The dividend record on this common stock has been as follows: 1901 1906 1907 1908 5 per cent .5 1909 1910-1912 per cent 6 per cent Up to June 30, 1913, thirty-two cash dividends had been paid on this fictitious common stock, aggregating a total disbursement of more than $48,500,000. In other words, this enormous amount would have been available from operating revenues during the period 1901-1913 for increased wage payments to locomotive firemen and engineers and other labor, for additions and betterments, or for the reduction of passenger and freight charges, had the road been properly capitalized at the time of its reorganization. The annual dividend at 6 per cent upon the watered common stock of the Atchison, Topeka and Santa Fe Railway amounts to $5,160,000. This is $700,000 in excess of the total yearly compensation of locomotive engineers and firemen on the Santa Fe System. 7. When the Atchison was reorganized, $104,994,930 of preferred stock was also issued. Up to June 30, 1913, the company had paid twenty-nine cash dividends upon this stock as follows: 1899 1900 24 per cent 4 per cent .5 per cent Applying the method of valuation adopted in the preceding section, $79,812,946 of this preferred stock was "water." The dividend payments upon same have reached the enormous total of $54,871,393. The annual dividend requirement upon the fictitious preferred stock, amounting to $79,812,946, at 5 per cent per annum, is $3,990,647. In other words, were it not for the absorption of operating revenue by the improper dividend payments upon the preferred stock, more than 89 per cent of the amount which is now paid to locomotive engineers and firemen would be available from such revenue for increased wage payments and for other legitimate purposes. 8. If both classes of stock are considered together, it is evident that, as the result of the reorganization of 1895, the Atchison stock issues were inflated, without adding anything to the value of the property or to its earning capacity, to the amount of $166,096,184. Dividends are now paid upon this watered stock to the amount of $9,167,627 annually. This amount is considerably more than double the total annual payments by the Atchison to its locomotive engineers and firemen. THE PLIGHT OF THE RAILROADS. THE CAUSE OF THE RAILROADS' FINANCIAL DIFFICULTIES. The present financial condition of the railroads has not arisen from increased wage payments to employes or to lack of proper direction and economy in operation, according to an article by W. Jett Lauck, in the January number of the North American Review. The difficulties in which the transportation companies now find themselves have been caused by the dissipation of their resources by stock manipulation, by indefensible reorganizations, by the issuance of fictitious securities, and by the granting of large bonuses to stockholders and enormous fees and commissions to financial syndicates. The necessity of making large annual interest and dividend payments upon fictitious capitalization has absorbed the net revenues of the railroads. The profits arising from the increased work and productive efficiency of railroad employes, and from the superb ability and progress shown by those in charge of the operation of the carriers, have been lost through misguided or improper financial management. There is no prospect, Mr. Lauck concludes, for the permanent improvement of the tranpsortation industry, for a reduction in freight rates, or no hope for the proper advancement of the railroad employe, until some public agency such as the Interstate Commerce Commission is given power to regulate the issue of railroad securities. If authority is given to the railroads by the Interstate Commerce Commission to advance their freight rates, "without legislation looking to the financial control of the railroads, their action would be tanta. mount to placing the stamp of approval upon past financial excesses and mismanagement and leaving the way open for similar practices in the future." Mr. Lauck depicts the present situation as that in which the railroads, in asking the Interstate Commerce Commission for authority to advance rates, are begging the public to pull them out of the hole which they, by their unbusinesslike and "in defensible financial methods," have dug for themselves. Colonel Harvey, editorially commenting in the same issue, says that it is not merely "the plight of the railways that Mr. Lauck sets forth so comprehensively and admirably," but "it is the plight of the country and, in a sense, the plight of the administration." The remedy, Mr. Lauck points out, is not punishment of the railroads for the recklessress and cupidity of their financiers by withholding the increased income that is Lecessary for development, for that would be further injustice to the railroad operating managers and employes who are to be properly credited with the greatly increased efficiency of carriers, and to the public but the legislation that will "protect investors, consumers and railroad employes" in the future. The situation is one "which calls for the exercise of the best judgment that can be derived from common sense," is the further comment of Colonel Harvey, who adds: "And in resolving a problem of that nature full confidence in our belief can be felt in the determination finally reached by President Wilson." The situation, shorn of its political trappings and without its partisan coloring, is set forth in Mr. Lauck's exposition of the facts as one requiring common sense solution. Two questions, he points out, must be decided by the Interstate Commerce Commission in making its decision on the railroads' request. One is the possibility of further reduction of operating expenses; the other is the legitimacy of the financial needs of the railroads in the light of their operating and financial records. To meet heavier expenses and smaller returns Mr. Lauck explains how economies have been introduced which are shown in statistics of increased tractive power and increased ton milage as compared with freight train miles. But granting that these economies were sufficient to offset losses in revenue, there still remains the question of a fair return upon the capital actually invested in improved and added equipment and road bed. securities." Mr. Here is the crux of the question. Had there been no large stock dividends and stock bonuses, no enormous underwriting commissions and fees, and no inflated stocks on which dividends had to be paid, a different story could be told. Lauck cites a number of illustrations which "clearly demonstrate the fact that the financial direction of our railroads in the past has been as indefensible as the management of actual operations of the transportation companies has been efficient and praiseworthy," and that "the gains made in the operating efficiency of the carriers has been consumed in the payment of dividends and interest charges upon fictitious He states that "increases in property values and in earning capacity are frequently made the basis of new securities given to stockholders. A striking example of this is the recent stock dividend of 33 1/3 per cent, or $20,000,000, made by the Pennsylvania Company to cover uncapitalized additions and betterments paid for from income. Stock bonuses, or rights granted stockholders to subscribe to new issues of securities at par when they are selling in the market at a premium have been very common. Four of the leading railroads of the East gave away more than $99,000,000 during the period 1901-1910 in bonuses to their stockFolders. In the West during the same period, five of the principal railroads authorized stock bonuses amounting to more than $185,000,000. The aggregate amount of capital stock thus distributed by the railroads of the United States is enormous. This practice means not only unwarranted capitalization, but also a permanent absorption of operating revenues in the payment of dividends thereon. The effect, therefore, is to place a constant burden upon the railroad employe, the shipper, and the consumer. A number of large banks have been "The connection between banking syndicates and railroad security flotation has recently been a matter of public inquiry. granted the exclusive right to handle the bonds of certain railroad companies and have been practically without competition in fixing the commission charged for this service. By way of illustration, eight representative railroads in the East during the period 1900-1910 issued new obligations of the par value of $810,000,000. The market value of these bonds was $827,300,000, but the railroads actually received only $787,200,000. More than $40,100,000 was paid out in underwriting commissions, the greater part of which might have been saved had the transportation com. roads in the West in floating $491,000,000 of bonds paid $21,000,000 in underwritpanies sold their bonds on the open market. During the same decade, four leading "Ordinary stock watering and manipulation have played an spicious part in adding to the fictitious capitalization of the railroads. It is a matter of official record that when the two railroads which formed the nucleus of one of 100 per cent, equal to $44,428,330 in money, was declared. ing fees. even more con "Another_notorious case of stock inflation, which is also in the records of the Interstate Commerce Commission, is that of the Chicago and Alton Railroad. In 1899, when the so-called Harriman syndicate acquired control of the old Chicago and Alton Railroad Company, its capitalization consisted of $22,230,600 of stock and $10,779,850 of bonds. Seven years later, when this company and the Chicago and Alton Railway Company were consolidated as the present Chicago and Alton Railroad Company, the new company began its existence with a capitalization of almost $114,600,000. The only tangible asset which the new company acquired in addition to the old Chicago and Alton Railroad property was a lire of railroad fifty. seven miles in length which had cost the syndicate $1,350,000. The invested capital of the original companies at the time of the consolidation was by a liberal estimate only about $52,000,000. The sum of $62,600,000 in fictitious capitalization, therefore, was added by the Harriman syndicate without a single dollar of consideration. "Numerous cases might also be cited to show how the capitalization of our railroads has been inflated under reorganizations or as the outcome of expansions made for the purpose of securing monopoly control. Recent official investigations have shown that the New York, New Haven and Hartford Railroad, in a reckless attempt to monopolize the transportation facilities of New England, has within the space of twenty-five years, issued excess capitalization to the extent of $75,000,000 and has acquired and capitalized steam railroads, trolleys, and steamship lines with such disregard of their actual value and earring capacity that it is estimated that more than $8,000,000 of the operating revenues of the New Haven Railroad itself. are absorbed each year by losses on these unwise investments. A large railroad company of the Middle West, by an unwise policy of expansion, has within the last ten years lost approximately $32,000,000. Another leading western railroad which passed through a reorganization in 1909 had its securities inflated to the extent of $59,420,000, for which not a dollar was added to the value or earning capacity of the property. In the reorganization of another leading western railroad in 1895, fictitious capitalization was issued to the amount of $166,096,184 in pre ferred and common stock. The earnings of this railroad have up to the present time been used to pay dividends aggregating $112,000,000 upon this watered capitalization, and the absorption of operating revenues annually by dividend payments upon these unwarranted stock issues is $9,167,000. "It is for this reason that the railroads after several generations of increase in earning power are no better off than they were before. Year by year the growth in the earning power of the transportation companies has been capitalized in one way or another, and the development of the country has been steadily anticipated or discounted by the issue of new securities. Capitalization has been made to keep pace with profits." What is the best course to take? To destroy the market value of the securities would be a serious injustice to the small investor. To deny an increased income to the railroads would result in not merely the same thing, but it would still further prevent the railroad employe from getting more of the share of the results of the efficiency which he has in large part brought about. Mr. Lauck therefore concludes that higher rates ought to be allowed by the Interstate Commerce Commission, but that regulation of the financial operations of railroads should be assumed by the Federal Government. He says: "The burden which has been permanently placed upon the consumer and the railroad employe and stockholder by improper financing in past years must unfortunately, be largely accepted. What can be done is to prevent similar financial practices in the future, and to make sure that no further handicaps to industrial progress, and to the economic well-being of the general public are added to those already existing. Due profits and liberal returns should be assured to the elements of risk and foresight in the development of transportation facilities. Legitimate rewards, however large, should be guaranteed to managerial ability and to invested capital. But railroad executives and operating officials should not be required to devote their time and talents to the earning of dividends and interest charges on fictitious capitalization. The railroad employe should not have to be confronted with the statement that an increase in wages would result in the impairment of a vested interest by interfering with dividend and interest payments, when, as a matter of fact, this vested interest originally consisted of watered capitalization which has been urloaded by promoters, reorganizers, or underwriting syndicates upon the unsuspecting public. The consumer should not be compelled to bear the burden of a higher cost of distribution of commodities, or in other words, an increase in cost of living, arising from the same causes. The permission to the railroads to advance their freight charges, should, therefore, while safe-guarding the present holders of railroad securities, be accomnaried by legislation which would protect investors, consumers, and railroad employes." Why Engineers, Firemen and Hostlers Decline to Arbitrate. RAILROADS REPUDIATE ARBITRATION AWARDS. LABOR UNION OFFICIALS ASSERT THAT RAILROADS HAVE NOT ACTED FAIRLY. A peculiar feature of the threatened strike of engineers, firemen and hostlers on the western railroads is, that while the unions representing these employes have gone on record as favoring arbitration in past negotiations, they now positively refuse to submit the present dispute to an arbitration board for a decision. This marked change in the attitude of the Railroad Brotherhoods toward arbitration is attributed by the officials of these organizations to what they assert is a disposition on the part of certain railroad officials to not fairly apply arbitration awards when made. W. S. Stone, Grand Chief of the Brotherhood of Locomotive Engineers, says: "The Brotherhood of Locomotive Engineers in the past has favored arbitration for the settlement of all disputes between labor and capital, and, in fact, has been instrumental in assisting to have several laws enacted upon this subject. However, with our experience of the past few years, we have changed our views, and unless some plan can be devised whereby members of the Brotherhood of Locomotive Engineers can be assured that the award will be put into effect as handed down by the Board of Arbitration, there will be no further arbitration, so far as we are concerned. This has been brought about by the sad experience of the past three cases. "In 1910, we had a wage movement of fifty-three railroads in the Western territory. A settlement was reached through mediation, the Honorable Charles P. Neill, Commissioner, being the one to bring about the agreement, which has never been carried out in good faith by the railroads in the West; and the present wage move ment in the West is due partially to the fact that the men were deprived of what they were rightfully entitled to by the award of 1910. "In 1912, we had an arbitration in the Eastern territory comprising all roads east of Chicago and north of the Ohio River. This award was handed down in November, 1912, and at this time, after almost two years have elapsed, and the term of the arbitration award has expired, we are still striving to have some of the railroads put it into effect and pay their back pay that the men are entitled to under the terms of the award. "The Brotherhood of Locomotive Engineers and the Brotherhood of Locomotive Firemen and Enginemen recently had a case in dispute on the Georgia and Florida Railway, unable to reach a settlement. He proposed to leave the entire question in dispute to a board of arbitration. At the time this was proposed all committees and grand officers declined to accept his proposition on the grounds of the difficulty experienced in the recent arbitration in the East in having the award placed into effect. But the vice-president and general manager assured the committee that if we referred the questions in dispute on the Georgia and Florida to arbitration, that the award given would be properly carried out in its entirety, and that he was willing to give us his personal bond and a guarantee that this would be done. The employes were interly opposed to any arbitration, knowing what the previous experience had been in the East, and this objection on the part of the employes was very fully explained to the manager, and he immediately assured us that we need have no fear in this connection, and any decision rendered by a board of arbitration would be put into efect at once on the Georgia and Florida Railway; and he sealed this pledge by stating that he would not only give us his promise to do so as general manager of a property, but would give us his word of honor as a Southern gentleman. Icause we had had some bad experiences along the line of arbitration, and still de"Notwithstanding this assurance on his part, we were a little bit skeptical beBut after several conferences we decided to call on the Honorable William L. Chambers, United States Commissioner of Mediation and Conciliation, and he came to a conclusion and decided to adjust the matter through mediation, but was unable to effect a settlement. It was then decided to place the matter before a parties consented thereto. The board convened in 12 per cent increase. This did not bring them up to the standard wages paid in Augusta, and after several days rendered an award granting the employes about a that territory. However, a few days afterwards, this same general manager, reman, served notice upon our arbitrators and our grand officers that he had appealed gardless of his promises both as manager of the property and as a Southern gentlefrom the decision of the Arbitration Board to the United States Court and so far as the award is concerned, it has not been placed into effect yet. It is in the courts and probably will be there yet for the next year or two. clined. can readily understand why our men are bitterly opposed to any further arbitra"With this experience in the last three cases we have had under arbitration, you tion, unless some plan can be devised whereby the award will be placed into effect without any quibbling and without any sharp practice on the part of the managers of the different railroad properties subject to the arbitration." W. S. Carter, President of the Brotherhood of Locomotive Firemen and Enginemen, says that he is but expressing the sentiments of the membership of that organization when he states "there will be no more arbitrations of railroad wage disputes until the men are convinced that railroad officials will not repudiate arbitration awards." President Carter says that he has always advised arbitration in the past when strikes were threatened, and that he was one of several representatives of organized labor that appeared before a congressional committee advocating the enactment of the present Federal Arbitration Law, known as "The Newland's Act," but he now believes that law to be prejudicial to the interest of railroad employes. "So long as the law permits either party to a wage dispute to administer an arbitration award, growing out of that dispute, the award will be applied in a partisan manner, and we have ample evidence that some railroad officials do not hesitate to deliberately misapply arbitration awards," says Mr. Carter. "There should be some authoritive representative of the Federal Government to insist that an award be applied on all railroads concerned, as interpreted by the arbitrators, and so long as railroad officials are permitted to place their own interpretation on such awards, and to apply awards to suit themselves, and thus defeat the real purpose of arbitration, the public should not insist that the engineers, firemen and hostlers submit the present wage controversy to arbitration." Mr. Carter further states that "while the arbitration of the firemen and hostlers wage dispute on eastern railroads in 1913 resulted in an award not entirely unsatisfactory to a majority of the men, the manner of applying that award has made radical opponents of arbitration of more than 30,000 men who voted in favor of arbitrating the eastern wage dispute of firemen and hostlers." He asserts that "after the signing of an agreement to arbitrate all matters in dispute, which form of arbitration was prepared by the representatives of the Federal Government, and after the arbitration hearings had commenced, the Toledo, St. Louis and Western Railroad management served notice that it would not be bound by the arbitration and desired to withdraw therefrom. The Federal Board of Arbitration took this matter under consideration and officially decided, which decision was made a part of the record, that the Toledo, St. Louis and Western Railroad could not legally withdraw from the arbitration at that late date." Mr. Carter asserts that the Toledo, St. Louis and Western Railroad has never applied any portion of the award and that in this particular case the Federal authority, to whom the matter was referred, decided that the observation of an arbitration award under the present Federal law is simply a moral obligation. "Of what effect is a moral obligation on a railroad corporation?" exclaimed Mr. Carter. He says that other railroads that joined in the eastern arbitration of 1913, through the activity of the Managers' Committee, have succeeded in evading payment of wages and application of working conditions secured by that arbitration award. "The names of 'hostlers' have been changed to 'watchmen,' 'foremen,' etc., by some railroads for the express purpose of avoiding payment of the wages fixed by an award for 'hostlers.' In one instance a Philadelphia and Reading official discharged a hostler because he demanded that he be paid the compensation fixed by the award, and officials of that railroad compelled firemen to continue cleaning engines for months after the award bcame effective, under penalty of dimissal, although the award specifically relieved firemen of that work. "When the award was made public, differences of opinion as to the intent of certain portions of same immediately arose. The Firemen and Hostlers Committee, being willing to have the matter adjusted equitably, proposed to the Managers' Committee that disputed points be referred back to the Board of Arbitration to interpret their own language; but the Managers' Committee insisted that the local committee on each road should take up with the management of such road the interpretation and application of the award. The Managers' Committee then insisted that specific instances, wherein the men complained that the award was not being properly applied be prepared and presented to the Managers' Committee, when the matter would then be adjusted. This was done and still there was no disposition to permit the Board of Arbitration to interpret its own awards. Nearly six months after the award became effective, with consent of the Managers' Committee, the Board of Arbitration again met and decided points in dispute. And then the intent of the interpretation of the award was disputed, and so the matter has been prolonged until we find the contention still engaging the attention of committees and representatives of labor organizations long after the award has expired, and the award not yet applied in many instances.' |