Fifty years in Wall Street
of the first moment that its railroads should be built with the
strictest economy and on the lowest possible capitalization. The
low cost of land and the cheapness of material for road-bed are
especially favorable to our securing this advantage; but the
laws have permitted a system of inflated financiering which
neutralizes these natural adaptations and immensely increases
the cost of transportation.
As railroads have to be largely built with borrowed money, their
construction in this country afforded an opportunity for
establishing credit relations with the great lending centres of
Europe, which might have been of incalculable value in promoting
the development of our vast resources in various directions.
England, Holland and Germany have indeed loaned us very large
amounts for railroad enterprises; but the law has permitted
these undertakings to be conducted with so much concealment,
misrepresentation and actual fraud, and has so disregarded the
rights of the bondholders, that American credit has become a
scandal and a by-word on the European bourses. The result is,
that foreign capitalists are seeking other fields of investment;
and their respective Governments are encouraging them by opening
up new colonies, and thus getting fresh sources for the supply
of products which otherwise would have continued to be readily
taken from the United States. Such are the rewards of immoral
financiering; and these bad methods are directly traceable to
the encouragements afforded by our negligently constructed
railroad laws.
Perhaps I may best succeed in making myself understood on this
subject by illustrating the way in which our railroads are
usually built. Under the laws of the State of New York—which are
a fair sample of the laws of most other States—a number of
persons form a company under the general railroad laws,
registering at Albany the proposed route of the road, the amount
of capital stock and bonds to be issued, and a few other
particulars required in the papers of incorporation. The
incorporators then proceed to form themselves into a syndicate
or company, for the purpose of contracting to build and equip
the road. Here comes the first step in the system of “crooked”
financiering. In their capacity of incorporators, the same men
make a contract with themselves, in the capacity of
constructors. Of course, they do not fail to make a bargain to
suit their own interests. They would be more than human if they
did. Usually, the bargain is that the construction company
undertakes to build the road for 80 to 100 per cent. of the face
value of the first mortgage bonds, with an equal amount of
stock, and sometimes also a certain amount of second mortgages
thrown in, virtually without consideration. The first mortgages
are supposed to represent the real cash outlay on the
construction and equipment; but, as a matter of fact, the true
cash cost of the work done and materials furnished ranges from
60 to 80 per cent. of the amount of first lien transferred to
the constructors. The Construction Company disposes of the
bonds, partly by negotiating their sale to the public through
bankers, at an advance upon the valuation at which they had
received them, and partly by using them in payment for rails and
equipment. Beyond the profits made from building the road for
the first mortgage bonds, there remains in the hands of the
constructors the entire capital stock and any second mortgage
bonds they may have received, _as a clear bonus_, to be held for
future appreciation, and to keep control of the Company and be
ultimately sold on a market deftly manipulated for that purpose.
This is the way in which a large majority of our railroads have
been and others are still constructed. It will thus be seen that
the actual cash cost of a railroad is ordinarily less than 60
per cent. of the stock and bonds issued against the property,
and that its first mortgage exceeds the amount of the legitimate
actual cost of the road.
The basis of all the discredit, the embarrassments, the
bankruptcies and the robberies of our railroad system is thus
laid at the inception of the enterprises. They rest upon an
intrinsically rotten and dishonest foundation; and the evil is
far from having reached the end of its mischief to the
financial, political and social interests of the country. In
some few cases, railroads thus exorbitantly capitalized have
proved able to earn the interest on their debt, provide for
additional outlays on construction and betterments, and even to
pay dividends on their stock; but, in a large majority of cases,
they have had to undergo a process of financial reconstruction,
in order to bring the debts of the Company within its ability to
meet its fixed charges. It is not a risky estimate to suppose
that of our present 125,000 miles of railroad, with its
$7,500,000,000 of stock and debts, 60 per cent. has undergone
this process of debt-scaling and rehabilitation. Were it not
that the new roads have opened up new country for settlement,
which has become an immediate source of traffic, these bad
financial results would have been more general and worse than
they have proved to be. The risks attending the building of
lines into unsettled regions ought to have been a reason why
they should be constructed upon conservative principles; but, in
reality, the prospects of settling new populations and of
tapping new sources of wealth, have been so magnified to the
eyes of distant and credulous lenders as to enable the
speculative constructors to easily consummate their illegitimate
schemes.
The general result of this system of financiering has been to
deprive the legitimate original investors of their chances of
making a fair return out of their investment. As a rule, the
bondholders have provided all the capital expended, and the
stockholders have invested nothing. The bondholders incur all
the risks; the stockholders have no responsibilities. If the
enterprise proves a success, the bondholders get their interest,
while the stockholders, without a dollar of original outlay, get
vastly more than ever falls to the mortgage creditors through
the stock becoming an instrument of profitable speculation. If
the enterprise is a failure, the bondholder has to forego
interest and finally to accept a new mortgage for a less amount
and at a lower rate of interest; whilst the original stockholder
has, in the meantime, made money out of artificially “booming”
the shares in Wall Street.
The profits realized on these speculative constructions are
enormous, and have constituted the chief source of the
phenomenal fortunes piled up by our railroad millionaires within
the last twenty years. It is no exaggeration to characterize
these transactions as direct frauds upon the public. They may
not be such in a sense recognized by the law, for legislation
has strangely neglected to provide against their perpetration;
but, morally, they are nothing less, for they are essentially
deceptive and unjust, and involve an oppressive taxation of the
public at large for the benefit of a few individuals, who have
given no equivalent for what they get. The result of this system
is that, on an average, the railroads of the country are
capitalized at probably fully 50 per cent. in excess of their
actual cost. The managers of the roads claim the right to earn
dividends upon this fictitious capital, and it is their constant
effort to accomplish that object. So far as they succeed, they
exercise an utterly unjust taxation upon the public, by exacting
a compensation in excess of a fair return upon the capital
actually invested. This unjust exaction amounts to a direct
charge and burthen on the trade of the country, which limits the
ability of the American producer and merchant to compete with
those of foreign nations, and checks the development of our vast
natural resources. In a country of “magnificent distances,” like
ours, the cost of transportation is one of the foremost factors
affecting its capacity for progress; and the artificial
enhancement of freight and passenger rates due to this false
capitalization has been a far more serious bar to our material
development than public opinion has yet realized. The hundreds
of millions of wealth so suddenly accumulated by our railroad
monarchs is the measure of this iniquitous taxation, this
perverted distribution of wealth.
This creation of a powerful aristocracy of wealth, which
originated in a diseased system of finance, must ultimately
become a source of very serious social and political disorder.
The descendants of the mushroom millionaires of the present
generation will consolidate into a broad and almost omnipotent
money power, whose sympathies and influence will conflict with
our political institutions at every point of contact. They will
exercise a vast control over the larger organizations and
movements of capital; monopolies will seek protection under
their wing; and, by the ascendancy which wealth always confers,
they will steadily broaden their grasp upon the legislation, the
banking and the commerce of the nation.
The illegitimate methods by which the wealth of this class has
been accumulated cannot always remain a mystery to the masses.
The time will come when every citizen will clearly perceive how
his interests have been sacrificed for the creation of this
abnormal class; and, when that time comes, a series of public
questions will arise that will strain our political institutions
to their very foundations. Already the working masses begin to
see the dim outline of the gigantic wrong that has been
inflicted upon them in common with all other classes. If they do
not understand the exact method by which a portion of the
rewards of labor has thus been diverted from them, they clearly
comprehend which is the class responsible. The labor troubles
that have so seriously shaken confidence during the spring of
this year have been largely stimulated by an idea that a serious
wrong has been done to the workman in the creation of these
abnormal fortunes. It is not surprising—although it may lead to
disappointing results—if workingmen should reason that, if
railroads can afford to make a few men so wonderfully rich, they
can afford to pay their employees higher wages and for shorter
hours. Nor can we wonder if, when capitalists are on every hand
piling up their wealth by the tens of millions, the laborer
should conclude that he ought to be able to get a few dollars a
week more, or deduct an hour or two off his day’s work, without
very seriously hurting the employing class. This may be and is
very fallacious reasoning; but it is what might very naturally
be expected under these circumstances, from a class who are not
trained to think beyond surface depth. It will be of no avail to
tell the workmen that this unjust distribution of wealth is
final and irrevocable; that there is no power of redress by
which a wrong of this nature can be righted; or that, as voting
citizens, they are as much responsible as anybody else for
permitting the neglects and defects of legislation that have