nioersit^ of a^ 4 d California 4 (pAienei p poued lo) o; peMenen uo pefsenbeg $ JO} peinsxii $ pesopue e5D;sO(i o\Di AJDjqrj I I Ag "pexun^ei ejDQ 'peAteoei epQ ^EE ^wT^ QHOOaH AHYHan ONIMOHHOa Ado3 pioH "unijoiot^ :jo jsoQ pe|Duips3 petXAio )oj{ esn fiapoynsxp ao^ :asnYoaa iwas ion I I pettraued ;ou ButAdo^ I I Apo AiDiqn m esn joj ["] :SNOLLDIUISaH 31^VM3Nga^WON V S){33M 333141 ■$ loj pemsTij ana ojDj AjDiqnrn :Ag inhs Aq peapeiio ISlHOdaH isan03H NYOi AHvnanHHiNi lUOdHH WIH31NI Edinburgh: 64, PRINCES STREET- Northern Assurance Company. INCOIVIE& "UNDS1897 FIRE Premiums, £662,000 LIFE Premiums, £246,000 Interest £185,000 \ccumulated Funds, £5,125,000 Head Offices LORDONsc ABERDEEN ruND5(i898J tj.l25>0UU. Northern Assurance Company. Head Offices : LONDON. 1, Moorgate St. ABERDEEN, 1, Union Ter. Branches — Birmingham. Bristol. Dublin. Dundee. Edinburgh. Glasgow. Liverpool. Manchester. Newcastle. Nottingham. Chicago. New York. San Francisco. Montreal. Melbourne. LONDON BOARD OF DIRECTORS. Dolonel Robert Baring. Ienry CoSiMo Orme Bonsor, Esq. , M.P. Lrnest Chaplin, Esq^. Alexander Heun Goschen, Esq. Ienry Charles Hambro, E>q. Villiam Egerton Hubbard, Esq. I Ferdinand ]\Iarshall Huth, Esq. I Henry James Lubbock, Esq. I Charles James Lucas, Esq. I William Walkinshaw Esq. I Rt. Hon. Sir Algernon West, K.C.B. Secretary.— R. W. Lowe. FirP DPTinrtTTiPnf -T^^' Bannering, Home Superintendent. Jfire Department. I jQ^ Fowler, Foreign Sztperintendent. Life Department.— F. Laing, Actuary General Manager.— H. E. Wilson. Fire Department. — Insurances are granted on Property situate in all parts of he British Dominions, and in most Foreign Countries, at rates which are computed iccording to the actual risk incurred. The Company has already paid over £9,500, 000 b the settlement of claims under its Fire Policies. Life Department. — The Company offers the advantages of perfect security, \vith freat economy in management -and moderate Rates of Premium. The total expenses in he year 1895 were slightly under 7 per cent, of the Income from Premiums and Interest, tr, excluding Commission paid to Agents, less than 4 per cent. In the Participation Branch the whole of the ascertained surplus at each valuatioa lelongs to the Assured. The Amount for the Quinquennium ending 31st December, 1895, vas sufficient to provide a Bonus of £1. iis. per cent, per annum upon the sum assured, "^ £7- 15s- per cent, for the whole Quinquennium, besides leaving ^10,896 to be carried onvard. The Liabilities were ascertained by the well-known combination of the Institute if Actuaries HM (5) and HM Tables of Mortality, with only 3 per cent, assumed as the ate of Interest to be in future earned by the funds, which are acknowledged to be very igorous data for the purpose. Provident Inveslmeiit of . . . . the Soundest Character. pRUDENT Persons contemplating Life Assurance, and desirous of doing so with the utmost advantage to themselves and their families, are invited to read the New Prospectus of the SCOTTISH ^^^^ " A. p. 1815 . WIDOWS' "^^ FUND /i4.5oo,ooo. ' v^ I ^ i.^ ■ The Prospectus contains full information regarding this great Mutual Institution, including the mode of dividing the large Profits realized, the System of Options, and the Various Privileges attaching to its Policies. Application should he made to I o n d n n ^ ''*' ^^'^^""-'-' ^ '^• ■-(WllVIWIljg, WATERLOO PLACE, S.W. AMERICAN RAILROADS AND BRITISH INVESTORS. BY S. F. VAN OSS, AUTHOR OF " AMERICAN RAILROADS AS INVESTMENTS. " LONDON : EFFINGHAM WILSON & CO., ROYAL EXCHANGE, 1893. .(^ AV VT .\'^ SffifCKfclS CONTENTS. CHAP. PAGE. I. — The American Kailroad of To-day - 1 II. — American Eailroad Finance - - 26 III. — Capitalisation 36 IV. — Rates and Revenue - - - - 56 V. — Revenue and its Application - - 87 VI. — Securities and their Returns - - 108 VII- — Summing up the Case - - - - 130 VIII. — How TO In\:est 154 Appendices. 1 191 1 Digitized by tine Internet Arciiive in 2008 witii funding from IVIicrosoft Corporation littp://www.arcliive.org/details/americanrailroadOOvanoricli PEEFACE r I iHE favourable reception accorded to my recent work on American Railroads has induced its London Publishers to suggest to me that I should write another volume of less formidable dimensions, — an abbreviated popular edition, as it were. I have the more readily accepted this proposal, because the scope of the larger book precluded me from entering as fully as was, perhaps, desirable into various matters which are always of great importance, but which recently have been forced still more into the foreground by one or two sensational events. Thus the present book is not precisely a con- densed edition of its more bulky predecessor. It deals with railroad conditions and investments in general, whereas the chief object of my earlier effort was to des- scribe the history and position of the various companies in particular; and it discusses at length various matters which received only superficial treatment in my other book. The principal of the sensational events to which I have just alluded is, of course, the Eeading collapse. It is most intimately connected with one of the chief features and one of the greatest defects of American railroad management, namely, the great discretionary vi. PREFACE. powers of the directorates. These i^owers are of such importance to the investor that I have made them the keynote of the following pages ; and although I have introduced no new arguments, I trust that the more or less exhaustive discussion which follows will be found serviceable, and deprive the characteristic dealt with of the greater part of the horror with which it is undoubtedly regarded by the average investor. Its drawbacks are almost entirely counterpoised by the pecuharities of capitalisation which it engendered, and investors need not expose themselves to its influences unless they like. There are hundreds of securities shielded against any possible abuse of discretion on the part of the managers. There is another matter to which I have been care- ful to call attention, and that is the great difference between the merits of one security and the other, and the existence of good and bad securities side by side. To enlarge upon such a theme seems somewhat super- fluous, for it ought to be plain to everybody that in a vast field of investments Uke American railroad securities, stocks of the most varied merits can be found. But unfortunately this fact does not seem to be generally recognised, and especially when something goes wrong the most ludicrous conclusions are drawn from one company or one stock to another. A large PREFACE. number of newspapers have, for example, been induced by the recent Beading debacle to condemn American rail- roads in general, and to discourage investment in any Transatlantic railroad stock. But granted that the Read- ing had the most depraved of managements, what does that prove against, say, New York Central securities ? Certainly not more than the default of Greece would prove against British Consols. Yet one company is made to suffer for the sins of another ; and it is therefore not altogether superfluous to call attention to the fact that it is far better, as it is certainly more scientific, to find distinctions and differences, than to draw forced com- parisons and to offer nonsensical generalisations. The following pages further contain a rather full dis- cussion of the Rate question, which is constantly passing through new phases. Space has also been found for a short description of railway conditions in general, for a specification and classification of the numerous kinds of securities, and for a few hints to investors. The Appendices contain data which I have little doubt will prove useful to those for whom they are intended. S. F. VAN OSS. London, June, 1893. I UNIVERSITY ) yiMERlCAN IjAlLROADS & BI^ITISH INVESTOI^S. CHAPTEE I. Although it is our intention to confine ourselves strictly to those matters which are of direct interest to investors, it seems desirable to give, by way of in- troduction, a brief sketch of the position which the railroads occupy in America. To the United States railways have always been of greater relative importance than to other countries. The scarcity of ordinary highways, canals and rivers effectually prevented the development of vast and fertile stretches of country ; there was no Baltic or Mediterranean cutting deep inland, and giving access to the heart of the continent by means of large rivers carrying craft to and from the centres of pro- duction ; there was one vast region, over 3,000,000 square miles in extent, the greater part of which would have been inaccessible even if the grand Mis- sissippi system had not led to what, from a commercial point of view, is a very bad part of the coast. The Father of Streams leads to the South, but the centre * This chapter is part of an article which originally appeared in the "Investors' Review" for August, 1892. I am indebted to the editor of that periodical for the leave lie has given me to reproduce it here. EARLY DAYS of population and of commerce being in the East, while agricultural production, the mainstay of the States, centres in the West, trade, which in the United States has practically but one direction, could not avail itself of the great river system; and before commerce could be established artificial channels had to be created along which it could move. The lack of highways of trade was keenly felt, more keenly than in any other country ; in fact, the full development of the vast territory west of the Alleghany mountains would have been an impossi- bility, had not this want been provided for. But, however apparent its necessity, and irrespective of the good prospects of such an enterprise, it may on the whole be regarded as doubtful whether in the early days of railways private enterprise would have embarked upon a similar venture had it not been supported by aid from without. Fortunately such assistance was given, chiefly owing to that intense jealousy between States and cities which in America has been, and still is, the direct cause of innumerable improvements and of amazingly rapid progress. In the early part of the century the Erie Canal, connecting Lake Erie with the Hudson, had been constructed by the State of New York, and its opening in 1825 soon indicated that the struggle for commercial supremacy would be decided in favour of New York. The other cities then striving to become the great commercial centre of the country, did not, however, look on helplessly. As early as 1823 the State of OF RAILWAYS. Maryland and the City of Baltimore planned the completion of a tramway from Chesapeake Bay to the Ohio River, and Pennsylvania made an unsuccessful attempt to construct a canal and portage railway system that would traverse the State from East to West, and cross the ridges of the Alleghanies. When the Liverpool and Manchester Railway had heen opened, these inadequate means of transportation rapidly developed into roads with steam traction, still supported hy the States in some form or other. The Baltimore and Ohio and the Erie received advances from the Legislatures in Annapolis and Albany ; the State of Pennsylvania owned and worked the Central Pennsylvania Railroad, which was afterwards acquired by the present Pennsylvania Railroad Company ; the State of Illinois gave the Illinois Central Railroad Company a strip of land twelve miles broad, and traversing the entire State from Cairo to Chicago; and nearly all the earlier routes received support in some form or other. The success of these railways was so great that construction soon began to assume considerable pro- portions. In 1835, 1,100 miles had been built; in 1840 there were 2,800; and in 1850, 9,000 miles; and everywhere new lines were projected and their sponsors encouraged by land grants, immunity from taxation, and other favours. The nation began to see that the presence of a railway meant production and accumulation of wealth, and that its absence rendered development impossible. As a result, railway con- FRIENDLY ATTITUDE OF struction was encouraged by every available means, and, favoured and fostered, patronised and protected by the people and their Government, railways were bound to grow at that rapid rate which has astonished the world. It cannot be said that the railway corporations have shown much gratitude for the favours showered upon them by the Legislatures. In those days there was in the United States a scramble for wealth which had anything but a salutary effect upon commercial morality; and railway corporations especially, which from the outset attracted the best brains of the nation, were conducted by a class of men too shrewd not to take advantage of the high favour wherewith the people regarded their ventures. The liberality of the Federal, State, and Municipal Governments, and the encouragement and confidence of the public, was in many instances abused, and, instead of leading to gratitude, seems to have aroused that greed which led to fraud, extortion, and blackmail. For not only was the construction of railways taken advantage of for the purpose of illicit gain at the cost of the investor — a matter to which we shall return later on — but railways abused the general desire to promote and accelerate their construction by making peremptory demands for loans or gifts of money from States, counties, and towns. These demands were the more repulsive because those who made them usually laid stress upon the *' necessity of changing the routes unless such aid be forthcoming," such alteration being THE PEOPLE ABUSED. possible since no company was ever required to file a detailed plan with any legislative body, as is neces- sary in almost every country. Strange to say, such great benefits were generally anticipated from the advent of railways that very few local authorities hesitated to respond to similar pressing requests, and that Municipal and State bonds were issued with a readiness which afterwards brought numerous town- ships into financial straits, and many a county into difficulties. But the railways by no means stopped short at extorting money from municipalities. It was not long after they had reached their teens that in their intercourse with individuals they gradually adopted unjust, unlawful, and sometimes even criminal prac- tices, which were far more baneful in their conse- quences than the wholesale blackmail of counties and municipal corporations. By means of discriminations, pools, and corruption, they inaugurated an era of commercial demoralisation which even moderate writers like Professor T. K. Ely, of Yale College, have denounced in the strongest terms^ and which probably is without a parallel in the commercial annals of any nation. Although pools and a widespread corruption were also strongly disapproved of, public indignation was roused chiefly by differential tariffs, and although it is not necessary to enter into many details, a few of the principal features of the objectionable use of " discrimination " may be mentioned. 6 THE DAYS OF There were discriminations against localities, in- dividuals, and classes of freight, and the two first- mentioned species were by far the worst. "Local discrimination " may be defined as the practice of making very low rates for competitive points, while intermediate ones would have to pay excessively high charges. To quote the most noted instance, the rate for cotton from Winona to New Orleans, 100 miles, was $3*25 per bale ; from Memphis, 325 miles, only §1-00 was charged, and there w^ere myriads of similar cases, some of them excusable on the ground of water or rail competition, others without any apparent reason. Now everybody who is acquainted with railway business knows that differential tariffs are a necessary evil, but it is evident that their application on too extensive a scale must be highly injurious to the community ; indeed, the serious decline in the value of land and the desertion of rural districts in the United States have been attributed to differential railway tariffs.* But in spite of their serious consequences, local discriminations were far less condemnable than discriminations between in- dividuals ; persons in the same town would have differential rates, and the differences would often amount to so much that the favoured persons were enriched and the others ruined. By a system of "rebates," "drawbacks," and " underbilling," the * Between 1870 and 1880 land values in seven Eastern States, according to the Tenth Census Report, declined 350,000,000 dollars. This fall has been attributed to discriminations in favour of the West. DISCRUnXATION. grossest injustices were committed; for instance, the Standard Oil Company once received $10,000,000 in eighteen months as rebate for petroleum shij^jyed hy others^ and its monopoly and wealth are well known to have originated in nothing but differential rates which ruined all its rivals by directly trans- ferring money from their pockets to the safe of what was then the Southern Improvement Company. Two of the greatest Chicago " packers " are likewise generally conceded to owe their wealth chiefly to differential tariffs; indeed, thousands made vast fortunes by the undue and criminal preference rail- ways gave them, and myriads of others were ruined in consequence. It should not be imagined that these statements are exaggerated. In " The Eailroad Problem," Mr. A. B. Stickney has shown, by a simple calculation, that an Omaha wheat merchant who, has a Chicago rate of a quarter cent, per bushel less than his rivals, must ultimately monopolise the business; and the Hepburn Committee, appointed by the New York Chamber of Commerce, collected evi- dence of over 5,000 cases of discrimination between individuals, practised by the New York Central and Erie Kailways in New York State alone. The proportions of this abominable system increased vastly after 1870, and in 1884 there must have been at least 100,000 prominent traders enjoying rates which gave them unjust and undue preference above others, and which doomed thousands to ruin. Nor did discrimination stop at goods traffic. The *' free POOLING. pass " abuse was at one time so universal that nearly half the number of passengers carried rode free, and the inference from this is that the other half practi- cally paid double fares. In addition, the attempts at "pooling," made in the meantime with the object of staying the decline in rates which resulted from excessive competition, imposed a tyranny not less objectionable than discrimination, and perhaps more hurtful. Pools deprived the community of the benefit of free competition, the soul of trade ; moreover, they caused severe fluctuations in transportation charges. These were decidedly detrimental to business in general on account of their short duration, which was connected with the speculative designs of their members — designs directly responsible for the frequent rate-cutting characteristic of the era of pools. Further, the inflation of capital, to which reference is made below, and of which it was alleged that it necessitated excessive rates, as well as the dishonesty of managers, who were suspected of resorting to discrimination for the sake of self-enrichment, was universally con- demned, and increased the indignation gradually provoked by so many causes for just complaint. This systematic discrimination could not fail to provoke angry protests in a country devoted to justice and dedicated to the proposition that all men are equal ; but it cannot be said that in its earlier stages resistance was very formidable. For a long time the railways remained so powerful that they could con- sider it unnecessary to pay any heed to their enemies. THE PEOPLE PROVOKED. Their favours had made friends among the public ; their recognised power rendered it dan^jerous for a person to oppose them ; their free pass bribed press and pulpit, bar and bench ; their influence and money bought Legislatures, into which they were the first to introduce that pernicious system of jobbery which still distinguishes American politics. With so many odds against them the enemies of the railroads had small chance of success. Indeed, it took the opposi- tion two decades to attain maturity and to outnumber the powers that were. But their number grew con- stantly and at the same ratio as did the indignation caused by blackmailing, discrimination, free passes, pooling, stock-watering, and corruption of Courts of Justice and Congress -men, and it can surprise nobody that the growing number of opponents, embittered by the hopelessness characterising their cause for so many years, ultimately w^ere as unreasonable in their claims for remedies as the railways had been unjust in their actions. To find the hapi^y medium between the alleged rights of the railways and the angry demands of an indignant public constituted, indeed, that which had gradually become known as " the railroad problem." Opposition was bound to come into existence first where the largest class suffered most, and hence it originated in the agricultural States of the North- West, where the Grangers, now merged into the Farmer's Alliance, controlled the Legislatures. In 1871 the State of Minnesota passed the first " Granger 10 RAILROADS ATTACKED. Law," and two years later Wisconsin followed suit, both States forbidding discrimination and fixing maximum rates, thereby setting an example w^hich was afterwards followed by several other States. The railways, however, deliberately disregarded these enactments on the ground of their alleged unlaw- fulness, and in 1874 President Mitchell of the St. Paul, in a now famous letter to the Governor of Wisconsin, gave his reasons for doing so, the principal of which was that the State had no right to interfere with the charges any corporation chose to make for its services. In consequence the case was carried before the Supreme Court, which in 1876 decided in favour of the State. This decision was of the greatest importance, because it defined the legal position of an American railway, and pronounced it to be, not a private corporation, but a public high- way subject to the supervision of the Government. If it were a private corporation its charter would be unlawful, because the "right of way" may not be granted to any enterprise which is not for the public weal ; and railways being invested with public use the Government has the power to regulate them. While this principle decided future legislation, and for that reason was of paramount importance, the de- cision based upon it was of little use. The railways, pretending that if the Supreme Court could compel them to obey Legislatures it could not force them to run trains at a loss, made reprisals in the shape of a very bad and slow service, and thus the Grangers were INTER- STATE COMMERCE ACT. 11 driven to a compromise ; they relaxed their laws and nominated Commissions to fix more reasonable tariffs. Bat by the time these Commissions were elected, the railways had bribed the Legislatures, in consequence whereof the new laws were not very dangerous. Nevertheless they were adverse to the railroad interest, although less stringent than the old enactments ; and in the meantime the struggle had attracted universal attention, and brought forth innumerable books and pamphlets. Moreover, the Supreme Court soon de- cided that no State could make laws for Inter- State railways ; and as in the meantime the agitation had grown constantly, Congress in 1885 appointed a Committee, presided over by Senator Cullom of Illinois, to enquire into the matter. This Committee presen^ted its report in 1886, adding a rider to the effect that in its opinion "no question of Government policy was of so much importance as this." A fierce struggle in Congress was the result of this report, for the railways of America, like those of England, are well represented in the Legislatures ; nevertheless the Inter- State Act was passed in 1887, and discrimina- tion and pooling strictly forbidden. The railway interest anticipated the gravest results from this Act, the most prominent railroad men, among them Mr. Chauncy M. Depew and Mr. H. V. Poor, predicting general disaster ; and no doubt these prophecies w^ould have been fulfilled had not the Act, fortunately for the railroads, possessed such weak- nesses as prevented it from being eft'ective. The 12 THE EFFECTS OF THE principal among them was pointed out to me by Mr. J. D. Springer, a former judge who is now second Vice-President of the Atchison Eaiboad Company, and consists in the fact that every official can refuse to give evidence on the ground that by doing so he might incriminate himself, and no American Court can require a witness to do that.* But of course the evidence of officials is necessary unless the Act is to be no more than a dead letter ; and since it can be refused on the ground of its requirement being con- trary to the cardinal principles of American jurispru- dence, the Act was bound to be a failure, especially as there were other circumstances which tended to render it inefficient. For the railways it is fortunate that was so, because there can be no doubt that the Act would have been most disastrous if applied rigour- ously ; its prescriptions, fixed as they were by people hostile to the railway interest and totally ignorant of railway practice, were much too severe. As it is, with all its weakness it did some harm which in a measure reacted upon the nation at large, for it is natural that anything detrimental to an interest representing one-tenth of the nation's wealth, and employing a vast proportion of its capital, must be injurious to a com- munity with which it is closely interwoven. But the Act has done some good too. The railways have been taught that it is dangerous to provoke the anger of the public, and there can be no doubt that abuses and * Since this article was written steps have been taken to remedy this defect. ^ IXTER-STATK ACT. 13 the complaints engendered by them have become much more rare since the Act came into force. At the same time the pubHc has seen that it went too far, and that a moderate amomit of discrimination, of "watering/' and even of "pooling," is inseparable from railway business. Both parties have therefore received a wholesome lesson, and the result is that the railways have abolished many of their most nefarious practices, and are gradually purifying their business methods, while the Legislatures are assuming a less hostile attitude and applying their laws less rigour- ously ; indeed, I have been assured by many authori- ties in the North-West that the relations between the various legislative bodies and the companies promise to become even cordial as time goes on, and many a State formerly ultra-hostile to the companies certainly has already seen the error of its ways, and amended them. Iowa, for instance, was at one time one of the most vehement opponents of the railways ; the consequence was that railway construction became stagnant in that State, and that it stood still while its neighbours progressed and prospered ; to-day Iowa is less "hard" on the railways than any Western State. Hence it may be confidently expected that the friction, wherever it exists, will soon wear itself out ; the animosity is fed chiefly by abuses and tyranny on the part of the railways, and the latter are not likely to resume their bad practices. Yet it may be useful to mention that everything that can be interpreted as a sign of the revival of tyrannical 14 RELATIONS AMONGST tendencies may rouse and revive indignation. For example, developments like the Reading combination can never have a salutary effect upon the railway question. It need not necessarily be actual tyranny ; the appearance of it is sufficient to provoke the indig- nation of a nation, by instinct and inclination op- posed to the tyranny of trusts and monopolies, and by habit hostile to great corporations. The matters just referred to, however much interest may be attached to them, only fill the background of this sketch ; the foreground is occupied by objects of greater direct importance to the investor, namely the relations— firstly, between the corporations mutually, and secondly, between them and the investor. The entente between the several companies has only lately commenced to become cordial, but even to-day it is far more strained in the United States than in any other country. Intensity in every respect is the great characteristic of the States and of everything American, good and bad alike, and this trait fre- quently leads the nation or the units of which it is composed into excesses. Among the numerous con- sequences of this characteristic, the love of "■ booms " fills no subordinate place ; and it was only natural that as soon as the profitable nature of railway enter- prise became generally recognised, construction went too far. The people were not satisfied with merely meeting the demand for transportation facilities, but they would persist in anticipating it. Hence railways soon were '* boomed for all they were RAILROADS MUTUALLY. 16 worth,'" and as a result the supply of transportation was speedil}^ considerably in excess of the demand ; to-day the disproportion still exists in a more or less marked degree, although no longer to the same extent as it used to do. The United States has 2| miles of railway per inhabitant against the United Kingdom's five-sixths of a mile, and although especially in this instance, and because of the peculiar conditions pre- vailing in the States, " comparisons are odious,"" one may from these figures deduce that competition is keener across the Atlantic than here. How keen it is may be seen from a few facts like these : Chicago and St. Louis have an aggregate population of 1,750,000, and the State of Illinois, through which nearly all connecting lines pass, boasts of 4,000,000 inhabitants, those of Chicago of course included ; seven railway companies cater for traffic between the two points. There are four great direct lines between such points as Omaha and Denver, five between Chicago and Cin- cinnatij six between St. Paul and Kansas City, and seven between Chicago and Des Moines (Iowa), while as many railways connect the Western metropolis with St. Paul and with Peoria. These numbers only relate to direct routes, and if we counted all intermediate lines, most of them would be considerably increased. For instance there are twenty-two different "lines" between Chicago and New York, and between the latter city and New Orleans there are not less than a hundred and six different routes along which freight can be and is shipped almost daily, although the 16 COMPETITIOy AND distances vary from the minimum of 1,180 miles, to the maximum of 2,053. The rates are in all cases virtually the same for through shipments ; other- wise these "lines " would not be competitive. As to the causes of this competition, although no very great practical importance attaches to them, it may be useful to state that the considerable profits to be made out of construction, in addition to that sanguine disposition of Americans which induces them to " overdo " so many things, were the most potent. And as to consequences, they all led to that " downward tendency of rates ^' so well known to the disappointed investor. Let us briefly state what remedies were applied to cure this malady, and with what results. We have already said that the disease originated in excessive construction, and its symptoms in all cases consisted of financial debility, sometimes seen in its chronic and sometimes in its acute form. The first medicine ad- ministered was decidedly homceopathic ; apparently it was thought that the fever would kill itself — that the weak would succumb and the strong survive. But expectations in that direction led to disappointment, because the weak possessed a considerably greater amount of vitality than they were credited with, and a general demoralisation of rates followed. In many instances this led to the destruction of the weak lines, and their subsequent absorption by the strong ; rate wars destroyed the feeblest first and strengthened the hands of the others ; but this victory was bought very ITS CONSEQUENCES, 17 dearly, and it soon became evident that a cure could be expected sooner from harmony than from war — and hence harmony was aimed at. It is not necessary to trace its estabHshment through all stages ; suffice it to say that the endeavours led to the more or less universal introduction of "pooling," which was generally regarded and defined as a means of allay- ing competition. In theory, ''pooling " is no bad thing; it is applied successfully and without serious injury to the public in many parts of Europe, but in America it has been a failure, and it was this because of the lack of good faith among the railways. "Pools" were simply made to be broken. Every railway violated them, secretly and dishonestly to steal a march upon its rivals, and openly for speculative purposes. The Achilles^ heel of " pools '^ is that adhesion of all their members is necessary to give them strength, and that dissent of one is sufficient to impart weakness ; and this proved fatal to all. In the days of pools, honesty among American railroad managers was still at a dis- count, and most of them patronised Wall Street ; and if a "bear" had the power to break up a pool, the temptation usually proved too much for him. Eate wars never were as frequent as in the days of pools, and this is why pools never were su-ccessful. A week of cutting would off-set a year of harmony, and since pools were detrimental to trade on account of the un- certainty of transportation charges, they were inju- rious both to the corporations and the community at 18 FOOLING TRIED. large * Hence their prohibition by the Inter-State Commerce Act, all that has been said to the contrary notwithstanding, was a distinct advantage to all con- cerned. It is equally certain that pools in no way stopped the decline in rates, which fell to such a phenomenal extent. From about five cents, in the early days of railroading, they dropped to 0.93 cents. in 1891. Since rate wards and pools failed to stay this decline, we must see whether other remedies could be devised, and if so, in how far they were effi- cient. It is gratifying to find that there was not only a remedy, but also that it consisted, not of artificial ingredients, but of natural components. To employ as few words as possible, the low rates were offset by consolidation and by technical improvements. Eate wars, in other words low rates, exhausted many a system and caused it to be absorbed by stronger ones ; in addition, the constant struggles tended to promote a combination of forces, and hence originated that consolidation which has been the most con- spicuous feature of American railways. To describe its extent w^ould be superfluous here, but it may be useful to mention that within the past twenty years more than 2,500 companies have been merged into others, and that to - day twenty - five corporations directly or indirectly control over 100,000 miles of railway. * We return to the subject of pooling in Chap. IV. CON SOLID A TION. 19 The results of consolidation are obvious. There is, in the first place, that immense saving of energy always attending the amalgamation of sundry small concerns, and the economy resulting from it ; in the second place, the combatants become more powerful, and war more destructive, and therefore more dreaded. Just as the growth of empires diminished the number of wars, growth of raihvay systems pro- moted peace ; and consolidation advanced, not only because war is more destructive, but also because peace is now recognised to be the only remedy for low rates, and the natural antidote against destructive competition. The acquisition of control through ownership, 'leases, and agreements, has furthered an entente cordiale ; and, apart from these, traffic asso- ciations, born of a desire for harmony, have pro- moted that amicable understanding which is essential to the profitable working of railways in a country where they compete vigorously. But in spite of all its salutary consequences, con- solidation alone would not have sufficed to offset excessive competition ; rates fell too much for that. The American railway charges less to-day for carry- ing freight than it costs railways in other countries to move it ; on English railways, for example, the cost price of moving freight is, as a rule, at least twenty per cent, higher than the selling price of the same amount of transportation on the average American railway. Yet, in spite of the fabulously low level of rates, it was absolutely necessary to reduce the cost 20 LOW BATES COUNTERPOISED of transportation to such extent that business would become profitable : without such reduction the entire interest would have been doomed to ruin. This problem has been the most difficult American railroads were ever confronted with, and it must be admitted that it has been splendidly solved. American railways contrive to make a fair profit with rates that would be ruinous to the railway companies of any other country. By gradually introducing an astounding technical perfection they have saved themselves from financial ruin. During twenty years which saw relatively little progress in England, American railways advanced with rapid strides, and although our engineers for the greater part are still loth to confess it, the standard American railway of to-day is ahead of ours, and even the worst line can, in some respects, teach us many a valuable lesson. Our English railways are guilty of preventable and wanton waste, and not least of waste of motive power. In this country, the cost of moving freight is much higher than it ought to be. There is not a single valid reason why, with our superior engineers, our mineral wealth, and our cheaper labour, it should be higher than in America, where it has been reduced to a minimum by the force of necessity. It is not necessary to say much of passenger traffic, since to most American lines this is of secondary im- portance, although it may be observed that, in propor- tion to its cost, passenger accommodation in America is far better than here ; while even in the matter of BY TECHNICAL PERFECTION. 21 speed, the best trans- Atlantic railways beat the cis- Atlantic* Passenger business in America is much of an advertisement, and rarely very profitable : the move- ment of freight is the pivot around which the business of all but a few companies turns. And in this branch of business small wonders were worked in a very few years. To begin with, the roadbeds of most lines have been wonderfully improved ; the majority are now well graded and ballasted, and, except on sidings and unimportant feeders, steel rails are universally met with. The rapid substitution of steel for iron tracks alone is a marvel. In 1880 there were 33,680 miles of steel rails against 81,967 of iron; in 1890, 167,606 miles were of the better metal, and only 40,697 remained of the baser; and everybody who knows how much the capacity of a steel track exceeds that of an iron, will understand what economies this change alone rendered possible. Still, the increase in the size of cars was much more important than the rapid introduction of steel rails for iron. Large wagons, of 60,000 lbs. capacity, are in universal use ; and the amount of dead-weight has been reduced to a minimum. In 1870, a Pennsylvania standard car weighed 20,500 lbs., and its carrying capacity was 20,000 lbs., so that to move a ton of paying freight it * The Empire State express, on the New York Central, daily rims from New York to Buffalo, 436^ miles, at a speed of 52tV miles an hour, inclusive of stops. The "World's Fair Flyer," running along the same road and the Lake Shore, covers the distance between New York and Chicago in 20 hours, and attains an aver- age net speed of 51 miles an hour. It easily holds the world's record for fast long distance runs. 22 CHEAP WORKING OF was necessary to haul rather more than a ton of dead weight. To - day the American car of the standard type weighs twelve tons and carries thirty. In England, and in Europe generally, a freight car of the most approved type weighs five tons, and carries eight ; which means that the proportion of dead weight to paying freight in America is 1:2^, in England only 1:11. In addition to this an American train usually carries as much as the condition of the way will permit, while in England ridiculously short trains can be seen. This fact, like the greater speed of freight trains in England, is no doubt connected with the more exacting demands of the public here, but there can be little doubt that expenses could be reduced very considerably if only serious attempts were made. The greater capacity of cars, the heavier train-loads, and the slower rate of speed, account for the lower cost of transportation, and, in addi- tion, the locomotives are stronger and use a trifle less fuel than ours, while, above all, much more ser- vice is got out of rolling stock, cars being made to to perform twice as much work as in this country. All this shows American railways to be in many ways superior to ours, and as improvements con- tinue at a swift pace, whilst we are almost at a standstill, the likelihood is that we shall be left behind more and more as time goes on. In connection with these technical features it is natural that we should confront ourselves with the question, "Will proportionate profits increase or not ?" AMEBIC AX RAILWAYS. 23 To this I believe an affirmative reply must be given, though it will be necessary to qualify the answer. The fall in rates seems to have reached its limit ; charges no longer tend continuously downwards, but oscillate around a point approaching the average for the past six years; moreover, competition is gradually becoming less destructive, owing to the wholesome influence exercised by the introduction of more sen- sible methods — methods w^hich find expression in the establishment of Associations and also in consolida- tion; and although rates in some sections will no doubt require further adjustment, they will presum- ably rise in those regions where local traffic is on the increase, and' there will in all probability be no further serious fall, and no renewal of rate wars. To this rate question I propose, however, to return at some length later on. Whilst rates are fairly approaching " bed rock," the expenditure involved in operating the various properties becomes cheaper as time goes on. Perfection of roadbeds and rolling stock, as I have said, con- tinues ; and the higher the level it reaches, the cheaper freight can be moved. What economies arise from this cause alone may be inferred from the fact that the Lake Shore Kailway, one of the best lines in the country, does a more remunerative business than the Wabash (which as far as geographical situation is concerned is its equal), although its rates are lower, and this solely because it can move a ton one mile at a cost of 0.458c., whereas its rival, just as favourably 24 WILL RATES DECLINE situated, but possessing an imperfect roadbed, cannot do it for less than 0.563c. This simply means that the Wabash, were its road as perfect as that of the Lake Shore, would earn over one and a quarter million dollars per annum more than it does now, and from this the reader may deduce what importance attaches to technical perfections ; at the same time he can see how foolish it is to object to constant betterments ; no matter whether paid for out of earnings or charged to capital, all judicious expenditure upon them must prove true economy in the end. Improvements being effected everywhere, it follows that the proportion of operating expenses to earnings must grow smaller, and as rates will not be subject to a further appreciable fall, it seems certain that the movement of freight will gradually become more profitable. The one event which could prevent this would be a resumption of reckless construction ; but for various reasons this is not likely. The mere construction of a railway is no longer a profitable business, because the immense systems of to-day are not coyed or cowed into '* buying out" as easily as were the small lines of the past, and in addition illicit gains have become well nigh impossible because of the higher standard of morality now prevailing throughout the country, and of the wholesome in- fluence of inevasible publicity. To this last fact I point because it is well known that the profits which could be made by the aid of ''watering," construc- tion companies, etc., were one of the principal causes STILL FURTHER? 25 of that injurious disproportion between the supply of transportation and the demand for it which was the principal, if not the only cause, of the fall in rates. The improvements in the relations between the railways and the Eepublic, and in the prospects connected with rates, do not constitute the only amelioration that has to be recorded ; those with the investor have also undergone a salutary change. But this matter may not be classified with those dealt with in these introductory and more or less prefunc- tory pages. It requires chapters of its own. CHAPTEE II. AMERICAN RAILROAD FINANCE. We have just dealt with raHroad matters in general, and outlined the relations existing between the com- panies and the public, and between the railroads amongst themselves. We now have to consider the entente between the corporations and the investor. Before we enter upon this vast theme it is, how- ever, desirable to clearly define the fundamental principles guiding these relations. These principles differ radically from those which underlie railroad finance in other countries, notably in England ; and it is essential to a thorough understanding of the whole subject that the difference should be most clearly realised. To impress its existence upon the reader's mind is, indeed, the principal purpose of this book; and for that reason I shall devote a separate chapter to an exposition of the principal distinctive features of American railroad finance. The initial chapter must have convinced the reader of the existence of marked differences between the American railroad and its English sister ; and indeed the two have but little in common. Even cars and couplers, rails and road-beds, brakes and bridges are entirely different in the two countries ; the circum- stances amongst which the railways came into exist- CONTRASTS. 27 ence and their present surroundings present but few analogies ; their relations with the people and with their rivals are not in America as they are "over here." But nowhere are differences so striking as in matters pertaining to finance ; indeed, in this respect one can hardly speak of differences ; there are contrasts, and contrasts of the most striking kind. A little reflection will show that the existence of dissimilarities between American and English rail- ways is quite natural. The two countries and their inhabitants differ widely from each other ; and social institutions being always indelibly impressed with the stamp of the surroundings and social tendencies of which they are the creatures, it follows that the essential characteristics of railways must differ in various countries, and harmonise with the most pro- minent features of the nations amongst whom they exist. Thus we find that the English railways are entirely in concord with the thoroughness and the conservatism of the English people ; in America on the other hand the railroads remind us of the energy and enterprise of the Yankee, of his occasional lack of thoroughness, of the mushroom growth of his country, and so forth. In but few respects is the contrast so striking as with regard to the relations between the railroads and the law. In England the collective wisdom of Parlia- ment has to decide whether the needs of the public call for a new line or not, and has to approve not only of the project but also of the cost of a new 28 FUNDAMENTAL PPJNCIPLES railway. The smallest issue of capital must be sanctioned by Act of Parliament, and the authorities look after many details of service, prescribe the intro- duction of safety appliances, and regulate the working hours of railway employees, whilst maximum tariffs are laid down within the bounds of which the com- panies are compelled to keep. In the United States on the other hand legislative supervision is for the most part absent. There are a few" feeble enactments, passed after decades of abuses, which serve to protect the people against downright tyranny or extortion;* but for the rest every one, so to speak, can con- struct a railway wherever he likes, and can build and work it in whatever manner he pleases. He can issue as much stock as he sees fit, introduce as few or as many safety appliances as he thinks desirable, t charge whatever rates he deems best, and regulate the working hours of his employees at his own pleasure. Thus we find that the American railroad enjoys a much higher degree of freedom than the English ; but in no respect, perhaps, is it so absolutely free from any kind of legislative interference as in matters pertaining to its finances. This lack of Government control exercised a most direct and decisive influence upon American rail- * Amongst these I include the more or less transitory enactments of the State Legislatures, notably those attempting to fix tariffs. Reference is made to them in Chap. IV. + Except in some of the New England States ; but the railways in that section have no direct interest for the British investor. In New York State there is also some slight supervision over their finances. OF CAPITALISATIoX. 29 road finance ; in fact, it determined its fundamental principles. It also affected railroad development in general to a much greater extent than is usually supposed ; for example, the destructive competition still prevailing in many sections of the country would never have come into existence if the American Government had interfered as much with railway enterprise as the British. But it is not necessary to refer again to the influence which the passive atti- tude of the Government exercised upon railway de- velopment in general ; our present purpose is to trace and illustrate its immense bearing upon rail- road finance, and to give an outline of those far- reaching consequences to which we shall frequently have to revert in the course of subsequent chapters. It is obvious that the absence of Government supervision over railway finance left railroad directors in possession of an almost unlimited amount of discretion and power, and so to speak rendered them responsible to no one, and that it left the investor without any protection whatsoever, save that which he gradually succeeded in craeting himself. Hence, during the early days of railways, it was within the power of the managers to commit the grossest abuses, and this implies of course that the investor was, in a very large measure, at the mercy of those who managed his property. This state of affairs could not fail to permanently affect both principles and methods of American railroad finance. It rendered the investor helpless, 30 ABSENCE OF LEGISLATIVE and therefore cautious and exacting; it made the manager omnipotent, and consequently independent, irresponsible, and often dishonest ; and by doing this it determined the attitude of both, and decided their mutual relations. More than that ; every one of the peculiar characteristics of American railroad finance, all its evils and peculiarities, spring from this absence of efficient supervision over capitalisation. As far as the investor was concerned, this funda- mental defect, it is almost superfluous to say, neces- sarily rendered him cautious and circumspect. There being nobody who undertook to protect him, the capitalist was bound to protect himself; there being no enactments which looked after the custodians and managers of his property, it was incumbent upon him to give those managers as little power as he possibly could. And, therefore, instead of becom- ing a shareholder of the new railways, instead of figuring as a proprietor who was to share all profits, but who had also to run the risks and to bear the losses, the investor contented himself with being a creditor who renounced his share of possible profits in order to avoid possible risks, and who preferred advancing money secured by a lien upon the property to investing in the property itself. From this attitude there sprang one of the most striking characteristics of American railroad finance. The railways of nearly every other country have been built exclusively by shareholders, those of the United States were constructed mainly with the pro- SUPERVISION AND ITS EFFECTS. 31 ceeds from the sales of mortgage bonds. Funded debt became the basis of American railroad caintalisation. Whilst it left the investor cautious and helpless, the absence of efficient supervision over capitalisation rendered the railroad "boss" audacious and power- ful: and this irresponsibility and independence was fraught with danger in a community which twenty or thirty years ago was absorbed in a feverish scramble for wealth, and at a time when business morality was at a discount. And if we recall to our minds the condition of business life during the era of railroad construction, we can only find it natural that those who constructed and conducted railways went as far as their unrestricted powers permitted them to go, and furthered their personal aims and ends as much as they could without the sHghtest regard for the interest of the property, its owners, or its creditors. Thus the passive attitude which the Government saw fit to adopt with regard to railroad capitalisation may be held directly responsible for those malpractices to which we shall refer at some length in subsequent chapters. But time, which has wrought so many quick changes in the affairs of American railroads, has also reformed their financial methods. True, in matters of railroad finance, the Government adheres to the policy of laissez faire it has always pursued ; but other circumstances have fortunately tended to miti- gate the results of this neglect to a very considerable extent. 32 THE INVESTOR AND It is quite evident that the old conditions were little calculated to promote confidential relations between the managers and the capitalist. The former were endowed with vast powers which they abused yet en- deavoured to keep intact ; the latter suffered from these powers and therefore tried to check and curtail them. Hence the aims and wishes of the "railroad boss" and of the investor were conflicting, their attitude was more or less antagonistic, and they had little faith in each other. Both were engaged in a constant struggle for supremacy; but although this contest has continued until the present da}^, the capital- ist has gained much ground, whilst there can be no doubt whatever that he will ultimately take possession of the field. This quiet contest reminds us very much of the attitude which the English Parliament assumed towards the Sovereigns of old. When the Crown required money, the people's representatives often refused to give it unless it yielded some of its prero- gatives or privileges ; when an American railroad company appealed to the capitalist for funds, the latter frequently exacted stipulations aiming at a restriction of the powers of its managers. Every issue of bonds offered an opportunity, of which the investor could avail himself, to increase the restraint he placed upon the discretionary powers of the managers; these opportunities were usually taken advantage of, most appeals for new funds being granted only against the surrender of some part of THE MANAGERS DISCRETION. 33 the manager's power. In this manner the investor gradually succeeded in limiting the midesirable dis- cretion of managers. For example, he frequently cur- tailed the power to issue new capital,* and often suc- ceeded in prescribing the application of revenue by means of stipulations in mortgage deeds. But the rude force of the investor's millions was not the sole agency which furnished the check the Government failed to provide. That the discretion of railway directors is abused far less frequently now than it used to be must also be attributed to the improvement in business morality which has taken place in the United States. The present generation of railroad managers has a loftier perception of its duties towards shareholders than its predecessor ; in addi- tion the railroad manager of to-day has been taught that his own interests demand that he should estab- lish the credit of his company on the soundest possible basis, and this, as well as the amelioration of business morality in general, were additional remedies against the evils that sprang from the laxity of the Government, and have assisted in removing its most baneful results and in lessening the friction between the manager and the capitalist. Of course we are here speaking generally ; there still remain some railway managers who either care little about honesty, or else fail to see that their great discretionary ■^ 111 many cases even the issue of common stock is limited iiow-a- days, whereas formerly it was hardly restricted in any case. But there is still room for considerable progress in this direction. An issue of bonds is, of course, limited in all instances ; at any rate, I know of no case where it is not. 34 DISCEETIOX. powers are antagonistic to the best interests of their employers. But speaking broadly it may be said that the managements of the vast majority of com- panies have ceased to strive after preservation or increase of undue discretionary powers, and that they recognise the great interest which their pro- perties have in a restriction and clear definition of the discretion which must necessarily be vested in those who are intrusted with the management of great railway corporations. With these general remarks we will for the present take leave of this subject ; to its details we shall have to revert on several future occasions. Before we conclude this chapter it is, however, pertinent to call attention to two facts. Firstly, it is evident that the investor who appreciates prudence and safety should as a rule never invest in any funds the yield of which depends in any direct way upon the discretion of managers ; even where there is no reason for distrust, it is best to remain on the safe side. The investor should confine himself exclusively to bonds, and at its best to preferred shares, the precedence of which is assured by stipulations preventing any further issue from taking place without his consent, and the returns upon which are in no way dependent upon the decisions of managers.* Secondly, the foregoing implies that the discretion of managers extends over two distinct matters : capitalisation and the applica- * The returns on most preferred shares must be paid if earned, although it is possible to make this "if earned" a very elastic term, by spending earnings on betterments. [See Chap. V.] THE CARDINAL POIXT. 35 tion of revenue. In how far it does this will be fully elucidated by the two following chapters, which deal with these intricate subjects. But when perusing these chapters the reader must bear in mind that the principles of American railroad finance are entirely different from the principles adopted in this country. It is essential that he should not lose sight of this cardinal point, that he should know why the difference exists, and that he should re- member that different principles must needs lead to different methods. CHAPTEK III. CAPITALISATION. The peculiar relations between the investor and the corporations, to which we have just called attention, have had a host of consequences ; but their influence upon capitalisation has been greater than their bear- ing upon any of the other affairs connected with rail- roads. Eailway capital, as we have already had occasion to state, contains a fictitious element of con- siderable magnitude, commonly called water ; and the origin of this "water" is intimately connected with the unrestricted powers which railroad managers had in the past. There prevail a good many erroneous ideas concern- ing water. Neither its origin and nature nor its effects are as fully understood as they ought to be, and the result is that most people have no very clear ideas upon the subject. The common version is that the causes, characteristics, and consequences of water are equally baneful, and that it is an indelible taint left upon American railroads by an era full of gross abuses. But this view is by no means absolutely correct. The origin of a vast amount of water is no doubt as disreputable as it possibly could be, and its effects are in many cases highly injurious; but a considerable part of it is the result of necessity or VAFJOUS KIXDS OF WATKB. 37 expediency, and the effects are not nearly so bad as is generally supposed ; in some respects they are even beneficial to the investor. There is, in fact, water and water; and to demonstrate the truth of this propo- sition we shall discuss the subject as fully as the scope of this little volume permits, and show its origin and consequences. This will be more easily effected by enumerating the various forms it took under the influence of the circumstances which called it into existence.* There were in the main six different ways of inflating the capital of American railways, namely : — 1. By fraudulent issues of shares and bonds. 2. By paying too much for construction. 3. By purchasing properties at excessive prices. 4. By buying superfluous competing lines. 5. By selling bonds and shares at a discount. 6. By declaring stock dividends. Fraudulent issues, of course, were the worst form of " watering." They were effected by the managers solely for the purpose of self - enrichment, either directly or else indirectly in connection with market manipulations. The Pacific and Beading railroads have in especial suffered very severely from this mal- practice, but the Erie has probably been cursed with it more than any other company. Between 1868 and 1872 '' Jim " Fisk and Jay Gould increased the share capital of that corporation from 1^17,000,000 * This chapter coutaius several pages transcribed, witli but im- material alterations and some additions, from American Railroads as Investments. 38 VAPJOVS SWINDLES. to ^78,000,000, mainly to manipulate Wall Street, and President Watson doubled the funded debt a few years later, it is said also chiefly for his own benefit. At that time Wall Street w^as not exactly an abode of saints ; but even for Wall Street these proceedings were too bad, and in 1869 the Board of the New York Stock Exchange refused to quote these shares any longer. But there are dozens of other companies which suffered to almost an equal extent, or at any rate, in the same proportion. Hardly less repulsive than this practice was the second, consisting of paying excessive prices for con- struction. In the early days of railroading it was not unusual for railway companies to enter into contracts with construction companies. These noxious concerns were usually composed of members of the board and their friends, and of course served no honourable purpose, their object being to enable directors to make money at the cost of the investor. To show how the capital of companies was inflated by this means, I will quote the case of the now defunct South Pennsylvania Eailroad Company, started by Vander- bilt to compete with Penns3dvania Eailroad. This road has been proven to have cost not more than $6,500,000, and a responsible contractor had offered to build it for that sum. Yet a construction company, composed of Vanderbilt's clerks, received $15,000,000 to complete it ; and the syndicate of capitalists which supplied this money got |40,000,000 in bonds and shares, so that for every dollar of actual cost over six CONSTRUCTION COMPANIES. 39 dollars of bonds and shares were issued. In the same manner, though not in the same proportion, the thing was worked all over the Union^ especially in connection with the Pacific roads, a group of railways which has seen more frauds than any other. The builders of the Central Pacific, for instance, commenced with the modest sum of $159,000, and taking this as a nucleus they completed the road, gathering a total capitali- sation of $139,000,000, and acquiring large fortunes over the transaction ; the Government Commission on Pacific liailroads in its Keport to Congress says that $58,000,000 would have been a very good price for the railway. Car Trusts were — and in some cases still are — another means of robbing companies for the benefit of their managers, the shareholder being com- pelled to pay an excessive price for rolling stock supplied by the Car Trust on the instalment plan.* On a par with construction companies was the purchase of other properties at excessive prices. The Coal and Iron Company of the Eeading, for many years a great burden to that line, has been quoted as one of the most notorious cases, this concern being paid for, it is said, at the rate of at least twice its intrinsic value. Years ago it was a common thing for railroad directors to buy a property in their private capacity, in order to sell or lease it to their company * One of these Car Trusts is connected with the Chicago, St. Paul and Kansas City, now the Chicago Great Western Eailroad. I have tried hard to find out what it is like, but failed to get any other information beyond that contained in a letter from a North Western raiboad resident, who tells me he is under the impression that the Car Trust is a parasite of the road. 40 PABALLEL LINES. at an immense profit ; and mitil twelve or fifteen years ago the majority of purchases of auxiliary con- cerns were permeated with fraud. Many leases, too, had little in common with Caesar's wife ; the history of the Wabash bears out this statement. But I believe this kind of fraud is very rare now. The purchase of "parallel" lines, although in numerous instances taken advantage of to carry out some " deal," was in a measure unavoidable, the independent existence of such lines being a constant danger to others, and destructive to all concerned. The Vanderbilt interest was practically forced to lease the West Shore and to buy the " Nickel Plate '' unless they wished to see their other properties turned into financial wrecks ; and the Pennsylvania had to arrive at a compromise with Yanderbilt, result- ing in the abandonment of the construction of the South Pennsylvania Eailroad, if it desired to main- tain its position in Pennsylvania. On the whole it may be said that this form of watering, under the peculiar circumstances that prevailed, could not have been prevented. Yet it caused a considerable amount of superfluous capital to be employed in transporta- tion, and in some degree the methods of managers were to blame for this, inasmuch as the existence of a line overburdened with water tempted to the construction of another which w^as free from this great impediment, and could therefore work at rates which would have been ruinous to the other company. These four were the noxious forms of water, and IS DISCOUNT WATER? 41 we have no desire to say a single word in defence of them. But the amount of water resulting from these malpractices is only a part of the whole ; and the remainder springs, not from dishonesty, but from necessity. Take, for example, the fifth of the forms enumerated above — selling stock and bonds at a discount. This was the most widespread cause of water ; yet but few objections can be raised against it, and it was excusable in almost every case. In the early days of railroads especially there was little inducement to invest money in these enterprises, and to create such inducement bonds had to be sold at a discount, and shares were frequently given into the bargain. But even Governments sell their securities at a discount if they cannot get rid of them at par or at a premium, and the railways, by their prospects, were justified in borrowing money at excessive rates if they could not get it otherwise. Like the cotton planters of the South, who after the war often paid fifty per cent, interest on the capital required for bringing their cotton land under cultivation, the rail- ways would have outgrown the payment of excessive rates for money if their affairs had otherwise been conducted with honesty and integrity. Unfortunately, at a certain period these two qualities, instead of being the rule, were the exception ; and as we have seen above, those who did not hesitate to pay dearly for the money they required, instead of endeavouring to effect economy in other directions, evidently thought that, a heavy handicap having been placed D 42 STOCK DIVIDENDS. upon the railways in the shape of clear capital, it could not matter much whether the burden was increased a little or not. But this fact furnishes no argument against the sales of securities at a discount as long as these sales were effected on straightforward lines.* But the abuses of the early days of railroads, above referred to, and the sale of securities at a discount, were not the only causes of "water"; the fictitious capital resulting from the payment of stock dividends also reaches formidable dimensions. The most famous stock dividend ever distributed was one of 80 per cent., paid in December, 1868, on the shares of the New York Central Eailroad Company, and eleven months later when the consolidation with the Hudson Eiver Eailroad followed, a further stock dividend of 27 per cent, was declared, while the Hudson Eiver Eailroad shareholders received one of 85. The Eeading paid a scrip dividend of 10 per * The practice of selling merely bonds, and giving shares with tliem, certainly looks peculiar. But it should be remembered that nobody felt great inclination to advance money unless it was upon security, and that it was usually impossible to find a sufficient number of bond fide shareholders. Many people deemed even bonds no sufficient equivalent for their investment, and besides prior rights upon the x^roperty they also wished to possess control of the com- pany, and a chance of partaking in the future profits ; and shares being not much sought after anyhow it mattered little to the promoter whether he gave them into the bargain with bonds or not. The majority of companies realised nothing for the shares they issued in their early days. The Missouri, Kansas and Texas Eail- way Company, for instance, gave $21,400,000 in shares to a con- struction company, in addition to the ]payment made in bonds. The New York Central, Erie, Reading, St. Paul, Chicago and North Western, in short, almost every railway company, as a rule parted with the earlier issues of its common shares without getting any cash for them, although, as is well known, shares are no longer given away now-a-days, and frequently sell at good prices. STOCK DIVIDENDS. 48 cent, in 1846, and one of 12 in 1847, while between 1871 and 1876 upon a capital of §34,200,000, already fictitious to the extent of probably more than one- half, $15,700,000 was paid in dividends, mostly in scrip. The Erie Kailroad made still larger payments of stock dividends ; the Chicago, Burlington and Quincy Eailroad paid 20 per cent, in 1880, the Atchison, Topeka and Santa Fe 50 per cent, in 1881, and the practice may be said to have been general, and is still resorted to in numerous cases. Only recently the Pennsylvania distributed a small scrip dividend, w^hich seems to have been declared chiefly for the purpose of sustaining the quotation of its shares. None of the six methods of watering enumerated and described above call for special comment, except the laste A stock dividend is somewhat of a farce, and of a deceptive nature. Several objections have been offered against it ; and on the other hand it has been defended with forcible arguments. Scrip dividends are frequently paid to shareholders as a substitute for cash dividends which have been passed. A board feels that shareholders are entitled to some return upon their capital; earnings have been employed to pay for betterments, and having no cash they pay scrip or shares. A moment's reflection will show that such a dividend is really no dividend at all. It creates more shares, and hence future distributions must be so much smaller. If a company pays a stock dividend of fifty per cent, its future 44 SOME NOTES ON dividends must be 33J per cent, less than otherwise, and hence a scrip dividend, looked upon as a return upon capital, is delusive. Whosoever receives it does not actually get a farthing more upon his investment when cash dividends are resumed."^ Their deceptive nature therefore leads to the conclusion that other reasons exist for their payment, unless it is a mere sham, and, indeed, their distribution is based upon three circumstances — the rise in the value of railway property, the payments made for betterments out of earnings, and most of all, the tendency of Legis- latures to cut down rates whenever they are so high as to make the possession of railway stock remuner- ative. The American people, although on the whole, I think, by no means unreasonable, are opposed to large corporations, a fact so abundantly demonstrated by the attitude of their Legislatures and Courts of Justice that it is not necessary to supply proof of the assertion. They do not stop to think that action * Yet scrip dividends do not altogether fail to benefit shareholders as a mass. Experience has shown that a stock dividend usually enhances the x^rices of shares ; for instance, if a dividend of, say, 50 per cent, is declared upon a stock quoting at GO, the price of the latter will rarely fall to 40 as it ought to do, but as a rule remains above that figure, so that usually there is a gain for its owner, which, it is asserted, offsets the non-payment of dividends. But with regard to this matter the fact should not be lost sight of that these profits rarely reach the xoersons for whom they are intended, namely the investors who perhaps for years held an un- remunerative security. Shares change hands more frequently than bonds, and hence the benefit of stock dividends usually falls upon people who have not deserved it by former sacrifices. But the fact that stock dividends proportionately raise the prices of shares renders them especially objectionable, inasmuch as it constitutes a temptation for directors to declare them and to speculate. In- stances are on record in which such dividends were declared solely for speculative purposes. SCFJP DIVIDENDS. -15 detrimental to a vast interest like railways must fall back upon the people ; they consider anything done to its disadvantage to be a public gain. Hence the people are " hard on railways," and as the railways by their conduct hardly promoted an amicable entente with the people, (see p. 9), the latter had a good deal of provocation, and often became un- reasonable. For instance, among the people of the North-West it is almost a maxim that no railway should be allowed to pay more than four per cent, on its common stock. " The stock being water to the extent of at least one-half," the Granger reasons, " four per cent, means eight, and eight will do." But those who talk in this strain overlook two important matters. In the first place they forget that the share- holder, no matter whether foreign or negative, has for many years held unremunerative stock, that in bygone days he has incurred risks and suffered losses, and that hence he is entitled now to returns which offset these. In the second place they do not recognise the principle that a railway company, as well as a private individual, is entitled to reap the benefits of an increase in the value of its property, and may lay claim to compen- sation for the risk run by early investments to which, more than to anything else, the wealth and the welfare of the Great Eepublic are due. This very unreasonable attitude compelled the rail- ways to ward off its effects ; and for that reason they frequently resorted to stock dividends as a dodge. By inflating their share capital, the companies en- 46 MOBE ABOUT deavourecl to conceal proJ&ts, in order to thwart the designs of rate-reducing Eaih'oad Commissioners ; and this was necessary because the shareholder was entitled to compensation for the risks incurred and the losses suffered in the past. We have just stated the causes of water ; it now remains for us to deal with its extent and conse- quences. The foregoing remarks must have given the reader the impression that a formidable proportion of the cajoital now nominally represented by American railways is fictitious. Such is indeed the case. It is, for example, generally conceded that the New York Central, Erie, and Eeading companies between them have water to the amount of at least $200,000,000, while some, Mr. J. F. Hudson for instance, estimate it at $300,000,000 out of an aggre- gate capitalisation of $500,000,000; and from this we can infer how much water the entire system contains. Both in respect of the extent to which watering has been carried on, and the degree in which the process has been applied, we find some in- teresting details in ''Poor's Manual" for 1884. In that year Mr. H. V. Poor wrote: — "■ The increase of share capital and indebtedness of all companies for the three years ending December 31, 1883, was $2,093,433,054, the cost of the new mileage as rej^re- sented by share capital and debt being about $70,000 per mile. The increase in the three years of the funded debts of all companies was $924,165,440; WATER. 47 of their floating debts, $169,880,406; of the two $1,094,045,846. It is not probable that the cost of the mileage constructed in the three years equalled the increase of funded and floating debts by at least the sum of s^200,000,000. The cost of the milea.^e constructed certainly did not exceed $30,000 to the mile. The whole increase of the share capital, $999,387,208, and a portion of the funded debt, was in excess of cost of construction. It will be seen by a statement hereto annexed that stocks and l)onds to the amount of $530,132,000 were listed at the New York Stock Exchange in 1883. The amount of stocks and bonds listed was equivalent to about $80,000 per mile of new road built during the year." From this it seems we may infer that the average cost of American railw^ays in 1883 was about $30,000 per mile ; and if, on account of subsequent better- ments we make a further allowance of §10,000, we find that to-day the total capitalisation ought to be $6,840,000,000 for 171,000 miles, whereas it actually reaches $10,122,500,000. This estimate, however, is in favour of the railways, for Mr. Poor, in his Manual for 1884, further says that the bond fide investment in railways probably does not exceed the aggregate of their floating and funded debts, and if this holds good to-day there would be, not as I presumed above, $3,282,000,000 of water, but $4,640,000,000. Some writers even go so far as to allege that the estimate of Mr. Poor, who is deemed a spokesman of the railways, is moderate and conserva- 48 THE EXTENT AND CONSEQUENCES tive, and the fictitious capital is said by some to amount perhaps to fully two-thirds of the total. The consequences of "water" are as varied as the means by which it was effected. Like most railway questions they admit of divergent views, varying according to the position one takes ; it is, for example, evident that the public sees the matter in a different light than the companies or the investor. The principal argument on the side of the public is that " water " engenders a desire to charge such rates as will result in good returns upon capital ; this is an undisputed and an indisputable fact, although the railways seem to consider it bad policy to avow it frankly. Water led to pools ; it resulted in discrimi- nations which were applied because it was expected that they would enhance earnings ; and it induced the railways to fix such rates as would enable them to pay good retm^ns upon an inflated capitalisation. In view of facts like these it is natural that the public, any- how clamouring for low rates, and unwilling to enable railroads to pay heavy returns upon their capital, strongly denounced watering. As to the investor, until a few years ago he had as little reason to approve of watering as the public. In the first place, water was largely the result of count- less frauds, and the possibility of creating it was responsible for numerous malpractices. Secondly, it had been the cause of comjDetition ; wherever a line burdened with "capital" could be found there existed the temptation to build another with less OF WATER. 49 stock, which, since it had to earn but one-half or one- third of the amount required by the existing company to pay the same return per cent, upon its small capital, could enter into a very successful competition. In the third place, there would have been fewer rate wars, not only because, as we have just shown, there would have been less competition, but also because all companies would have been placed on an equal basis — that of actual cost — in their endeavours to earn fair returns, with the result that " cuts " would have been put a limit to by the requirements of solvent systems. In the fourth place, if there had been less water there would have been better returns upon the capital, bonds could presumably have been placed at four or five per cent, instead of seven or eight, and the returns upon shares would have been higher ; but as a low rate of interest is scarcely de- sirable from the investor's point of view, this aspect may perhaps be left alone. This being the true nature of water, the fact that it engendered a distrust which dealt many heavy blows to the credit of American railroad securities is by no means surprising. To quote once more from Mr. Poor's Handbook (for 1884): — " It is in this (immense " increase of fictitious capital) that is to be found the " cause of the general distrust which prevails, and the " enormous decline in the price of railroad securities. " From 1879 to near the close of 1883 a most singular " delusion rested upon the public as to their value, and '' this delusion was taken advantage of on a vast scale 50 WATER ENGENDEBS DISTRUST " by able and unscrupulous adventurers. Whatever was *'manufacturered and put afloat was seized with avidity ** by an eager and uninformed public. The delusion " was increased and prolonged by payments on a very " large scale of interest and dividends from capital. In " this delusion the most loud-mouthed and unscrupu- " lous promoters usually had the greatest success. The " delusion culminated about the time of the opening of " the Northern Pacific, in connection with which vision- " ary schemes of immense magnitude had been put " upon the market. Their worthlessness, and the rapid ** decline of their securities, exerted a powerful influence " over the pubHc mind which continues unchecked to *' the time of writing this. The distrust extends alike " to good and bad, so that prices at the present time " have as little reference to values as they had at the "beginning of 1883. The distrust will probably con- " tinue until time shall show what securities are really " well based." In England the distrust which sprang from the ob- jectionable kinds of water lasted considerably longer, and in addition no allowance was made for those de- scriptions which were either unavoidable or else in the interest of the investor. Even to-day it has by no means disappeared, and with the old rascalities still lingering in the minds of our investors, and with an occasional fresh "scandal" to revive the distrust, this can cause little surprise. As recently as 1885 the public — it may be useful to say the American public as well — were imposed upon in a manner which AMOXaST INVI'JSTOIIS. 51 renders it difficult to say which of the two was the more astonishing, the audacity of the impostor or the creduhty of those imposed upon. The exposure of the swindles was followed by a distrust which so entirely possessed itself of the public mind that it lasted long after the cause had almost entirely dis- appeared;, and in a measure it continues despite the the great improvement in railroad matters and rail- road morality which set in in 1885 and has continued unabated ever since. To-day there may still be several black sheep among the great flock of American railways. But it cannot be questioned that both the efficiency and the honesty of the management have, on the whole, increased at a very rapid pace, and that most of the companies have been weaned from the bad practices which rightly brought all of them into disrepute. The improvement has been altogether marvellous, and in a measure the investor seems to recognise it ; at least this must be deduced from the fact that issues of American railroad bonds are eagerly purchased to-day at rates which ten years ago would have attracted few investors. True, this improved credit is not solely a consequence of greater faith in these securities : the redemption of United States Bonds, the conversion of the National Debt, the increase in the number of Trusts, and other developments have improved the demand for American railroad securities, and probably contributed more to their popularity than the consciousness that these investments deserve greater confidence now than 52 EAILEOAD MORALITY. they did ten years ago. But however much allow- ance must be made for these influences, it re- remains a hard fact that the investor's estimate of the merits of American securities has improved and keejDS on improving.* Yet in England, and in Europe generally, there is not that faith in American railway stocks, and especially in American railroad bonds, which they deserve, and perhaps this lack of confi- dence is not remarkable. As recently as ten years ago methods of management gave abundant reason for distrust. We had been deceived and disappointed, and lost faith in consequence ; and not being accustomed to observe rapid changes in our own surroundings, were slow to believe that in America a change from bad to good could be effected within a single decade. Yet this transition has undoubtedly taken place. A visit to the States, or a comparison of the con- ditions of to-day with those of the past, will readily convince even a sceptic, although it is far from us to assert that changes, however favourable, amount to a complete cure. Of so great a flock of scurvy sheep every single one cannot reasonably be expected to have become sound within so short a time. But although the order of things has not been absolutely and completely reversed, there are so many favour- able changes that by this time the healthy element preponderates by far, and is daily growing in extent. In England most people do not appear to be aware of * Of course we must look at this matter in a broad spirit, and dis- regard temporary depressions of the market, such as the one through which we are passing now. WATER DOES NOT 63 this enormous alteration, and although there are abundant reasons for a revision of opinion, the same notions concerning "Yankee Eails^' which were held ten years ago prevail to-day among the majority of European investors, who, unaware as they are of the great change for the better, still believe that American railway securities deserve little confidence and no reliance ; while many continue to regard the companies chiefly as tools provided for the use of cunning men, and designed to fleece the foreign lamb. The reasons for this distrust have almost entirely dis- appeared, and the distrust itself is therefore no longer warranted. But to this matter we will return later on. With regard to "water," people have modified their ideas as little as in respect of other matters pertain- ing to American railway finance. Ten or fifteen years ago it was said that nothing was more inju- rious to the investor than "water" and the frauds connected wdth it, and this opinion was not devoid of foundation then. To-day the same views prevail, although they are no longer supported by conditions. Some railway companies no doubt continue to sufier from the effects of water fraudulently poured out; but time has discounted its effects in numerous cases, whilst in others its influence has been to a great extent neutralised. Water, regarded in its entirety, is not nearly as detrimental to the companies now as it used to be. Circumstances like the growth of the country, the ex- 54 ALWAYS MEAN SWINDLING. pansion of systems and appreciation of properties have supplied a counterpoise for the fraudulent part of it, as they did many years ago in England ; and what we have termed the necessary portion, apart from being inevitable, is gradually becoming harmless instead of baneful. In a way it is even beneficial. All that has been said to the contrary notwithstanding, water emphatically begets a desire on the part of rail- ways to charge such rates as will enable them to pay good returns upon a highly inflated capital. Whether they will in all cases be able to give effect to this desire is an open question ; that they have suc- ceeded in many is beyond dispute. Numerous com- panies pay good dividends upon largely inflated stock ; others are trying to. Now let us suppose there were no " water." Then the companies, with the same earnings, would pay enormous dividends, pro- bably an average of 10 per cent., and perhaps more. Such high returns of course could not fail to attract attention, and would undoubtedly invite new com- petition ; but apart from this, would the nation with its never-ceasing complaints of rates — would the State Legislatures, which reduce transportation charges as soon as returns upon capital exceed a moderate figure — permit a return of 10 per cent, to be paid upon railway capital ? Surely not. Hence it may be said that water is in a measure beneficial to the investor, because it is instrumental in giving him those high returns upon his actual investment, and those rewards for past losses and sacrifices, which THE LIGHT SIDE OF WATER, 55 would be impossible without it. And it is but fair that it should do so. Stock was given away and ** water " created largely — though by no means exclu- sively — to give something which in the future would reward those who sacrificed in the past. Hence the investor of to - day receives great benefits from the wrongs inflicted upon his predecessor. He receives a good rate of interest on bonds which he bought at a discount : he gets fair returns upon shares which originally cost him nothing or next to nothing; the value of his investment in American railways has risen far above the price originally paid for it ; and all this has been effected chiefly by means of the much-abused ''water." Does that not imply that the prevailing ideas of water stand in urgent need of revision ? CHAPTEE IV. RATES AND REVENUE. The initial chapter has already dealt with several aspects of the rate question, at some length with the causes^ extent, and consequences of discrimination, and in a cursory manner with the constant decline in transportation charges. But this decline has not received that exhaustive treatment to which its im- portance entitles it. Eates, as everybody knows, constitute the only source of all railroad revenue; upon their adequacy depends the adequacy of the returns upon the capital invested in railways ; and the subject, therefore, interests investors to a suffi- cient extent to render a full discussion desirable. We shall not return to the complex question of discrimination. There cannot be any doubt that differential rates continue to exist in more than one guise, despite the enactments of the Legislatures ; but the strenuous opposition offered to the pernicious practice has gradually suppressed its most vicious forms and reduced it to something like harmless dimensions. Eailway economists of undoubted stand- ing give us the assurance that railways cannot be efficiently worked without judicious application of differential rates, and as far as American railways are concerned we are not disposed to dispute this BAILWAY HATES. 67 assertion, since the United States has Httle to com- plain of with regard to its rates which, taken all round, are far below those charged in any other country/'' The question of discrimination does not, therefore, at this moment affect the position of American railways to an extent which invests the subject with supreme importance to investors. The railways themselves, and laws like the Inter- State Act, have reduced it to the smallest dimensions to which it could possibly be confined ; and with com- petition rampant in all sections of the country, with the true principles of railroad management becoming more clearly recognised as time rolls on, and with the business morality of railroad officials subject to a rapid process of purification, discrimination no longer * I published the subjoined table in the Economist of January 28th, 1893. The figures are all taken from official sources, whose accuracy cannot be doubted : — L. and N. W. Maximum rate per ton, 258 miles. Dutch Tariff per ton, 395 kilom.= 258 miles. Trunk Line rate per ton, about 950 miles. 1. Lowest class ^ of freight Class Bin England) „ 6 „ U.S. i „ C„ Holland) 8. d. 18 6 s. d. 8 4 s. d. 21 11 2. ^ Class 3 in England \ Middle class 1 „ 3 „ U.S. 1 of freight 1 Piece goods, slow | V freight in Holland/ 53 1 15 4 43 9 3 . ( Class 5 in England \ Highest 1 „ 1 „ U.S. 1 class of ] Piece goods, fast freight. I freight in Holland J 76 5 30 8 65 7 58 THE DOWNWARD TENDENCY exists in forms injurious to the interests of the com- mercial community. Discrimination, therefore, has ceased to constitute the backbone of the rate question in the United States. The gross injustices of a dozen years ago are no longer committed. The undue preference shown to individuals, to localities, and to particular trades is a thing of the past, and speaking broadly all ship- pers now find themselves on a more or less equal basis. But instead of the hostile legislation engen- dered by abominable malpractices, the railways now have to face the general downward tendency of rates which, according to some people, threatens to play havoc with their revenue. This tendency arises in the main from two causes : in the first place the public demands lower rates, in the second place the railways themselves are con- stantly endeavouring to undersell each other. It will be noted that the two causes to which I assign the movement seem contradictory; I there- fore hasten to add that they are not at w^ork side by side, but separately in different sections of the country. In the newer territories the people clamour for lower rates; in the older regions the railw^ays reduce them of their own accord ; in both instances the companies are the sufferers. Let us first take the case of the newer sections, where railways, of course, are youngest: that is to say, passing through the stage which Eastern rail- ways w^ere in twelve or fifteen years ago ; for in the OF BAILWAY HATES. 59 West the railroad history of the East is only repeat- ing itself. Near the seaboard most lines have attained maturity ; in the newer regions the majority are still, as it were, feeling their way, and are not yet firmly established. They are, in fact, in the same position as the people amongst whom they exist. The country across the Mississippi, its people and its institutions are at this day still separated from maturity by a wide chasm of time, and that chasm will have to be filled with experience. The object lessons which, as we know, have not been spared to the East are still in store for the Westerner, and notably with regard to railways he has to learn a good many things yet. When he wanted railroads, he was very kind to them, too kind in fact. Xow he has got them he is the reverse. He has seen that railways, much though they have accomplished, did not at once introduce those Utopian conditions which he confidently expected, and his disappointment, though natural, has made him cross and unreason- able. This frame of mind finds expression in some very curious demands. The Westerner — and one might say the American in general — has, in railroad matters, gradually obtained the protection of the law he has so long clamoured for. He is tolerably well guarded against the abuses which in bygone days provoked so much well-founded indignation. But with that he does not seem satisfied. What he requires now is low rates — excessively low rates. In spite of the 60 THE FABMEB AND pamphlets of the boomer — in spite of the grandiloquent leaders of the American newspaper — agriculture does not pay in the United States, that is to say, it does not give the farmer much beyond a fair livelihood, and it does not enable him to indulge in those luxuries which, according to him, surround the Easterners and the people in big towns. It is quite true that he is providing Europe and the large cities of the East with wheat, and that he is pushing the farmers of distant countries out of their own home markets. But he has to overcome great obstacles to do that. In order to compete with others he has to send his cereals a thousand miles and more ; and the cost of trans- portation is so considerable that it reduces the price he obtains for his produce to a very low level, and his profits to very modest dimensions. Of course, even a farmer's mind perceives that, were there no distance, the cornfields of Kansas and the wheat-lands of the North West would pay better than they do now ; and he therefore argues that it is the duty of railways to obliterate it. The reasoning is not very logical, but that matters little as far as the farmer is concerned. He does not care a cent about logic or anything else as long as he gets low rates. He thinks the railway has been built to carry his cereals for next to nothing, and not to yield returns to the people who put their money into it. It is waste of energy to tell him that railway capital is entitled to interest, or that it may look for pro- tection to the people to whom it is entrusted. That HIS BATES. 61 does not concern him in the least. Let the capitahst starve, but give the farmer a low rate to the seaboard, no matter whether railroad companies go bankrupt or not. That is what the process of reasoning of most West- ern folks amounts to. And the farmer being as yet "boss" of the West, it is not at all surprising that he proceeds to put rates down. He has his Kailroad Commissioners, and what on earth is the object of having railroad commissioners if they don't reduce railway rates ? So the commissioners do as the farmer bids them. They are drawn from the farm- ing contingent, these commissioners, and sympathise with the movement ; but even if they did not believe in its good purpose, they would obey Mr. Hayseed, who appoints and pays them. They know very little of railway business, and still less of railway economics. They are short-sighted, narrow-minded, and believers in heroic remedies. In consequence they reduce the maximum rates already fixed by themselves. They have done it recently in Texas and Nebraska ; they did it before that in Iowa, and earlier still in Wisconsin and Minnesota. They know perfectly well that these States at one time paid dearly for such action, so dearly, in fact, that they cancelled their low tariffs with neatness and despatch. But they think the people of Iowa, Minnesota and Wisconsin are " chumps," and honestly believe that they them- selves are cleverer and their State better, and so they pay no heed to the object lesson. Of course. 62 THE BATE SITUATION after a time they will see the folly of frightening away capital by preventing it from receiving its due, and then they will revise their rates, just as Iowa did. But if you predict this, they laugh at you. And when Nebraska has come to its senses, Wyoming will be where Nebraska is now, and will try the same dodge over again, with precisely the same result.* This meddling with railroad rates, in fact, is part of the economic education of the Yankee, who never seems to get any sense excej)t by unpleasant object lessons, and never sees the folly of his economic fallacies save after injurious experiments. It is so with McKinleyism, it is so with the Sherman Act, it is the same with railroad legislation. Protection and the silver craze seem to have had their day, and so has railroad legislation, or rather rate regulation, as far as the East is concerned; in the West its day has not yet come, but it is undoubtedly dawning even there in many of the older States. On this side of the Missouri people are rapidly losing faith in rates fixed by commissioners, rates which either do no good or else harm. On the other side of that river people will no doubt also come to their senses, and it will not take them many years either ; but they are not quite so far yet. Nevertheless even there this experi- menting with tariffs fixed by commissioners who know not what they are doing will not last long. It will soon cease, or rather shift. For, this tendency to meddle with rates is going in a slow wave across the * Since the above was written, the Nebraska Maximum Law has already been suspended. IN THE WKST. 63 States, moving westward from the older parts to the newer regions. It has ah'eady passed over the East, where it is almost forgotten by this time. It is now at its height about the hundredth degree West of Greenwich. But from there too it will recede. We must expect to see it next in Wyoming and Colorado. Then we shall hear of it in Utah and Idaho. Finally it will sweep over Oregon, Washington, and California, and sink into the Pacific Ocean and oblivion. But meantime the craze is very unpleasant to the railways. They can if they like carry cases before any of the Upper Courts, and as a rule they will get justice there. At any rate, they won their case against the State of Texas in 1892, the same as they had won similar cases in other States before.* But the abrogation of statutes does not altogether remove the evils of the prejudice. As long as the attitude of the people remains hostile to railroad capital conditions must be strained, and railroad business must be interfered with, especially in America, where the railroad manager is a born fighter. If people make it warm for him, he will insist upon making it warm for the people. He usually gives tit for tat, no matter whether it increases * lu August, 1892, a decision was given in the U.S. Circuit Court in Texas, according to "which the establishment of obligatory rates by State Railway Commissioners is not a due process of law within the scope and meaning of the Constitution of the United States, and that rates made by States or Rate Commissioners must be reason- able. This decision was given in a test suit brouglit by the ;Mer- cantile Trust Co., of New York, against the State Railroad Commis- sioners of Texas. The judgment given was that the law fixing the unreasonable tariffs in question is invalid. 64 2 FAX A GEES BE TALI ATE. the mutual bitterness or not, and without having much regard for the interests of the investors. Strained relations between the population and the railroads, instead of the amicable understanding essential to the welfare of both, are the result, and the hostilit}^ affects business in general and railway revenue in particular in a thousand small ways, and makes capital not only unremunerative for the time being but also timid. This deplorable state of affairs will con- tinue until experience brings the people back to their senses ; when they have regained these they usually leave railroads alone. Meantime the investor suffers loss and capital grows timid. With regard to this State interference with rates, and the clamour for low tariffs on the part of the public, it is necessary to make brief reference to one or two other aspects of the question. I find in a report of Convention of State Eailroad Commissioners held at Washington in April, 1893, the following remarks, offered by Commissioner Becker of Minne- sota, which are admirably suited to serve as a starting point. During the discussion it w^as sug- gested that rates should be such as to give a fair return upon the bona-fide cost of a road. I should, by the way, like to see the Commissioner able to fix a tariff, giving the cost of transportation for six classes of freight between every one of a thousand stations and the 999 others, in such manner that it would always yield this revenue to a nicety, despite the enormous fluctuation in the volume of freight; A CURIOUS ARGUMENT. but that is a detail. Mr. Becker, then, said : — * Money invested in raih'oads is no more entitled ' to protection than the private money of any in- ' dividual. I object to an inquiry on the part of any ' commission in this country as to what a railroad ' costs. I do not care what it costs. It may have ' been economically built ; it may have been extrava- ' gantly built. I would never inquire how many bonds ' a railroad company had issued. They may issue all * the bonds they can sell, for all I care. That makes ' no difference. The men who invest their money in ' those bonds, if it is a good investment, will get the ' benefit of it, and if it is a poor one they will lose their ' money. The same with reference to capital stock. ' I should not inquire what amount per mile a railroad * had invested in capital stock. They may issue all ' the stock they please, and water it all they please, so ' long as they find men to buy it. It is their look out ' whether they have bought good stock and paying * stock, or whether they have bought poor stock. And * I will go still further and say that the expense which 'the railroad company is at to carry the freight or ' to manage its business affairs is a matter which does * not enter at all into the question of what is a reason- * able rate. I object most strenuously , as a citizen, ' against any form of authority which undertaJies to say ' that thepeojyie of this country are hound for ever to pay ' the interest upon the bonds of any railroad company by * freight tariffs, or the dividends upon any stock by ^freight tariffs. I think that in looking at the question 66 CONNECTION BETWEEN " of reasonable rates ive should not looh at it from that *' standpoint, but ive should looh at it from the stand- *^ point of a man who pays the freight and see ivhether his '' business will justify it to be made.^' The passage which I have reproduced in italics affords a typical illustration of the mode of thought of your average Western railroad commissioner ; but it is so nonsensical, and the procedure it implies would be so monstrous, that it hardly deserves to be taken into serious consideration. It shows that the people, as I said before, do not care a straw for the investor as long as they get a cheap rate — until ex- perience has taught them better. They are too short-sighted to perceive that if they frighten away capital they will be worse off than ever. But we may be sure that they will never succeed in practically con- fiscating railroad property. Laws as the farmers would have them would not only be ruinous to the entire country because of the withdrawal of every penny of foreign capital, which would be sure to follow, but they would run counter both to the Con- stitution and to the sense of justice, not to say the common sense, of the American people. But in the first part of Mr. Becker's utterances there lies a good deal of common sense. In America, as we have seen, the railroad is really a private enter- prise, and the Government has no more obligation towards the companies' than towards other property. It must, and we may be sure it will, protect it as such. But it has no responsibility in the matter of returns. WATER AND BATES. 67 Provided the Government guards their rights of pro- perty, investors in railways have only themselves to blame if they make an unremunerative investment. They may build a road which is not wanted, or they may build it badly. They may buy securities at too high a price. They may invest money in a property which lacks honest management. They may commit a dozen other follies. But should one of these mis- takes lead to loss the investor cannot reasonably blame anybody but himself. It is the investor's busi- ness to see to it that his money is put into a good property, managed by honest people. If he is im- prudent enough to neglect that, he himself is respon- sible for all consequences. We make these reflections to pave the w^ay for one or two observations related to yet another side of the rate question. They amount to this — that close kin- ship exists between the popular demand for lower rates and the after-effects of the abuses committed with regard to capitalisation. Everybody knows that American railway capital contains that fictitious element to the discussion of which we have devoted the third chapter. A good deal of the stock issued by the various companies does not all represent money actually invested ; and although the American people do not on the whole object to pay such rates as will secure a reasonable return upon the hand fide cash investment, they are unwilling to submit to charges which will enable the companies to distribute divi- dends on heavily watered stock. In other words, the 68 EXAGGEBATEI) NOTIONS people decline to pay the piper, to be responsible for the rascalities perpetrated by the old bosses, for the lack of judgment which resulted in waste of capital, and the like. And these considerations explain utter- ances like that of Mr. Becker, quoted above. For, it cannot in fairness be denied that there is some justification for these views. The foremost duty of a railway manager is to earn good dividends upon the capital of his company; and you may argue in whichever way you please, you cannot gainsay that the consideration of a minimum sum, sufficient to pay interest and admitting of the distribution of dividends, must of necessity be taken into account when tariffs are fixed. This means that wherever the capital is inflated there will exist a desire to charge rates high enough to leave returns upon the watered stock; and there exists, therefore, an undeniable connection between water and rates. It does not matter that rates are already lower in America than anywhere else, nor does it say much that to double the dividend it is not necessary to double the rates, but that a fractional rise will do. The fact remains that there is watered stock upon which the roads want to earn returns, and on the strength of this truth we are entitled to maintain that the abuses of capitalisation are intimately connected with, and afford some excuse for, the rate agitation. But the validity of the excuse is apparent only. This water was little else than a premium which the country paid to the promoters and the investors who gave them railways. Had CONCERNING WAT KB. 69 there been no chance of creatin<^ water, nobody would have taken the trouble to build roads in a new country, or to advance the money wherewith to l)uild them. Thirty years ago a five or six per cent. American rail- way bond offered at par would have attracted nobody, and the companies therefore had to choose between watering their stock or paying a high rate — say eight, ten or twelve per cent. To do the last would saddle the young corporations with a weight of obligations which would crush them to death before they reached their teens ; to water was therefore the only course open. Moreover, exaggerated notions concerning the in- fluence of water upon rates are prevalent. There being few companies without it, water is, of course, not altogether devoid of consequences. But its bearing upon rates is not nearly as great as some people seem to suppose. Only a very few roads succeed in earning dividends on watered stock. The New York Central is one of them, the Southern Pacific is another. But similar companies are usually in an exceptional position, and notably the case of the former deserves consideration on the part of railroad commissioners. It is well known that Vanderbilt watered the stock of the New York Central. But this corporation sub- sequently sunk vast sums in betterments, and paid them out of earnings ; the property itself appreciated, and despite all its water, the road is to-day worth fully what it is capitalised at. And there is many a company which is in precisel}^ the same position. 70 VALUE VERSUS COST. The St. Paul and the Great Northern, for example, belong to this class, and many others ; the Northern and Union Pacific will belong to it when their lands and their property have risen in value, as no doubt in course of time they will. Now, will these railroad commissioners contend that such properties are not entitled to reap the benefit of this appreciation ? Surely, against Mr. Becker's "money invested in rail- roads is no more entitled to protection than the private money of any individual" the railroads may set : " money invested in railroads is as much entitled to the benefits accruing from enterprise or sound judgment as the money invested in any other busi- ness." Furthermore, Mr. Becker may safely let the "water versus rates " question take care of itself. There is in the United States such an amount of competition that it is impossible for any road with heavily watered stock* to pay dividends upon it. Take, as an example, the competitors of the New York Central, which itself earns good dividends because its water has been evaporated by a rise in the value of the property, and by betterments paid for out of earnings. Amongst its rivals we find the Lehigh Valley, the Lacka- wanna, and the Erie roads. The Lehigh Valley has a capitalisation of about $98,000 per mile, the Lackawanna of $170,000; both companies have little water in their capital. The Erie has an * By this term we mean, of course, stock in excess of the actual value of a road, not of its cost. VALUE VFBSUS COST. 71 enormous amount, its property being capitalised at some Jij210,000 per mile, though worth much less than that of the two other roads. Now, the Lehigh Valley and Lackawanna earn good dividends, the Erie does not, and it never will unless its water is eliminated by appreciation of its property, or by heavy expenditure on betterments out of earnings. There are several roads situated like the Erie, the Wabash and Beading for instance ; but none of them pays returns upon its watered stock. As a fact, I do not believe it will ever be possible for any road to pay good dividends on watered stock until the water is eliminated by such processes as we have in- dicated above, and for the following reason : whenever a road earns good returns upon an excessive capitali- sation, there exists a strong temptation to construct a competing line, because with less capital, i.e., if built without watered stock, this road would be sure to pay excellent returns. Thus, in theory, profits (and also rates) must be automatically levelled down to the point at which they just pay fair returns upon bond fide investment; and in practice they are. There do not exist many roads in the United States — no, not even the Erie or the Beading, or the Wabash — which do not pay fair returns upon the money represented by their actual value ; in fact, I do not know of a single one, unless it be still in its infancy. The subtle economic influences that are at work somehow reduce profits to that level, and at the same time they tend to automatically keep rates on a basis which is 72 THE BATE SITUATION fair to all concerned, that is, neither so low as to withhold adequate returns from capital, nor so high as to be burdensome to trade and travel. Forsooth, well may Mr. Becker and those whose thoughts he interprets say that the actual cost of a road has nothing to do with the rate it may fairly charge. It is the actual value of the property which regulates both its returns and the rates which determine these returns. But enough of this. What we have discussed here are conditions chiefly prevailing in the West, and perhaps also in the "new" South; conditions which soon, and in the natural course of events, will make room for others. Let us now see how matters lie in the East, where conditions are more mature. Here, too, railroad people have their rate question ; but it is of a different kind from what it is "out West." In the Eastern and Central States, and perhaps also in some of the older parts of the North-West, rates are much lower than elsewhere.* Yet they seem still on the downward grade. But this is not a result of rate-reducing railroad commissioners. The rail- ways themselves are responsible for it. The matter is not at all complicated. The low rates in the East, notably on the Trunk lines, arise almost entirely from competition. It is well known that an amazing number of lines cater for a traffic which, stupendous though it be, does only in prosperous * In 1891 the average freight rate in the Eastern States was 0.78 cents,, or less than four- tenths of a penny per ton-mile. IN THE EAST. 78 years suffice to keep all lines busy. As a result the roads are as a rule underselling each other, and the consequence is that the rates keep on declining, and that increased traffic often results in decreased net earnings. The Pennsylvania Railroad, for example, the greatest road in America, carried in 1892 13,457,000,000 tons of freight one mile against 12,258,000,000 tons one mile in 1891, an increase of about ten per cent. Owing to the decline in rates, however, the earnings from this traffic increased only from $134,250,000 to $139,000,000, or barely 3i per cent ; expenses, therefore, rose in proportion ; and hence net earnings actually amounted to $1,750,000 less than in the preceding year, in spite of an enor- mous increase in traffic, and notwithstanding the l^revalence of general prosperity ! Small wonder that President Roberts expresses his dismay at this state of things in the observations which he inserts in his report for 1892. After call" ing attention to the anomalous conditions which cause railroads to earn less with a larger traffic, the President of the Pennsylvania Railroad Co. says : '* In an effort to remedy this unnatural condition *' of affairs, the chief officers of the principal railways ** of the country, after a very full discussion of the "subject, and at the suggestion of the Inter-State " Commerce Commission, deemed it proper to appear " before Congress and suggest such amendments to the " Inter- State Commerce law as would, while increasing "the efficiency of the Commission in detecting and E 74 THE PRESIDENTS AND ' punishing violations of its provisions, also enable the ' railways to enter into proper traffic relations with ' each other, on a basis to be supervised and approved ' by the Commission. These matters were forcibly ' presented before Committees of both Houses of Con- ' gross, and it was fully explained that the object ' sought was not an increase of rates or the prevention 'of competition, but simply to secure alike to all ' shippers the rates filed with the Commission ; but ' the effort to obtain any satisfactory modification ' thereof was unsuccessful. As a result, the greatest ' industrial interest of the country, and the one with ' which its prosperity is the most intimately connected, ' is apparently left in such a position that it is unable ' to enter into any legal arrangements that will enable ' it to meet the anomalous conditions already referred * to, or to so manage its affairs as to either properly ' serve the public, or make a fair return to its owners. ' It is to be hoped that a careful consideration of the ' subject will convince Congress that the protection of ' the public, no less than of the companies themselves, ' requires at their hands legislation that will authorise ' the making of such contracts under proper supervi- 'sion." These observations clearly show that the railroads consider themselves aggrieved ; but, nevertheless, we find ourselves unable to sympathise with the Pennsyl- vania president. In the interests of railway investors it is undoubtedly desirable that railways should pay well, but I fail to see that the roads are taking the THEIR ARGUMENTS. 75 proper steps to attain this end. It is well known that the trunk line presidents went to Washington chiefly to obtain a repeal of the pooling clause of the Inter- State Commerce Act. But although I have followed their arguments pretty closely, I cannot say I have found them very convincing. It has been abundantly demonstrated that " pools " are neither beneficial to the public nor to the railroads, and the effects of these combinations are so evident that it requires strong arguments to bring the public to the opposite view. And since the American pool is undeniably a bad thing, it was impossible even for men like Mr. Roberts or Mr. Depew to carry the day in Washington. Nor can we say we regret this, since we firmly believe that however undesirable rigid legislative interference on the whole may be — notably State interference with rates — the abolition of pools deserves the hearty ap- proval of railway shareholders. In the foregoing extract Mr. Roberts says that the object sought by pools was not an increase in rates. But if that is not the case, what earthly purpose does a pool serve ? It is admitted that a pool will increase earnings. It is certain that a pool does not increase the volume of freight. And I should like to know how under these circumstances earnings can be increased otherwise than by raising the rates. There is, it will be seen, such an evident hollowness in Mr. Roberts' arguments that nobody can be sur- prised at his failure. The views I have just expressed are, it is true, dis- 76 POOLS ONCE MORE : carded as fallacious by several authorities, whose greatness I can only measure by my littleness. Mr. Eoberts, Mr. Depew, Mr. Walker, in fact almost every railroad man, denounces the prohibition of pooling, defends the practice in general, and recommends its re-introduction in particular. With such authorities arrayed against me, I might despair of convincing anybody of the unsoundness of their views, were it not that, being railway presidents, these gentlemen are either prejudiced to an extent which would prevent them from seeing the weakness of their own argu- ments, or else fully aware of the defects of their reasoning, but conscious of the fact that it would be bad policy to say so. But pools are no novelty in America; and if they had any merits at all, the presi- dents who clamour for their reinstatement would not fail to point them out. Yet I challenge anybody, first, to prove that pools have ever benefited American railways, and second, to gainsay that every pool was injurious to the public. And if pools are of no use to the companies, and detrimental to the community at large, why on earth should they be reinstated ? It is worth while to enter very closely into this question of pools. The presidents are scheming in Washington to get them back, and will perhaps be successful. We are told by railroad people that these pools would be of immense benefit to all con- cerned, and it may therefore be assumed that in- vestors believe that the repeal of the pooling clause means the advent of the railroad millenium. Yet FBOM THE PUBLIC'S POINT OF VIP'AV. 11 it may be regarded as certain that this expectation is not warranted, and that pooling would be quite as disastrous to the investor in the future as it has been in the past. That is why we think we must go fully into the matter. Let us see how these pools work. We will take a trunk line pool. There are four direct routes between Chicago and New York; there are nineteen indirect lines. The Vanderbilt, the Pennsylvania, the Balti- more and Ohio, and the Erie roads are the best. Given equal rates without a pool, and no sane man will send anything or travel by any of the roundabout routes. The bad lines know this very well, and there- fore they lower their rates to such extent as will counterbalance the drawback of their inferior service. This is done by consent of the good lines, who deem it wise to make this concession for the sake of peace. Thus arises a condition which is fair both to the public and to the roads. The public can get all kinds of transportation : it can spend $30 on a first-class ticket from New York to Chicago if it wants to travel by vestibuled express, and it can get there for half that sum if it is satisfied with a steamer to Portland, Me., and vath the roundabout service of the Grand Trunk Eailway ; you can send a case of woollens, if wanted to be delivered within thirty hours, by the N.Y.C. at N.Y.C. rates, but if time is no object, you can let it go by steamer to Norfolk, and then by the Cumberland Gap express, over the Norfolk and Western, the Louisville and Nashville, and the 78 FROM THE BAILWAYS' Evansville lines. You can also strike the happy medium provided by the Erie, the Lackawanna- Grand Trunk- Wabash combination, and others. This is fair, and as it should be ; you pay according to the quality of the service, and the roads are re- munerated on the same just basis. But trade seeks the best routes, and the roundabout lines do not get much traffic, in spite of their lower rates. They want, however, more of it, and therefore start cutting. True, they lose over the transaction, but so do the better lines ; and in consequence a pool is attempted. All lines make the same rate between two points, and apportion the traffic. The result is that the public has to pay wholly or nearly the same price for good and bad transportation alike, and that it cannot say whether the goods it sends shall go by a fast IJ day line, or by one which may take three weeks, as some do. Furthermore, all lines have their fixed proportion of the traffic, and can get neither more if they exert themselves, nor less if they provide the most inferior service. As a result the latter becomes worse the longer the pool lasts. Now we need not even remember that pools cause severe fluctuations in rates because they are shortlived and lead to rate wars which upset trade ; what precedes is quite suffi- cient to demonstrate that pools are bad from the public's point of view, and that the universal dislike with which they are regarded is very well founded. Now let us look at the matter from the railways' point of view. Without a pool — i.e., when free com- POINT OF VIEW. 79 petition determines the cost and quality of trans- portation — the good line, with a small capital and a shrewd management, is best off, as it should be; I say as it should be, because every man and every company is entitled to the benefits accruing from foresight, economy, good management, and the like. The weak road may succumb — usually does succumb. But does this matter ? Is it the duty of the public to support a shop which is badly managed, lays in an unsaleable stock of goods, has a heavy mortgage, etc., in order that it may keep out of the Bankruptcy Court ? Should a nation be forced to keep alive a road which was built without being wanted, robbed by the adventurers who built it, and is doomed to ruin if matters are allowed to run their free course ? If such a road wants to cut rates, let it do so by all means : if only the other roads make a firm stand it will do little harm, and kill itself all the sooner. It will go bankrupt, or be reorganised, or perchance be bought b}^ one of the better roads, which will keep it for its cheap and slow traffic, like the New York Central does the West Shore. "But this would amount to reckless waste of capital," cries your "railway economist." It would not, and even if it did it would be deliberate waste on the part of those who called the road into existence, waste which was foreseeable, waste for which the public cannot be held responsible, and waste from which the public will not suffer. I will admit it is hard for the investor who loses over the affair ; but it is his 80 THE FIERCE FIGHT look out that he does not get interested in roads, bad, superfluous, or dependent upon dishonest directors. If he does not take care he cannot blame others if he loses, nor expect others to guard him against damage. It would be nothing short of monstrous to compel the public to pay the penalty for the folly of the in- vestor or for the rascalities of directors. Yet even the good roads will try to keep the bad ones going. They form a pool. They themselves do not benefit by it ; they only pay blackmail to a weak road which might temporarily reduce their business. They do not, or will not, see that this momentary loss would be ultimate gain. They form a pool to keep up their customary dividend without a hitch, and to maintain the price of their stock at the highest possible level. Of course, the pool does not last long. Every one of its members ca7i break it up ; several of them will break it up as soon as it suits their book, for instance, when they have *' beared" a sufficient amount of their stock in Wall Street. To make their profits in Wall Street all the bigger, they will cut to a pheno- menal extent. The cut will be " met " by others, "to drive the rascal back into the pool.^' And one week of universal cutting will eliminate whatever increase in the revenue may have been brought about by the pool. That was the experience gained in the days of pools. Yet — tempora, O mores ! — railroad people ask for the repeal of the " fifth clause " — Mr. Depew and Mr. Eoberts as well as the small fry of presidents and managers. FOR THROUGH TRAFFIC. 81 It will be asked how I reconcile this fact with my opinion that every railroad man knows that pools are of no use to his company ; and I will state what I think is the reason. I ascribe it partly to personal motives of the American railroad president, partly to his exaggerated conception of the virtues of his col- leagues. The lower class of presidents yearn for the return of the good old days of pools, when they could make money in Wall Street. The better class yearn for the restoration of their vanishing powers, and in addition seems to think that, pools being applied with fair success in other countries, they must be equally successful in America. But this assumption is a mistake. A pool is a conspiracy of railroads, having for its object to force a nation to pay excellent returns upon the capital employed by its railways. Where there is a highly developed business morality and a jealous legislative supervision, as in England, they may be fairly successful and comparatively harmless. With a young impulsive nation like the Americans, whose business morality has not yet reached its highest attainable point, they must end in disaster. I think the American presidents ought to see that ; at any rate I cannot perceive how any one of them can for a moment believe that a single company will fare the better for pools. It is impossible to give the name of only one company which saw its revenue increase in proportion to its tonnage during the era of pools, for so brief a span as twelve months. 82 BAILWAYS SPOIL What strikes one most with regard to pools is the insane desire of the roundabout routes to get what they call their share of the through traffic ; for pools only regulate through traffic, and do not touch local business. It is evident that where the New York Central can only get a scanty profit with its low rates and excellent lines, the Grand Trunk cannot make a profit with rates still lower, with a much longer route, and a very inferior roadbed. Yet all roads want to get " through traffic " to which their situation does not entitle them. When will they adopt the wiser course and concentrate all their energies exclusively upon the lifeblood of railways — local traffic ? This fierce fight for through business has brought dozens of prosperous companies to rack and ruin. The whole list, from Atchison down to Wabash, bears the sad traces of this stupid struggle — this fruit- less fight which is one of the greatest evils of American railways. And the worst of it that in this respect companies of the highest standing are almost as bad as those of the lowest ; the Pennsylvania, for example, makes no exception, as will be seen from the follow- ing paragraph which we are surprised to find in the last Pennsylvania report immediately before the grievance paragraph already quoted on p. 73 : — "The policy referred to in the last annual report, of '' stimulating, through an increase of equipment and " other facilities, the movement of grain between Erie '* and Philadelphia, resulted in a largely increased " volume of traffic ; but owing to the sharp competi- THFAli OWN RATES. 88 " tion in the rates between the lines engaged in lake ** and rail transportation, these efforts would seem "to have been more beneficial to the commercial " interests of the city of Philadelphia than to those of **the transportation companies." The question which forces itself upon us is, Why does the Pennsylvania cater at all for this traffic? The president frankly avows it does not pay, and he ought to have known this beforehand, in 1891, before he spent money on "the increase of facilities," as well as in 1892, when he had to acknowledge that the expenditure had been wasted. Nobody can be in the least surprised at this failure. Grain from Erie to the seaboard ought to be left to go along its natural route, that is via Buffalo, the Lake and the Erie Canal ; if in spite of the low rates at which it must be carried, the Pennsylvania endeavours to force it over its own road to Philadelphia, across the moun- tains, and loses over the transaction, it cannot reason- ably complain. It is this foolish competition for unpaying through freight which is the ruin of American rates. No rail- way has any inducement to compete for such busi- ness. The companies should foster local traffic. If they do that they will obtain good rates which pay, and though their traffic may be smaller their profits will be larger. The New England roads, the oldest in the country, have a strong local traffic, and care little or nothing about through freights; they get an average rate nearly four times as large as the 84 IMPR0VE2IENT IN other Eastern roads, and they pay large dividends in consequence. Why cannot the other systems follow their example ? Surely they must know by this time that local trafdc is the lifeblood of a railway, and that the game played for through business is not worth the candle. There is not a prosperous road in the country which has not a strong local business, and no line living on through freight is doing well. Yet, whenever and wherever railway rates have come to grief, it has been because the railways were cutting each other's throats in order to obtain unremunerative through traf&c. Why not put a stop to this foolish policy ; why not devote all energies to local business ? It is all very well to abuse railway commissioners. But the harm these gentry have done to rates is nothing compared with the injury which railways have inflicted upon themselves by their fierce and foolish fights for through traffic. The railways know this full well ; and those who follow the development of traffic matters in the United States must be glad to observe that the painful lesson which three decades have taught is gradually begin- ning to bear fruit. Eate wars in their fiercest forms — and these wars naturally were always fought for through traffic — are abandoned now, and in the con- test for through business the lines are one after the other throwing up the sponge. A few devote them- selves almost entirely to local freight; others do so chiefly, but keep a finger in the through traffic pie ; only three or four lines of low standing try to BATE CONDITIONS. 85 subsist principally on through business, the refuse of railway traffic. Thus there is improvement in the rate situation, as well as in other matters ; the way is being paved for sound rate conditions, and a few companies have already reached this goal. There is not a single feature in the entire complex question of rates which need cause alarm. The people may for a time meddle with rates and give directors and investors a bad quarter of an hour; the companies may act foolishly; but experience will ultimately bring both to their senses. For this experience the investor may have to pay occasionally whenever he ventures out- side the securities not exposed to the vicissitudes of the rate situation. But he need not run similar risks unless he feels so disposed; and there can be no doubt that in the long run matters will turn out all right. The roads will not break their own windows by rousing the ire of the people; the people will do nothing which would frighten away capital. And with the corporations careful not to give renewed offence, and the people inspired with a wholesome dread of excessive or un- just interference, the matter may safely be left to settle itself. There is the less reason to feel alarmed because satisfactory conditions prevail in New England, whose railways, now matured, have gone through, all the stages younger roads are in yet. There the lines supply an efficient service, get rates four times as high as the trunk lines, and pay heavy dividends ; the rigid supervision of the various States does not 86 PROSPECTIVE BATES in the least interfere with the adequacy of rates or the prosperity of the companies. There is no reason why the same thing should not happen in the other sections of the country ; only we shall have to wait till they too have attained maturity. During their era of growth we must expect unpleasantness, losses and risks ; but it is in return for these that we get higher interest upon our capital. Nor should we overlook the fact that even to-day there is, in spite of the rate question, no line of any importance which does not pay handsome returns upon its actual cost. CHAPTEK V. REVENUE AND ITS APPLICATION, We have hitherto spoken chiefly of matters affecting raih'oad income; the uses to which the companies put their revenue is to engage our attention next. It seems desirable to introduce this subject by referring to one or two of its most sahent features. In the first place it may .be well to point out that whereas there is but one way of obtaining revenue — that is, by earning it — there are several means of dis- posing of it ; railways can either spend their income upon betterments, invest it in some way or other, or distribute it amongst the owners or creditors of the property. In the second place it seems expedient to state that the application of revenue largely rests in the discretion of railway managers. Eailway directors in the United States are endowed with an extraordi- nary amount of discretion, so much so that the free hand they enjoy is one of the principal points in- vestors have to reckon with. I have laid stress upon their great discretionary powers by devoting a special chapter to the subject, in the hope of firmly impress- ing its bearing upon the reader's mind. And I should like to call attention to it once more, since this dis- cretion seems to affect the application of revenue more 88 THE DISCRETION OF DIRECTORS. visibly, more frequently, and more deeply than it affects anything else. I say seems to affect ; for in reality these great dis- cretionary powers have had a far greater bearing upon capitalisation than upon the application of income. Perhaps this does not seem so, unless the matter is gone into rather thoroughly. Nevertheless reflection will soon bear out the statement. There cannot be any doubt that but for the free hand left to directors a goodly proportion of the water now existing — in fact that entire part of it which was avoidable — could never have been poured out. Now this water, and therefore the discretion of directors which was instru- mental in creating it, permanently affects the bond and stockholders ; they are reminded of it every year, and every balance sheet, every income account, every dividend, shows its influence ; it leaves its trace throughout the entire history of a road, and will impress its stamp upon the future; it affects even rates, physical condition, and earning capacity. Its effects are destined to last for ever. But the dis- cretion which disposes of revenue is not permanent, only transitory. It may either exercise or waive its powers at any time, and will leave no permanent track behind, except in a few abnormal cases. For that reason it would be of subordinate importance if it could not and did not assert itself at any moment. The influence of this discretion upon capital is there- fore only as it were occasional, though far-reaching ; its bearing upon returns is frequent, but of less stu- INVESTING MONEY 89 pendous consequence ; and hence its results appear to be much more baneful with regard to the appli- cation of revenue than with regard to capitalisation, though this appearance is deceptive in the extreme. However, small but repeated inflictions usually seem much greater than single but heavy blows with lasting effects. We referred above to the well-known fact that ways of spending railway income are three in number : it may be disbursed for investments, betterments, or dividends. Let us consider the effects which un- limited discretion may have upon each. It will be best to illustrate our remarks by referring to the affairs and accounts of an imaginary railway, and we will therefore assume the existence of the A. B. and C. Eailroad Co., with a funded debt of $10,000,000, bearing interest at the rate of 5 per cent., and a share capital of an equal amount, divided into $5,000,000 five per cent, non-cumulative preferred shares, and $5,000,000 ordinary stock. We will further suppose that this railway has annual gross earnings to the extent of $3,000,000, whilst its working expenses amount to $1,900,000. With this simple case before us, it will be easy to find lucid illustrations whenever we require them. Let us first take the competence of directors to invest money. Their road, it will be observed, is quite a paying concern, though not a very large affair in a country where some companies represent as much as $500,000,000 capital. It earns enough F 90 IN SUBSIDIARY LINES. to pay its interest, to distribute 5 per cent, amongst its shareholders, and to build up a nice little reserve. Under normal conditions, and with an ideal manage- ment, its income account will therefore be some- thing like the following : — INCOME ACCOUNT OF THE A. B. AND C. KAILKOAD. Gross earnings $3,000,000 Working expenses .. . ... ... ... 1,900,000 Net earnings $1,100,000 Interest on bonds $500,000 Dividends on preferred stock .. . 250,000 ,, common stock ... '250,000 Total disbursements 1,000,000 Surplus $100,000 This is the account under normal conditions. But now the directors get the extension bee in their bonnet, and lease or acquire control of a road. They have perfect authority to do this, and similar investments or acquisitions are made every week, almost every day. Sometimes they are on a grand scale, and sometimes only of small moment; but they can be made, and are made constantly, by directors in all parts of the country who consult nobody but their colleagues. Now let us suppose the investment or lease turns out well ; then, of course, the ordinary shareholders of the A. B. and G. reap the benefit ; to the pre- ferred shareholders it makes no difference. But COMPANIES WEAKKy'Kl) liY !J1 leases and investments do not always pay ; in fact, a road is never leased to another company unless its directors have a reason for it, and that reason usually is that the lessee guarantees better returns than the road could earn independently; the lessee hopes to make his profit by the economy or by any of the other benefits that usually attend amalgamation. But it happens quite often that the lessee closes a bad bargain. Let us imagine that the A. B. and C. Eailroad Company has made such a mistake, in consequence whereof it loses §500,000 per annum. The result is that the common shareholders no longer obtain a dividend ; but they would have had all the profit had the lease or the investment been remunerative, and at any rate had a chance of gain- ing. But as a further consequence of the blunder the preferred stockholders only get |5 100,000 amongst them, or 2 per cent, on their shares, instead of their accustomed 5 per cent.; and on these people the loss is rather hard, for their dividend being limited to 5 per cent, they run the risk of loss through the lease without any corresponding possibility of benefit. Matters may even get worse than this. Next year the A. B. and C. may lose $700,000 instead of $500,000 ; and then it will be unable to pay the interest on its bonds, and must go bankrupt unless it happens to have a reserve to fall back upon, or takes to borrow^ing. All that will be the result of the unlimited discretion of directors. Let it not be supposed that this case is an exag- 92 UNREMUNERATIVE INVESTMENTS. gerated example. Similar occurrences are quite common in American railroad history, and dozens of companies either have suffered through such leases or still sigh under their burden. The Louis- ville and Nashville has twice been forced to reduce its dividends on account of leases and extensions ; the Atchison came to grief mainly through extension ; the Eeading fell three times because of unremunerative investments which, to aggravate matters, seem to have been dishonest investments into the bargain. The Norfolk and Western had to stop its dividend in 1892 chiefly because it went in for extension, and there are a score of other equally prominent com- panies like the Erie, the Wabash, the Denver and Eio Grande, which either have suffered or still suffer from the effects of similar unfortunate ventures. Against these abuses the investor cannot protect himself. He must trust to the integrity and judg- ment of his directors ; where honesty and ability are wanting he is likely to become a helpless victim, unable to do anything except bewail his losses. And even where these two desirable qualities are not lacking he may suffer. His directors may be honest and able, and yet they may incur risks and land their employers dry. They may embark upon new enter- prises, notably extensions, in the firm belief that they are furthering the best interests of those whom they represent, and nevertheless may plunge their property into ruin. The same may of course occur in cases where shareholders have greater control over their AMBITIOUS DIRECTORS AXD 93 property than in America with its peculiarly autocratic business management ; for after all shareholders are guided by, and as a rule rely upon, the advice of their directors. But wherever a company's officers need not consult their shareholders every time before they decide grave and vital matters, there is apt to come into existence a stronger tendency to venture than in those cases where stockholders do something more than elect directors who during their term of office can do as they please. The consultation of share- holders by directors may be what it is sometimes called — a mere sham ; but nevertheless the mere formality seems to increase the consciousness of responsibility and to cultivate caution in directors. In America directors have jpZei;i poiivoir, a mandate without instructions ; and though they are in a way responsible, the fact that at the worst they can only be censured after they have blundered seems to blunt their sense of responsibility and to foster their innate tendency to embark upon all kinds of extensive enter- prises. Most Americans feel pretty big anyhow, especially when they happen to be railroad presi- dents. As a class the latter are bold and ambitious, and not being restrained by cumbersome instructions, by vigilant supervision, or by a keen sense of respon- sibility, they would embark upon big schemes even if they were prompted by nothing but professional ambition, although that is nowise the case, as we shall see presently. The shareholder is less ambitious in his ideas ; in 94 THE MISCHIEF THEY DO. fact, it may be safely assumed that he does not care for these constant extensions in some form or other, of which his directors are so passionately fond. Investors as a rule are of a cautious temperament, though they do not always act cautiously. And to confine ourselves to the example of our imaginary A. B. and C. Kailroad Company, those financially interested in it, though not adverse to receiving higher returns upon their capital, or to an increase of the safety of their returns, must be supposed to prefer their regular 5 per cent, to the chance of getting more which they may have in return for the risk of losing all. They are apt to ask : Why not leave well alone ? And were they consulted they would, unless they were fools, say that they are satisfied with the safe and reasonable return they enjoy, and instruct their directors to confine their energies exclusively to endeavours tending to increase these returns by a conservative improvement of the property. To your average shareholder good and safe returns are the main point. He is not senti- mental, and he does not care a pin whether he draws his 5 per cent, from an obscure company or from a railway " chaining the Pacific Ocean to the Great Lakes," or performing some other grand feat. Not so with the majority of managers. To the railroad director it matters a great deal whether his company is large or small. A road only a few hundred miles long cannot afford to pay the princely salaries with which the great systems endow their THE PEGS AXD CONS first officers ; and, what says still more, the president of a small company does not have that great and gratifying power which a Chauncey Depew or a President Eoberts has, and which is so dear to the heart of the American. And the knowledge that the managers of big systems receive big salaries, and rank among the most influential men of the Ee- public, has a great deal to do with the development of vast systems, and with the constant amalgamation and extension of smaller ones. Look at it from whichever point yon may, you will be unable to find a more potent cause of this constant sacrifice of prosperity to greatness, which is so conspicuous a feature of the American railroad, than the personal ambition of the presidents. Nevertheless the tendency is often defended, and defended with a good deal of ability. If you make observations like the foregoing to an official who has caught the extension fever, he will overwhelm you with a variety of apparently valid and convincing arguments in favour of it. He will tell you that unless his company builds branches into the adjacent countr}^, rival systems will construct them, and that, in consequence, his system will be a tree without roots when the country has grown up. There is something in this, but only a little, for the best systems have not many branches ; they are either lines with few feeders but a fine strategic position, or roads which prosper chiefly because they command all the business of a certain district ; your " through 96 OF EXTENSION. route " of a thousand miles or so never pays, as we have seen in the preceding chapter. Then the manager will say that the wily rival may "obtain control " of your road, and either play ducks and drakes with jouv dividend, or kill you by means of a rate war. There is some truth in this too, but only because the American system of "bossdom^' with its incessant changes of ownership and "control," and with its end-justifies-the-means policy, is a ver}- bad one. Then the circumstances calling for and leading to consolidation are often referred to as an excuse for this everlasting sacrifice of prosperity to the Moloch of greatness and greed. But it is all rubbish. There can be no excuse for a policy which ruins pros- perous properties by the dozen simply because they are small ; not even the chance of acquiring a pros- perous greatness can justify it. As we have said, the worst of all this is that the shareholder has no say in the matter. If a board has ruined a property, the shareholder may refuse to re-elect it at the next annual meeting, but after all it is poor comfort to shut the stable door after the horse has bolted. The shareholder ought to be guarded against these " shocking outrages." But how is he to be protected against them ? Even if he were consulted before these decisive steps are taken the recommendation of his directors whom he trusts* — for if he did not trust them they would not be his * In theory, of course ; and it seems to go without saying that we allude to the election of directorates by majorities of shareholders. THE GREAT 15, 227,625 $232,629,998 158 CAPITAL A balance sheet contains two kinds of entries ; the principal belong to " capital accounts," that is, what might be called the fixed status of a company ; the others relate to "current accounts," which embrace far more elastic items. The former are of very trifling value and indicate little. On the "Dr." side, that is among the assets, we find the various properties, roads, rolling stock and investments ; and on the credit side there are the liabilities against these properties, the bonds and the stock. The liabilities are as a rule a few millions below the assets, but these data say very little nevertheless. In the case of the Beading, for example, how are we to know whether "Railroads, wharves and termi- nals " are worth $80,673,510, and the " Investment of Eailroad in the Coal and Iron Company " $70,633,446? They are not; but how should an investor see it from the accounts ? The statement of current assets and liabilities on the other hand, is an extremely valuable indicator. It shows whether the company can transact its current business with facility or not. The Reading, for instance, was at the end of the two fiscal years 1891 and 1892 in the following relative position ; we obtain these figures by addition of the various items under "current accounts" on the two sides of the balance sheet. 1891. 1892. Current liabUities $6,296,929 $12,211,339 Current assets 6,157,743 13,031,445 Excess of current liabilities over assets in 1891 $139, 186 Excess of current assets over liabilities in 1892 $820,106 ACCOUNTS. 159 Here we have what looks Hke a favourable change from 1891 to 1892, for m the latter year the current assets exceed the current liabilities by a small sum. An expert would at once proceed to further investi- gate the matter,* but our purpose does not render it necessary to enter into a similar analysis. Since November, however, considerable changes have occurred. The company took to borrowing in various ways, and in February, 1893, its floating liabilities reached a total of §18,472,838, against which there were only assets to the extent of $15,779,784. More- over, whereas the bulk of the liabilities were due almost at once, the assets were largely " locked up," consisting as they did of coal, book debts, etc.. Thus the company became embarrassed; it could not meet its current obligations out of its current income, and went into the hands of a Receiver. It has a floating debt of huge dimensions, and it cannot get into smooth water until this floating debt is paid off or changed into funded liabilities, and until its current assets are liquid, and large enough to cope with the current liabilities against them. Now let us look at the balance sheet of a sound company, say the New York Central ; we shall then at once see the difference. The assets and liabilities of that company on June 80th, 1891 and 1892, were as shown below : — * He would see what part of the liabilities are pressing, and what proportion of the assets is available at once ; and if the urgent needs are not offset by liquid assets, such as cash in hand, amounts receivable, etc., he would immediately perceive that the financial condition of the company is not an easy one. 160 ANOTHER BALANCE SHEET. General Balance, N.Y.C. & H.R.RR., June 30. Assets. 1891. 1892. Road and equipment 151,002,288 153,585,294 Special equipment 5,706,464 5,406,464 Stocks and bonds 10,034,635 9,394,322 Ownership in other lines, real estate, etc 4,169,701 4,568,929 *Due by agents, etc 5,280,791 5,028,220 *Supplies on hand 3,072,813 3,337,891 *Ca8h 2,896,277 1,368,609 *Harlem construction account 1,049,984 1,263,541 *\yest Shore cons' tion acct. 643,433 *Miscellaneous 140,230 165,084 Total assets 183,353,178 184,761,787 Liabilities. 1890-91. 1891-92. Capital stock 89,428,300 89,428,300 Funded debt 65,377,333 68,077,333 Real estate mortgages 357,000 342,000 Securities acquired from leased lines 3,359,700 2,827,200 Past-due bonds 4,790 4,790 *Interest and rentals accr'd . . 3,890,039 3,660,211 *Unclaimed interest 14,324 11,089 ^Dividends 894,283 1,117,854 *Unclaimed dividends 30,075 30,650 *AVages, supplies, etc 3,822,833 3,544,994 *Due other roads, etc 2,939,003 1,546,819 *West Shore constr'n account 9,472 *Rome, W. & O. cons, account 811,199 *Profit and loss 13,226,026 13,359,348 Total liabilities 183,353,178 184,761,787 The items marked with asterisks constitute current assets and UabiHties. They foot up (1892) as follows: Current assets, n^ll, 806,778; current liabilities, $10,723,876 ; and the current assets therefore exceed the current liabilities by more than $1,000,000. But that is not all. The assets are liquid, w^hich, as we have seen, was not the case with the Eeading. There is $1,368,000 in cash, and $5,028,220 " due I A NOTE ABOUT ACCOUNTS. IGl by agents," the equivalent of cash, while the " notes payable and loans," so conspicuous in the case of the Eeading, like other urgent liabilities, are absent. Thus a comparison of current liabilities and assets will at once show the difference in the position of the two companies. The New York Central, having no current liabilities except those inseparable from its business, and a large amount of available cash to meet these, was in a sound state : the Eeading, with bills and loans due, and little cash or equivalent of cash, was in a precarious position. A company can, as a rule, only be of sound standing when its floating assets exceed its floating liabilities, and are liquid. It is not of sound standing wdien the reverse is the case, or when its current liabilities are urgent. Loans, etc., amongst these liabilities are nearly always a signal of distress, or, at any rate, denote financial weakness. A company should never have occasion to include amongst its current liabilities anything but items inseparable from its current traffic business. Notes, bills, and the like, are always suspicious. They constitute the floating debt, which must either be redeemed out of earnings or else funded, and always betrays some defect or other in the management. Hence these ''floating" items, and especially a comparison of them with the corresponding figures of previous years, give the investor some very valuable indications. But not so the other entries. Of course, bonds and stocks are issued, and constitute liabilities, and they are offset by property in some form or other. 162 IS THERE A But it stands to reason that the balance sheet will always show the value of this property to exceed, or at least to equal, the liabilities incurred in order to pay for it, in other words, its stocks and bonds. But how is the investor to know that this '' book value " is real worth ? Take the Beading balance sheet for example. It says the railroads, wharves, and terminals are worth (1892) $80,673,510, and computes the value of the investment in the Iron and Coal Company at $70,633,446. These figures are mere fables, as, in this instance, everybody happens to know. But how is the investor to say in every case to what extent analogous data can be relied upon in the case of other companies ? It is quite evident that it would be impossible to ascertain this value without either an examination of the property by an expert, or a thorough analysis of the company's report. But both means are not accessible to the average investor. He has either to rely upon the usually perfunctory and unreliable discussions of the newspapers, or else upon some golden rule or other. Of these rules there are several, but not one of them is good enough to deserve any faith. It has been said that the bonds and stock of a company, whose property is worth what it is capitalised at, will stand in a ratio of about 10 to 1 to its net earnings ; but there are some very striking exceptions which do 7wt prove the rule. Then some people, acting upon the principle that a road will always pay returns upon its bond fide cost, say the GOLDEN RULE? 168 properties of companies which pay dividends on their stock are worth as much as the balance sheet states. This is undoubtedly true ; but there are some lines which cannot be said to be worth less than what they are capitalised at, and yet pay no dividends. So a hard and fast rule does not exist. With the soundness of a bond it is different. It is quite easy to compile a table showing the rank of various bonds, and by comparing this table with the income accounts of a few years, clear and reliable inferences can be drawn. Let us, as an illustration, take the funded debt statement and the income account of the Louisville and Nashville in its re- port for 1892. They are given as follows in my larger work on American Railroads : — Table I. — Fuxded De}5t of the Louisville axd Nashville Railroad Company ox June 30th, 1892. 164 HOW TO SEE WHAT Condensed Income Account. Earnings Irom- Freight Passengers Mails Express 1892— Dol. 14,604, 5,137. 507. 455, 92 Gross earnings , 21,236,712 Operating expenses — ! Oper. expenses (excl.tax); 13,792,12: Leaves net earnings! 7,443, Eecei23ts— j Income from investments I 533, Georgia RR. profit . Total income . . . Digbursements — Taxes Rentals Interest on debt, etc. Georgia RR. deficit . Deficit other RR. Dividends Total disbursements Balance 1890—91 Dol. 13,113,965 4,800,688, 431,0261 427.425' 1889—90 ' 1888—89 Dol. Dol. 2,845,951 11,325,235 4,704,769 4,036,362 422,770 419,050 406,294 368,139 19,220,729 12.051.434 7,152,285 657,217 60.658 7,976, 513, 124, 128, 2,376, 7,880,160 410,810 4,207,629 205,501 2,400,000 18,846,004 16,599,396 11,419,092 10,326,085 1887—88 Dol. 11,081,650 4,224,413 357,193 350,811 16,260,241 10,267,535 7,426,912 6,273,311 638,686 677,109 8,065,598 , 6,950,420 397,721 401,112 4 524 694 i 1^'^^^ 90,339 i 23,376 186,203 I 199,425 2.405.367 1 1.594.800 8,002, def. 25, 759 7,i23,933i sur.656.227 7,604,323 6.284,206 sur.461,275sur. 126,2 14 I 6,092,706 528,828 6,621,534 375,557 15,000 4,370,80:i 3,453 238,943 1,518,000 6,530,765 sur. 90,769 The first of these tables gives details of the various issues whose rank can be easily ascertained after a perusal of the preceding chapter, and this statement further shows that, in 1891-2, the Louisville and Nashville had to pay $4,172,394 interest on its debt. The second says that in the same year it earned $7,976,893, or rather more than $3,800,000 over and above its funded debt ; a very considerable margin of safety therefore. The latter of the two tables being " comparative," it will, moreover, be seen that these earnings were nothing out of the common; in fact, they were rather bad, for the company earned less than in preceding years if due allowance is made for the increase of the system ; hence it is clear that its bonds are amjoly secured. A BOND IS WORTH. 165 and perfectly safe investments. The higher the bonds rank the greater their safety. For example, the first mortgage trust 5 per cent, gold bonds (see Table I) have nothing worth speaking of "in front " of them; the generals, on the other hand, must yield precedence to nearly all other descriptions. There- fore, though still amply secured, they are not quite so good ; and if the reader will look at the yield of the two, as given in Appendix A, he will at once see that the "credit" of the first mortgage bonds is better than that of the general bonds. The same table is also of service in determining the value of the shares. By comparing the relation between past earnings and past dividends it becomes possible to draw inferences from current earnings as to dividends in the near future. All that is re- quired to arrive at correct conclusions is great care and due regard for every fact bearing upon the case ; the neglect of one single factor of course at once upsets the value of the deductions. By instituting similar comparisons between the earning capacity of a property, its fixed charges, and the rank of its various securities, even the non-expert is able to satisfy himself as to the safety and intrinsic merit of every security. And it is most desirable that every investor should possess the slight qualifications required for this purpose, because there are many rail- road companies which, though of low standing, have nevertheless issued securities of the highest order. To mention a few cases in point, the Beading, Erie and 166 A FEW CONCLUDING Northern Pacific are very shaky companies : yet their first mortgage bonds are perfectly safe. This fact, which may strike an outsider as wonderful or incred- ible, is really only a consequence of those peculiar characteristics of American railroad finance to which we have called attention, an outcome of defects which have provided their own remedy. I entertain no doubt whatsoever that a time will come when the standing of most companies will equal the present position of their best bonds ; but the majority of American corporations are still so constituted that they have issued bonds of a far higher status than that which they enjoy themselves. And this circum- stance should be fully realised by the investor. The facts referred to in this little work, and the conclusions deducted from them lead to a very plain inference. The investor must confine himself exclu- sively to securities whose soundness is be3^ond a doubt, that is to say securities amply covered by mortgages and earnings, and beyond the reach of the discretion of directors. It matters little whether a bond is issued by a company of the very first order, as long as it is amply secured and as long as earnings leave a sufficient margin of safety above interest requirements. Concerning these facts the investor should satisfy himself. And as there are presumably persons who in spite of the ease with which this can be done, do not care for the pleasure and satisfaction of finding out for themselves, we will in addition to the foregoing remarks give a very simple and fairly OBSERVATIONS, 1G7 reliable rule to go by. The merits of a bond can be inferred from its yield. An American security of the very first order will rarely yield more than £4 10s. per cent, net, though up to the i'5 level y7iet yield) every bond may be regarded as tolerably safe. It is always a difficult and delicate task to draw the line between the safe and the unsafe. But if it must be drawn somewhere, let it be drawn at this five per cent, because we feel we can answer for that. There are several bonds which yield more, and yet are sound; but those w^ho look upon them as second-class investments will at all events be on the safe side. With these facts before him the investor ought to find no difficulty in investing his money safely in American securities. A few additional hints might be given^ but they are either self-evident, or else a little study of easily obtainable materials will lead to their discovery. For example, it is unwise to purchase bonds when prices are at their highest level. Even the most stable of bonds fluctuates in price. If one looks at the table on page 141, but especially at the Official Weekly List published with the authority of the London Stock Exchange, one will see that all of them reach highest and lowest quotations at pretty regular intervals, and that, on the better class of bonds, the margin between the tw^o levels ranges from about 5 to say 12 per cent. This renders it quite evident that every day in the year is not equally fit for buying bonds. The diflerence in price makes no very appreciable difference in the net yield. But in 168 THE PRINCIPAL addition to the yield there exists an opportunity of making a profit by the regular and recurring appre- ciation of stocks which, in spite of their oscillations, are sound. By buying and selling at the proper moment the investor may therefore add considerably to his income without increasing his risks, or rather, whilst at the same time decreasing both his risico and his outlay. Then, it will have been noted that a "guaranteed" bond always yields proportionately more than a company's own security. Thus, Western Pennsylvania fours guaranteed by the Pennsylvania yield ^GS 19s. 3d. per cent., whereas the Pennsylvania's own equipment fours yield only £3 10s. 9d. Again, the "credit" of Illinois Central three-and-a-halfs is very high, i03 13s. 6d.; that of the Chic. St. Louis and New Orleans fives is £4 6s. 6d., though these bonds are guaranteed by the Illinois Central, and covered by a lien on one of its main lines. The difference made between the two has not much ground to stand upon. The public has simply a prejudice against " guaran- teed " bonds ; but of course, when the guarantee is good the prejudice is unfounded, and the investor will do well to take advantage of it. And to return once more to the lesson which it is the principal object of this book to teach : Shares, other than a few amply covered preferred descriptions like St. Paul or Chicago and Northwestern preferreds, are not Jit for investment. They may be fine things for the gambler, or perhaps are suitable for " speculative investors " ; they may be certain of LESSON. 1G9 occupying a very high status after a decade or two ; they may be "cheap," have "reached rock-bed," or " sure to rise " — but no cautious or conservative in- vestor has any business to trust to them. Perhaps one or two of the very best shares (their names are given in Table IX., on page 172), may be occasionally mixed with bonds. But wise persons had better give a wide berth to all others, no matter whether they pay dividends or not. In conclusion I give a few tables showing selections of desirable and safe investments of different grades. They were made out before the recent fall occurred, but I see no necessity for alteration as the fall was abnormal, and is in the course of being rectified as this work goes to press. The tables are adapted to the well known principle which spreads a sum of money over various investments in order to reduce risks; and with the help of Appendix A everybody can compile lists that will suit him. Of course, upon a vast number of bells an infinite variety of changes can be rung ; but it will be best to select bonds maturing at distant periods, and mixed in such manner that they are secured by liens upon properties in different sections of the country. 170 LISTS FOR INVESTORS. List No. 1. First Class Gold Bonds. Cost p. ct. Yield p. ct. $1,000 $1,000 $1,000 Illinois Central 3» p. ct. due 1951 Peunsylvania 4 p. ct. Equipmt. Trust due 1914 New York Central 7 p. ct. 1st Mort. due 1903 97 104 126^ 98 96 3 13 6 3 17 9 4 2 6 $1,000 $1,000 Cleveland, Cin., Chic. & St. L., Cairo div. 4 p. ct. 1st, due 1939 Minneapolis, St Sainte Maine & Atlantic 4 p. ct. 1st Mort., due 1926, guar. by Canadian Pacific 4 4 3 4 4 9 Investment of £1,043 to yield about £4 Os. per cent. List No. 2. First Class Sterling Bonds. Cost p. ct. Yield p.ct; £200 £200 Pennsylvania 6 p. ct. General Mort. due 1910 Chicago & Alton, 6 p. ct Consol. Mort. due 1903 128 118 112 132 4 4 19 £200 Baltimore & Ohio 4^ p. ct. Sterl. Mort. due 1933 3 18 3 £200 Philadelphia & Erie 6 p. ct. Sterl. Mort. due 1920 4 8 6 Investment of £980 to yield about £4 Is. per cent. List No 3. First Class Miscellaneous Bonds. $1,000 £200 $1,000 £200 $1,000 Chic, St. Louis, & New Orleans, guar. by 111. Central, 5 p. ct. Gold, due 1951 Atlantic First Leased Lines Pent Tr. 4 p. ct. Deb Canada Southern, guar, by N.Y.C., 5 p. ct. 1st Curr., due 1908 St. Paul, Minneapolis & Manitoba 4 p.ct. due 1940 Atchison, Topeka & Sta. Fe, 4 p. ct. General, clue 1989 Cost p. ct. 122J 94 105 92 83 Yield p ct. 4 2 4 6 6 4 13 9 4 10 6 4 18 3 Investment of £993 to yield about £4 10s. per cent. LISTS FOR INVESTORS. 171 List No. 4. Good Miscellaneous Bonds. Cost p. ct. Yield p. ct. $1,000 Louisville & Nashville 5 p. ct. 1st (Jold due 11)31 109 I27i- 89 82 99 1 10 9 $1,000 Indianapolis & Vincennes 7 p. ct. Curr. due 1908 4 12 () $1,000 Denver & Rio Grande 4 p. ct. 1st G(jld due 1936 I i:i $1,000 Missouri, Kansas, & Texas 4 p. ct. 1st Gold due 1990 1 17 (■) $1,000 Oregon & California 5 p. ct. 1st Gold due 1927 5 .3 Investment of £1,013 to yield about £4 15s. per cent. No. 5. Good Miscellaneous List. Guaranteed Bonds. Cost p. ct. Yield p. ct. $1,000 Canada Southern 5 p. ct. 1st Currency due 1908, guar, by N. Y. Central . . 105 4 13 9 $1,000 Alleghenny Valley 6 p. ct. Gold, due 1910, guar, by Pennsylvania 1284 4 13 9 $1,000 Nashville, Florence, and Sheffield 5 p. ct. Gold, due 1937, guar, by Louisville and Nashville 105 4 16 9 $1,000 Pittsb., Clevel. and Toledo 6 p. ct. Gold, due 1922, guar, by Bait, and Ohio.. 115^ 5 1 $1,000 Colorado IMidland, 6 p. ct. 1st Gold, due 1936, guar, by Atchison 106 5 12 6 Investment of £1,120, to yield about £4 19s. per cent. No. 6. Fair Miscellaneous Llst Cost p. ct. Yield p. ct. $1,000 Norfolk and Western 6 p. ct. General Gold, due 1931 122 83 100 109 874 4 15 9 $1,000 $1,000 Atchison 4 p. ct. 1st Gen. Gold, due 1989 Philadelphia and Reading 5 p. ct. Con. Gold, due 1922 4 18 3 5 $1,000 Norfolk and Western 6 p. ct. Improv., due 1934 5 10 9 $1,000 N. Y., L. Erie and Western 5 p. ct. Fund. Coup. Gold, due 19G9 5 14 3 Investment of £1,003, to yield about £5 5s per cent. 172 LISTS FOR INVESTORS. No. 7. GrooD Secoi>j-d Class Investment. Cost p. ct. Yield p. ct. $1,000 £200 $1,000 $1,000 $1,000 Pennsylvania §50 shares, 5 p. ct. Consol. Gold, due 1923 Alabama Great Southern 5 p. ct. Genl. Gold, due 1927 Norfolk and Western 5 p. ct. Gold, due 1990 Denver and Eio Grande 5 p. ct. Impr. Gold, due 1928 Colorado Midland 4 p. ct. Cons. Gold due 1940 521 5 14 92 5 11 6 851 5 18 3 85 6 6 60 6 14 3 Investment of £584, to yield about £6 Os. per cent. No. 8. Speculative Investment in Bonds. Costp.ct. Yield p. ct. $1,000 N. Y., Lake Erie and Western 6 p. ct. 2nd Gold, due 1969 95 6 6 3 $1,000 Chic, and Northern Pacific 5 p. ct. 1st Gold, due 1940 78i 60 75 71i 6 8 6 $1,000 Colorado Midland 4 p. ct. Consol. Gold, due 1940 6 14 3 $2,000 Texas and Pacific 5 p. ct. 1st Gold, due 2000 6 13 3 $1,000 East Tenn. Va. and Ga. 5 p. ct. Equip, due 1938 7 8 $6,000 nominal. Investment of £910, to yield about £6 14s. per cent. 9. Fairly Safe Investment in Shares. Present Price. Yield p.ct. Points which present prices are below high- est of year. $2,000 $2,000 Baltimore & Ohio Common . . Chic, Milw., & St. Paul Pre- ferred 78x 122* 95" 125 104* 6 8 3 5 15 3 5 6 3 4 17 6 4 15 9 22i 6i $2,000 $2,000 $2,000 Illinois Central Common Lake Shore Common New York Central , . . 12^ 11^ lOi- Investments of £2,100 to yield, if no change in the rate of Dividend occurs, about £5 8s. per cent. APPENDIX A, 173 ,0 o 02 1-5 ►^ P -A) l-S S :ri C50T-lrHT-( (M-MCO -^ ' T-H r-( 7— ( .— ( a: qjCOCOCOCOCOCOCO CO CO COCO CO rtH 't -^ -^ ^-*^^ -!H i -H t- t- CO CM 1-1 C5 CS C t* rr ■^ .0 .3^33 ^ P^^^ (-^ r— ( -S o o 3 .i p^ o •;il •;d t> rid ^J S O O >^ I ^ ri3 o o ri c ;r^ ^ 3 3 o fcpg -M : t^ tn - o o ?:! to . ^ .3 :o &3 ^ s :3:/:o • • c 2 ^ ;=^ _. o o '^ ^P ^0 "9 r-- .^ 0.3 ^• .-.3 >;0 o ^.2^ t£l§D o Q Ph |.|i-||5 -"^ p :z; O 3 00000000 00000000 0^0 o_o^o^o__o^o^ o" o" o o" o'~ o' t-" o" oooooo^o O LO 2C_»-0 o o c- o cTeri"'— I i-Tio'c^f uo^co" :^©==^'=fj I-H 1—1 =a5=,-( :«©: 00000 00000 0x000 o'co'o'o'o -?< T-l o o o C<) t— '^ o t— -4r«*? c^Tco"^ 00000 000 000 r-O 000 ooooo 00^0 1-^" o o"" 1 .0" o'' o" o o x)5oi-o OOiO t— _^1 O X o o ^jo SI r-l 1-1 CO '^:«©i :^= =»= =«^ 174 APPENDIX A. c3 ^ =^ ^ CD pi Hs <^ h, j)^^^ ^ "^ '^„ h-j Peh G'i^ i-s i-j Pq r=i t>> >-» t>i 5£ >-» 1-5 H^ l-S jO 05" 0" '^ CO ■^ '— 10 CO t- ^ l-H o =€e>= '=+i^w= rH T-H :^^CfJ ^ =^©=rH =^E ■^ CM =^CM C+i z^:^ ^:^ 0^ =»= =€©= APPENDIX A. 175 ^ «• -^2'::^ ?.o« .2 c^; 5 K^ rn rH 1 r O O li -i S8 o o ^ ^5 o<- d ^ ■o ^4 c 1 C3 -5 ^ ►^ < ^ ^3 O CO -o o as o CD OO o :0 o C5 c:. OS o . 00 Ci C5 o O i-H rH C— 1 1— 1 00 i-H 'M ^ GO rH ^ 'M O 1— ( rH rH rH CO S . 1-i CO o y: o o C^ 1^ ,-( r-l rH rH o ^ 1 C5 C5 C5 T— 1 OS rH C5 Ci C5 C5 Oi rH 1^ o :c o -^ o o Til O t- o ■^ -o o t- o t- .2 liii 2 O rH 1 "c CO 15 1 ^ ^ &£> 1 .2~ i ci J -2 ^ : .2 ■ 'A I Hi "5 rn O i o C 73 •^ ^ t ^ O :r* Pi;- ■ cc-5 ^ ^ T£ Ch ^ > o '-iJ -jf; I— < 3 >- o S ^ ^ o o — o :=> o o o o o § 00 o o o o bo -> o o o o o ou O O i ' o o^cTir^'cT c£ d^o irT co^ "'::£ ^" o" O 3 o ^^ O '>« O C5 o o o CO o <^ P ::^ S J 0C5 o , 1 o^ ^ C: I- «_ •<-s -4? ,^ 1— 1 lO ac CO r-l r-l o O ^--+^^^ ^ =^- ^ ^^ :«e= ^if> =»= 176 APPENDIX A, > ci ^o§ m J^ ^^^ ^ ■^ &^1 fl i ^ to . II g ? « M 1-5 p O 1 l^^oS I' it t ^ g 1 l3>'5.|" ^ hs H-5 fi^ — 1 ^ 1—1 1—1 r-{ T-t T-{ T^ T-*.-r-K y-< T-{ i» oo r-^ CO rH Ci l-i COrH t-O O CO Ci Ci -^ O O '^ lA o O ?0 CO O CO — ( Oi CO C<« GC CO CO -S-s 05 C5 O 05 Ci C5 Ci O Ci Ci Ci Ci Ci Ci Ci Ci Ci »— 1 1— 1 T— 1 T— 1 rH rH rH rH 1— 1 rH rH ■r-\T-\ T-\r-\T-K lO-^ CO t^ lO CO CO lO «o -^ U^ lO ^ lO «D O ' 'o m 1— 1 * 7— I o 5 '> 1 1 ; 'o ' 'o ' ''o "c ^ 9 : : mT : f^ ;3 S. 2 .S" S c5 ^ 9 o o • S O re .3 i o cm :| 1 2 ^ "^ o o ooo ^1l! 11111 .2 ^o^ OociOr^l>a20 "Th is"^ ;^ O^ •3^ ^ rH I-3-1I1I iES^r^.29 o pq h-1 :>2 O) h^ o Iz; 11 ^^H^S Q Ci5 S r^ -^ <1 fS^^ -6 o CO O CO o 000 CO cs CO C5 Ci C5 CO CO OS 05 O O i-H rH C1 >" ^ CO 1—1 T-H rH rH ^ ¥J TJ^ '^ lO >0 lO >.o 10 10 iO 10 »0 »0 U5 10 »r5 to 10 to wl-M >^ HT1 --*|oq -Itj MHci H y :o ^1 o -f lo i.O Ci CO CO CO 00 ■* KO (M -^ C5 c^■, ■c O CO O O T-H rH ,-1 CS C5 C<1 Ci CM rH CO C.o 00 to 1-0 •^ ^ ^1 ^ co" »r5^rH"'7 a 1 4-3 .2 1 p S5 s o. CO o o Tj O 'N HlCq H« M H Hcq r-lpj X HC^l-ilTJ-^KM o O t- lO fN UO 1-1 ^ lO C5 ^ OO O UO O CO (M T— 1 t— t^ 'S O CC CC O 'X' — 1 CO Ci O Ci t— oo t— CO 00 CO t-CO-^ CM 1— 1 7—1 1—1 id »0 Ci O 00 00 o CD 05 '^ o o t- o o oo 05 CO Cti t- S-S T-H CD CI rM O; T-H rH CO CTi cr^ Oi Oi cn T— 1 1— 1 I— 1 T— 1 r— 1 T— 1 C5 Oi 1— 1 7—1 05 05 1—1 1— ! OS 1—1 o c CI Ci o:> 1-1 (M 1-1 rH i-( Oi CTj Oi I— 1 I—I 1—1 ^1 «£> O UO O liO CO O CO t-CO lO O UO '* CO uo xo in lo 2 • n3 ni • itJ ; ^h 1 • [^ •S M 2 ^ • -^^ --s : : : 1 ^ 55 5 1 3 -^ ^ ^ p^ S o o S o -1-3 1—1 d~ *o c3 Ph +3 o 1 fcXJ 1— i o B o • O '^ 4^ rrl ^ S o Fi PI Pi 1 > fill III i#8 :3 S ?r 5q6 4 6 III ^ o o ooo o oo o o ^ o o o o o oo ^ (3, -tH o o o o o o o o o (3 o o "ii S o 00 o o o o o_ ^^o o^o^ o o o o o o o o S'^ co" Ci S o^ o" o^ o" b-'o" iSiS o" cTcT ^"oo^o" o"'o" § § T^l (M o o o o o o:> o ■■-H Ci -Tt^ O CO -^ o CO O fi -u CO^ O CM 00 O UO lO lO^lO^ O^Ci o_ O 00 O CO o C5 O ^1 o -rt< t^ Ol 00 -"^ >o co" T-T t-^ -* c cort* OJ -llNr-*:* -I0» 73 OrH'* | o O '^lOt-C^lTiHC-Ot-t- CO iO t- 1 XO t}< 5 00 1 o ©■ o o o o O 3 ■r-{ - -o -- - ^ - - -lo o ^2 '^ - ^^ ^ 1—1 "^ " " " "~ =©5= =^ < r "B" tal Tr. , Com". . Pref. mmon i-cum. •0 and 1 ^ . ^ §1 I— T S? o 1 a ft CD Ordinary ^ d Lines Kei io, Commoi )f New Jers California DC & St. Pan Non-cumu Western, C^ Pref. Nc tsburg nati, Chica o vc Pref. . dson Canal Grande, Pr -(J O o I-.2 02 & Atlantic 1st Lc Baltimore and Central Railrot Central Pacific Chicago, Milwti Do. Chicago & Nor Do. Cleveland and Cleveland, Cin o Do. Non-cumu Delaware and Denver and K 1^ 000000'-iO:^0 00 Q§ ^ S=5 be o O O O O O O X) O ».f o O O "S ^ o^q o55ocvicircr^x;o coo O o 5| o"o i-t" o" v: —" I-' t-" — T 1 rf -o"^ — " o^o'o" o'o S rt •^ o o -x 3 -M o .'.• ro re o o o o 5 5 c -^ So pc o -H C;^c: t-^o ^ "^'^q o o ''I H^ T— T ^ ^ -m' S" — "^ > ■'^~ =^" '^''^ ^ ^ 0*^0" xT o'o~ ^ CO'M^— ^'MrO'M-^'M r-l CO (M i-O 1-t '^ =«©=:«^^:«^=<^:^=:^e=<^=!^ : ^^ :«»=<©: 180 APPENDIX B, oo 4j O O ^ M QO § *^ri Ph >rt ■'^ CO fi<^ o •r-l <^ o ^S .S CO -fU ^ 3 1^ ^ • b; ^* o ^'^ o ^ I 1=^ I t~ I o o O 'O '^^ o -* I I ^co I CO O «0 O 00 XO O '^ I I cooc I CO O CO CO '^IH iO CO Tfl I I CO 00^ xo t- I CO O CO CO ■<* C~- lO CO O CO CO -Ttl Q S CO'* ins 00 CO (M CO (M CO t— O CO CO CO CO -<^ o o o -to o xo pi o • m • 1^ o S o Eo • Jh f-l ^ o fl . 13 -+J 03 Co r^ C4_J r^ .2 2 £ « a o • M^^ c3 cj cu © a;> o bo O o o o o CO o -* 00 o o o o o o CO <^^o_ oo'co'o'" 05 CO O ^ UO o^ oTgo'co" 00 =0^*©= O O ' o'oo"' fM 00 1 CO o o o o o o o o o o o o O CO o o^o o O Ci o >c o o lO '^ O C: .S :? jr 2 c ^ « OOOOOOOOOO-MOOOIOOOOO • OOOOO'OOOOOX^ — ^ — ■ — — — ^o~- ^ - S'3 ooot-oooo^t-c^c; — cnoxoo 2 S iC U't; O i^ O Lt: O O O '^ 1-1 o c; X L.~ _ X ^ o o 1-1 (M 'M o X t- X t- CO t- X C5 cr- r^ :r _ c^ X -r- "^ "^ S SS=^^3>=^^^'^^S^=^^55=S=4^ =^= 182 APPENDIX D. The following Tables show the rate per cent, of annual income realized from shares bearing any given rate of yearly dividends or interest, from 1 to 15 per cent., when purchased at various prices from 10 to 200 per cent. For example : To ascertain what rate of annual interest will be realized on a share which bears 7 per cent, per annum, and can be purchased at 92 {i.e., at 92 per cent, of its par value, whatever the par may be), find 92 in the column of " i)urcliase price," and follow that line across to the column headed '* 7 per cent.," which will show the correct figure — in the present instance, 7.60 per cent. §8^ tH 1— I CO O C5 t- rH O CO U:) cc .'>i t-^ CO o CO CO UT! O UO t^ tH CO t^ o OO r-H CO -^ O CO i-H rH CJ r-^ ^ ':e^ ^ CO CO XO -^' CO CO 1^ o o o fM 00 CO O 1-H OO -^ O CO* C^ o lO lO '^ '^ ^ O O CO tr~ XO 01 CO xo t-^ lO CO r-l O CO CO CO CO CO XO cjq m O H > oS od o OCOiO lO 1—1 od vo 00 '^ '^ CO CO CO xOi-H t- 1-1 CM '^ t— CO rH ^ O -^ CO CO CO CO CM t^ CO O 1—1"^ CO UO GO CO XO CO CM CM C<1 o -^ G.0 00 CO --H

.0 -t< I.O CO CO CO C) I JH ci d d CO X X rH -*< CI d CO rH CI CO CO -TH Cr. CO X t-^ t- t- t- d d ?5S i-ido (M (M G.0 01 Ci X -; Ci t- ^ oi '■0 -H -1^ -t -jj -t< co' O l-O OS 00 CO CD CO C5 CO CO r^c-- CO CO CO t- 00 T-H lO CD t- O CM CO IC UO ui ITS l.O rH X CO -H t- O CM O GO -J^ ^" -^' ^ CO CO CO CO -* CO --IH CM X Co' CO Co' Co' CM* 5S 'MCM CO o t-I O CO X) CO C5 i-H rfH CO CO O 00 iO i.O O O "^ '*" OO CO C5 lO CO o "M C5 1^ C5 X CO i,0 do6oc5o6o6 ^1? 00 X '"' 1^' O --H O 1-1 CO ».0 C5 OO '^^ OO O -Tl C CO Ct rH Ci rH O CJ 00 CO 00 00 t^ t-^ t-' t- CO '^. -^ riH CO CM rH t-* t-' t-' t-' t-* 0? t^ CO CO t^ t-co "N lO CS CO X X CO -^ CO rH CO C5 O CM O O X t- O O t- IfS -x}H CO (M CO CM rH O C5 -H rH rH (M CM X t— CO 1.0 -^ ??s C5 0C5 X X X X X X t- t- c- t- t- t- t- t- CO CO CO CO CO CO CO CO 9^ C5 CO O CO 00 00 00 j -« c^ ^ o t^ X CO O ^ CM C-^ t-4 ir-^ t-^ t-^ '^rHOSt^CO OlO^OO rHOXt-CO O-^COCM rH C-^ t-^ CO CO d <:£ <:£ z6 <:6 -di CO t— X C5 rH q 05 oq t- t- d in* iri 16 CO »n COifS 0*0 !i CM »0 X O CO o o 00 t-. CO o -^ O ITS lO )0 lO UO CO t- X CO CM rH CO O O lO ITS O ^ CO CO X rH OS X tr-; CO CO ^^ ^1 "'^ ^71 ^ft -H t- --1 -?* X 10 ^ ^_ CO CM ^ '^' -^ '^* -^* 05 i. ;::;;;:;: I : : ^^g rH CM CO -Tt^ o O O O lO o CO t- X Ci o O O O UO CO rH Ol CO '- 1.0 CO CO CO CO CO CO t^ X C5 CO CO CO CO t- rH Ol 184 APPENDIX D. i-i 20.54 20.27 20 CO GO CO 00 in t— rtl G3 -M CM Ci c rH Ci GO t- O i—? rH d> <:£ d d> <^ rH 1—1 tH rH tH Oi GO t- t- t- co t-; CO lO 'xfH 05 05 05 05 05 00 o lo O <:o Ci 00 CO odd 1— 1 1— 1 r-t G^ CO KO CM lOOO ^ t~-* t-* t-' O rH CM -rH lO ^_ CO G Exchanges — Brazilian Exchanges . . .2 Clare i Goschen i Norman's Universal Cambist . 2 Tate's Modern Cambist . . 2 Exchange Tables — Dollar (Eastern) . . . !■ Garratt (South American) . . i' Goodricke's Tea Exchange Tables !• Lecoffi-e (French) . . .2 (Austria and Holland) 21 Merces (Indian) . . .2: Schultz (American) . . .2. Schultz (German) . . . 2.|i8( Insurance — Bourne's Publications . . i: Short-Term Table ... 2 Effingham Wilson, 11 Royal Exchanoi-:, London. 3 nterest Tables— page Bosanquet . . . . .12 Crosbie and Law (Product) . 13 Cummins (2% °/o) ... 13 Gilbert's Interest and Contango 16 Gumersall 17 Ham (Panton) Universal . . 17 Indian Interest (Merces) . . 22 Lewis (Time Tables) . . .20 Rutter 24 Schultz 24 Wilhelm (Compound) . . 26 nvestors {see also Stock Exchange Manuals) — Birk's Investment Ledger . .11 Investment Profit Tables . . 27 Houses and Land ... 9 How Money makes Money . 15 How to Invest Money . . 9 oint-Stock Companies — Cummins' Formation of Accounts 13 Company Frauds Abolition . 5 Company Promoters (Law of) . 5 Haycraft (Directors) . . .10 How to ascertain the Profits (Dale) 14 Simonson's Debentures and De- benture Stock (Law of) . Smith .... 24 7 7-10 regal and Useful Handy Books- List of laps — British Columbia ... 6 Hauraki Goldfields ... 6 Kalgoorlie .... 6 Tasmania, West Coast of. . 6 Witwatersrand Goldfields . . 6 [ining — Accounts of G. M. Cos. . .14 Beeman's Australian Mining Manual 11 British Columbia Mining Laws 12 Charlton's Information for Gold Mining Investors . . .13 Gabbott's How to Invest in Mines 16 Goldmann (South African Mining) 16 Kindell's African Market Manual 19 Milford's Dictionary of Mining Terms 22 Paull's Columbia and Klondyke Manual . . . . .22 Tin-Mining in Spain. . . 12 iscellaneous — Arithmetic and Algebra . . 21 Australia in 1897 . . .22 Author's Guide . . . .27 Miscellaneous [contifiued) — PAGE On Compound Interest and An nuities . . . . , Copyright Law .... Cotton Trade of Great Britain , District and Parish Councils (Lithiby) Factors (Law relating to) . Gresham, Sir Thomas (Life of) Ham's Customs Year Book Ham's 1 nland Revenue Year Book High Court Practice . Licensing Acts . Macfee, K. N., Imperial Customs Union .... ' Maritime Codes, Spain and I Portugal (Raikes) . I Maritime Codes, Holland and I Belgium I Patent Lawand Practice (Emery) I Property Law (Maude) ! Public Man Public Meetings Red Palmer Schedule D of Income Tax ; Solicitors' Forms (Charles Jones Veld and " Street " . \ World's Statistics Honey Market {see Currency and I Finance). Pamphlets j Prices — Dunsford (Railways) . Ellis (Market Fluctuations) Mathieson (Stocks) . Railways — American and British Investors . Dunsford (Dividends and Prices) Home Rails as Investments Mathieson's Traffics . Poor's Manual (American) Railroad Report (Anatomy of a) Railways in India Ready Reckoners(j'^^also Exchange Tables, Interest, etc.) — Buyers and Sellers' (Ferguson) . Commission and Brokerage Hawke's Instantaneous Share ! Reckoner .... Henselin's (Multiplication) Ingram (Yards) .... Kilogramme Tables . Redeemable Stocks (Mathieson) Merces (Indian) Robinson (Share) Silver Tables (Bar Silver) . 27 15 Effingham Wilson, PAGE Sinking Fund and Annuity Tables- Booth and Grainger (Diagram) . 12 Hughes 18 Speculation {see Investors and Stock Exchange). Stock Exchange Manuals, etc. — Contango Tables . . .16 Fenn on the Funds, EngUsh and Foreign . . . ■ • 15 Higgins, Leonard, The Put-and- Call t8 Investor's Ledger . . .21 Investors' Tables, Permanent or Redeemable Stocks . .18 Laws and Customs (Melsheimer) 21 Laws, English and Foreign Funds (Royle) . . .24 Motors and Cycles . . . iS Options (Castelli) . . .13 Poor's American Railroad Manual 23 Rapid Share Calculator . , 14 Redeemable Stocks (a Diagram) 12 Registration of Transfers . .15 PAGE Stock Exchange Manuals,etc.ro;2^. ) — Robinson (Share Tables) . . 23 Rules and Usages (Stutfield) . 2? Stock Exchange Official Intelli- gence 2C Stock Exchange Values, 1885-1895 26 Willde}''s American Stocks . 26 Tables [see Exchange Tables, Inter- est Tables, Ready Reckoners, and Sinking Fund and Annuity Tables, etc.). Telegraph Codes — Ager's (list of) . . . 29 3C 30, 31 • 32 Miscellaneous (list of) The Premier Code . Trustees — Investment of Trust Funds . 7 Judicial Trustees Act, 1896 . 19 Marrack's Statutory Trust In vestments ... Trustees, their Duties, etc. Wilson's Legal and Useful Handy Books List .... 7-1C 11 Royal Exchange, London. NEW BOOKS. COMPANY FRAUDS' ABOLITION. Suggested by A review of the Company Law for more than lialf a eentury, By Richard Russell. Price !s. 6ci. Just Published, Third Edition, Price Is. net. BANKS AND THEIR CUSTOMERS. A Practical Guide for all who keep Banking Accounts from the Customer's point of view. BY The Author of " The Banks and the Public ". IVIAPS. NEW MAP OF THE WITWATERSRAND GOLD- FIELDS. Compiled by Messrs. 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