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ajJGUST J, 1907
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The Commoner.-
WATERLOGGED. STOGKS OF AMERICAN RAILWAYS
Mr. A. B. Stickney, president of tho Chicago
Great "Western, recently discussed railway rates
toefore the Transportation club of St. Paul. Tak
ing tho complete statistics for 1905, he found
that the average rate of interest paid on all tho
railroad bonds in the United States was 3.G6 per
cent, and the average rate of dividends paid on
all tho railroad stock was 3.02 per cent.
"Here," said Mr. Stickney, "is the average
margin of profit of all the railways in the United
States. There is no other business in
the country which is done on so small a margin
of profits as 3.02 per cent dividend. No other
invested capital gets such -small returns as the
capital invested In railroads."
If anybody asks how much of the stock upon
which the average dividends of 3.02 per cent
are paid is water, and, therefore, entitled to no
dividend whatever, they reply that there can't
be any water because the capitalization per mile
of American railroads is much less than that of
English railroads which is exactly like arguing
that Florida Is an ideal sumni6r resort because
it Is much less disagreeable than Panama.
But one fact is rather significant... That is,
there are not many spots in the vast mass of cap
italization where you can sink a drill without
striking water.
Take, for instance, that conspicuous group
of railroads known as the "hard coalers."
The anthracite industry naturally invited
monopolistic ambition. The supply is confined
to a region in Pennsylvania all of which could
be put in an area twenty-two miles square. This
region, roughly speaking, is only 100 miles from
Philadelphia and 150 miles from New York.
Transportation, of course, is the key.
Eight railroads tap tho territory namely, the
Reading, Erie, Pennsylvania, Lehigh Valley, Del
aware & Hudson, Delaware, Lackawanna &
Western, New York, Ontario & Western, and the
Central of New Jersey. There were, early, va
rious fragile pools and gentlemen's agreements;
but the first really important step toward mon
opoly was made in 1871 by F. B. Gowen, then
president of the Reading. Ho began buying all
the independent coal lands he could get hold of.
" 'He seems to have had the right idea -.namely,
that it doesii't make any particular difference
what price. you pay for property provided it en
ables you to get a monopoly of a staple com
modity. Having a monopoly, you can easily
make consumers pay dividends on the purchase
price. He bought about a hundred thousand
acres of undeveloped coal lands, therefore, or a
third of the amount in sight. In so doing he
loaded up Reading "with an increased debt to the
amount of $50,000,000. Hereafter there ex
isted 50,000,000 additional motives for mon
opolizing hard coal.
Tho result was a pool in 1873, among the
hard coalers, limiting output and fixing prices.
Tlhis continued, with many vicissitudes, until
1884, when the Pennsylvania broke away. -The
price of coal fell, and Reading, with its load of
debt representing undeveloped coal lands, went
into the hands of receivers.
When an individual goes into bankruptcy
the water is squeezed out of him. When a rail
road goes into bankruptcy not only is tho water
not squeezed out, but more is put in. The pro
cess is called "reorganization." Every impor
tant railroad reorganization involves an inflation
of capital.
Reading was reorganized and set going
again. A. A. McLeod came Into control, and
promptly took up the plan to monopolize hard
coal. Some brilliant financiering followed. Un
fortunately the courts upset; some of tho Mc
Leod leases. The whole structure fell. The fall
touched off the panic of 1853.
Once more Reading went, Into the hands of
receivers and was reorganized. Of course, none
of the water was let out. On the contrary, more
was put in.. This time the .capitalization was
lifted above $300,000,000, or about $316,000
per mile of road.
This reorganization, however, brought in
the powerful friendship of M,r. Morgan. Thanks
largely to him, a spirit of amity began to per
vade the hard coal roads; but this better under
standing among the carriers did not Increase
the happiness of the "independent" operators
who depended upon them 'for transportation..
Certain of hese operators projected an inder
pendent rafftpad to tidewater. But the project
failed. Ut
Still the'independents were dissatisfied with
freight rated". Presently, led by the Pennsyl-.
vania Coal company, they projected another
road to be built along, the old Delaware and-
Figures Showing How Countless Mil
lions Have Been Made by a Scratch
of a Pen. Will Payne in Everybody's
Hudson canal. The Pennsylvania Coal com
pany was a comparatively small concern. Its
output amounted to only flvo per cent of tho
total. It had $5,000,000 capital stock a good
deal of it scattered in rather small holdings.
Morgan & Co, quietly gathered In tho majority
of the stock.
Now just what Morgan & Co. paid for that
$5,000,000 of Pennsylvania Coal company stock
has never boon disclosed; but tho house turnod
the stock over to tho Erie railroad, which Issued
thoreforo $32,000,000 of four per cent bonds
and $5,000,000 of four per cent preferred stock.
It was supposed that this $5,000,000 of pre
ferred stock represented the bankers' commis
sions, or bonus; but that is neither hero nor
there. The Pennsylvania Coal company was tho
key to the monopoly of hard coal. Tho monopoly
has been in perfect working order evor since. In
terest and dividends on tho securities issued by
the Erie road in payment for Pennsylvania Coal
company stock amount to sixty cents on each
ton of that company's output. But what of that?
They might as well have amounted to $1.60.
Consumers of monopojized hard coal would have
had to pay it.
THE WATER-LOGGED ERIE
Erie's previous experiences In the stock
watering lino had been extensive and pictu
resque. From 1868 to 1872, In the able hands
of Daniel Drew, Jay Gould, and James FiBk,
its share of capital was increased from $17,
000,000 to $78,000,000. Nearly all of this In
crease was mere flat, put out for speculative
purposes and with scarcely a pretense that any
actual value lay behind the issue. Reams of
stock were printed and put out by night for tho
purpose of breaking Commodore Vanderbilfs
corner in tho shares.
In 1895 the road, being bankrupt, under
went a typical reorganization, conducted by Mr.
Morgan. There were outstanding, for example,
$33,597,000 second mortgage bonds. In tho re
organization these bonds received seventy-five
per cent of their face value in now four per
cent bonds, and fifty-five per cent in new four
per cent preferred stock, or 130 per cent in all.
Tho old $77,837,000 bogus common stock was
t converted into a like amount of new common
stock. 'there was issued $63,000,000 of first
and second preferred stock, a large part of which
was distributed as sweeteners iind bonuses to
reconcile the old security holders
In defending the capitalization of the hard
coal roads in 1901, Mr. McLeod pointed out that
four of them namely, Reading, Erie, New York,
Ontario & Western, and Lehigh Valley had
outstanding $382,554,000 of stock upon which
no dividend .had ever been paid and which had
a merely nominal value in the market.
So, if this was water, who was hurt by It
no dividends being paid and the stuff being of
little value? Why bother about the old rags
heap? But today dividends are paid upon all
of this stock with the exception of Erie com
mon. Last year common seemed so bright that
the stock sold at above $50 a share, while
Reading's watered common sold at $164 a share.
The Baltimore 4fc Ohio and the Lake Shore roads
have jointly bought over $60,000,000 of Read
ing stock, out of a total of $140,000,000
thereby passing it on toward a form of capitall
, zation with Jlxed charges. The New York, New
' Haven & Hartford has bought $29,000,000, or ,
one-half, of the common stock of the New York,
Ontario & Western, thereby putting it also in
the way of 'becoming a form of capitalization
bearing fixed charges for these purchases by
one road of the stock of another are generally
financed in th3 end'by an issue of- bonds.
THE LOOT IN UNION PACIFIC
How could all this 'watered stock be, so
handsomely supported and become so agreeably
valuable unless the railroads were charging ttie
public for coal and for transportation much more
than enough to yield a reasonable return ufcon
the actual investment
After the Credit Mobilier scandal, congress
investigated ttyp Union Pacific and, found that
it had cost "the 'contractors a little under $51;-'
000,000 to build the road.
For this there was issued
Government subsidy bonds $ 27,000,000
First mortgage bonds. , 27,000,000
Land grant and income bonds.... 18'000'.000
Common stock. ...y. 30,000,000
Ttal ' $108,000,000
The Northern Pacific fared oven better in
this regard, a ho govornmont gave it 40,000,000
acres of public lands a piece of generosity
which in no wfso restrained tho stock watering
proclivities of tho builders and reorganize.
The road has been reorganized three times
and is now capitalized at more than $65,000 a
mile, excluding tho bonds that It issued Jointly
with the Groat Northern to pay for Chicago,
Burlington & Quincy Htock. Canadian Pacific
is capitalized at only $29,000 a mile. Northern
Pacific's funded debt por mile, excluding tho
Burlington bonds, is grcator than the entire cap
italization per mllo of the Canadian road. To
understand how Northorn Pacific's capitalization
has been boosted to this figure wo need only
glance at tho last reorganization. There were
$42,000,000 of first mortgage bonds outstand
ing. In tho reorganization:
Each $1,000 bond received $1,350 In new
prior lien bonds.
All second and third mortgage bonds re
ceived 11 8 & por cent of face value in now prior
lion bonds and fifty per cent value In preferred
stock.
Each $1,000 bond recolvod $1,685 in new
securities.
Tho old stock, practically all water, was
exchanged for now stock of tho same amount.
Tho Atchison, Topeka & Santa Fo has been
' reorganized twice. In the last reorganization
tho old gonoral mortgage four por cent bonds
received seventy-five per cont in new gonoral
mortgage fours and forty por cont In now ad
justment fours. Thus $129,320,770 was con
verted Into $148,718,983 In new fours. Old
second mortgage "A" bonds received 113 por
cont in now proforred stock. Second mortgage
"B" bonds received 118 per cont in now pro
forred stock.
Of tho "A" and "B" bonds there were $87,
937,500 outstanding, and thoy drew four per
cont a year intorcat. Tho holder paid lira caU
assessment of four por cent, and recolvod 99t
869,375 of now preferred stock which draws five
per cent a year In dividends. Tho old common
stock, about all water and of very little value
at the time of tho reorganization, was ex
changed for the same amount $102,000,000
of new common stock. Tills new common stock
now draws five por cont a year in dividends, and
until the recent deplorable slump in stocks it
sold above par.
Thoy will tell you that it would not bo
fair to squeeze out tho water in a reorganiza
tion. For example, a great many small Inves
tors had bought Union Pacific, Northern Pacific
and Atchison stock during boom times. Times
turned bad. The roads could no longer carry
the overcapitalization and tho profitless branch
linos with which financial geniuses had loaded
them. Bankruptcy followed. But the small,
Innocent Investors must not bo frozen out. They
must be permitted to exchange their old stock
for new, and so given a chance to recoup when
good times come again. Such Is tho argugment.
As a matter of fact, it doesn't work that
way. The ordinary Innocent Investor gets fright
ened when he sees the road approaching in
solvency, and dumps his stock on a falling mar
ket for what little It will fetch; pr ho is pinched
in ills own small business and has to sell; or
ho can't pay tho assessment. In any event he.
throws over the stock. Tho opulent "reorgani
zation syndicate" or individual financiers scoop
it in.
In 1902 the Messrs. Moore and their friends
bought up $70,000,000, in round numbers of the
stock of the Chicago, Rock Island & Pacific
which had paid from two to three and a half per
cent a year in dividends through tho hard times.
By the simple devices of a lease and a liolding
company they "converted this $70,000,0070 bf
Rock Island -into '; "' '-
Four per cent bonds .- $ 70,000,000
Four, percent preferred stoclcjy,?. . . 49,000,3)00
Common stodkrv .urov. . 70,00ft;000
ul -
a oi
$189,000,000
. In short;, capjtaliza.tjon, , of $70,0jQQ000
was converted intp a capitalisation of $X89"
000,000 out o fraud &nd w'iuiqut adding a single
dollar to the actual mvetme in the road' itself.
And this $189,000,000 enters into 3Ir.
Stickney's ' calculation as a 'part of that'poor,
starved railroad capital that gets hardly any
return because rates are so low.
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