88 NATURE OF CAPITAL AND INCOME [Cuap, V
down as a bad asset worth only $10,000 instead of
$50,000; that is, B’s assets shrink $40,000. A’s loss is thus
enough to wipe out all of B’s capital of $30,000, and pare
down the value of his other liabilities by $10,000, so that B
can now pay only $30,000 out of the $40,000 he owes. In
other words, he is able to pay only 75 cents on the dollar.
Next comes C, who has $20,000 invested in B’s note. He
gets only 75 cents on the dollar, so that this asset, nominally
worth $20,000, is found to be worth only $15,000, and his
loss is only $5000. This loss is not enough to wipe out all
his capital, but only reduces it from $30,000 to $25,000,
so that C remains solvent. Consequently D, who owns (’s
bills for $5000, will lose nothing. The force of the catas-
trophe has been spent. It ruined A and B and injured C,
but stopped short of D.
From this example we may see that the statistics of
bankruptcies are often misleading. Thus, it is usual for
the. statistician to sum up the liabilities of all bankrupt
firms. But in case the various firms are connected, as in
the above example, the total sum lost is not as great as
though the same amount of bankruptcy occurred in inde-
pendent firms. In the preceding example the only loss is
$90,000, all in A’s assets. But there would appear to be
a loss of $90,000 in A’s account, one of $40,000 in B’s
account, and one of $5000 in C’s, or $135,000 in all.
This misleading result is evidently due to counting parts
of the loss twice and three times.
Failures are sometimes due to a false fear of calamity,
a shock to business confidence. This will cause a shrinkage
of values in several ways. For instance, it will induce
creditors to demand payment and refuse renewals of bills,
Forced liquidation and contraction of credit are the result.
No physical capital is destroyed, but the form of ownership
is violently disturbed, and often the management, being
transferred from stockholders to bondholders, is turned
from competent to incompetent hands. Above all, the
