Sec. 9] CAPITAL ACCOUNTS 81

§9

The original capital of a concern may therefore be either
increased or decreased. In the course of its fluctuations
it may sometimes shrink to zero. If it sinks below zero we
have insolvency, — the condition in which assets fall short
of liabilities. The capital-balance is intended to prevent
this very calamity; that is, it is for the express purpose
of guaranteeing the value of the other liabilities.
These other liabilities represent, for the most part, fixed
blocks of property carved out, as it were, of the assets, and
which 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 this
“slack” ought properly to be taken up or given out by the
capital, surplus, and undivided profits. Capital thusacts asa
buffer to keep the liabilities from overtaking the assets. Itis
the “margin’’ put up by those most interested in an enterprise,
 as a guarantee to others who advance their capital to it.
The amount of capital-balance necessary to make a business
reasonably safe will differ with circumstances. A capitalbalance
 equal to five per cent of the liabilities may, in one
kind of business, such as mortgage companies, be perfectly
adequate, whereas fifty per cent may be required in another
kind. Much depends on how likely the assets are to shrink
and how much; and much, likewise, on the character of the
liabilities. If the assets have stability of value, less capital
will be required than if they consist of speculative securities.
The risk of insolvency is, then, the chance that the assets
may shrink below the liabilities. This risk is the greater,
the more shrinkable the assets, and the less the margin of
capital-value between assets and liabilities. The subject
lends itself to mathematical and statistical treatment;
but to work out the quantitative relations would lead us
far afield ; it would require much statistical material, and
its analysis by the mathematics of chances.

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