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CHAPTER 6 | Firms, the Stock Market,
and Corporate Governance
Brief Chapter Summary and Learning Objectives
6.1 Types of Firms (pages 170–173)
Categorize the major types of firms in the United States.
▪ There are three legal categories of firms: sole proprietorships, partnerships, and
corporations.
6.2 The Structure of Corporations and the Principal-Agent Problem
(pages 173–174)
Describe the typical management structure of corporations and understand the concepts of
separation of ownership from control and the principal-agent problem.
▪ Corporations have a separation of ownership from control. The conflict between the
interests of shareholders and the interests of top management is the principal-agent
problem.
6.3 How Firms Raise Funds (pages 174–181)
Explain how firms raise the funds they need to operate and expand.
▪ Owners of small businesses can obtain funds for expansion by reinvesting profits, taking
on partners, or borrowing from relatives, friends, or a bank. Firms can raise external
funds by relying on financial intermediaries or through financial markets.
6.4 Using Financial Statements to Evaluate a Corporation (pages 181–183)
Understand the information provided in corporations’ financial statements.
▪ An income statement sums up a firm’s revenues, costs, and profit over a period of time.
A firm’s balance sheet sums up its financial position on a particular day.
6.5 Corporate Governance Policy and the Financial Crisis of 2007–2009
(pages 183–187)
Discuss the role that corporate governance problems may have played in the financial
crisis of 2007–2009.
▪ Between 2007 and 2009 a problem in the market for home mortgages led to the worst
financial crisis since the Great Depression. In 2010, Congress overhauled regulation of
the financial system with the passage of the Wall Street Reform and Consumer Protection
Act.

116 CHAPTER 6 | Firms, the Stock Market, and Corporate Governance
Appendix: Tools to Analyze Firms’ Financial Information (pages 193–199)
Understand the concept of present value and the information contained on a firm’s income
statement and balance sheet.
Key Terms
Accounting profit, p. 182. A firm’s net income,
measured as revenue minus operating expenses
and taxes paid.
Asset, p. 170. Anything of value owned by a
person or a firm.
Balance sheet, p. 183. A financial statement that
sums up a firm’s financial position on a particular
day, usually the end of a quarter or year.
Bond, p. 175. A financial security that
represents a promise to repay a fixed amount of
funds.
Corporate governance, p. 173. The way in
which a corporation is structured and the effect
that structure has on the corporation’s behavior.
Corporation, p. 170. A legal form of business
that provides owners with protection from losing
more than their investment should the business
fail.
Coupon payment, p. 175. An interest payment
on a bond.
Direct finance, p. 175. A flow of funds from
savers to firms through financial markets, such
as the New York Stock Exchange.
Dividends, p. 177. Payments by a corporation to
its shareholders.
Economic profit, p. 183. A firm’s revenues
minus all of its implicit and explicit costs.
Explicit cost, p. 182. A cost that involves
spending money.
Implicit cost, p. 182. A nonmonetary
opportunity cost.
Income statement, p. 182. A financial statement
that shows a firm’s revenues, costs, and profit
over a period of time.
Indirect finance, p. 175. A flow of funds from
savers to borrowers through financial
intermediaries such as banks. Intermediaries
raise funds from savers to lend to firms (and
other borrowers).
Interest rate, p. 175. The cost of borrowing
funds, usually expressed as a percentage of the
amount borrowed.
Liability, p. 182. Anything owed by a person or
a firm.
Limited liability, p. 170. The legal provision
that shields owners of a corporation from losing
more than they have invested in the firm.
Opportunity cost, p. 182. The highest-valued
alternative that must be given up to engage in an
activity.
Partnership, p. 170. A firm owned jointly by
two or more persons and not organized as a
corporation.
Principal-agent problem, p. 173. A problem
caused by an agent pursuing his own interests
rather than the interests of the principal who
hired him.
Separation of ownership from control, p. 173.
A situation in a corporation in which the top
management, rather than the shareholders,
controls day-to-day operations.
Sole proprietorship, p. 170. A firm owned by a
single individual and not organized as a
corporation.
Stock, p. 177. A financial security that
represents partial ownership of a firm.
Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act), p. 185. Legislation
passed during 2010 that was intended to reform
regulation of the financial system.

CHAPTER 6 | Firms, the Stock Market, and Corporate Governance 117
Key Terms—Appendix
Present value, p. 193. The value in today’s
dollars of funds to be paid or received in the
future.
Stockholders’ equity, p. 199. The difference
between the value of a corporation’s assets and
the value of its liabilities; also known as net
worth.
Chapter Outline
Facebook Learns the Benefits and Costs of Becoming a Publicly Owned Firm
Nine years after Mark Zuckerberg started Facebook in 2004, the company had more than 1 billion active
users. Zuckerberg started Facebook because he believed that people were less interested in meeting new
friends online than they were in finding a better way to stay in touch with friends they already had. In the
fall of 2011, Facebook needed to raise funds quickly to finance its expansion. Turning Facebook into a
public firm and selling stock would raise revenue, but buyers of the stock would have a partial claim on
its profits and could question Zuckerberg’s leadership. In May 2012, Facebook finally did sell shares of
stock to the public. But during the following year, Facebook had difficulty selling advertisements and
revenue grew more slowing than expected. In 2013, Facebook’s stock finally rose above the initial price,
providing gains for investors who bought at that price.
6.1
Types of Firms (pages 170–173)
Learning Objective: Categorize the major types of firms in the United States.
In the United States, there are three main categories of firms. A sole proprietorship is a firm owned by a
single individual and not organized as a corporation. A partnership is a firm owned jointly by two or
more persons and not organized as a corporation. Most law and accounting firms are partnerships. Most
large firms are organized as corporations. A corporation is a legal form of business that provides owners
with protection from losing more than their investment should the business fail.
A. Who Is Liable? Limited and Unlimited Liability
The owners of sole proprietorships and partnerships have unlimited liability, which means that there is no
legal distinction between the personal assets of the owners and the assets of the firm. An asset is anything
of value owned by a person or a firm. Beginning in the early nineteenth century, state legislatures began
to pass laws that allowed firms to be organized as corporations. Under the corporate form of business, the
owners have limited liability. Limited liability is the legal provision that shields owners of a corporation
from losing more than they have invested in the firm. The personal assets of the owners of the firm are
not affected if the firm fails. Limited liability makes it possible for corporations to raise funds by issuing
shares of stock to a large number of investors. Corporate profits are taxed twice—once at the corporate
level and again when investors receive a share of corporate profits. Corporations are generally larger than
sole proprietorships and partnerships and more difficult to organize and run.
B. Corporations Earn the Majority of Revenue and Profits
Although only 18 percent of all firms are corporations, corporations account for the majority of revenue
and profits earned by all firms.

Teaching Tips
Corporations are often described as “publicly owned.” Be sure your students do not mistakenly believe
this phrase means “government owned.”
Extra Solved Problem 6.1
The Risks of Private Enterprise: The “Names” of Lloyd’s of London
The world famous insurance company Lloyd’s of London got its start in London in the 1600s. Ship
owners would come to Edward Lloyd’s coffeehouse to find someone to insure (or “underwrite”) their
ships and cargo for a fee. Coffeehouse customers—merchants and ship owners themselves—who agreed
to insure ships would make payments from their personal funds if a ship was lost at sea. By the late
1700s, each underwriter would recruit investors known as “Names” and use the funds raised to back
insurance policies sold to a wide variety of clients.
By the 1980s, 34,000 people around the world had invested in Lloyd’s as Names. A series of disasters in
the 1980s and 1990s—such as earthquakes and oil spills—resulted in huge payments made on Lloyd’s
insurance policies. It had become clear that Lloyd’s was not a corporation and the Names did not have the
limited liability that a corporation’s stockholders have. Many Names lost far more than they had invested.
Some of those who invested in Lloyd’s had the financial resources to absorb their losses, but others did
not. Tragically, as many as 30 Names may have committed suicide as a result of their losses. By 2011,
only about 700 Names remained invested in Lloyd’s. New rules allow insurance companies to underwrite
Lloyd’s policies for the first time, and Names now provide less than 15 percent of Lloyd’s funds.
a. What characteristic of Lloyd’s of London’s business organization was responsible for the
financial losses suffered by the Names who had invested in Lloyd’s?
b. In the early 2000s, corporations such as Enron and WorldCom suffered severe losses after it was
discovered that executives of the firms had falsified financial statements to deceive investors.
How were the losses suffered by Enron and WorldCom stockholders different from the losses
suffered by Lloyd’s of London’s Names?
Solving the Problem
Step 1: Review the chapter material. This problem is about firms and corporate governance, so
you may want to review the section “Types of Firms,” which begins on page 170 in the
textbook.
Step 2: Answer part (a) by explaining what characteristic of Lloyd’s of London’s business
organization was responsible for the financial losses suffered by the Names who
had invested in Lloyd’s. Lloyd’s of London was a partnership. A disadvantage of
partnerships, as well as sole proprietorships, is the unlimited personal liability of the owners of
the firm. The liability Lloyd’s partners, or Names, incurred went beyond the amount of funds
they invested in the company. Therefore, when the insurance company was hit with a series of
financial losses some of the Names suffered severe financial losses.
Step 3: Answer part (b) by explaining how the losses suffered by Enron and WorldCom
stockholders were different from the losses suffered by Lloyd’s of London’s
Names. Enron and WorldCom were corporations, so their stockholders had limited liability.
Their losses were limited to the amount they had invested in these firms.

6.2 The Structure of Corporations and the Principal-Agent Problem
(pages 173–174)
Learning Objective: Describe the typical management structure of corporations and
understand the concepts of separation of ownership from control and the principal-agent
problem.
Corporate governance is the way in which a corporation is structured and the effect that structure has on
the corporation’s behavior.
A. Corporate Structure and Corporate Governance
Corporations are legally owned by their shareholders, the owners of the corporation’s stock. Shareholders
do not manage the firm directly but elect a board of directors to represent their interests. The board of
directors appoints a chief executive officer (CEO) to run day-to-day operations and may appoint other top
management. Managers may serve on the board of directors; they are referred to as inside directors.
Outside directors are directors who do not have a management role in the firm. The top management of a
large corporation does not generally own a large share of the firm’s stock, so there is a separation of
ownership from control: A situation in a corporation in which the top management, rather than the
shareholders, controls day-to-day operations. The separation of ownership from control is an example of a
principal-agent problem: A problem caused by an agent pursuing his own interests rather than the
interests of the principal who hired him.
Teaching Tips
Although the principal-agent problem is a serious one, managers who pursue their own goals at the
expense of the firm’s best interests invite the scrutiny of institutional investors such as mutual funds and
pension funds. Unlike many shareholders who have modest stock holdings, institutional investors often
hold a significant percentage of a firm’s outstanding shares. These large investors can demand that a
board of directors make strategic and personnel changes if a firm’s performance is unsatisfactory and they
may cause a drop in share prices by selling some or all of their stock holdings.
Extra Making
the
Connection
Take Me Out to the Board Room
The Topps Company, famous for selling baseball cards and Bazooka bubblegum, saw its fortunes slump
beginning in the mid-1990s as its youngest customers turned to video games and the Internet. Topps
management decided to put the company up for sale. In the spring of 2007, Tornante Co., headed by
former Walt Disney CEO Michael Eisner, and another firm offered to buy Topps. A majority of Topps’
board of directors approved the deal and recommended that its shareholders do so as well. But three of the
ten board members dissented, claiming that the price Eisner’s group offered was not high enough. In fact,
Upper Deck, a rival in the baseball card market, later submitted a bid for Topps that was 10 percent
higher than the bid that the Topps board approved. After several months, Upper Deck’s management
finally withdrew its bid but not before publicly complaining that Topps consistently ignored Upper
Deck’s requests for “information about the company’s operations.” The lower bid of the Eisner group was
finally accepted in the fall of 2007. But why did Topps not welcome Upper Deck’s offer? Some analysts
perceived a principal-agent problem because the CEO and other Topps executives may have lost their
jobs if the firm were sold to Upper Deck. In announcing his bid, Eisner made it clear that he and his

partners were interested only in taking a financial interest in Topps and that management changes would
not be made.
Sources: Tennille Tracy, “Topps Throws Spitballs Into Upper Deck,” Wall Street Journal Online, August 23, 2007.
http://blogs.wsj.com/deals/2007/08/23/topps-throws-spitballs-into-upper-deck/; Dana Cimilluca, “At Topps, a Bench Clearing
Brawl,” Wall Street Journal Online, March 14, 2007. http://blogs.wsj.com/deals/2007/03/14/at-topps-co-a-bench-clearing-brawl/
6.3
How Firms Raise Funds (pages 174–181)
Learning Objective: Explain how firms raise the funds they need to operate and expand.
To earn a profit, a firm must raise funds to pay for its operations. If a small business is successful and the
owner decides to expand, it can obtain funds in three ways. First, the firm can reinvest its profits, called
retained earnings. Second, the owner can take on one or more partners who invest in the firm. Third, the
owner can borrow funds from relatives, friends, or a bank.
A. Sources of External Funds
Unless firms rely on retained earnings, they must obtain the external funds they need from others. The
economy’s financial system transfers funds from savers to borrowers—directly through financial markets
or indirectly through financial intermediaries such as banks. Firms raise external funds in two ways.
Indirect finance refers to a flow of funds from savers to borrowers through financial intermediaries such
as banks. Intermediaries raise funds from savers and lend to firms (and other borrowers). The second way
to acquire external funds is through financial markets. Direct finance refers to a flow of funds from
savers to firms through financial markets, such as the New York Stock Exchange. A financial security is a
document that states the terms under which funds have passed from the buyer to the borrower. A bond is
a financial security that represents a promise to repay a fixed amount of funds. The interest rate is the
cost of borrowing funds, usually expressed as a percentage of the amount borrowed. The interest rate on a
bond is equal to the coupon payment, which is an interest payment on a bond, divided by the amount
borrowed. For example, if the annual interest payment on a $1,000 bond is $40, then the interest rate is:
$40
0.04,or 4%
$1,000
=
Many bonds that corporations issue have maturities of 30 years. The interest rate that a borrower selling a
bond has to pay depends on how likely bond buyers think that the bond seller is to default. The higher the
default risk on a bond, the higher the interest rate.
A stock is a financial security that represents partial ownership of a firm. When a corporation sells stock,
it is increasing its financial capital by bringing additional owners into the firm. A shareholder is entitled to
a share of the corporation’s profits. Corporations generally keep some profits—known as retained
earnings—to finance expansion. The remaining profits are paid to shareholders. Dividends are payments
by a corporation to its shareholders. A corporation must make promised payments to bondholders before
it can make dividend payments to shareholders.
B. Stock and Bond Markets Provide Capital—and Information
Most buying and selling of stocks and bonds involves investors reselling existing stocks and bonds. There
is no single place where stocks and bonds are bought and sold. Some trading takes place in buildings
called exchanges, but computer technology has spread the trading of stocks and bonds to dealers outside
of exchanges. Changes in the prices of stocks, bonds, and other securities reflect investors’ future
expectations. A bond that was issued in the past may have its price increase or decrease, depending on
whether the coupon payments being offered on newly issued bonds are higher or lower than on existing

bonds. The price of a bond will also be affected by changes in default risk, or investors’ perceptions of the
issuing firm’s ability to make coupon payments.
Changes in the value of stocks and bonds offer information for a firm’s managers as well as investors. An
increase in the stock price means that investors are more optimistic about the firm’s profit prospects, and
the firm might want to expand as a result. A decrease in the firm’s stock price indicates that investors are
less optimistic about the firm’s profit prospects, so management might want to shrink the firm’s
operations.
C. Why Do Stock Prices Fluctuate So Much?
Stock market indexes are averages of stock prices with the value of the index set equal to 100 in the base
year. The three most widely followed U.S. stock indexes are: the Dow Jones Industrial Average, the
Standard and Poor’s (S&P) 500, and the NASDAQ composite index. All three indexes follow a roughly
similar pattern: Increases in stock prices during expansion and declines in stock prices as the U.S.
economy is in a recession.
Teaching Tips
The double taxation of corporate profits—once from the corporate profits tax and again from the income
tax on shareholders’ dividends—gives corporations an incentive to raise funds more through debt (bonds)
than equity (stocks). Some economists have criticized the corporate profits tax for the incentive it gives
corporations to incur debt solely for the tax consequences of doing so.
Extra Solved Problem 6.2
Does the Principal-Agent Problem Apply to the Relationship between Managers and
Employees?
Briefly explain whether you agree with the following argument:
The principal–agent problem applies not just to the relationship between shareholders and top
managers. It also applies to the relationship between managers and workers. Just as shareholders
have trouble monitoring whether top managers are earning as much profit as possible, managers
have trouble monitoring whether employees are working as hard as possible.
Solving the Problem
Step 1: Review the chapter material. This problem concerns the principal–agent problem, so you
may want to review the section “Corporate Structure and Corporate Governance” which
begins on page 173.
Step 2: Evaluate the argument material. You should agree with the argument. A corporation’s
shareholders have difficulty monitoring the activities of top managers. In practice, they
attempt to do so indirectly through the corporation’s board of directors. But the firm’s top
managers may influence—or even control—the firm’s board of directors. Even if top
managers do not control a board of directors, it may be difficult for the board to know
whether actions managers take—such as opening a branch office in Paris—will increase the
profitability of the firm or just increase the enjoyment of the top managers.
To answer the problem, we must extend this analysis to the relationship between managers
and workers: Managers would like employees to work as hard as possible. Employees would
often rather not work hard, particularly if they do not see a direct financial reward for doing
so. Managers can have trouble monitoring whether employees are working hard or goofing

off. (Is that employee in his cubicle diligently staring at a computer screen because he is hard
at work on a report or because he is surfing the Web for sports scores or posting to his
Facebook page?) So, the principal–agent problem does apply to the relationship between
managers and employees.
Extra Credit: Boards of directors try to reduce the principal–agent problem by designing compensation
policies for top managers that give them financial incentives to increase profits. Similarly, managers try to
reduce the principal–agent problem by designing compensation policies that give workers an incentive to
work harder. For example, some manufacturers pay factory workers on the basis of how much they
produce rather than on the basis of how many hours they work.
6.4
Using Financial Statements to Evaluate a Corporation (pages 181–183)
Learning Objective: Understand the information provided in corporations’ financial
statements.
Before a firm can sell new issues of stocks or bonds, it must provide investors with information about its
finances. In the United States, the Securities and Exchange Commission (SEC) requires publicly owned
firms to report their performance according to generally accepted accounting principles. Some private
companies (for example, Moody’s Investor Service and Standard and Poor’s) collect information from
businesses and sell it to subscribers. Investors and the managers of firms need information regarding the
firm’s revenues and costs, as well as information regarding the value of the property and other assets the
firm owns and the firm’s debts or other liabilities it owes to others. A liability is anything owed by a
person or a firm. The information investors need to know to decide whether to buy a firm's stocks or
bonds is contained in the firm's financial statements.
A. The Income Statement
A firm’s income statement is a financial statement that shows a firm’s revenues, costs, and profit over a
period of time. Accounting profit is a firm’s net income, measured as revenue minus operating expenses
and taxes paid. Economic profit is the firm’s revenues minus all of its implicit and explicit costs.
Because economic profit takes into account all costs, it provides a better indication than accounting profit
of how successful a firm is. Economists always measure cost as opportunity cost. Opportunity cost is the
highest-valued alternative that must be given up to engage in an activity. An explicit cost is a cost that
involves spending money. An implicit cost is a nonmonetary opportunity cost. The firm’s most important
implicit cost is the opportunity cost to investors of the funds they have invested in the firm. The minimum
amount that investors must earn on the funds they invest, expressed as a percentage of the funds invested,
is called a normal rate of return. If a firm fails to provide at least a normal rate of return, then it will not
remain in business over the long run.
B. The Balance Sheet
A balance sheet is a financial statement that sums up a firm’s financial position on a particular day, usually
the end of a quarter or year. A balance sheet summarizes a firm’s assets and liabilities. Subtracting the value
of a firm’s liabilities from the value of its assets leaves its new worth. Net worth is what the firm’s owners
would be left with if the firm were closed, its assets sold, and its liabilities paid off.
Teaching Tips
Although it is a macroeconomic topic, your students may be interested in the role stock prices play as an
admittedly imperfect leading economic indicator. Changes in stock prices reflect firms’ expected future
performance. A sustained rise or decline in stock prices (as reflected in the Standard and Poor’s average

of 500 stocks or the Dow-Jones Industrial Average of 30 stocks) over several weeks or months can be an
early notice of a turning point in the business cycle from recession to expansion or expansion to recession,
respectively.
Extra Making
the
Connection
A Bull in China’s Financial Shop
Prospects for Sichuan Changhong Electric Co., manufacturer of plasma televisions and liquid crystal
displays, looked excellent in 2008, with rapidly growing output, employment, and profits earned from
trade in the world economy. And Changhong was not alone. In the 2000s, the Chinese economy was
sizzling. China’s output grew by 11.4 percent during 2007, dominated by an astonishing 24 percent
growth in investment in plant and equipment. The Chinese economic juggernaut caught the attention of
the global business community—and charged onto the U.S. political stage, as China’s growth fueled
concerns about job losses in the United States.
Yet at the same time, many economists and financial commentators worried that the Chinese expansion—
which was fueling rising living standards in a rapidly developing economy with 1.3 billion people—
would come to an end. The debate seemed to be over whether China’s boom would have a “soft landing”
(with gradually declining growth) or a “hard landing” (possibly leading to an economic financial crisis).
Why the debate? Although China’s saving rate was estimated to be a very high 40 percent of gross
domestic product (GDP)—double or triple the rate in most other countries—the financial system was
doing a poor job of allocating capital. Excessive expansion in office construction and factories was fueled
less by careful financial analysis than by the directions of national and local government officials trying to
encourage growth. With nonperforming loans—where the borrower cannot make promised payments to
lenders—at unheard-of levels, China’s banks were in financial trouble. Worse still, they continued to lend
to weak, politically connected borrowers.
China’s prospects for long-term economic growth depend importantly on a better developed financial
system to generate information for borrowers and lenders. Many economists have urged Chinese officials
to improve accounting transparency and information disclosure so that stock and bond markets can
flourish. In the absence of well-functioning financial markets, banks are crucial allocators of capital.
There, too, information disclosure and less government direction of lending will help oil the Chinese
growth machine in the long run.
Chinese firms, like Changhong, may well play a major role on the world’s economic stage. But China’s
creaky financial system needs repair if Chinese firms are to grow rapidly enough to raise the standard of
living for Chinese workers over the long run.
6.5 Corporate Governance Policy and the Financial Crisis of 2007–2009
(pages 183–187)
Learning Objective: Discuss the role that corporate governance problems may have played
in the financial crisis of 2007–2009.
Firms disclose financial statements in periodic filings to the federal government and in annual reports to
stockholders. The management of a firm has two reasons to attract investors and keep the firm’s stock
price high. First, a higher stock price increases the funds the firm can raise when it sells a given amount of

stock. Second, to reduce the principal-agent problem, boards of directors often tie the salaries of top
managers to the firm’s stock price. However, problems that surfaced during the early 2000s revealed that
some managers inflated profits and hid liabilities. At other firms, managers took on more risk than they
disclosed to investors.
A. The Accounting Scandals of the Early 2000s
In the early 2000s, top managers at some firms, such as Enron and WorldCom, falsified their firms’
financial statements to mislead investors about how profitable they were. The federal government
regulates how financial statements are prepared but cannot guarantee the accuracy of the statements. To
guard against future scandals, the Sarbanes-Oxley Act of 2002 was enacted, which requires CEOs to
personally certify the accuracy of financial statements. Most observers acknowledge that the Sarbanes-
Oxley Act increased confidence in the U.S. corporate governance system, though problems during 2007–
2009 at financial firms again raised questions of whether corporations were adequately disclosing
information to investors.
B. The Financial Crisis of 2007–2009
Beginning in 2007 and lasting into 2009, the U.S. economy suffered the worst financial crisis since the
Great Depression. Beginning in the 1970s, financial institutions began securitizing mortgage loans.
Mortgage-backed securities are similar to bonds—buyers receive regular interest payments, which in this
case come from the payments made on the original mortgage loans. At first, the securitization process was
carried out by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"). Fannie Mae and Freddie Mac would buy mortgages granted to
borrowers and bundle them into securities that were sold to investors. In the 1990s, private financial firms
began securitizing mortgages. By the early 2000s, many mortgages were granted to “subprime”
borrowers, borrowers with flawed credit histories, and “Alt-A” borrowers, who failed to document that
their incomes were high enough to afford their mortgages. Housing prices soared but began falling in
2006. By 2007, many borrowers began to default on their mortgages, and many financial institutions
suffered heavy losses.
Many investors complained that they weren’t aware of how risky some of the assets on the balance sheets
of financial firms were. In the fall of 2008, Fannie Mae and Freddie Mac were brought under direct
control of the government. The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),
is legislation passed during 2010 that was intended to reform regulation of the financial system. The act
created the Consumer Financial Protection Bureau to write rules to protect consumers in their borrowing
and investing activities. The act also established the Financial Stability Oversight Council, which is
intended to identify and act on risks to the financial system.
C. Did Principal-Agent Problems Help Bring on the Financial Crisis?
Beginning in the 1990s, private investment banks began to securitize mortgages. Investment banks had
traditionally concentrated on providing advice to corporations selling stocks and bonds and on
underwriting the issuance of stocks and bonds. To address the risks of investment banking, Congress
passed the Glass-Steagall Act in 1933 to prevent firms from being both commercial banks and investment
banks. Congress repealed the Glass-Steagall Act in 1999. Many of the best-known financial firms
remained investment banks. Mortgage-backed securities originated by investment banks were sold mostly
to investors, but investment banks retained some of the securities as investments. When the prices of the
securities declined in 2007, the investment banks suffered heavy losses. Lehman Brothers declared
bankruptcy, Merrill Lynch and Bear Stearns were sold to commercial banks, and Goldman Sachs and
Morgan Stanley became bank holding companies. The era of the large Wall Street investment bank
appeared to have ended.

Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000 all had
become publicly traded corporations. With a publicly traded corporation, the principal-agent problem can
be severe. Some economists believe that the financial crisis may not have occurred if investment banks
had remained partnerships.
Extra Economics in Your Life:
Spreading the Risks of Stock Ownership
Question: Buying shares of stock would be risky even in the absence of principal-agent problems.
Shareholders enjoy limited liability, but unlike bonds, stock dividends are not always paid, and
shareholders face the possibility that stock prices can fall below the level paid for them. Aside from
buying shares of well-known companies, how can people with limited funds minimize the risks involved
in investing in stocks?
Answer: Many people choose to purchase stocks through mutual funds, which are professionally
managed investments that combine, or pool, the funds of many investors. Mutual fund managers can use
these pooled funds to buy a variety of stocks, rather than just one or two, to minimize the risk that a fall in
the price of one stock will result in large losses. Mutual funds are sold through many investment firms,
and there are funds that specialize in different categories of financial instruments; for example, growth
stocks (stocks with high potential for earnings growth, but with a low potential for slow or negative
growth), stocks of firms in a particular industry, and stocks of firms headquartered in foreign countries.
There are also mutual funds that invest in bonds and short-term assets.
Extra AN INSIDE LOOK News Article to Use in Class
Visit www.myeconlab.com for current An Inside Look news articles.
Appendix
Tools to Analyze Firms’ Financial Information
(pages 193–199)
Learning Objective: Understand the concept of present value and the information contained on a
firm’s income statement and balance sheet.
Large firms raise funds from outside investors, and outside investors seek information on firms and the
assurance that the firms’ managers will act in the interests of investors.
Using Present Value to Make Investment Decisions
If you own shares of stock or a bond, you will receive payments in the form of dividends or coupons over a
number of years. Most people value funds they already have more highly than funds they will receive in the
future. Present value is the value in today’s dollars of funds to be paid or received in the future. Assume
that you are willing to lend $1,000 today if you are paid back $1,100 one year from now. In this case, you
are charging 10 percent on the funds you have loaned. Economists would say that $1,000 today is equivalent
to the $1,100 to be received one year in the future. $1,100 can be written as $1,000 (1 + 0.10). Or:
$1,000 × (1 + 0.10) = $1,100

If we divide both sides of this equation by (1 + 0.10), we can rewrite this as:
0.10)
(1
$1,100
$1,000
+
=
This formula states that the present value is equal to the future value to be received in one year divided by
one plus the interest rate. Writing the formula more generally:
1
Future Value
Present Value
(1 )
i
=
+
The present value of funds to be received in one year can be calculated by dividing the amount of those
funds to be received by 1 plus the interest rate. The formula can be expanded to calculate the value of
funds to be received more than one year in the future. Suppose you are asked to lend $1,000 for two years
and are promised 10 percent interest per year. After two years, you will be paid back $1,100 (1 + 0.10) or
$1,210. Or:
$1,210 = $1,000 (1 + 0.10)(1 + 0.10),
or
$1,210 = $1,000 (1 + 0.10)2
.
This formula can be rewritten as:
2
0.10)
(1
$1,210
$1,000
+
=
We can generalize the concept to say that the present value of funds to be received n years in the future
equals the amount of funds to be received divided by the quantity 1 plus the interest rate raised to the nth
power. Or, more generally:
Future Value
Present Value
(1 )
n
n
i
=
+
where Future Valuen represents funds that will be received in n years.
A. Using Present Value to Calculate Bond Prices
The price of a financial asset, such as a bond, should be equal to the present value of the payments to be
received from owning that asset. The relevant interest rate used by investors in the bond market to
calculate the present value and, therefore, the price of an existing bond is usually the coupon rate on
comparable newly issued bonds. The general formula for the price of a bond is:
1 2
2
Coupon
Coupon Coupon Face Value
Bond Price ...
(1 ) (1 ) (1 ) (1 )
n
n n
i i i i
= + + + +
+ + + +
where Coupon1 is the coupon payment to be received after one year, Coupon2 is the coupon payment to be
received after two years, up to Couponn, which is the coupon received in the year the bond matures. The
ellipsis takes the place of the coupon payments received between the second year and the year the bond

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there was a kind of tacit arrangement that I should do so--and, by
George, I really think I'm hit this time, and that I mean more than
ever I did before."
"Mean more! In what way, Gordon?"
"In the way of marriage, of course, you old idiot. Mean that if I
were to ask her, I think she'd have me. And she'd be a deuced
creditable wife to have about with one; and the governor must just
stir himself, and use his influence and get me a consulship, or a
commissionership, or something where there's a decent income, and
not very much to do for it. There are such things, of course."
"I don't know, Gordon. Recollect these are the days when every
thing is won by merit, and not won without a competitive
examination."
"O yes; competitive examination be hanged! I'm not going in for
any thing of that sort. If a man who's sat for the same borough for
five-and-twenty-years, and never voted against his party except
once, by mistake, when he'd been dining out and strolled into the
wrong lobby--if such a patriot as this can't get a decent berth for his
son without any bother about examination and all that kind of thing,
where are our privileges as citizens? O no; that'll come all square, of
course. But what do you advise me about the girl?"
"It's difficult to give such advice off-hand, Gordon, more especially
as I have never seen the young lady, and have scarcely heard of her.
But though you're not particularly learned, young un, you've plenty
of knowledge of the world, and are one of the last men likely to be
entrapped into a silly marriage, or to let yourself be made miserable
for life by giving in to a mere passing fancy. So if you and the young
lady are really fond of each other, and if your father can be
persuaded to give himself the trouble to get some tolerably decent
Government appointment for you, I should say, 'Propose to her like
an honourable man; and God speed you!' I--I think I should see my

father first, Gordon, and make sure of what he would do; for, from
all I've heard, I don't think Mr. Guyon is a man of resources--I mean
pecuniary resources."
"N-no," said Frere; "I should not think he was. He's a remarkably
chirpy old boy, tells very good stories, and is always well got-up; but
I shouldn't think his balance at his banker's was very satisfactory.
However, Kate's simply charming; stands out from all the ruck of
girls one knows, and is in the habit of meeting and dancing with, like
a star. I'll write down to the governor and sound him about what
he'd be inclined to do; and I'll just go round before dinner to Queen
Anne Street; not to go in, you know,--of course not; but there's the
last Botanical Fête to-morrow in the Regent's Park, and Kate asked
me if I was going, and I said I'd go if she went, and she said she'd
try and get some one to take her. I suppose the old woman who's
always about with her doesn't care for dissipation by daylight. I say,
Charley, fancy if it comes off all straight! Fancy me a married man!"
Yeldham smiled, but said nothing. There was scarcely any
occasion for him to speak; for Frere was full of his subject, and
rattled on.
"How astonished your people will be! I can see the Vicar reading
your letter announcing the news through his double eyeglass, and
then handing it over to little Constance and exclaiming, 'Won-derful!'
And Constance with her large solemn gray eyes, and her pert nose,
and her fresh little mouth; Constance, whom I used to call 'my little
wife' when I was grinding away with the Vicar in those jolly days--ah
what a glorious old fellow he is!--won't she be surprised when she
finds I've got a real wife! And you,--you'll be left alone in chambers,
Charley, old boy; all alone!--though you don't see much of me as it
is, do you, old fellow?"
"No, Gordon; not much," said Yeldham rising; "not so much as I
should wish. But it's pleasant to me to look forward to your coming,
to bring a little of the outside world's life and light into these dreary

old rooms, and to prove to me that I am not actually part and parcel
of these musty old books and parchments, as I'm sometimes half
inclined to believe. However, I could not expect to have you always
with me, any more than I could expect it to be always summer; and
indeed, if you were always here, I should not know what to do with
you. Come, my five minutes' rest has been prolonged into a perfect
idleness. Out with you, and let me get to work again!"
"No, no; not yet, Charley. It's so seldom I have the chance of
getting you to take your nose off the paper, and to open your ears to
any thing that is not law-jargon, that I'm not going to give in so
soon. Besides, I've been talking all this time, and now it's your turn.
I want your advice, and you're going to give it me; and that's all
about it."
"It's a great pity you don't stick to your profession, Gordon," said
Yeldham, half laughingly, half in earnest; "you would have made a
great success at the Old Bailey. You've all the characteristics of that
style of practice charmingly developed; plenty of cheek, plenty of
volubility, and supreme self-reliance. If you had done me the honour
of listening to me instead of thinking what you were going to say
next, you would have heard me advise you half an hour ago."
"Stuff! I heard you fast enough. Propose to the girl, and all that;
very honourable and straightforward, you know, Charley, but a little
old-fashioned, you know,--at least you don't know; how should you,
shut up in this old hole? But what I mean to say is, fellows don't
propose to girls nowadays, old fellow, except in books and on the
stage, and that sort of thing. You understand each other, you know,
without going on your knees, or 'plighting troth,' or any rubbish of
that kind. But what I want to know is, what is my line towards the
old party--Guyon père?"
"Hold on a minute, Gordon," said Charles Yeldham rising from his
chair, plunging his hands into his trousers' pockets, and taking up his
position of vantage on the hearthrug. "Granted all you say about my

being old-fashioned, you yet seem to think that there is a phase of
courtship sufficiently unchanged--I was going to say sufficiently
natural--for me to be able to advise you upon."
"He-ar, he-ar!" said Mr. Frere, knocking the table on which he was
seated.
"But before I attempt to give you any advice, I must know
whether you are really in earnest in this business. Yes; I know you
say you're 'hard hit,' and 'serious this time,' and a lot of stuff that
I've heard you say a dozen times before about a dozen different
girls. What I want to know is, do you really think seriously of
marrying Miss Guyon? Has it entered your mind to regard it from any
other point than the mere calf-love view, what you in your slang call
'being spooney' upon her? I mean, Gordon, old fellow,--I'm a solemn
old fogey, you know; but it's in the fogey light that such a solemn
thing should be looked at--are you prepared to take Miss Guyon as
your wife?"
"On my sacred honour, Charley, there's nothing would make me so
happy."
"Then the honourable way to go to work is to see Mr. Guyon at
once and speak to him. Tell him your feelings and----"
"And my prospects, eh, Charley? He's safe to ask about them."
"Well, you can tell him what you've just said of your father's
position, and what you intend to ask him to do for you. And then----
"
"Yes; and then?"
"Well, then you'll hear what he's got to say to that."
"Ye-es; it won't take me very long to listen to an exposition of Mr.
Guyon's views on my financial position, I take it. However, I'm

almost certain--quite certain, I may say--of Kate; and as you think
it's due to her to speak to her father----"
"I'm sure of it, Gordon. It's the only honourable course."
"Well, then, I'll do it at once, though I don't much like it, I can tell
you."
"Whatever may be the result, it's best you should know it soon,
Gordon. Nothing unfits a man for every thing so much as being in a
state of doubt."
"I'll end mine at once, Charley. No; not at once. I must first see if
that Botanical-Fête arrangement is coming off, and after that I'll
speak to her father. Devilish solemn phrase that, eh, Charley!"
"It won't be so dreadful in carrying out as it sounds, my boy. Clear
out now; you shan't have another instant!"
Gordon Frere nodded laughingly at his friend; and after making a
hurried toilet in his own room started off for Queen Anne Street,
while Charles Yeldham seated himself at his desk.
But not to work; his mind was too full for that. The short light
conversation just recorded had given Charles Yeldham matter for
much deliberation. When a man's life is thoroughly engrossed by
mental work, the few humanising influences which he allows to
operate on him are infinitely more absorbing than the thousand
fleeting affections of the light-hearted and the thoughtless. When
Charles Yeldham gave his thoughts a holiday from his conveyancing,
and turned them from the attorneys who employed him and the
work which they brought him to do, his mind reverted generally to
the loved ones in the vicarage at home or to the two men whose
friendship he had time and opportunity to cultivate. Never was
younger brother better loved than was Gordon Frere by the large-
hearted, large-brained philosopher whose chambers he shared. It
was indeed from the elder-brother point of view that Yeldham

regarded Frere. As a boy Gordon had been the one private pupil
whom the old vicar had admitted into his house; and later in life he
had passed two long vacations reading at the seaside with his old
tutor and the members of his family. Charley loved the young man
with all the large capacity of his loving nature, looked with the most
lenient eye on his boyish frivolities and dissipations, and had hitherto
never feared for his future, hoping that he would settle down into
some useful career before he thought of settling himself for life. But
the conversation just held had entirely changed his ideas. Gordon,
unstable, unsettled, without any means or resources, had
announced his intention of taking a wife. And what a wife! Of the
young lady herself Yeldham knew nothing; but certain pleadings
which he had drawn some twelve months beforehand in a case
which never came into court, and which had been settled by mutual
arrangement, had given him a very clear insight into the character of
Mr. Edward Scrope Guyon, and into that worthy gentleman's
resources and manner of life. With such a man Yeldham felt
perfectly certain that an impecunious scion of a good family like
Gordon Frere coming as a pretender for his daughter's hand would
not have the smallest chance of success; and it was with a heavy
heart that he sat idly sketching figures on his blotting-pad, and
turning over all that he had recently heard in his mind.
"I don't see my way out of it," said he, throwing down his pen at
length, and plunging his hands into his pockets. "I don't see my way
out of it, and that's the truth. Gordon is hard hit, I believe,--harder
hit than he has ever been yet, and means all fairly and honourably;
but fair play and honour won't avail much, I imagine, in carrying out
this connection--at least with the male portion of the family. A man
with the morals of a billiard-marker and an income of a couple of
thousand a-year would have a better chance with old Guyon than a
Bayard or a Galahad. He's a bad lot, this Mr. Guyon, but as sharp as
a ferret, and he'll read Gordon like a book. All the poor boy's talk
about what his political influence and what his father must do for
him, and all that, won't weigh for an instant with a man like Guyon,
who is up to every move on the board, and who will require money

down from any one bidding for his daughter's hand. I wonder what
the girl's like, and how much of the play rests in her hands. That old
rip would never be base enough to make her his instrument in
advancing his own fortune? And yet how often it's done, only in a
quieter and less noticeable manner! Gad! I begin to think I am a bit
of a cynic, as Gordon chaffingly, calls me, when I find these ideas
floating through my head; and I'm sure any one would imagine I
was one, or worse, if; knowing my own convictions, they had heard
me advise that poor boy to see old Guyon and lay his statement
before him. But I'm convinced that that is the only way of dealing
with such a matter as this. Have the tooth out at once; the wrench
will do you good and prevent any chance of floating pains in the
future. Guyon will handle the forceps with strength and skill, and
poor Gordon will think that half his life is gone with the tug. But
once over, when he begins to find that the gap is not so enormous
as he at first imagined, when he sees people don't notice the
alteration in his appearance, he'll begin to think it was a good job
that it happened while he was yet young, and he'll settle down and
get to work, and perhaps make the name and reputation which his
talents, if they had any thing like fair play, entitle him to. It's
wonderful the different light in which men see these things. There's
my boy there just mad for this girl, raving about her beauty, going
into ecstasies about her hair and eyes and figure; and here am I, his
chum and intimate, who can safely say that never in the course of a
life extending now to some six-and-thirty years, have I had the
faintest idea of what being in love is like. Lord, Lord! what a queer
world it is! and what is for the best? Perhaps, if I had had nice
smooth fair hair instead of a shock-head of bristles, I should have
been kneeling at ladies' feet instead of stooping over my desk, and
writing sonnets for girls instead of drawing pleas for attorneys. I
know which pays best, but I wonder which is the most interesting.
'Never felt the kiss of love, nor maiden's hand in mine,' eh? Well, I
don't know that I'm much the worse for that. Maidens' hands seem
to lead one into all sorts of scrapes; and as for the kiss of love----
Why, what time's that?"

The striking of the clock on the mantelpiece roused him from his
reverie; and looking up, he discovered that his intended five-
minutes' absence from work had been extended over two hours, and
that the daylight of the late summer time was beginning to fade. So,
with a heavy sigh, he lit his reading-lamp and settled down to his
desk again. Like every other man accustomed to hard work, he
found it immediate relief from thought, and soon became immersed
in his writing, at which he slaved away until it was time to get some
dinner. He had no heart to walk up to the club that evening. He
might meet some fellows of his acquaintance there,--very possibly
Gordon himself; and he was not inclined to chatter upon trivial
subjects. So he put on his hat, and strode over to the Cock; the
quiet solemnity of the old tavern at that hour of the evening, when
the late diners had departed and the early supper-eaters had not yet
arrived, being thoroughly congenial to his feelings. After his dinner
he went back to his chambers; and after smoking a pipe, during
which process he again fell a-thinking over Gordon's trouble, he
returned to his work, and was in full swing when he heard a key in
the lock, and the next minute Mr. Gordon Frere entered the room.
"Hallo, Gordon!" said Charley, looking up at the clock; "why, it's
not eleven; what on earth brings you home so early, young un?"
"Happiness, Charley! jolliness, old fellow! It's all right about to-
morrow; Kate's going to the fête, and---- After dinner at the Club I
went up into the strangers' smoking-room, and there wasn't any one
there I knew--only a couple of old fellows, who sat and smoked in
silence; and so I got thinking it all over; and what a stunning girl she
is, and how sure I am that she's fond of me, and how fond I am of
her--regularly hit, you know; and so I thought it would be horrible
somehow to go any where after,--to the theatre, you know, or to
hear the fellows chaffing in the way they do about--women and
every thing; and so I came home."
"Just in time to wish me good-night, my boy. I'm off to bed."

"Not until I've extracted a promise from you, Charley, old fellow."
"And that is----? Look sharp, Gordon; I'm sleepy."
"And that is, that you'll come with me to-morrow to the Botanical
Fête."
"To the--to the Botanical Fête! I? Ah, I see, poor Gordon! too
much Guyon has made you mad."
"No, Charley, I'm serious. You know you're my best and dearest
friend, the only real friend I have in the world--for my own people
are like every body else's own people, full of themselves and not
caring one rap for me--and I want you to see my--to see Miss
Guyon, and to give me your real opinion about her."
"By which, of course, you'll be thoroughly influenced, and if I
won't approve give her up at once. No, Gordon, I'm not much
experienced in these things, but I do know enough not to commit
myself in the way you suggest. However, I'll tell you what I'll do. I'll
make half holiday for once, and go with you to the fête--reserving
my opinion of the young lady to myself."
"Well, it's something to have got you to leave that old desk for an
hour, to get you to look at trees and flowers instead of foolscap and
red-tape. And as for Miss Guyon--well, you'll say something about
her, I've no doubt."
"I'm not sorry this opportunity offered," said Charley Yeldham to
himself as he was undressing. "I've not much curiosity; but I confess
I'm anxious to see the girl who has so captivated Master Gordon--
partly on her own account, and partly to see if I can trace in her
manner any suspicion of a---- No; no woman could be bad enough
to lay herself out to entrap a man at her father's desire! And
besides, Gordon Frere's not worth snaring!"

CHAPTER VII.
KATHARINE GUYON.
So, three men, all good fellows in their way, and two possessed of
qualities not common, and destined to be influenced throughout all
their lives by the seeming chance that had made them acquainted
with her, were thinking of Katharine Guyon, rather than of any or all
their more immediate and important concerns. She had dawned, a
new luminary, on their horizon; and two were conscious worshippers
of the bright visible presence, the other had not yet turned his eyes
that way. He will do so before long, and then----?
As for Katharine Guyon herself, she had thoughts at present for
but one person, and speculations only on one subject. Her warm,
impulsive, wholly undisciplined heart had accepted Gordon Frere as
its tenant and ruler, after a sudden fashion, which was not to be
defended or excused if judged by the standard of conventionality, or
indeed of common-sense. When the latter quality shall be in any one
instance admitted into a case of love-at-first-sight, it may advance a
claim to invariable acknowledgment; certainly not otherwise. As for
conventionality, Katharine in no way bowed to its authority; and it
was fortunate indeed that her good taste and innate good-breeding
preserved her from any boldness or vulgarity of demeanour; for
those were her only safeguards. Legitimate rule over her there was
none, and she would not for a moment have brooked usurped
authority. Her position was peculiar, and, though there was a good
deal of the glitter of fashion and the reality of enjoyment about it, to
clear-sighted eyes, looking below the surface, pitiable.

Katharine's mother had brought her husband no advantages in
their short, not remarkably happy, marriage, except those attached
to an extensive and distinguished family connection. She had no
fortune, no possessions of any kind, except some handsome jewels,
which were secured to her, to descend to her children. She lived only
a short time; but it is probable she thought the period sufficiently
prolonged; for she died, when Katharine was born, with no further
expression of regret than that she wished she could have taken the
child with her; but was consoled by learning that the physicians
thought the feeble infant very unlikely to live. Isabella Stanbourne--
for such was the name of Katharine's mother--was a handsome
woman, of fine mind and high principles. These qualities had not
availed to prevent her making the tremendous though not unusual
mistake of a wholly uncongenial marriage; but they did her the
questionable service of opening her eyes to the blunder she had
committed before she had been Edward Guyon's wife many weeks.
Once opened, Mrs. Guyon's eyes were not the sort of optics ever to
be even partially closed again; and they perceived and scrutinised
every particular of her husband's character and conduct with
merciless clearness and vigilance. That gentleman furnished them
with ample material for their scrutiny; and from the close of the
honeymoon to the termination of her life Mrs. Guyon held the
partner of her existence, whom she knew to be a liar and a
profligate, and suspected to be a swindler, in quiet,
undemonstrative, but supreme contempt. She was a woman in
whom the existence of any kind of regard or even compassion was
incompatible with the least feeling of scorn; and so she never tried
to persuade herself that she entertained either towards her
husband, from the day she found out that the man she had married
was a being of a totally different order to the idol which her fancy
had set up and worshipped. She did not leave him, even when she
made further and more serious discoveries: in the first place,
because she disliked the scandal of a separation; in the second,
because she was conscious of great delicacy of health, and had a
strong presentiment that she should not survive the birth of her
child. She determined to give herself the chance, if, contrary to her

conviction, she lived; she could then decide upon her future. The
chance befriended her, and Mrs. Guyon died. Her last days were
undisturbed by her husband's presence. He had gone to Doncaster
when the event which made him a father and a widower took place;
and having made rather a good thing of the expedition, he returned
to town in very tolerable spirits, and felt that he should now be more
interesting and irresistible than ever as a young widower, and could
easily get over the inconsolable stage by a trip on the Continent. His
dead wife's sister-in-law, the Hon. Mrs. Philip Stanbourne, undertook
very gladly to look after the little motherless infant, at whom the
elegant Ned barely glanced, during her days of babyhood; and she
redeemed her promise well.
It is unnecessary to inquire into the career of Mr. Guyon between
the period of Katharine's birth and that of her début in society. It
was evident that, however well-founded his anticipations of success,
it had not been in the matrimonial direction; and indeed some rather
amusing anecdotes were current in society concerning "Ned's"
audacious attempts and egregious failures. His wife's relatives had
never particularly admired Mr. Guyon; but they were kindly,
unaffected people; and Mrs. Guyon had been strictly and uniformly
silent on all her domestic concerns; so that, though they surmised
that the brief marriage had not been the altogether ecstatic union
Isabella had imagined it would prove, they had nothing but surmise
in their minds respecting it; and they never thought of withholding
from the motherless girl any of the advantages derivable from their
social position and influence. These were far more important to
Katharine's father than her guileless uncles, aunts, and cousins
imagined--to whom a life of shifts, scheming, and pretence was an
utterly unknown and unsuspected possibility--and much more
important too to Katharine herself, as regulating her father's conduct
towards her, than the girl ever knew or dreamed of. She would
probably have been placed economically out of sight, at a foreign
boarding-school, and left there to attain the age of womanhood,
unnoticed by her father, had not the kind relatives under whose care
her early childhood had been happily passed given her consequence

in Mr. Guyon's eyes, causing him to regard her as a valuable
possession, a court-card in fact. So, instead of a cheap foreign
school being selected as an oubliette for the child,--in virtue of
whom Mr. Guyon had a seat at the tables of many who were more
great than wise,--an expensive establishment for young ladies in the
Regent's Park was honoured by Mrs. Stanbourne's choice; and there
Katharine was brilliantly, if not solidly educated, the larger portion of
the pension and her personal expenses being paid by her uncle. In
Katharine's early girlhood the Hon. Philip Stanbourne died; and she
sustained by this calamity a double loss: not only that of her kind
relative and friend, but of her aunt's counsel, training, and protection
in the perilous time which lay before her,--the time of early
womanhood, and her entrance into society. The widow went abroad
with her daughter, who was some years older than Katharine; and
though she was in London when the events just related took place,
she was not likely to be again a settled resident in England, as her
daughter had married an Austrian nobleman, high in the diplomatic
world, and desired to have as much of her mother's society as
possible.
The fashionable "establishment" had turned out few girls so well
calculated to do it credit and extend its fame as Katharine Guyon,
when, at a little more than seventeen, she appeared in a circle of
society where, though her father, with all his cleverness and savoir
faire, received little more than toleration, she at once made a
favourable impression. In her appearance she combined the personal
attractions of both her parents: she had her mother's high-bred look,
her father's vivacity and his fine features; she had the elegant
carriage, the delicate hands and feet, the refined voice of Isabella
Stanbourne, and the airy easy manner which in Mr. Guyon had a
soupçon of impudence. In disposition she resembled her mother
exclusively; but there were strong points of difference between
them,--difference deepened no doubt by the circumstances of
Katharine's girlhood, by the fact that she had never been the object,
as her mother had been of exclusive and conscientious female care
since she had ceased to be a child. She had not the clear, direct,

keen perception of her mother; but she was her equal in resolution,
and more than her equal in implacability. She was high-spirited now,
and impatient of contradiction to a degree that indicated some
violence of temper; her feelings were keen and impulsive, and her
affections strong and passionate, though undeveloped; for indeed
who had the girl to love? She had gone through the ordinary
schoolgirl friendships, and also through the customary flirtations
since the former had come to a natural end; but she did not really
love any body in the world, except perhaps Mrs. Stanbourne, and of
her she had seen but little for some time.
Her feelings towards her father were of a mixed, and, on the
whole, of an unsatisfactory character; such as any one watching the
girl with anxiety and experience must have recognised with regret.
She was fond of him after a fashion, and there was a good deal of
camaraderie between them; but she had an intuitive distrust of him,
and she knew instinctively that all his indulgence, all his flattery, all
his yielding to her wishes and furnishing her pleasures, were
superficial compliances. He liked the kind of life she liked; she knew
him well enough, without formally reasoning upon her knowledge, to
feel convinced that if their tastes or wishes clashed in any way, hers
and not his would be expected, if not obliged, to yield. She admired
her father's pleasant manners and social talents; she had but rarely
any opportunity of contrasting his fulfilment of the paternal relation
with that of other men; and she was full of youth, health, spirits,
and capacity for the enjoyment of every kind of pleasure that
offered; so she went her way carelessly and joyously, and reasoned
little upon the present or the future. Katharine and her father were
not real friends, but they were always technically "good friends;" a
result to which the underlying violence of the girl's nature no doubt
unconsciously conduced. Mr. Guyon hated trouble and detested
scenes; and he had a tolerably correct occult sense that he might
find himself "in for" both if he interfered much with Katharine:
consequently he did not interfere; and as she was totally in the dark
respecting his pecuniary circumstances, and never asked any
troublesome questions, they got on very well together. Real

companionship they had none, but they did not miss it; and while
her father's chief anxiety about Katharine was that she should make
a good match before she "went off" in looks--a good match implying
a rich son-in-law, conveniently indifferent about settlements, and
ready to "do" bills to any reasonable or unreasonable amount--
Katharine's chief anxiety about him was, that he should dye his hair
and whiskers with greater success, and drink less wine on evenings
when he went to parties with her. She knew he was proud of her
beauty, and thought her "doosid good company;" but she did not for
a moment imagine he had any sentimental love for her; indeed she
fancied he had not much feeling, for he had never mentioned her
mother to her in his life. Their relation, in fact, was pleasant, hollow,
and heathen; and when Katharine abandoned herself to her
newborn love for Gordon Frere, she never thought of her father's
feelings or wishes in the matter, or had a more dutiful notion in her
mind than that it "made it pleasant that papa liked his coming about
the house." You see she was no exceptional being, no angel alighted
for a little on a sphere unworthy of her footsteps and her wings; but
an interesting, captivating, self-willed woman,--such as
circumstances had made her; a woman whose weaknesses were as
visible as her charms, whose strength was latent and unsuspected.
It was not to be supposed that a girl like Katharine--handsome,
clever, dashing, and independent in her ideas and manners, of a not
precisely-to-be-defined position in society, and with a not-exactly-to-
be-commended father--should escape sharp and not kind or
altogether candid criticism. She was very much admired; she
commanded admiration indeed, however reluctantly accorded; and
men liked her very much, even men who were not in love with her,
and with whom she did not take the trouble to flirt. Women did not
like her; and yet the girl gave them no fair excuse for their
prejudice. She was not a determined coquette, conquering and
monopolising; she was not rudely inattentive to women, as
"beauties" and "blues" usually are: she was smiling and agreeable,
and perfectly indifferent to them all; and, with a host of
acquaintances, had but one female friend, her aunt Mrs.

Stanbourne. With Lady Henmarsh, who was a distant relative on her
father's side, Katharine lived on terms of great intimacy,--the lady
was indeed her constant, her official chaperone,--but it was an
intimacy of the kind which more frequently precludes than includes
friendship.
Lady Henmarsh was a woman of the world, in every possible
meaning and extent of the term. She was the exact opposite of Mrs.
Stanbourne, in manners, mind, tastes, opinions, and principles; and
she disliked Mrs. Stanbourne so cordially, that she might have
endeavoured to influence Katharine in a contrary direction to that of
her wishes, simply to annoy that lady; but she was saved from any
thing so unphilosophical by the fact that it suited her in every way to
appoint herself high-priestess of Miss Guyon's world-worship. As no
one ever saw, and many had never heard of Lady Henmarsh's
husband, it was a pardonable mistake, frequently made by
strangers, to suppose that she was a widow. This, however, was not
the case. A miserable invalid--whose migrations, if not quite confined
to Goldsmith's itinéraire, were only from his dull house in Hampshire
to his dull house in Cavendish Square; a cross, palsied, querulous
old man, called Sir Timothy Henmarsh, who had long since lapsed
out of the sight and the memory of society--still existed, not
altogether to the displeasure of his lady, who would be seriously
impoverished by his death; existed in a condition of illness and
suffering which rendered it indispensable that his wife should, in
deference to what society calls common decency, provide herself
with some further excuse for her neglect of him, and her constant
presence at gay and festive scenes of every description, than the
real, but unproduceable one, that she liked dissipation and disliked
him. Lady Henmarsh and Mr. Guyon had been very good friends
indeed in former days, when he was a young widower, thoroughly
consoled, and Hetty Lorimer was a pretty portionless girl, who knew
that she had nothing to look to but marriage, and that if she desired
to secure the enjoyment of such things as her soul loved, she must
take care that it was a "good" one. A marriage with her handsome
cousin would have been any thing but one of the required

description; and indeed neither of them ever contemplated such a
possibility. They were persons of a discreet and practical turn, and
Mr. Guyon went to Hetty Lorimer's wedding (a solemnity at which Sir
Timothy Henmarsh's son, a gentleman some years the bride's senior,
sternly declined to be present) with perfect alacrity and good
humour. They had been excellent friends ever since; and when, the
time having arrived at which Mr. Guyon found it convenient to
transfer his daughter from the "establishment" to Queen Anne
Street, Lady Henmarsh gave him her advice, and offered him her
services with enthusiastic friendship, what more proper and
satisfactory arrangement could possibly have been entered into than
that Lady Henmarsh should "do the maternal" by Katharine?
"I've no doubt you'll do it to perfection, Hetty," said Mr. Guyon, as
he rose and terminated the interview; "only you won't look the part
within a dozen years." And the good-looking deceiver went down the
stairs with a smile, which expanded into a grin when he reached the
street; for Miss Hester Lorimer and Miss Isabella Stanbourne had
been girls together, and the former was a little older than the lady
who had married the irresistible Ned Guyon.
This unexceptionable arrangement had now lasted a considerable
time, and no likelihood of its coming to a conclusion by the marriage
of Katharine had yet presented itself. Lady Henmarsh was better
pleased than Mr. Guyon that it should be so, and less surprised. She
understood Katharine better than her father understood her; she
knew how entirely unscathed she had been amid the lightning
flashes of real admiration and simulated sentiment which had played
around her girlish head; she knew that in Katharine's perfectly
impartial brightness, her frank acceptance of the incense offered
before her, her smiling pleasure and indifference, consisted the
barrier to Mr. Guyon's wishes. For her part, she was in no hurry
about the matter; indeed, the longer Miss Guyon should require
some one (meaning herself) to go about with her, the better pleased
she would be. But though Lady Henmarsh did not disquiet herself
because Mr. Guyon's wishes remained unfulfilled, she would very

seriously and earnestly have disapproved of their being traversed
and thwarted. She did not particularly care that Katharine should
marry soon, but she fervently desired that she should marry well;
and it was with a new and very unpleasant sense of misgiving that
she observed the eager and vivacious pleasure which Katharine
evinced in the society of Mr. Gordon Frere, and watched the faces
and the manner of the two from the alcove, whence she beheld the
dancers at Mrs. Pendarvis's ball. Lady Henmarsh knew very little of
Gordon Frere; indeed, only one fact, beyond the good looks and the
good manners patent to all observers. But in that one fact lay the
only important item of knowledge, in the estimation of Lady
Henmarsh. Gordon Frere was a poor man, with no income to speak
of, and only very desultory, undefined, and contingent expectations.
Clearly this would not meet either Mr. Guyon's views or her own. She
hoped, she trusted, nay she believed, that Katharine would not be so
infatuated as to think of marrying Frere; she trusted Frere was too
much a man of the world to think of marrying Katharine. It was only
a flirtation,--it must be only a flirtation; but even that, if she carried
it to such an extent as she had done at the ball, Katharine must be
induced to give up. It would be remarked, it would keep off other
men: of course it was quite foolish to be afraid of any thing serious;
so Lady Henmarsh hoped, and trusted, and believed, and yet she
doubted and feared. She did not altogether like to acknowledge to
herself, perhaps, how little confidence she felt in her own power of
"inducing" Katharine to do any thing which did not accord with her
own inclination and humour. The tie between them was formed of
mutual complaisance, not of influence and respect. Lady Henmarsh
did not understand either the strength of Katharine's feelings or the
determination of her temper; she had never seen either roused into
action, and she regarded her as rather shrewder and more worldly-
minded than most girls, as well as cleverer and better-looking. So,
though she knew her to be self-willed, she calculated on her sense
and shrewdness overcoming her obstinacy in a matter in which her
worldliness would teach her that obstinacy was injurious and
misplaced.

Lady Henmarsh pondered these things one fine summer's day,
while Katharine rambled about the Botanical Gardens with Gordon
Frere and others; while every glance caught from his blue eyes, and
every sentence intoned especially for her ear by his earnest musical
voice, bound the girl's heart more closely to him, and rendered the
task which Lady Henmarsh proposed to herself more difficult of
fulfilment, more infructuous in result.
"At all events, it shall not go on like this beyond to-night," said her
ladyship to herself: "if she looks at and dances with him as she did
at Mrs. Pendarvis's, I shall tell Ned Guyon about it, and find out what
he thinks; but my decided opinion is that it is full time some steps
were taken." And then she went to visit Sir Timothy.
Mrs. Streightley and her daughter had returned to the Brixton
villa, had been affectionately received by Robert, and had heard
from him the history of all his doings in their absence. Of course
Ellen had, allowed the briefest possible space of time to elapse
between her return and the despatch of an eager summons
entreating Hester Gould to come to her with the least possible delay.
Hester arrived about two hours before the ordinary dinner-hour; and
the young ladies passed that space of time in the interchange of
delightful confidences; complete and heartfelt on the part of Ellen
Streightley, and as meagre as might be on that of Hester Gould. All
the particulars of Ellen's engagement, which she had already
detailed by letter, were again confided to Hester; all the particulars
of the visit from which they had just returned, and which had been
made to certain relatives of Mrs. Streightley's, of the agricultural
persuasion, were once more related in full.
"I used to think Thorswold rather a stupid place, dearest Hester,"
said Ellen, and a fine blush overspread her pretty honest face: "little
did I ever think I should meet my fate there. I do so long for you to
see Decimus. You will think him so delightful."

"I shall be very much pleased to see him, Ellen," returned Hester;
"and I rejoice, as I am sure you know, in your happiness. But tell me
about your brother,--what does he say to it all?"
"Well, indeed, Hester," said Ellen, hesitating and laughing, "that is
what I hardly can tell you, he has said so little. He kissed me, and
pulled my ear, and called me a little goose, in his own kind way, you
know; but he is so taken up with some new friends he has made, I
cannot make him out. He looks quite different, I am sure; and is so
particular about his dress! A lot of new clothes have just come home
from his tailor's, and a whole boxful of lavender-kid gloves. Isn't it
funny, Hester? Dear old Robert, he talks a great deal about Mr.
Guyon; but I suspect he thinks more of Miss. Though indeed I only
found out there was a Miss Guyon quite by accident."
Hester Gould's face flushed with sudden anger, and into her calm
calculating heart there came a pang of unaccustomed doubt and
fear. But it was quite in her ordinary tone she said:
"So your brother's friend is Mr. Guyon, is he? Does he live in
Queen Anne Street?"
"Yes, yes; I am sure that is the street I have heard him mention.
Stay, there's an invitation stuck in the chimney-glass--here it is. 'Mr.
and Miss Guyon request'--and so--yes, '110 Queen Anne Street' Do
you know them, Hester?"
"No, not personally; but I have seen Miss Guyon frequently. I used
to teach singing to the Miss Morrisons in the next house, No. 109--it
is vacant now, and shut up since Sir Christopher died--and I often
saw her going out to ride. She used to go just about at my hour."
"And is she nice, Hester,--is she pretty? Robert never has told me
any thing particular about her. Men never can describe any one."
"She is very handsome, very elegant, and very fashionable,"
replied Hester; and then she departed from her usual cautious

reticence so far as to say, "and I heard the Morrisons say Mr. Guyon
was very 'fast,' and lived beyond his means."
"Indeed," said Ellen in a very grave tone, for to her the accusation
of living beyond one's means sounded very portentous; "I am sure
Robert would not approve of that."
Hester Gould watched Robert Streightley quietly and closely the
whole of that evening. She saw him different to any thing he had
ever been; preoccupied, absent, but not unhappy. A smile played
frequently over his features; and though he sunk into frequent fits of
abstraction, they were evidently not painful. He was as kind and
affectionate as usual to his mother and sisters, as attentive to
herself; but a change had passed upon him which she fully
understood. In her cold repressed way, she was bitterly angry.
She went home rather early. As Robert Streightley saw her to the
cab, and bade her good-night, she said to herself:
"Daniel Thacker knows this Mr. Guyon,--his sisters may know
something about the girl. I'll go to Hampstead to-morrow; they don't
mind Sunday visitors; and I may have a chance of seeing their
brother. Really that girl Ellen grows sillier every day."
CHAPTER VIII.
AMARYLLIS IN A MARQUEE.

The prettiest public fêtes in London are those given in the gardens
of the Botanical Society in the Regent's Park. There is to be found
plenty of fresh green turf; there are myriads of lovely flowers
blooming in open beds, or tastefully arranged beneath the
marquees; there are solemn old big trees stretching out their
umbrageous arms, and in their majesty making one think even less
favourably than usual of the perky straggling sticks at South
Kensington; there are the bands of two or three guards regiments,
having sufficient compassion on the visitors to play one after the
other, and not, as in some places, at the same time; and there is
generally a collection of the nicest-looking people in town. There are
few savans, and not much literary or artistic talent; but as savans
and the professors of literary and artistic talent are for the most part
any thing but nice-looking, and as flirtation is the science to which at
these gatherings attention is principally devoted, their loss is not
felt; indeed it may be safely said that the general company is
happier for their absence.
Although the last fête of the season is scarcely to be compared to
its immediate predecessor, the warm weather of the two preceding
days had done very much in contributing to its gaiety on the first
occasion when Mr. Charles Yeldham found himself making holiday
from his work, and taking part in a grand ceremony of nothing-doing
with those whose lives were passed in never doing any thing; and,
like most men who rarely emerge from the business of their lives to
seek a temporary respite from perpetual work in a few brief hours of
enjoyment, Charley was determined to make the most of his time,
and to reap the full value of those precious hours which he had
grudgingly given up. With his chum leaning on his arm, he made his
way through the fruit-tent and the flower-tent, round the American
garden, where the glorious azalias, so lately a mass of magnificent
beauty, now stood bare and drooping; now attracting the attention
of a group of faded dowagers by his energy and volubility; anon
pausing in rapt attention, listening to the strains of the melody-
breathing "Sonnambula," as performed by the Grenadiers, or
nodding head and beating hand in sufficiently ill-kept time to a

whirlwind galop rattled through by the band of the Artillery. Into his
holiday, as into his work, Charley had thrown his whole heart; he
had determined to shut out temporarily all thoughts of attorneys,
pleas, work, and worry, and he went in for the pleasures of the day
with an eagerness and an impetuosity that perfectly astonished his
companion.
"I'll tell you what it is, Charley," said Gordon Frere, after they had
careered round the gardens, and were standing once more by the
gate at which they had entered--"I'll tell you what it is; you're like a
country cousin, by Jove! or one of those horrible fellows that come
up to town with a letter of introduction. You want to see every thing,
and all at once. It's a deuced good thing that you don't often give
yourself an outing, or you'd be wanting me to take you to the
Thames Tunnel, and the Monument, and Madame Tussaud's, and all
sorts of wonderful places. Here have we been rushing about from
pillar to post, or rather from tent to tent, and from band to band,
and you've never yet given me breathing-time to look round and
speak to any of the people I know. Now you really must hold on for
a moment, for it's just upon three o'clock, and that's the time that
Kate--Miss Guyon, I mean--said she should be here; and I promised
to be near the entrance, to join her at once."
He spoke with animation, and his bright eyes glowed with fire as
he seized his old friend by the shoulders and used a feigned force to
arrest his progress. You see Mr. Gordon Frere was brimming over
with happiness. To be six-and-twenty years of age; to be good-
looking; to have high animal spirits; to have indulgent tradespeople,
and a tolerable sufficiency of pocket-money; to be in love with a very
charming girl, and to have your passion returned, are all things
calculated to make a man content with life, and disposed to regard
human nature from its best point of view. He was pleased to speak
of himself as a "creature of impulse," and, by some accident
probably, he rightly described himself. Whatever best pleased him
for the time being he took up and went in for earnestly and
vigorously. He had done so all his life, in cricketing, rowing, riding, at

school and college--actually once in reading, when he studied so
hard and to so much purpose apparently, that old Mr. Yeldham wrote
to Charles, anticipating for his son's chum and his own pupil the
highest University honours; but Gordon slacked off, and when the
class-list came out, a double-third was all the position awarded him.
Up to this time the "impulse" had not been shown very strongly in
any love-affairs: he had had his ball-room flirtations, involving
bouquet-sending, Rotten-Row riding, Opera-box haunting, &c., as all
men have; but he had never--to Charles Yeldham's idea at least--
been so really smitten with any one as he announced himself to be
with Miss Guyon. So his honest old chum, albeit he had his own
views of the probable reception of Gordon's proposal by Mr. Guyon,
could not find it in his heart to check him, and only smiled pleasantly
as he said:
"All right, Gordon; all right, my boy. But you talk of my taking you
about here and there, as though I were not a mere child in leading-
strings in such a place as this, to be shown each separate sight in
the proper order. Now we've seen the fruit and the flowers, and
listened to the bands, let us take a look at the people. Tremendous,
what you call 'swells,' are they not? No end of crinoline, and flowers,
and finery. By Jove! just turn a few of these young ladies to walk
through the Temple Gardens, and there would not be much work
done that day. Every clerk's nose would be glued to the window; and
I verily believe that even old Farrar, our underneath neighbour,
would leave his books and his papers for such a refreshing sight.
Now there's one,--look there! that tall girl just coming in, with--hallo!
steady, young 'un; what's the matter?"
Charley Yeldham might well cry "steady;" for Gordon gave a visible
start as he turned in the direction indicated by his friend; and his
tone was thick and hurried as he said, "That's Miss Guyon and her
father--and--who the devil's that man with them?"
"Now that's a curious thing," said Yeldham with provoking
placidity. "I don't suppose I know another soul in all this large

gathering; but I do know that man intimately, and I can tell you who
he is. That's Robert Streightley, the City man, that you've so often
heard me speak of, and--but what has come to him? Talk of 'swells,'
why, I should scarcely have recognised Bob Sobersides, as they used
to call him, in that costume. And so that is Miss Guyon, is it? that's
Miss Guyon I say, young 'un, she's--she's wonderfully lovely."
"For God's sake, don't stand staring there with your mouth open,
Charley; but let us go up and speak to these people. They've seen
us already;" and Mr. Frere, passing his arm through his friend's, led
him up to the group, and after making his own salutations, freely
presented him to Miss Guyon and her father. Immediately after his
introduction, Yeldham turned and shook hands with Robert
Streightley; and after a few words of astonishment from each at
meeting the other in such a place, they commenced a conversation,
in which Mr. Guyon took part, leaving Gordon Frere and Katharine
walking together a little in advance of them.
There are few things more embarrassing than having something
very particular to say, knowing that you will have great difficulty in
saying it, and being perfectly convinced that if ever it is to be said at
all, the exact time has arrived. This was Gordon Frere's position. He
knew that the end of the season had arrived; that another fortnight
would see Miss Guyon flown, with the rest of the fashionable world,
to some English sea-board, foreign watering-place, or country-
house, whither he could not have the remotest excuse for following
her; he knew the proverbial danger of delay, especially in love-
affairs; he fully shared in Charley Yeldham's only half-expressed
doubts as to the reception of his proposal by Mr. Guyon, and in the
sudden and unexpected appearance upon the scene of Robert
Streightley whom he had never met before, but of whom, his
wealth, his talents, his City position, he had heard frequently from
Charley--he saw a new and important element of danger. If he
intended to make his coup for the winning of this peerless beauty,
now was the time. So he screwed up his courage and began.

"You are a little late, Miss Guyon,"--this in a low, deep, tremulous
voice; "you said you would be here at three."
"You don't pretend to say that you recollect any thing I said about
it, Mr. Frere?" in the same tone. "I scarcely remembered we had
touched upon the subject."
"Don't you pretend to imagine any such thing so far as I am
concerned, Miss Guyon. No, no; pardon me for one instant; you
know that whatever concerns you, in however trifling a degree,--and
more especially when it relates to the chance of my seeing you,--is
always of importance to me."
He had bent his gaze upon her, as he said this, and he received a
faint fluttering glance as his first reply. Then she said,
"I was scarcely conceited enough to think so, and--and of course I
feel the compliment. However, we have met, you see."
"Yes; and so long as that has come about, no matter how late you
are; for you see I still hold to my original opinion. However late or
early, I must be doubly thankful for the chances of meeting you now.
For the season's at an end, and I suppose you will be off with the
rest?"
"I suppose so; though nothing is settled, I believe."
"And where do you go?"
"Papa talked of Scarborough some time ago. He has not said any
thing about it lately; and as I am wholly indifferent on the subject,
I'm very good to him, and let him have his own way."
"Are you similarly complaisant to Mr. Guyon in all things?"
There must have been something special in the tone of his voice;
for she looked up quickly with a slight flush, and said,

"In all matters in which I take no particular interest. Where I am
concerned I am exigeante, and--I am afraid--stubborn."
"Let us call it 'firm,' Miss Guyon," said Frere, with a slight smile.
"Firmness is a quality by no means reprehensible, even when
exercised towards one's father. It's a horrible thing this break-up of
the season, especially as one gets older. All the little pleasant--well, I
suppose I may call them friendships--are nipped in the bud until
next April, when one has to begin again and struggle on until
August, when we find ourselves in exactly the same position in
which we were a twelvemonth before."
"That is, unless we take up with a different set of friends," said
Katharine; "and I believe there are instances on record of such a
change."
Gordon Frere looked at her again, and threw an additional warmth
into his voice as he said, "Granted that fidelity is uncommon, Miss
Guyon, it should be the more prized when it is found. You are going
to-night to Mrs. Tresillian's?"
"Yes; Lady Henmarsh has promised to take me. It is almost my
'last rose of summer;' positively the last of our ball-engagements this
season."
"Let us trust it will be one of the pleasantest. You will come early,
and you will give me the first valse, and as many afterwards as you
can."
"I--I shall be very happy; but we shall leave early. Papa has a holy
horror of having his horses kept out late, more especially when he is
not present; and he will not be there to-night, I think; for he's going
to ask Mr. Streightley to dine with us, and I believe he wants to talk
business to him afterwards."
"Mr. Streightley going to dine with you! By the way, who is Mr.
Streightley?"

"Mr. Streightley? he's a horror--I didn't mean that. He's a City
friend of papa's, and, as I'm told, a very rich man."
"Very rich, and in the City, eh!" said Gordon Frere, looking over his
shoulder at the object of their remark. "He's better got up than most
of his genus. I think I could swear to Poole in his coat. Very rich, and
you've been told so, Miss Guyon! He's a lucky man."
"Is he, Mr. Frere? You'll excuse my saying that I don't follow you;
that I don't know why Mr. Streightley is lucky."
"Did you not yourself say that he was very rich, Miss Guyon, and
that you had been told so?" said Gordon, with more warmth than he
had previously exhibited. "Society acts as this gentleman's avant-
coureur, and repeats his claim to respect wherever he goes; and of
course he finds people prepared to proffer him ready-made honour."
The bitterness in his tone jarred on Kate's ear. His face was
averted, so that there was no need for her to restrain the half-
inquiring, half-loving gaze with which she looked up at him as she
said,
"I never knew you cynical before, Mr. Frere, and I don't think the
mood becomes you. Surely the notion that wealth is the most
desirable of all possessions is utterly exploded. For my own part, I
think that riches in a man--I mean when they are so great as to be
talked about--are something against him; something to be got over,
like his being black, or having a hump-back."
"This is a very refreshing doctrine, Miss Guyon; but I'm afraid it
has not many disciples; and even you would lean to the side of the
modest competence and----"
"I would lean to nothing; I would give way to nothing so palpably
sordid and base."
"You are strangely in earnest on this point, Miss Guyon."

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Macroeconomics 5th Edition Hubbard Solutions Manual

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