ts--the plant, machinery and other property--plus
the elusive qualities which are bound up in the word "goodwill,"
representing the selling power, organisation, and the expectation of
future profits. The capitalisation of the reserve simply affects the
manner in which the liabilities of the company are arranged, and
the existence of a reserve fund merely means that the Ordinary
shareholders have a claim to a larger amount than their nominal
holding in case of liquidation. It does not matter in the least
whether this larger claim is handed to them in the shape of a
certificate, since the nominal amount of their claim has nothing
whatever to do with the amount that their claim realises to them
annually in the shape of dividends, or in the event of liquidation,
from the realisation of the company's assets.

In fact, the capitalisation of reserves is sometimes criticised by
economic purists as a retrograde step because it seems likely to
encourage the directors to be extravagant in the matter of dividends.
In the example which we supposed above of the company with a capital
of three millions and reserve fund of one million, if the reserve fund
is turned into Ordinary shares and the earning power of the company
remains the same there may obviously be a temptation to the directors
to modify the prudent policy under which they had hitherto placed one
hundred thousand a year to reserve, because if they continued it the
shareholders would discover they were really no better off and that
they simply got a lower rate of dividend on the larger amount of
shares, and that their actual receipts from the company were exactly
the same as before. And if the earning power of the company remained
the same and the directors left off placing the one hundred thousand
a year to reserve, and paid away the whole of the net profit in
dividend, it is clear that the progressive expansion of the company's
business would be to that extent checked. On the other hand, there is
a contrary argument that as long as the company has a large reserve
fund there is a possibility that dissatisfied shareholders may agitate
for a realisation of sufficient assets to enable that reserve fund to
be distributed, especially if it has been wholly acquired out of past
profits. In this case the capitalisation of the reserve fund puts this
temptation out of their reach since, when once the reserve fund has
been capitalised, it can only be got at by greedy shareholders thr