fact established by the search is — when such is the case — that there are no existing patents to stand in the way of a patent's being issued for the new device. The patent application should not usually be made until this matter is determined. In some difficult cases, however, as the cheapest and best method of determining the facts, the applica- tion may be made first and the patent office itself be left to work out any conflicting claims. It should be borne in mind that patent applications already in the office and not yet acted upon are not open to public inspec- tion, and that conflicts or interferences may be foimd in these. Such obstacles can be brought to Hght by the filing of the ap- plication and in no other way. As soon as this has been filed, the patent office will notify the applicant of any confficts found in pending patents, and he will then have an opportunity to prove, if he can, the priority of his own invention or of those parts which are in interference. After notice of allowance of a patent, the inventor has six months within which the final fee may be paid and the patent be issued. The general purpose of this six months of grace is to give the inventor time to make his appHcations, if any are to be made, for foreign patents. As the patent dates from the day of issue — not from the day of allowance — it is customary in the case of valuable inventions to let this six months' period almost expire 192 PROTECTION OF AN ENTERPRISE before the patent is taken out in order to secure the latest possible date on the patent. If the invention is of considerable value, foreign patents will, of course, be applied for meanwhile. Delays in Patent Application When an invention is made its proper patent protection is one of the first things to be considered. Sometimes, however, the invention itself is so nebulous that a patent is impossible until it is more fully crystallized; sometimes it is so novel that the inven- tor does not wish to publish his discovery, not even in a patent appUcation, until he can more fully master its principles and its applications; sometimes it is thought better to wait until the invention is more fully developed so that one comprehensive patent may cover the perfected machine. Sometimes patent application is delayed merely because the inventor is inexperienced and is not aware of the risk involved — does not realize the unhappy position he will occupy if some con- flicting invention comes in ahead of his and secures a prior patent. Those better versed in patent matters take no such chances. As soon as a patentable idea of value is developed, steps are taken without delay to secure whatever protection may be had. If the new invention is not in patentable form, or conditions make an immediate application inadvisable or impossible, designs and full descriptions are prepared, signed, duly witnessed, and then filed away. Then in case of conflicts in the patent ofiice, the date of the invention and the other essential data are at hand. Drafting the Patent Application The patent application becomes on allowance the patent it- self. Therefore its drafting is a matter for careful and accurate work. As to its general form and contents, nothing need be said here. The requirements of the patent ofiSce are exphcit and are insisted upon. If the application is not in technically correct form it will not be filed but returned for correction. PATENTS 193 While this is true as to the general form and contents of the appHcation, the actual wording of the description and the specifi- cation of the claims are largely outside the purveyance of the patent office. The patent office officials will caU attention to obvious errors in the application and require correction of them, but they are not called upon to play the part of patent attorneys; therefore they frequently permit matter to pass in both descrip- tions and claims which is more or less defective and sometimes fatal to the patent. Thus, if too little is claimed, or if errors exist; if the patent fails to state the proper construction of the appara- tus, or the correct components of the new product, or the results actually produced by the patented process; or if its descriptions are vague and misleading — the patent may fail in whole or in part, according to the nature and gravity of the fault. The courts are usually liberal toward the inventor in their interpretation of patents, but there is a point beyond which they will not go. It is the inventor's business to have his patent papers in proper shape, and to attain this end he should, as has already been said, employ a competent patent attorney. Character of Patents The character of the patent application and of the patent issued pursuant thereto will depend almost entirely upon the nature of the invention. A fimdamental patent covering broadly the apphcation of a general principle, is, of course, much to be desired. Such a patent, for example, was the one granted Bell for the telephone which covered the transmission of articulate sound by means of electrical impulses. This was indeed basic, covering every practical method of transmitting articulate sound by elec- tricity, and securing the field to Bell and his Ucensees for the fife of his patent as an absolute monopoly. The BeU patent was fiercely attacked but was upheld — whether justly or not is beyond the scope of the present discussion — and so long as that one principle was effectively upheld, the telephone field was thehs. 194 PROTECTION OP AN ENTERPRISE Others invented very excellent telephones and various improve- ments in telephones, but all were subservient to that one jeal- ously guarded principle and could not be used during the life of the patent by which it was held, without the somewhat costly consent of its holders. In contrast to this is the experience of the first exploiters of the Thermos bottle. The idea was not new, but its populariza- tion in the form of a handy bottle was distinctly new. No really basic patent could, however, be had. The manufacturers there- fore proceeded with such patents as they could get, which were not very good. To introduce the bottle it was necessary to edu- cate the public in its use and public education is costly. Large amounts were spent on advertising and other expenses incident to its introduction, but the bottle met a popular need and finally attained a distinct success. Hardly had it reached the profitable stage, however, before imitators appeared selling the same article at a less price and imder equally attractive names. These other bottles were not substitutes; they were the same thing. The general result was a very profitable business for the imitators at the expense of the original concern. They reaped where they had not sown, but they did this without violat- ing the statute law. Multiclaims and Multitudinous Patents It is but seldom possible to secure a broad basic patent, and the present-day practice meets this situation by multitudinous claims covering the mechanical principles and combinations em- ployed from every angle. In addition to this, many applications are made and separate patents taken out for every different por- tion of the mechanism. For example, take the case of an auto- matic perforating machine operated by a keyboard much Uke that of the typewriter, used in preparing perforated paper tape for use in machine telegraphy. A general patent with some forty or more claims covers the machine itself; another patent with PATENTS 195 almost as many claims covers the keyboard; the direct perforating apparatus is covered by another multiclaim patent, and so on. As many as seventy or eighty patents will sometimes be taken out on an important invention, or on one that is to be protected to the fullest possible extent. The great German chemical companies protected their line of products, so far as this country was concerned, by thousands of product patents. Approximately 4,500 of these patents were seized by the Alien Property Custodian during the Great War and were later transferred to an American organization. The taking out of many and multiclaim patents is un- doubtedly good business practice where inventions or processes are of material value. From the legal standpoint a patent of multitudinous claims would not usually cover, or be worth more than the ordinary modest patent of from two to a dozen claims, nor would numerous patents protect better than a few. If, how- ever, another inventor should contemplate entering that particu- lar field, it would be very discouraging to him to find it already thickly covered with patents and claims; and as he ordinarily could not possibly distinguish that which is really good as a direct protection from that which is only good as a bluff, the practice has a " scare " value quite outside and apart from any legal utility. " Follow-Up " Patents It is almost inevitable that a device as first patented is crude and susceptible of much improvement, or changing conditions necessitate changes in its construction or design, and such modi- fications offer patent possibilities of the greatest importance. Not infrequently the improved mechanism or new mechanism is quite as valuable as the original machine. In addition to this, when any mechanism of real utility is invented, it is equally sure that attachments and devices necessary to its best use wiU also be invented. Thus, the first crude telephone has not only been greatly improved in itself, but switchboards, signaling devices, 196 PROTECTION OP AN ENTERPRISE coin-operated phones, and other connected mechanisms have followed in endless succession, until the telephone patents, or patents arising from the use of the telephone, run up into the thousands. Where an invention is of sufficient value to justify the expense, expert mechanics are frequently employed for the sole purpose of watching its operation and working out attachments, improve- ments, and connected inventions which are promptly covered by patent. Each new patent has, of course, its seventeen years to rim, and by means of such patents valuable inventions are frequently controlled long after the expiration of all the original patents. Nature and Limitations of the Patent The necessity for all this careful watchfulness and multipUed protection is readily seen when we consider the nature and limi- tations of the patent. A patent is in fact a very imsatisfactory instrument. It is formal evidence that duly appointed officials of the United States goverimient have examined the papers sub- mitted by the applicant; that, so far as they can ascertain, there are no confficting claims superior to those of the present patent claims; that, as there appears no good reason for not so doing, they have issued the patent in question; and that, by reason of such issue and for the life of the patent and for any extensions thereof, the party to whom such a patent is issued has — as far as the patent officials are informed at the time — the sole and exclusive right to make, use, and seU the invention or discovery covered by his patent and to assign similar rights to others. To so much and no more is the government committed when a patent is issued. It does not guarantee the patent. Nor is the patent in any way a final and complete title, nor is it so regarded, unless so fundamental or unique in its claims as to have no opposi- tion, until its vahdity has been fully upheld in the courts — ^until it has been "adjudicated." It is a conditional title to the inven- tion, a sort of quit claim deed. It is a certificate that the owner PATENTS 197 has the best title known to the government officials and that he is authorized to hold possession of the invention for the life of his patent unless someone presents a better title — or possibly secures the services of a better patent lawyer — and ousts him therefrom. It is a tentative title that may perhaps never be questioned, but one that is always open to attack by anyone who has, or thinks he has, a superior title. This may seem an exaggerated statement of the weakness of patent protection, but it is literally correct. The patent, signed, sealed, and delivered by the duly authorized officials of the United States government, and stating in formal terms that the patentee is entitled to the exclusive use of the invention covered thereby for the period stated may be a real "muniment of title, " or may be but a house of cards to be blown down by the first breath of contention. Whether this is the best way to issue patents is another ques- tion. It is the way that they are issued in this country and the weakness of the system must always be taken into account when protection is sought through patents, or when patents are bought, or are accepted as valuable assets, or when they form the basis of an enterprise. A patent is a very desirable thing to have and in many, and perhaps in most, cases, is a sufficient title to the inven- tion it covers; but it is always liable to be attacked and, until fully adjudicated, to be overthrown. For this reason, as well as on the grounds of general prudence and safety, not only should the patent itself be strengthened in every possible way — by blanket claims, multitudinous patents, and patents on improve- ments and connected mechanisms— but no other means should be neglected for the protection of the enterprise which is based in whole or in part on the ownership of patents. Attacks on Patents Even though a patent be reinforced and safeguarded in every possible way, it does not always avaU. Patents are occasionally igS PROTECTION OP AN ENTERPRISE subject to attacks which can be described only as piratical. A concern financially strong sees a weaker concern enjoying a valu- able patent. Coveting its neighbor's possession, a deliberate infringement is begun. Suit is naturally brought by the owners of the patent to restrain this invasion of its rights, but the ad- vantages are all on the side of the stronger concern. The weaker party usually cannot match the legal "heavy weights" opposed to it, nor can it stop the infringement during the progress of the suit save by giving heavy bond. If it is vmable or afraid to give such bond, the stronger party continues its infringement while the litigation is in process, thus not only draining the resources of its opponent by means of its wrongful competition, but fighting it with the profits. The suit itself is long and costly, and too often right and justice are defeated by the inability of the weaker party to pay the price. In such event the suit fails from ineffective prosecution, and the smaller concern has been deprived of its rights and its property by as high-handed, lawless, and iniquit- ous a proceeding as ever disgraced the robber barons of medie- val Europe. In some cases of the kind suit is never begun, the weaker party recognizing the handicap as too heavy. In the writer's knowledge a small company was organized to manufacture and handle a scale of improved construction — a scale that would weigh much more quickly and more conveniently than the ordinary device. Lacking capital, the small company was of necessity slow in placing its scale on the market. Before it had made much prog- ress a strong, well-estabUshed company brought out a competing device, apparently in direct infringement of the smaller com- pany's patent. The small company made preparations for suit, but after an investigation of the expenditures involved and a contemplation of the difficulties of proving the infringement — if infringement it was — gave up before the fight began. The results were entirely too uncertain to justify the time, the trouble, and the heavy cost involved. PATENTS 199 Patent Litigation— The Goodwin Film More just in its results was the suit of the Goodwin Fihn and Camera Company against the Eastman Kodak Company, the litigation involving the rights to the sensitized film now used so largely in photography. For over forty years those interested in photography had been vainly searching for a flexible film that could be sensitized for photographic purposes. The Reverend Hannibal Goodwin, a clergyman of Newark, N. J., with a taste for chemistry, knew the profit possibilities of such a film. He also knew that his own salary was sadly inadequate, and to meet this latter condition undertook to solve the problem of the flexible film. His efforts were successful and his application for a patent was filed May 2, 1887. For some reason much opposition on the part of the patent officials was encountered from the start. As stated in the final opinion confirming Goodwin's right to the process, "The long delay and the contradictory ruhngs of the patent office would have discouraged an inventor who had not supreme faith in the justice of his cause." Meanwhile, in 1889, the chemist of the Eastman Dry Plate and Film Company — predecessor of the present Eastman Kodak Company — also filed an application for a patent covering the much desired sensitized film. An interference was declared by the patent office between the applications. The Eastman chemist filed a disclaimer of the fundamental and controlling claim for a flexible, sensitized film which Dr. Goodwin was striving for, and restricted his application to a special formula, differentiated from Goodwin's by its use among other constit. ent materials of a very large proportion of camphor. The patent for this subsidiary process was then issued. Dr. Goodwin predicted that the formula would not work on account of the amount of camphor employed. The Eastman Company at once began to manufacture a sensitized film under the patented formula and put it upon the market. It was hailed as the long looked-for substitute for glass. Shortly the deleterious effects of the camphor in the formula 200 PROTECTION OF AN ENTERPRISE began to show themselves as Dr. Goodwin had foretold, and in order to make a marketable product the company was obliged to reduce the amount of camphor and finally was practically using the Goodwin formula. Because of the antagonistic attitude of the patent office officials, and because his poverty compelled him to take all the time allowed by law in replying to the patent office objections to his claims. Dr. Goodwin was imable to secure the allowance of his patent until September 15, 1898 — over twelve years from the time that his application was filed. As soon as the patent was allowed, he began negotiations looking to the commercial ex- ploitation of the new film, and also notified the Eastman Com- pany that their film was in infringement of his process. About a year later the Goodwin Film and Camera Company was formed and a small plant was established, and began operations August I, 1900. A few weeks later Dr. Goodwin met with an accident which, in December of the same year, caused his death. The Goodwin plant was poorly equipped and entirely in- adequate for the commercial production of the film. Negotiations were accordingly taken by Dr. Goodwin's heirs to enlist further capital. In the early part of 190 1 these negotiations were success- ful and strong backing with ample capital was secured. In December, 1902, a formal suit was filed against the East- man Kodak Company. The Eastman Company immediately retaliated by bringing a countersuit against the Goodwin Com- pany under a supplementary patent covering the cartridge form in which the film was marketed. The Goodwin Company de- cided to await the result of the countersuit before proceeding with the original suit. The countersuit consumed three or four years and finally resulted in the defeat of the Eastman Company, the cartridge patent being declared invaUd. The suit under the Goodwin patent was then actively prose- cuted. Experts of the highest standing were employed on both sides. The search into the condition and literature of the art was PATENTS 201 most exhaustive and every effort was made by the defendant to break down the Goodwin patent. These efforts were of no avaU. The decision of the lower courts that the patent was valid and had been infringed was upheld in the highest courts. The decision in the higher courts was given in March of 19 14 — twenty-seven years after Dr. Goodwin's first application had been filed and fourteen years after his death. The interval had seen momentous changes in the photographic art. Among these was the popularization of photography and the use of the hand camera for which the sensitized film itself had been largely re- sponsible. Also the marvelous development of the motion picture industry had been made possible by this same sensitized film. As soon as the final decision was given the Goodwin Company applied for an injunction restraining the Eastman Kodak Com- pany from manufacturing the film. At that time the Goodwin Company and the Eastman Kodak Company were practically the only manufacturers of films in the country. As the Goodwin Company was in no condition to supply the enormous demand for the film, the issue of the injunction would have almost stopped the motion picture industry of the country. Its issuance was therefore delayed a few days by consent of both parties to see if some adjustment of the matter could not be made. Before the expiration of this " armistice, " the Eastman Kodak Company effected a settlement for its past infringement and took out a hcense under the Goodwin patent for the remainder of its term — then about a year and a half. A cash payment of some milUons of dollars was a feature of the settlement. The Goodwin-Eastman case is perhaps the most striking example in the history of patent Htigation of a patent for a valu- able invention's being sustained after a prolonged and costly struggle. The expenditures on both sides were enormous. The report of the case filled seven large, closely printed volumes. The amount paid in settlement was the largest recovery ever obtained in a patent suit in this country. Obviously, great resources had 202 PROTECTION OF AN ENTERPRISE to be available in order to combat successfully so wealthy and powerful an antagonist. Patent Litigation — The Selden Patent Of quite a different character was the litigation over the Sel- den automobile patent. Here, instead of a "hold-up" of the in- ventor, we find the inventor himself apparently endeavoring to "hold-up" the industry. Mr. Selden — himself a patent lawyer — filed in 1879 an apph- cation for a patent covering what was in effect the mechanism now used in every automobile driven by gasoline or petroleum engines. His principal claim was "the combination with a road locomotive, provided with suitable rxmning gear, including a propelling wheel and steering mechanism, of a Hquid hydrocarbon gas engine of the compression type, comprising one or more power cylinders, a suitable liquid fuel receptacle, etc." As stated, Mr. Selden's application was made in 1879, long before the day of the practicable automobile. Whether his mechanism was capable of doing what was claimed, or whether it could have been developed to do this had his patent been promptly allowed, will never be known. Apparently realizing that he was in advance of the times, Mr. Selden deliberately waited for the times to catch up. Under the patent office rules, each time that the examiners discover some conflict, or make some objection, or require some amendment of the application, the applicant has a year to respond. The objections made to Mr. Selden's patent were numerous, and in every instance Mr. Selden availed himself of this time limit to the full. So effectively were his efforts co-ordinated with patent office practice that his patent apphed for in 1879 was not allowed until sixteen years later. This extraordinary delay in the issue of Mr. Selden's patent practically doubled its life, postponing its effective date until the automobile industry had emerged from its profitless condition of infancy into a considerable and growing industry of tremendous PATENTS 203 possibilities. As a result, the patent which would have been of only minor value if promptly allowed, now gave promise of enor- mous profits. The Selden patent was granted in 1895. At the time, the automobile industry had already attained to a considerable annual volume of business and was growing rapidly. Mr. Selden at once "threw his hat in the ring" and demanded royalties. The Selden patent was then considered basic. and royalties were forthcoming from many of the manufacturers in large amounts. Some of them were recalcitrant, however, and a fight began. All the suits were finally merged in one test case, and it is doubt- ful if a patent suit was ever more vigorously fought than this. The testimony was voluminous, filling thirty-six octavo volumes. In the lower court the Selden claims were upheld. In comment- ing on the delay in the patent ofl&ce. Judge Hough said: Without prolonged discussion it may be held briefly that Selden did not overstep the law. He did delay. He was not in a hurry. He could not get anyone to back him and doubtless appreciated that if he was ahead of the times it was wise not to let his patent get ahead. If he had gotten his grant in 1880 without a moneyed backer, the patent might and probably would have expired, or nearly so, before anyone saw its possibiUties, and if the business world had seen them within seventeen years, that term would then so nearly have expired that Selden would never have been able to get the final hearing before it ran out. At best, an accounting and not an injunction would have been his lot. The difference he may have well considered as a lawyer, and personally, I believe he did think of it. . . . No htigation closely resembling this case has been shown to the court, and no instance is known to me of an idea being buried in the patent office imtil the world caught up to and passed it, and then embodied in a patent only useful for tribute. But patents are granted for inventions. The inventor may use his discovery, or he may not; but no one else can use it for seventeen years. That seventeen years begins whenever the United States so decrees by its patent grant. That the applicant for patent rights acquiesces in any delay, or even desires delay is immaterial to the courts so long as the statute law is not violated. On these principles complainants are entitled to a decree. 204 PROTECTION OP AN ENTERPRISE An appeal from this decision was at once taken to the higher court. Here it was again held that the inventor was within his rights in delaying action in the patent ofl&ce, the court stating that the patent must be "viewed without prejudice and with absolute judicial impartiality." In its decision, however, the higher court took a different view of the patent from that held in the lower court. It held that the patent itself was valid but restricted to the one type of engine referred to therein, and that for this reason the later automobiles using a different t3^e of engine were not in violation of the Selden patent and that their manufacture and use could not be restrained. Thus ended one of the most remarkable patent cases ever brought before the courts. CHAPTER XVII TRADE-MARKS, TRADE-NAMES, AND COPYRIGHTS Trade-Marks Definition A trade-mark is a distinctive name, expression, device, or motto, used to designate a particular product, or class of products, or line of goods, marketed under that distinctive mark or designa- tion, or as defined by the Supreme Court of the United States, "A trade-mark is a word, letter, device or symbol, or some com- bination of these, used in connection with an article, and either inherently or by association pointing distinctly to the origin or ownership of the article to which it is applied. " Under proper conditions the parties originating and using any such distinguishing name or mark and thereby giving it a value, acquire the right to its use as against any others attempting to employ it for the same purpose. This right is not gained by virtue of a government grant or permission as in the case of a patent, but is a clearly defined common law right, i.e., a right arising from the use of the mark itself, which is recognized by the common law, and, as stated in some detail later, is not dependent upon registration. Nature of the Trade-Mark A well-established trade-mark is not infrequently the most valuable asset of a flourishing business, practically representing its good- will. In the case of process products its protective value is frequently greater and far more desirable than that of the ordinary patent. A trade-mark does not in itself confer any exclusive right to the article it protects. On the contrary, it usually— though not 305 206 PROTECTION OP AN ENTERPRISE necessarily — indicates that the same or similar articles or products are manufactured by others, the trade-mark having been adopted to distinguish the particular manufacturer's article or product from these others. Given an attractive article or product, the value of the trade-mark is given to it by the reputation of the concern, by a maintenance of standard, by aggressive adver- tising, by efl&cient distribution, and not usually by any exclusive right to or control of the product. For instance, anyone familiar with the art can make soap " 99^*^ per cent pure " and having every other distinguishing features of Ivory Soap as far as shape, size, and composition are concerned, but there they are estopped — they cannot use the term "Ivory Soap" or any of its other dis- tinctive insignia. The competing soap may not only be just as good; it may be the same, but it cannot be sold as "Ivory Soap" save by the owners of the trade-mark. The right to or ownership in a trade-mark is not of a nature to permit its sale or transfer independently of the article which it designates. For instance, if a certain kind of Uquid cement were distinguished by a blue star printed on the container, this trade- mark might be registered and might be claimed as the property of the concern manufacturing the "Blue Star Liquid Cement." The blue star, however, indicates that particular kind of liquid cement, and the right to use the blue star cannot be sold to some- one else for the purpose of designating a different kind or grade of liquid cement. The concern might seU its formula for the cement it produced, including with it the trade-mark by which that cement was designated, or it might sell the blue star trade- mark to another concern already making the same liquid cement, but it could not legally transfer the blue star trade-mark to desig- nate some liquid cement of different composition or properties from those of the true Blue Star Liquid Cement. As the converse of this, the sale of a business and good- will carries with it the brands and trade-marks used in that business. TRADE-MARKS 207 Selecting a Trade-Mark The selection of a trade-mark is too extended a subject to be discussed here in detail. The national law is very explicit as to what may not be registered and thus delimits the field very sharply. Perhaps the most important prohibition is the require- ment that no words or devices descriptive of the goods to be trade-marked may be used. If words are employed they must in their ordinary use indicate something else than the article or goods to be designated, or otherwise in themselves mean nothing at all. Under this provision of the law the trade-mark must derive its value from its arbitrary association with the article or goods to be designated. Thus the term "sea-foam" with a dis- tinct meaning of its own, well-understood wherever the English language is employed, was used to designate and did designate very specifically a certain brand of baking-powder — an arbitrary association brought about entirely by long use and active adver- tising. Similarly " Kodak " and " Sapolio, " with no independent meanings of their own, have come to stand specifically for the articles or products with which they have been associated. In- deed this may be carried so far that in some cases the word is finally incorporated in and becomes part of the language. Thus the trade-mark " vaseline, " with no meaning outside of its trade- mark use, will be found hsted among the other good English words in any up-to-date American dictionary. Under these conditions it is obvious that the trade-mark should be distinctive and striking so that it may be readily fixed in the pubUc mind. If, while retaining these essentials it can be made attractive and pleasing, as in the case of "sea-foam," its value is greatly enhanced. Registering a Trade-Mark In most of the states the laws provide for the registration of trade-marks and a national law permits their registration in the patent office at Washington. This registration, whether state or 208 PROTECTION OP AN ENTERPRISE national, does not in itself, as already stated, vest the right to the trade-mark in the individual, but is merely a public notice and proof that the particular trade-mark is claimed by the person by whom it is registered. The right to register a trade-mark is attained by virtue of its use. No trade-mark will be registered "which has not been in bona fide use for one year in commerce with foreign nations, or among the several states, or with Indian tribes," and this use must have been prior to the use of the same mark for a similar purpose by others. The use of the mark must also have been on the trade- marked article or its container and in connection with its sale. The registration of a trade-mark is a simple matter. Never- theless if the matter is of any material importance the application should be made through an attorney. "The owner of a trade- mark may prosecute his own application for registration of such trade-mark, but he is advised, unless familiar with such matters, to employ a competent attorney."' The government fee for registration is $io; the attorney's fee will range from $io up according to the complexity of the case. Importance of Registration While registration of a trade-mark does not in itself give ownership, the mark should be registered as a matter of public notice that it is in use and that its ownership is claimed. The great advantage of such registration appears in case of litigation. If other parties use the mark and the registered owners bring the matter into court, they merely file the evidence of registration and rest their case. The registration is considered prima facie evidence of ownership, and the parties against whom the suit is brought must then either show that they have a superior right to the ownership of the mark in question or lose their case. If, however, the mark is not registered, the burden of proof is re- versed. Then the complainant parties, lacking the convenient ' Rules of the United States Patent Office Relating to the Registration of Trade-Marks. TRADE-MARKS 209 evidence afforded by registration, must show that they have been using the trade-mark in question and that their use and right ante- dates and is superior to that of the defendant parties. In other words, the registration of the trade-mark does not establish the ownership of the mark, but is a pubhc notice that owner- ship therein is claimed, and a presumptive proof of such owner- ship; and any party infringing on or contesting this ownership must prove a superior right or relinquish his claims. It is a coign of vantage from which to fight in case of htigation, and a measure by which the burden of proof is shifted to the opposing parties. Term of a Trade-Mark Trade-mark ownership has the advantage of not expiring by time limitation as does a patent. It is not a special concession or a reward from the government to genius or enterprise. It is merely a private right in and to a property created by the energy and ability of the originator, and, like any other property right, inures to the benefit of the owner or his assigns in perpetuity or until lost by disuse or abandonment. The government certificate of trade-mark registration does, it is true, expire in twenty years from its date and must be renewed from time to time, but the actual ownership of the trade-mark does not expire so long as it is in active use. Establishing a Trade-Mark Given a good trade-mark with a fairly good article or product to support it, the establishment of the trade-mark and the success- ful sale of the article or product is merely a matter of skillful, extensive, and, usually, long-continued advertising, and in connec- tion with this the proper distribution of the trade-marked article and the maintenance of its standard. There should be no failure of supply and no variation of quahty. Nothing discourages the consumer more completely than the inability to get the article he wants when he wants it, or discourages him more quickly than 210 PROTECTION OP AN ENTERPRISE to find the article when he does get it, varying in some way from the old familiar standard — in appearance, taste, odor, or effect. Man may hke variety, but not of just that kind. Value of Trade-Marks The holding power of an established trade-mark is surprising. Such a name stands for the formula of the preparation covered and all its qualities. Once fixed in the pubhc mind and properly followed up, its displacement is almost impossible. The only way in which it can be overthrown is by the substitution of some other trade-marked article of the same nature and of equal or higher quality, and in this way only with extreme difl&culty and with contributory laxness on the part of the owners of the established mark. We all recognize this in our personal experience. Some particular cough syrup suits our system; we get good results with a certain kind of shaving cream; we are accustomed to some make of tooth-paste; so we continue to buy and use these particular articles. Other articles may be equally good — ^perhaps better — but we are not concerned, much preferring to continue the use of those to which we are accustomed. In the kitchen Dr. Blank's baking-powder has been intro- duced. The cook hkes it and uses it with excellent results — or results that she esteems excellent. Thereafter no other baking- powder appeals to her, no matter what its claims. Ordinarily she will not even try another powder. If she is persuaded to do so, not understanding the new powder nor how it is best used, her results are hardly likely to be satisfactory. She prefers old friends to new anjrway, and joyfully returns to the famihar brand. Further, she is a zealous champion of her own particular bak- ing-powder and in season and out of season is always ready to recommend it and to fight for it. As an advertising agent she is invaluable and, once obtained, quite inexpensive. All this is merely a manifestation of the natural conservatism of human nature — a following of the lines of least resistance. TRADE-MARKS 211 Once started in a particular direction or in the use of a particular article, an individual may be depended upon to continue in that direction, or to continue the use of that particular article, until some other influence is strong enough to effect a change and substitute some other direction or article. Furthermore, if the individual is a free agent with no preferences, and has not yet adopted an article that he must sooner or later use — as for in- stance a youth approaching maturity who has not yet sworn allegiance to some particular brand of shaving soap or make of razor — when the need arises he will almost invariably select the article recommended by his friends. This being recognized as true, the enduring value of an established trade-mark will be realized. As to the dollar and cents value of a trade-mark, " Mr. Duke has stated on the witness stand that he regarded the name 'Bull Durham' as worth at least $10,000,000 and probably nearer to $20,000,000. The R. J. Reynolds Tobacco Company, it is re- ported, have been offered $10,000,000 for the Camel Cigarette good-will. ... It is a common saying in advertising circles that such well-known trade-marks as Ivory Soap, Victrola, Kodak, and Uneeda are worth a million dollars a letter."" Persistence of a Trade-Mark Mr. Rowell in "Forty Years an Advertising Agent" dis- courses interestingly on this subject. Speaking of Pond's Extract, he says that Dr. Humphreys of homeopathic specific fame, who then owned the trade-name mentioned, was glad to part with a business associate even though this involved the most valuable trade-name the concern possessed — no less a trade-name than "Pond's Extract," a preparation of witch hazel used as a house- hold remedy from one end of America to the other. What a commentary it is on the value of a trade-mark! The Humphreys people had made Pond's Extract for years. It was ad- » Printers' Ink, November 11, 1920. 212 PROTECTION OF AN ENTERPRISE mittedly a preparation of witch hazel. They could no longer sell it as Pond's Extract; that privilege had passed to Mr. Hurtt, but dozens of other people were selling extracts of witch hazel, and the Humphreys people had still just as good a right to make and sell an extract as any- body else. They could call it Humphreys' extract but not Pond's. Everybody had heretofore bought Pond's extract of the Humphreys concern; now they could buy Humphreys' extract there but not Pond's. To get Pond's they must go elsewhere. And yet the Humph- reys' extract was identical in composition with Pond's; was made by the same people that had always made Pond's and was sold in larger bottles and at a lower price; and for all that the people would have none of it. They had learned to use Pond's and would have no other. I had knowledge in the earlier days of a similar case. Two men were part owners of a preparation for the hair called Hall's Hair Re- newer. They were not agreed on business methods, and one disposed of his interest in the concern to the other and that other became a millionaire. The first man knew just as well how to make the prepara- tion and did make it, put it on the market and advertised it, too, only it was Plummer's Hair Renewer and not HaU's. Everybody wanted Hall's, nobody would have Plummer's, and the money spent in ad- vertising it was wasted. After a time the owner of Hall's Hair Re- newer, having become wealthy had social aspirations that the patent medicine business did not aid, and the renewer was sold for a great price to J. C. Ayer and Company, of Lowell, who had already ex- ploited with some success practically the same thing under the name of Ayer's Hair Vigor, but could not make it compete with Hall's that had been earher in the field. Patents vs. Trade-Marks Mechanical inventions and processes may be protected by pat- ent. The mechanism or product may be sold under a trade-mark, thus having the double protection of patent and trade-mark. But if the invention or process is patented and the mechanism or product is also sold under a trade-mark with which it has become so closely identified as to be inseparable, on the expiration of the patent not only does the invention or process become the property of the pub- lic, but, as discussed under " Trade- Names " later in the chapter, so does the trade-mark by which it is known. For this reason in the case TRADE-MARKS 213 of a process, which may in many cases be kept secret, it is at times a question whether the patent or the trade-mark should be relied on. If the process is patented, its formula must be set forth fully in the patent — ^it is no longer a secret. The respective merits of the different methods of protection for a process or product are well illustrated by the history of the two well-known and exceedingly valuable pharmaceutical prepa- rations, phenacetine and vaseline.* Phenacetine was held by a process patent. It was very profit- able so long as exclusive rights could be held and the patent was an efl&cient protection. When, however, the life of the patent expired, the manufacture and sale of phenacetine, as " Phenace- tine, " was thrown open to the world and the long and exceedingly profitable monopoly enjoyed by the patentees was ended. Vaseline, on the contrary, was not and is not protected in any way by patent, but by the name of the substance. "Vaseline" is owned as a registered trade-mark. Under that name the product was originally brought out and introduced to its multitude of users. Before competition arose it§ market had been made, but that market was made for "Vaseline," and by that name alone the product was and is now held. The process by which vaseline is produced has for many years been a matter of public knowledge, and the substance may be made and sold by anyone, anywhere, under any name except that of "Vaseline." As a matter of fact it is largety manufactured and sold under other names, as notably that of "petroleum jelly." The name "Vaseline" is, however, the exclusive property of the company by which it is registered, and so well is this name established that, while the company does not control the entire trade in the product, it does control the most profitable portion of it and will continue to do so as long as the product is properly made, properly handled, and properly kept before the pubhc. 3 See also Chapter XVIII, " Protecting a Process." 214 protection of an enterprise Trade-Names The Trade-Name and its Protection The trade-name is merely the name mider which a business is carried on. It cannot be registered unless in some peculiar identifying form, and is not specifically protected by either na- tional or state laws. The right of the owners to their trade-name is, however, a fully recognized common law right. It is based on exactly the same principle as the right to a trade-mark, and may be protected, where necessary, by direct legal proceedings. Ordinarily this is no more difficult than the protection of any other property right. Troublesome cases sometimes arise, how- ever, when a person whose name is similar to the name or leading name of an existing firm or company adopts practically the same title for a similar business. Speaking generally, a person cannot be prevented from using his own name in the conduct of his busi- ness by the fact that some other party, to whom the name also belongs, is already conducting a similar business under that name. In a well-known New York case,"* the doctrine is laid down broadly: Every man has the absolute right to vise his own name in his own business even though he may thereby interfere with and injure the business of another person bearing the same name, provided he does not resort to any artifice or contrivance for the purpose of producing the impression that the estabUshments are identical, or do anything calculated to mislead. ... A person cannot make a trade-mark of his own name, and thus obtain a monopoly of it which will debar all other persons of the same name from using their own names in their own business. While this is true, the courts can usually be depended upon to enjoin any use of a name plainly intended to trade wrongfully on the reputation of a name and business belonging to another. 4 Meneely v. Meneely, 62 N. Y. 427. TRADE-NAMES 215 The well-known case of Baker's Chocolate shows the readiness of the courts to protect an established name. Here a competing Baker sought to put out his chocolate under that name — which was also his own name — clearly intending to confuse the pur- chasing public and to use to his own advantage the very excellent reputation already established for Baker's Chocolate. The courts forbade the attempt, ruling that while the infringing Baker might use his own name in connection with the chocolate made and sold by him, it must be done in such a way that it would be clear to those who bought his chocolate that it was not that made by the original Baker. Another somewhat extreme case was the prohibition of the term " Rem-Sho " to designate a new typewriter. The name was formed from the names of those who invented and were interested in the new typewriter — Remington and Sholes. Suit to prevent its use was brought by the owners of the already estabhshed Remington tj^ewriter, who claimed that they were injured by the use of the name ".Rem-Sho" on a competing machine. Although the use of the compounded name was in itself entirely legitimate and it did not closely resemble the older name "Rem- ington, " the courts held that the use of the name did injure the complainant's established rights and granted an injunction for- bidding its use by the defendants. Trade-Names as Trade-Marks — Protection of a Product Under some circumstances the trade-name practically takes the place of the trade-mark. This is true of the old well-estab- lished firms, companies, or enterprises, the reputation of whose names has been built up by the excellence of their goods, or per- haps through the fact of their being first in the particular field in which their business lies. A good example of this, and one which also exempMfies the all-around protection that should be given an enterprise, is found in the history of the Remington typewriter. This typewriter was 2l6 PROTECTION OP AN ENTERPRISE the first practical machine to be constructed, and was brought out under the name of one of its inventors — "Remington." The original machine was naturally well protected by patents. Many improvements were made from time to time and all were duly and fully covered by patents. A trade-mark was adopted in the early history of the machine which, in the form of a red peal, was and is to be found on every Remington typewriter and on everything connected with the machine. The name "Remington" was, however, made the principal feature, and given every prominence. Even the name of the firm which controlled the sale of the machine was subordinated to the all-important trade-name "Remington." This machine being the pioneer in its field found no existing demand for t)7pewriters. It proceeded at once to create a demand which, as there were no competing machines, was exclusively a demand for Remington typewriters. The machine was con- stantly and vigorously pushed, and so well were the opportunities improved that when, first by the discovery of other non-infringing methods of typewriter construction, and then by the expiration of the principal typewriter patents, the typewriter field was opened to others, the Remington was too firmly entrenched to be displaced. Other and good machines were then on the market and they secured a portion of the trade, but for many years the Remington held its position as the best known and most widely used of American typewriters, and is still one of the leading machines. It may be stated broadly that there are no patents of any material importance now protecting the Remington machine, its position depending on the trade protection afforded by its name and trade-mark, sustained by good business management and by the continuing excellence of the machine. " Lost " Trade-Names As already stated in the comparison of patents and trade- marks, where a trade-name or trade-mark has become so closely TRADE-NAMES 217 identified with a patented device or process as to stand in the public mind for that device or the product of that process, the owner's right to such name or mark is lost on the expiration of the patent. Thus, as in the case of phenacetine, had the vaseline process been patented, the owners could not have held the trade- mark "Vaseline " after the expiration of their patents, as both the product and the name would have then become the property of the public. The Stillson wrench is an example of a "lost" trade-name. For many years the patented StiUson wrench was manufactured and sold by the owners of the patent. Finally the patents expired, and as by that time the term "Stillson Wrench" had come to designate a particular kind of wrench and it was known by no other name, both the exclusive right to the manufacture of the wrench and the use of its name were lost. The original owners might and still do make the Stillson wrench, but any other manu- facturer who desires to do so may also make the same wrench and sell it as the Stillson wrench. Similarly, the exclusive right to the name "Singer Sewing Machine" was lost to the original owners as soon as the basic patents on the Singer machine expired, the courts holding that, as the term had come to designate a particular kind of sewing machine, it had become public property. The Singer Sewing Machine Company could still continue to manufacture their machine and call it the "Singer Sewing Machine," but anyone else manufacturing a similar machine could also call it the "Singer Sewing Machine"; and the only superiority enjoyed by the original manufacturer was the requirement that any other firm manufacturing and selling the machine must add after the name, "not manufactured by the Singer Sewing Machine Com- pany of Newark, N. J." It may be asked here why the name "Remington" could be held when the name "Singer" was lost. The answer is that the term "Singer" designated a sewing machine that was basically 2l8 PROTECTION OP AN ENTERPRISE different from any other machine and had come to stand for the mechanical principle which distinguished that machine from other machines. So true was this that the right to manufacture the Singer Sewing Machine was not really a public right unless the manufacturer who wished to make the machine could also use the name by which that particular kind of machine was known. In the case of the Remington t5^ewriter, there was nothing markedly distinctive in the construction of the machine. Other typewriters worked on the same general principle as the Reming- ton, and the term "Remington" did not designate any distinct type of construction, but merely the typewriter made by a par- ticular concern. For others to use the term would be unnecessary and misleading. The name "Remington" therefore is still held by the manufacturers of the original Remington t3^ewriter, while the name "Singer" is open to the world. Unfair Competition Under the general rules of what is known as "unfair competi- tion, " or "unfair trade, " a protection much akin to that afforded by trade-marks and trade-names is extended to any distinguish- ing feature employed in marketing a particular product, or the goods of a particular manufacturer. Thus a characteristic label may have been used to designate a particular product, or a pack- age of a particular size, shape, or color may have been in use so long as practically to indicate its contents. Or, perhaps the combination trade-mark, trade-name, label, size, color and shape of package, distinguishes the product. Without being an exact imitation in any respect, a competing product may be so prepared as closely to resemble a product already well known to the pur- chasing public by these distinctive details. Instances of this are familiar to us all. Sunshine Soap comes in a package of a certain size, shape, color, and distinguishing label. The makers of Sunshine Soap, by their long adherence to this package and by the maintenance of quantity and quality, COPYRIGHTS 219 and by the exercise of continuing marketing ability have estab- lished a very valuable good-will, and this good-will is carried to some extent by their distinctive package. If, however, a compe- ting Sunlight Soap comes in a package of similar shape, size, color, and with a label in the same style as that of our Sunshine Soap, in perhaps nine cases out of ten the consumer will take it without question under the impression that he is getting Sunshine Soap. It is obvious that a competitor should not be allowed to avail himself in this way of the good-will values belonging to the manu- facturers of Sunshine Soap. But the many identifying details cannot be covered broadly by governmental registration, many of them cannot be registered at all, and the rules of unfair com- petition must be relied upon for protection. In most cases the protection is ample. Thus, the American Pencil Company brought out a hexagonal pencil labeled "Beats all." Another pencil company brought out a hexagonal pencil almost identical in appearance and called it " Knoxall." Suit was brought and the latter pencil was enjoined, as its manufacture and sale was held to be an attempt to trade on the good- will acquired for the "Beats all" pencil. Similarly, "I Want a Biscuit," put up in a package much resembling Uneeda Biscuit, was enjoined as an attempt to trade on the repu- tation of the latter biscuit. And, generally, whenever there is sufficient outward resemblance between two competing articles to cause the purchasing pubhc to buy the one under the impres- sion that it is obtaining the other, the article which was first in the field and which is injured by the resemblance can usually enjoin its competitor and stop its sale. Copyrights Nature of the Copyright Literary, musical, and artistic productions may be protected by copyright. This protection, where possible, is of the utmost importance, but its application is too hmited and too well under- 220 PROTECTION OF AN ENTERPRISE stood by those interested to require extended consideration here. It is somewhat similar to the patent in its nature, securing to the copyright-owner the exclusive right "to print, reprint, publish, copy and vend " the copyrighted work, which cannot be quoted or used by others either in whole or in any material part without the permission of the copyright-owner and the payment of such royalties as he may require. The owner of the copyright also secures the exclusive right to translate, dramatize, arrange, adapt, receive royalties on repro- ductions of musical compositions, etc. The copyright is not subject to attack — unless by direct charge of wholesale plagiarism, or theft — nor, on the other hand, does it protect anything except the special publication, picture, musical composition, or other production for which it is granted. Another author or artist may,. if he so desires, produce another book or picture entirely similar as to subject matter, provided only that the wording or the treatment is different. Ideas are not protected by the copyright — only the particular form in which those ideas are expressed. There is no way to safeguard a production capable of being copyrighted, save by copyright. The exclusive right vests in the author, artist, or composer through the fact of origination, and by copyrighting his work he gives pubUc notice that he claims and has secured such rights. If he does not copyright his work, it is held to be given to the pubKc and may be reproduced and sold by anyone who will. No attorney is needed to secure a copyright. The process is simple. Blanks are furnished on application by the Copyright Department of the Library of Congress with full instructions as to the formalities to be observed and as to the preparation and filing of the application. The fees are nominal — $i for each copy- right secured. The copyright extends over a period of twenty- eight years and may at its expiration be renewed for another similar period. CHAPTER XVIII PROTECTING A PROCESS Patent vs. Secret Process When a process has been discovered for the manufacture of a known product at a less cost, or for the production of sortie new and useful product or preparation, as stated in the preceding chapter, it may usually be protected by a "process patent." To be patented it must, however, be disclosed, and when the process is of considerable value and is known only to the discoverer and his associates, it is sometimes a perplexing matter to decide whether it is better to protect it by patent or to hold and use it as a secret process. If it is patented the process appears in the patent application and is readily accessible to any competitor. If it is not patented, but operated as a secret process, anyone who gains possession of the secret, either by discovery, by spying upon the inventor, by bribery of employees, or by any other means, has the same right to its use as has the original discoverer. It is this possibility — ^in many cases probability — that if it be held as a secret process it will become known to competitors, that makes it debatable whether to patent the process or to retain it as a secret. If the process is one easily discoverable by those investigating along the same general lines, or one that is perhaps suggested by the nature or appearance of the product, or that might be revealed by an analysis of it, or if the conditions are such that the preservation of the secret is difi&cult or impossible, the process would naturally be patented as the only feasible means for its protection. If, however, the process is intricate or outside the usual lines of investigation, or not discoverable by analysis of the product, or of such a nature that patent protection is in- effectual, it is usually the better policy to hold it as a secret 221 222 PROTECTION OP AN ENTERPRISE process and to risk the chance of its discovery or of its being re- vealed by someone in the secret. DilBculty of Defending Process Patents The conditions surrounding a process usually make its pro- tection by means of a patent far more difficult than in the case of a mechanical device. Any infringement of the latter shows on its face and the mere inspection of the competing device is sufficient to disclose the fact of infringement. Thus, if an inventor devises and patents a foimtain pen of new design — one that both fills and feeds more readily and more certainly than any of the present niakes — and puts it on the market, a competing pen caimot adopt the same mechanism without immediate discovery. The infringe- ment proclaims itself. In the case of a patented process, on the contrary, there is usually nothing in the finished product to show whether it is made by the patented process or by some other process. Thus, if a manufacturer of pencils were to discover a method of making artificial graphite equal to and cheaper than natural graphite, he would have a process of great value. If he patented it and shortly thereafter a competing pencil appeared containing a similar arti- ficial graphite, the first manufacturer could not tell from an analysis or from any other examination of the competing article whether or not it was prepared by the patented process. He might be morally certain that his rival was using his process but he could not prove the infringement. The new graphite might have the same chemical composition and be identical in every other way with the graphite manufactured by the patented pro- cess, but that proves nothing — the competitor may have dis- covered a new method of producing the same result. The only way by which infringement could be actually proved would be by comparison of the patented process with the process employed by the competitor. This, as the competitor is under no necessity either of revealing his process or of admitting an investigator to PROTECTING A PROCESS 223 his factory, is ordinarily a matter of very great diflScuIty, and is frequently impossible. Balancing the Probabilities When any question exists as to the better method of pro- tecting a process, the decision is reached by a balancing of the probabilities. For instance, one of the smaller chocolate man- ufacturers after long experiment discovered a method of pro- ducing a soluble chocolate, possessing many advantages over any other " instantaneous chocolate " then on lie market. The man- ufacturer deemed the discovery highly valuable and as soon as the process was perfected the important question arose as to the best means for its protection. The process could be patented, but if so its method of prepara- tion would be published to the world. Competitors could, if they would, steal the process; or if not, the details revealed in the patent application would be likely to give them hints or sugges- tions that might lead to other methods of preparing the same or a practically similar composition. The greater danger was, however, from theft. The process must be described in working detail in the patent. If some other manufacturer of chocolate preparations chose to steal the process bodily, devote a secluded part of his factory to its preparation, put the whole matter into the hands of a few trusted employees, and then come out with an announcement of a new soluble choco- late, the detection of the fraud would be almost impossible. In such case the claims made for the stolen preparation would, naturally, be identical with those made for the legitimate product and its appearance and qualities would also be the same. The owner of the original process might be morally sure that the process used was his, but how could he substantiate his beUef and how secure the facts necessary to give him a fighting status in the courts? As in the case of the artificial graphite, he must not only show that the preparation was the same as his but that 224 PROTECTION OP AN ENTERPRISE it was produced in the same way — that is, by the process revealed in his patents. His own belief would have no weight as legal evidence. He could not compel the dishonest manufacturer to come into court and to make known the process actually used. Practically the only methods of securing the absolute proof re- quired for the protection of his rights would be to introduce spies into the competitor's factory who might discover and testify to the process used; or otherwise to win over some of the workmen familiar with the process employed by his competitor and use their testimony to prove the infringement. Either of these plans would present serious difficulties in execution and be of doubtful propriety. On the other hand, if the process were not patented but carried on secretly, the owner's exclusive possession would depend absolutely upon his ability to keep the secret within the walls of his factory. If he were able to manufacture the material himself without assistance, his exclusive possession would be easier to maintain; but this purely personal operation is impracticable in most commercial processes, and in the particular instance the secret would of necessity be known to his workmen. One of these workmen might be attracted to his competitor's factory by the promise of higher wages or the secret might be discovered by more direct bribery, or by spying, or by other underhand methods. Or, if nothing of this kind is attempted, the finished product might give his competitors some hint as to the direction in which to work, and the secret process be discovered by them through direct experimental investigation. No matter how discovered, if the secret process once became known, its value as a monopoly would be lost. By that time the inventor's right to a patent would have also been lost and he would be devoid of protection. In the particular case the manufacturer decided in favor of the secret process. It would, as suggested, be hable to discovery, but the difficulty of enforcing the patent rights in a case of this kind are practically insuperable, while the possibilities of main- PROTECTING A PROCESS 225 taining the secrecy of the process for at least a considerable time are excellent. Trade-Mark Protection for Process Products A consideration of much importance when the best method of protecting a process is to be determined is the fact that if it can be kept secret for a reasonable length of time, the ^.dditional protection of a trade-mark, a trade-name, and other distinctive selling features may be thrown around it. Protected in this way, the actual process of preparation becomes a matter of much less vital importance, and may sink into insignificance. As already stated, the formulas of many valuable trade-marked preparations are widely known, but this does not affect the value of the prepara- tions to their owners. The formula has become an incident; the real yalue now lies in the trade-mark, the trade-name, and the other identifying features by which the preparation is known to the pubUc. This phase of the subject is discussed in some detail in the preceding chapter. Patent vs. Secret Process — Determining Conditions To sum the matter up, it may be said that when a process to be guarded is one that can be kept in the hands of one man, or perhaps a few men, and is of such a nature that it will not be re- vealed by the product itself, and is not likely to be discovered otherwise, it is best held as a secret process. An excellent instance of such a process is the Breguet method of tempering hair springs for watches — a secret that has been held in the Breguet family of Switzerland for generations. The process produces one of the finest hair springs made. It is of a nature that one man might himself temper enough hair springs to supply the watches of the world. Such a process should be — as it is — kept a secret. To patent it would only destroy the present profitable little monopoly. Prevention of infringement would from the nature of the case be practically impossible. VOL. I — IS 226 PROTECTION OP AN ENTERPRISE When, however, a process requires the employment of many men who either necessarily know its essential features, or are in a position to learn them, or when it is of such a nature that the product itself may suggest the process, or in any other case where the process is hkely to be discovered, it is better patented. Under such circumstances its production for any length of time as a secret process is practically impossible, and, on the other hand, it could hardly be adopted and used by a rival manufacturer with- out detection. Examples of both kinds of processes are found in the modem methods of producing and treating iron and steel. The major operations must be conducted on such a scale and under such conditions that the processes employed could not be kept secret, and on the other hand their surreptitious employment is prac- tically impossible. The Bessemer process of making steel, for instance, could not long be kept a secret. On the other hand, French and Belgium inventors claim to have discovered a new process for producing a high-grade steel at low cost — "by the addition of certain secret substances and by means of a certain undivulged process, the ordinary Bessemer steel process can be applied to produce steel as pure as that derived electrically." If the inventors' claims are correct their process is very valu- able, and as the added materials and the change in the ordinary Bessemer process are of a nature to be easily concealed, the whole matter will probably be held as a secret. As a matter of fact, in the iron and steel industry there is considerable intermingling of patents and secret processes. Wherever the process can with reasonable safety be kept secret, it is usually so held; where it cannot, it is patented. Combining Patent and Secret Process Between the processes which should manifestly be kept secret — as the tempering of hair springs — and the process that is ob- viously best protected by patent — as the Bessemer process — PROTECTING A PROCESS 227 come a multitude of processes for which the best method of pro- tection can only be decided after a consideration of the particular conditions. In a few complicated cases the protection of patents may be secured for parts of the process while other parts are kept secret. Inasmuch as a process cannot be patented that does not definitely "get somewhere," this is only possible where distinct ends are attained by different parts of the process, i.e., where a distinct product is produced by part of a process, which product is then converted into another product by a second part of the process. Some of the German dye processes, it is said, are protected by this method — ^patented in part and in part kept secret — making it impossible for anyone to obtain the final product from the patent descriptions — yet as the patented part does produce a definite known product, and in some cases a very useful product, the patent is entirely valid. In spirit it is an evasion of patent law requirements but it is a legitimate and at times a very effective evasion. HG tt-On C76 1923 Author Conyngton, Hugh Title Financing an enterprise