STOCK DIVIDENDS 
17 
led to a policy of extremely liberal dividends to stockholders, as 
compared with 1913-1919. This is indicated by the fact that out 
of the total surplus available for distribution from 1913 to 1919 for 
2,971 corporations paying stock dividends, only about 43 per cent 
was actually distributed either in cash, stock, or other dividends, 
while from 1920 to 1926 the dividend distribution aggregated about 
62 per cent. While there was a large increase in cash dividends from 
1920 to 1926 as compared with the preceding seven years for corpor- 
ations paying stock dividends, it amounted to less than 100 per cent 
as compared with an increase of nearly 500 per cent in stock divi- 
dends. (Table 5.) The reasons are not difficult to understand. 
Prior to the stock dividend decision the profits taxes and war-time 
requirements for capital rendered large reinvestments in property 
desirable as has been stated, while the large surtaxes combined with 
uncertainty as to whether stock distributions were taxable to share- 
holders, tended to prevent the capitalization of the surplus represent- 
ing this reinvestment. While the return to a peace-time basis and the 
abolition of the excess-profits taxes removed the two earlier incen- 
tives to a large invested capital, the enormous development and 
expansion of industry since that date has furnished an almost equally 
powerful motive for continued reinvestment in the property and 
business. 
Although a considerably lower proportion of the total surplus 
attributable to the later period was reinvested in the property at the 
end of 1926 than of the surplus attributable to the earlier period at 
the end of 1919, the total amount of the reinvestment in the case of 
2,971 corporations paying stock dividends in the later period was 
larger;about 2.7 billions as compared with about 2.2 billions. There 
was, therefore, an enormous reinvestment in the later as well as in 
the earlier period much of which could not in consequence be distribu- 
ted in cash or other assets. 
With the decision in Eisner ». Macomber that stock dividends were 
not taxable as income to stockholders any inhibitions against such 
dividends resulting from their possible effect in increasing the sur- 
taxes of large shareholders were removed. High surtaxes on large 
individual incomes though successively reduced from war levels and 
eliminated so far as the smaller incomes were concerned, were still 
in effect, however. To the extent that the corporation distributed 
dividends in stock rather than in cash the business expansion of 
1920-1926 could be financed and the stockholders could at the same 
time be given some tangible evidence of their increasing equity 
without the larger shareholders becoming taxable thereon. The net 
result was a much greater increase in stock than in cash dividends. 
One or two further points with reference to the stock dividends of 
1920-1926 may be noted. The first is that despite the large earnings 
of the last seven years, the net increase in accumulated surplus for 
2,971 corporations paying stock dividends was only some three hundred 
odd millions during this period. In other words these corporations 
distributed the equivalent of all but a small proportion of their huge 
surplus obtained from earnings and adjustments from 1920 to 1926. 
The size of these distributions combined with the fact that so large 
a proportion of them was in stock caused a pronounced reduction 
in surplus per dollar of capitalization. As of the date of closing 
nearest January 1, 1920, the stock capitalization of these corporations