Sec. 3] CAPITAL ACCOUNTS 71

we should expect the shares to sell at juw=190. The
actual selling price, however, is $240. kere are discrepancies
 which call for explanation. If a business man were
called upon to explain them, he would say that book
values and market values are entirely distinct, the latter
depending on estimated ‘‘earning power.” The stock is
worth its “capitalized earning power,” and its value
fluctuates from day to day in response to a thousand
causes. This is quite true, but it does not constitute a distinction
 between book values and market values, for book
values also represent estimated earning power. The book
valuations of the company’s lands, buildings, machinery, etc.,
were originally determined by their earning power; their
cost value was, at the time of purchase, a market estimate
of earning power as truly as the market price of stock. This
principle holds true of liabilities as well as of assets. The
liabilities are simply capitalized charges, interest, rentals,
and other expenses.
The meaning of the discrepancy is, therefore, not that one
valuation depends on earning power and the other not,
but that there are two estimates, one that of the bookkeeper,
 which is seldom revised and usually conservative,
and the other that of the market, which is revised daily.
Thus the stockholders of the Second National Bank are
credited by their bookkeeper with owning $1,295,952.59,
whereas in reality the total value of their property is more
nearly $2,100,000. The bookkeeper has systematically
undervalued the assets of the bank, and even omitted some
valuable assets altogether, such as good will. The object
of a conservative business man in keeping his books is not
to give mathematical accuracy, but to make so conservative
 a valuation as to be well within the market, even in
times of financial stress. He is more interested in safety
than in precision, and in maintaining his solvency even in
the face of heavy shrinkage of market values than in meeting
 the requirements of ideal statistics.