ments. If the
directors now decide to capitalise that L1,000,000 of reserve fund,
the only effect is that each shareholder will be given one new share
for every three which he holds in the existing capital, the reserve
fund will be wiped out, and the ordinary capital will be increased
from L3,000,000 to L4,000,000. None of the shareholders will be in
actual fact better off to the extent of one halfpenny, because all
will be in the same position with regard to one another; their
relative shares in the enterprise will not have been altered. If we
imagine, by way of simplifying the problem, that all the Ordinary
shares were in one hand, that one holder would have had in his
Ordinary shares a claim to the total assets of the company, that is
to say, to its earning power as long as it is a going concern, and to
whatever its assets realise if it went into liquidation; the fact that
L1,000,000 worth of the assets had been bought out of past profits or
premiums paid on new issues of shares would have already added to the
value of the claim that he had on the property of the company, and no
addition would be made to that value by turning the reserve fund into
shares.

In other words, the reserve fund is already the property of the
shareholders, and to convert it from reserve fund into capital, making
them a present of new shares, which merely represent their claim
to the assets held against the reserve fund, is as empty a gift as
presenting a man with a piece of paper informing him that he is the
owner of his own hat. All this remains equally true if, besides the
ordinary capital, there is a considerable amount outstanding of
Preference shares and Debenture debt. In any case, the Ordinary
shareholders possess a claim to the earning power of the company when
prior charges have been satisfied, and to whatever surplus may remain
on liquidation after first charges have been paid off in full. Whether
that interest of theirs is represented by a larger or smaller number
of shares, or by shares of a larger or smaller denomination, or by a
reserve fund upon which they have a claim when all other claims have
been settled makes no difference whatever as a matter of academic
fact. Apart from the sentiment of the matter, there is no reason why
ordinary capital should have any nominal value.

As to the earning power of the company, that, of course, is not
affected one whit by the process. The earning power of the company is
all in the asse