138 EDWARD SHERWOOD MEADE 



should always pay out less than it earns, in order that an ade- 

 quate surplus reserve should be accumulated. The surplus 

 reserve of a corporation is that part of its net earnings which 

 is set aside before dividends are declared. The effect of an 

 adequate surplus reserve is thus to guarantee the dividend 

 rate, and to cause the securities of the corporation so pro- 

 tected to sell for prices eqUal to or greater than their face 

 value. 



The amount of surplus required to give this standing 

 to a corporation varies with the nature of the business and 

 naturally bears a certain proportion to capitahzation. This 

 proportion should be increased with the irregularity of earn- 

 ings or of expenses. 



Iron and steel, although staple commodities, neverthe- 

 less, from the standpoint of the surplus reserve which is neces- 

 sary to sustain the dividend rate of corporations engaged in 

 their production, belong to the class of commodities whose 

 demand is fitful and uncertain, and whose methods of produc- 

 tion are constantly being revolutionized. The surplus reserve 

 of a steel company should, therefore, be larger in proportion 

 to its average earning power than the reserve of a railway cor- 

 poration, if its securities are to sell at investment prices. Only 

 by the accumulation of a large proportion of surplus earnings 

 in a form in which they can be got at on short notice, can a 

 corporation engaged in the manufacture of steel guarantee to 

 the investor that, if he buys its securities, his sleep shall be 

 sweet. European manufacturers recognize this necessity. 

 They are extremely cautious in the pajmient of dividends, and 

 their depreciation accounts are generally large. 



A large surplus reserve is of peculiar value when earnings 

 are suddenly threatened by competition. During the brief 

 interval when the conflict is raging, this storehouse can be 

 drawn upon to sustain the dividend rate ; and the corporation 

 thus strengthened can sail into the safe harbor of a pool or 

 combination with its credit unimpaired and its financial repu- 

 tation intact, while a few passed dividends might have in- 

 flicted a damage upon its reputation which a long period of 

 subsequent good conduct might have difficulty in repairing. 

 The American Sugar Refining company, for example, has been 



