Capital
a stock of wealth existing at a given instant of time is called capital; a flow of benefits from wealth through a period of time is called income. Many authors restrict the name capital to a particular kind or species of wealth, or to wealth used for a particular purpose, such as the production of new wealth; in short, to some specific part of wealth instead of any or all of it. Such a limitation, however, is not only difficult to make, but cripples the usefulness of the concept in economic analysis.
When a given collection of capital is measured in terms of the quantities of the various goods of which it is composed, it is called capital goods; when it CAPITAL is measured in terms of its value, it is sometimes called capital value.
One of the best methods of understanding the nature of capital is to understand the method of keeping capital accounts, A capital account or balance sheet is a statement of the quantity and value of the wealth of a specific owner at any instant of time. It consists of two columns-the assets and the liabilities the positive and negative items of his capital. The liabilities of an owner are his debts and obligations to others; that is, they are the property rights of others for which this owner is responsible. The assets or resources of the owner include all his capital, irrespective of his liabilities. These assets include both the capital which makes good the liabilities, and that, if any, in excess of the liabilities.
The owner may be either a physical human being or an abstract entity called a "fictitious person" made up of a collection of human beings and keeping a balance sheet distinct from those of the individuals composing it. Examples of fictitious persons are an association, a partnership, a joint stock company, a government. With respect to a debt or liability, the person who owes it is the debtor, and the person owed is the creditor. The difference in value between the total assets and the total liabilities in any capital account is called the net capital, or capital balance of the person or company whose account it is.
A fictitious person is to be regarded as owning all the capital nominally intrusted to it and as owing its individual members for their respective shares; consequently there is no net capital balance belonging to the fictitious person, although in most cases there is a liability item called capital which represents what is owed to those most responsible for the management of the business. The most important example of a fictitious person is a joint stock company. Associated with the stockholders are usually also bondholders without voting power, but with the right to receive fixed payments stipulated in the bonds which they hold. The "capital" item in the capital account of a joint stock company is a liability due to the stockhold- It represents what is left after the value of all other liabilities is deducted from the value of the assets. ers.
The items in a capital account are constantly changing, as also their values; so that, after one statement of assets and liabilities is drawn up, and another is constructed at a later time, the balancing item, or net capital, may have changed considerably. However, book- CAPITAL keepers are accustomed to keep this recorded "capital" or "capital balance" item unchanged from the beginning of their account, and to characterize any increase of it as "surplus" or "undivided profits" rather than as capital.
The bookkeeper systematically undervalues the assets of the company and even omits some valuable assets altogether, such as "good will". The object of a conservative business man in keeping his books is not to obtain mathematical accuracy, but to make so conservative a valuation as to be well within the requirements of the law and expediency. There are two valuations of the capital of a company, the bookkeeper's and the market's. The latter, being more frequently revised, is apt to be the truer of the two, although it must be remembered that each of them is merely an appraisement.
Insolvency is the condition in which the assets fall short of the liabilities other than capital. The capital balance is intended to prevent this very calamity; it is for the express purpose of guaranteeing the value of the other liabilities those to bondholders and other creditors.
These other liabilities, for the most part, are fixed blocks of property, carved, as it were, out of assets, the value of which property the merchant or company has agreed to keep intact at all hazards. The fortunes of business will naturally cause the whole volume of assets to vary in value, but all the "slack" ought properly to be taken up or given out by the capital, the surplus, and the undivided profits. A man's capital thus acts as a safety fund or buffer to keep the liabilities from overtaking the assets. It is the "margin" he puts up as a guarantee to others who intrust their capital to him.
The assets may comfortably exceed the liabilities, and yet the cash assets at a particular moment may be less than the cash liabilities due at that moment.
This condition is not true insolvency, but only insufficiency of cash. In such a case, a little forbearance on the part of creditors may be all that is necessary to prevent financial shipwreck.
A wise merchant, however, will not only avoid insolvency, but also insufficiency of cash. He will not only keep his assets in excess of his liabilities by a safe margin, but he will also see that his assets are invested in such a manner that he shall be able, by exchanging them for cash, to cancel each claim at the time and in the manner agreed upon.
There are three chief forms of assets; namely, cash assets, quick assets, and slow assets. A large part of the skill !
CAPITAL of a business man consists in marshaling his assets so that he always has enough cash and enough quick assets to provide for impending debts, while maintaining at the same time enough slow assets to insure a satisfactory income from his business.
Since the liabilities of one man are also the assets of another, when one man fails and is able to pay only fifty cents on the dollar, the unlucky man who is his creditor-who has the first man's notes as assets-suffers a shrinkage in his own assets which may in turn mean embarrassment or even bankruptcy to him. It is usually true in a panic that the failures start with the collapse of some big firm, involving a shrinkage in the assets of others.
We have seen how the capital account of each person in a community is formed.
Our next task is to express the total net capital of any community. This is the sum of the net capitals of its members, i. e., all the innumerable assets of all the persons less all the liabilities of those persons. This net sum will be the same, of course, in whatever order the items are added and subtracted. There are two ways in particular.
The simplest is, first, to obtain the net capital balance of each person by subtracting the value of his liabilities from that of his assets, and then to add together these net capitals of different persons to get the capital of society.
This method of obtaining society's net capital may be called the method of balances; for we balance the books of each individual. The other method is to cancel each liability against an equal and opposite asset, which equal and opposite asset, as we shall see, must exist somewhere in another individual's account, and then add the remaining assets. This method may be called the method of couples; for we couple items in two different accounts. The method of couples is based on the fact that every liability item in a balance sheet implies the existence of an equal asset in some other balance sheet. This is true because every debit implies a credit. A debt may be owed to somebody, as well as from somebody, a debtor, and the debt of the debtor is the credit of the creditor. It follows that every negative term in one balance sheet may be canceled against a corresponding positive term in some other. Each of these two methods of balances and of couples-is important in its own way.
If, then, we suppose balance sheets so constructed as to include all the real and fictitious persons in the world, with entries in them for every asset and lia- CAPITAL bility-even public parks, and streets, household furniture, and other possessions not formally accounted for in ordinary practice-it is evident that we shall obtain, by the method of balances, a complete account of the distribution of capital value among real persons; and, by the methods of couples, a complete list of the articles of actual wealth thus owned. In this list there will be no stocks, bonds, mortgages, notes, or other part rights, but only land, buildings, and other land improvements, and commodities. All debit and credit items being two-faced-positive and negative cancel out in the total.
In spite of this close association between them, capital and income have thus far been considered separately.
The question now arises: How can we calculate the value of capital from that of income or vice versa? The bridge or link between them is the rate of interest.
Although the rate of interest may be used either for computing from present to future values, or from future to present values, the latter process is far the more important of the two. Accountants, of course, are constantly computing in both directions, for they have both sets of problems to deal with; but the problem of time valuation which nature sets us is that of translating the future into the present; that is, the problem of ascertaining the value of capital. The value of capital must be computed from the value of its expected future income.
We cannot proceed in the opposite direction and derive the value of future income from the value of present capital. This statement is at first puzzling, for we think of income as derived from capital, and, in a sense, this is true.
Income is derived from capital goods.
But the value of the income is not derived from the value of those capital goods. On the contrary, the value of the capital is derived from the value of the income.
Not until we know how much income an item of capital will bring us can we set any valuation on that capital at all.
It is true that the wheat crop depends on the land which yields it. But the value of the crop does not depend on the value of the land. On the contrary, the value of the land depends on the value of its crop.
The present worth of anything is what men are willing to give for it.
In order that each man may decide what he is willing to give, he must have (1) some idea of the value of the future benefits his purchase will bring him, and (2) some idea of the rate of interest by which these future values may be translated into present values by discounting. With these data he may derive the value of any capital from the value of ing. With these data he may derive the value of any capital from the value of its income by means of the connecting link between them called the rate of This derivation of capital value from income value is called "capitalizing" income. interest.
Savings in its broadest sense includes more than simply saved money. It in- cludes all the net increase in capital value after all income has been detached.
It is the net appreciation, or the differ- ence between the interest accrued and the income taken out. Savings are the income taken out. therefore still a part of capital. They are the part of capital saved from being taken out for income. They are not a part of income taken out. The individual is always struggling between saving more capital and taking out more income. He cannot do both-have his cake and eat it, too. nature of capital and income, we may To recapitulate, in a few words, the now say that those parts of the material the dominion of man, constitute his capital wealth; its ownership, his capital property; its value, his capital value.
Capital value implies anticipated in property; its value, his capital value. Capital value implies anticipated innow say that those parts of the material fits or its value. When values are considered, the causal relation is not from capital to income, but from income to capital; not from present to future, but from future to present. In other words, value of the expected income. the value of capital is the discounted value of the expected income. nal jurisprudence the punishment of CAPITAL PUNISHMENT, in crimitreme penalty, notwithstanding the practice of the world from the remotest times down to the present day, has frequently been reprobated by philosophers and philanthropists, who have even gone so down to the present day, has frequently any earthly power. In the United States, each State has jurisdiction over its own territory, and the laws punishing crime differ in several respects. In many of the States murder is by statute divided into different degrees, differing from territory, and the laws punishing crime tion which accompany the act. Death by hanging, or electrocution, is the usual penalty for murder of the first degree, but in a few States imprisonment for life is substituted for capital punishment.
For the various methods of execution, see EXECUTON.