Fifty years in Wall Street
made these inequalities possible. This class never reason either
calmly or logically, and it will take a great deal of fruitless
agitation to satisfy them of the hopelessness of their methods
of seeking reparation.
The Socialistic seductions which have captivated such large
masses of the working population of Europe will all the more
readily find acceptance among our millions of laborers because
they have before their eyes such conspicuous instances of the
unequal division of wealth and of the overwhelming power of
organized capital. Certainly, if any facts could be supposed to
justify the doctrines of Socialism and Communism, it would be
the sudden creation of such fortunes as those which, within a
very few years, have come into the hands of our railroad
magnates. A few years later, the public will understand much
better than it now does how facts like these have contributed to
the raising of questions of government which will dangerously
test the cohesion and endurance of our political institutions.
Artificial methods of establishing our railroad corporations
have naturally led to artificial methods of regulating their
operations. Over-capitalization incapacitates the roads for
competition; for it necessarily holds out a temptation to
parallel existing roads by others at a lower capitalization. As
roads running between the same points were multiplied,
competition for “through” business became more active, until not
only were dividends threatened on some of the best lines, but
some roads were driven into default on their mortgages. At this
point the “pool” was introduced—a device by which all lines
running between the same points agree to put their business from
through traffic into a common aggregate, to be distributed among
the several members according to certain accepted percentages.
It was hoped that, in this way, uniformity of charges could be
maintained, at such rates as were necessary to make the business
satisfactory to each member. This, however, was soon found to be
a step “from the mud into the mire.” The pool was discovered to
operate as a premium on the construction of new parallels.
Speculators were quick to perceive that they could build new
lines on the same routes for much less cost than the old ones,
and that, with a lower capitalization, they could easily compel
the pool to admit them to membership, with all the privileges of
a ready-made traffic and with all the guarantees the pool could
afford of exemption from competition, and of ample charges.
Thus, the pools that, in the first instance, were made necessary
through the evils of speculative methods of construction,
became, in turn, the source of a new and even worse form of the
same evil. New roads were built, or sets of old detached ones
were connected, so as to afford additional parallels to the
existing trunk lines, with no other object than to compel the
latter to support them by dividing with them a portion of their
traffic, or to accept the alternative of a reckless cutting down
of rates. The end to this viciously excessive system of
construction can only come when the pools have been reduced to
such a low condition that they will no longer care to take
newcomers into their co-partnership; in which case speculative
builders will see no chance for profit in such ventures. The
fate of the “Nickel Plate” and of the West Shore speculations,
by which nearly 1,000 miles of needless road was built to divide
traffic with the Vanderbilt system, serves as a warning against
the danger of building roads to live upon pool support; but,
nevertheless, the Eastern trunk pool still stands exposed to a
great deal of harassing outside competition from possible and
contemplated new combinations of existing detached links. Routes
of the latter kind are even more formidable competitors than new
lines, because they can be provided at a lower capitalization,
and have already the support of an established way traffic. It
would not be surprising if, within the next three or four years,
several new routes should in this way be established between New
York and Chicago.
It will thus be seen that the very contrivance intended to stave
off the vicious effects of artificial capitalization is
contributing, by a sort of punitive process, towards the end of
reducing earnings to a just ratio to the true value of the
properties. The weakness of the pool, arising from its
temptations to new competitors to enter the field, is not the
only cause of its failure. Up to this time it has been found
impossible to find a form of pool stringent enough to restrain
the members from cutting rates against each other. The modes of
possible evasion are so numerous, the sacrifices of special
advantages that each member has to make are so galling, the
small share that remains to each road in a numerously divided
business is so small, and the temptations of agents to get
freight “by hook or by crook,” in dull times are so
irresistible, that the strictest watching and the severest
penalties fail to secure a faithful observance of the pool
agreements. Much forbearance is shown towards transgressions,
and deliberate violations have to be condoned or connived at;
but, all the time, the pools are in imminent danger of
jealousies and breaches of faith causing their disruption. No
sooner have they won public confidence by maintaining harmony
through a period of prosperous business, than the public wake up
to find that some member has been secretly “cutting,” and the
agreements are torn to pieces.
The result is, that the public have lost all confidence in the
ability of the pool to regulate competition; and, still worse
for the railroads, their managers are losing faith in them also.
The great crucial test of this expedient so far as respects the
Eastern lines, is likely to come when the number of smaller
outside competitors, of the character just alluded to, comes to
be increased. The pool will not be likely to admit them into its
fold, which already includes too many diverse interests to
permit of harmony; and if it did, the danger of disagreements
and disruption would be only thereby increased. And yet, if
those routes are shut out, they will act as so many free lances,
attacking the older lines in every direction, and doing business
at rates which will leave the pool companies no alternative but
to follow suit. In this dilemma, the outlook for some time ahead
is not an encouraging one for the older companies. To my view,
it seems very probable that their original sins of construction
and their subsequent transgressions of stock “watering” are
about to find them out. The natural law of competition is a
terrible foe to the violators of commercial justice. It is the
inevitable police power of trade. Its working may be evaded for
a time; its final conquest over wrongs and monopolies may
sometimes be delayed beyond the limits of human patience, and
men may at such times lose confidence in its power to right the
wrongs of society; but its ultimate success in the restoration
of equity and fair-play is as certain as the rising of the sun.
My absolute confidence in the ultimate triumph of this principle
prompts me to venture the assertion that, _at no very distant
period_, the wrongs practised in the original construction of
our railroads and in the subsequent “waterings” of their stocks,
will be compensated through competition adjusting the profits of
the companies to the equivalent of a fair return upon a _true
valuation_ of the properties; that is, a value measured by what
they are able to earn under the conditions of free competition
and the now current cash cost of providing like facilities.
That, it appears to me, is the solution towards which our
railroad problem is now steadily working; and neither
Congressional legislation, nor State regulation, nor the
resistance of organized capital, can be expected much longer to
stave off that result.
It may, however, be very properly asked, whether legislation
has no duty in the premises? To me, it appears that it has a
very weighty one. The consequences of the original neglect
to prescribe proper regulations for the construction,
capitalization and financial management of railroads has
been so fully exposed by their past history, that the
Legislatures will greatly err if they neglect to impose
restrictions upon future corporations that will prevent
farther repetition or perpetuation of the evils. When the
Government bestows upon railroads important privileges and
franchises, under which fundamental private rights are held
in abeyance for the common good, it is due to the public
protection that the recipients of these favors should be
held under restrictions which will prevent them from abusing
the privilege to the public disadvantage.
When a railroad company capitalizes its property at double its
actual cost, and seeks to collect charges calculated to yield
dividends upon such false capital, it grossly perverts and
abuses the privileges conferred by its charter, and virtually
perpetrates a public robbery. This appears to be a perfectly
plain proposition, and yet this glaring wrong has been so long
tolerated that not only the railroads, but a portion of the
public even, have come to regard it as a sort of right inherent
in these corporations. One of the first duties of the State
Legislatures, therefore, is to enact laws requiring that the
stocks and bonds issued against any railroad hereafter built
shall, in no case, exceed in the aggregate the _true cash cost_
of the property; the penalty for the violation of this
restriction to be forfeiture of charter. The responsibility of
managers should be definitely fixed. All extensions, betterments
or improvements should be provided for by issues of stock or
bonds on like conditions. The issue of mortgages should be
restricted within 60 per cent. of the true cost of the property.
In order to prevent wrongful speculative profits being realized
by the incorporators, they should be prevented from becoming the
constructors of their road, directly or indirectly; and all
contracts for construction, equipment, extensions or
improvements should be made upon open competitive bids, the
lowest bid to be accepted, with substantial guarantees for the
faithful performance of the contract. Also, it should be made
the duty of a board of State railroad commissioners to see to it
that all these conditions are strictly complied with.
Regulations should be provided prohibiting issues of stock for
any other than construction or equipment purposes, forbidding
the payment of dividends not actually earned, and enforcing the
amplest publicity of details relating to current traffic and the
financial affairs of the companies.
Had our original railroad laws incorporated provisions of this
character, our railroads would have all along ranked as the
safest and most stable investments of the country; the discredit
that hangs over our corporate enterprises would have been
averted; transportation would have been done at lower rates with