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to enact laws for the public welfare and who are desirous of reaching the underlying causes of the present conditions brought about by financial and operating management of the railroads of the country, to these representatives of the people can be commended the following clean-cut statement of the Interstate Commerce Commission:

A proper return in net operating income might not result in a net corporate income sufficient to meet a carrier's interest and dividend requirements.

This succinct statement is to be found on page 362 of the commission's report in the Five Per Cent case, No. 5860. It is hidden away in a third paragraph under the subtitle, " Net operating income and net corporate income," and follows a discussion of "The test of the sufficiency of revenues. It does not even begin the paragraph, but is preceded by the statement that "net corporate income is the amount remaining for dividends and surplus after interest, leased line rental, and other charges have been paid."

A "proper" return in net operating income may be regarded as having been secured in the process of producing transportation when the net result is just and fair compensation to the dollars invested for the work they perform. Net operating income has consideration only for the dollars actually invested and engaged in the task of production. It has nothing whatever to do with capitalization; that is, with " paper claims " as to the amount invested. These paper claims almost universally are far in excess of the number of dollars actually at work.

When the owners or holders of these paper claims insist that the dollars these claims represent, which are not and never have been at work in producing transportation, shall be supported also by the production of the invested dollars to the extent of an equal return, then an "improper" return is the result. Such a condition ensues when the railway corporation brings forth its inflated paper claims to investment-its capitalization-and demands a return upon all these from net operating income.

The commission says in its report already referred to:

Interest and dividends are computed upon the par value of securities, and this value may differ widely from the amounts actually invested in the property on which an adequate return is due. This is especially true of capital stock, which is shown as a liability at par on the books of the carriers, although the par value may have little or no relation to the amount of cash invested in the property.

The history of the American railroads even down to the present day is replete with instances of practice upon practice by which capitalization has been increased far above the amount of capital actually invested, and in consequence without any corresponding increase in the earning ability or value of the properties. Almost as numerous instances could be cited along with increased capitalization where even the capital "invested" has been dissipated, thus multiplying to an even greater extent the productive burden that is placed upon the remaining capital at work.

The Rock Island, heavily burdened as it was with excessive capitalization, had more than $50,000,000 of its resources dissipated by the Moore-Reid management. Its stock at that time contained 30,000,000 more paper-claim dollars than there were real dollars at work. An attempt to increase this already fictitious capitaliza

tion by another 150,000,000 of paper-claim dollars broke down through the utter inability of the working dollars to carry the burden. In the case of the Chicago & Alton the earnings of the working dollars had been so great as to permit the management to put to work through investment in the property some of these surplus dollars. All these were represented by 22,000,000 paper-claim dollars which Mr. Harriman caused to be issued from the printing press, and in addition, the press having once started printing, there came forth as by magic a total of more than $62,000,000 of securities representing no investment of capital.

The Chicago & Alton deal, of unsavory remembrance, which caused President Roosevelt to stigmatize the most prominent participant as "an undesirable citizen," is one of many illustrations in railway history of inflation of capitalization. There the four modern buccaneers secured control of a majority of the stock of the Chicago & Alton and ran up its capitalization from $38,000,000 to $114,000,000. Its bonds they purchased for about 65 cents on the dollar, and then they turned around and sold at least $10,000,000 of these very same bonds to insurance companies in which they exercised an influence for as high as 96 cents on the dollar, netting the perpetrators as much as

31 cents on the dollar.

Such transactions as this Chicago & Alton deal never have met with the approval of self-respecting railway officials. Even the personal attorney of one of the participants, in the final argument of the subject before the Interstate Commerce Commission, stated that

When this thing was done it was not considered unethical, but we realize that in the changed public opinion and in the changed conditions now it would not be a proper or legitimate action to-day, and the man who did it then would not undertake to do it to-day.

This "repentance" does not alter the fact that by just such methods huge earnings have been sponged out of, and continue to be sponged out of, our railroads and squeezed into the hands of private individuals and "families." These and like methods account for not a few of the enormous private fortunes of to-day. At the same time the railroads have been burdened with a dishonest capitalization upon which it is insisted that the public must pay dividends, or, rather, must bear a rate of transportation that will permit of sufficient earnings to meet these unjust capitalization charges.

The St. Louis & San Francisco capitalization account contains, at the lowest estimate, more than 100,000,000 paper-claim dollars unrepresented by any working dollars by which to earn dividend returns. At least $46,000,000 of its $50,000,000 outstanding stock is fictitious. This, along with other elements in "the indefensible financial policy" of the Frisco had resulted in the improper diversion of net revenues of the railroad to a sum "which approximates between $3,500,000 and $4,000,000 per annum," says the Interstate Commerce Commission.

Just how much fictitious capitalization is in the account of the Union Pacific can probably never be determined. As far as our investigation could get into the intricacies of the capitalization of this road it is a conservative estimate to place the amount of paperclaim dollars somewhere around $75,000,000 or $100,000,000. The 48 per cent profit shown in my discussion of construction companies in "Property investment" as having been made by the directors and

promoters was largely in stock issues and Government land grants, this cost of construction being paid for in large part by the firstmortgage bonds of the company and the second-mortgage bonds loaned by the United States Government. It is known that during this construction at least $36,000,000 in common stock was issued having no investment value, and that about $14,000,000 of similar fictitious value was injected at the time of the consolidation of the Union, Denver, and Kansas Pacific roads.

Approximately $35,000,000 of the Missouri, Kansas & Texas Railway represents fictitious capitalization, including $19,500,000 injected upon the acquisition of the International & Great Northern; $6,000,000 resulting from the looting of the road by the Jay Gould crowd in the early eighties; $10,000,000 in the reorganization of 1876; and about $1,000,000 at the time of its construction.

The capitalization of the Duluth, South Shore & Atlantic contains about $18,000,000 of fictitious valuation injected upon the consolidation of small branch lines.

At least $17,000,000 of the capitalization of the Missouri Pacific contains securities with no equivalent in value of capital invested.

Take the Louisville & Nashville. The commission states that at least $16,000,000 too much is charged to its cost-of-road account, this sum including discounts on stocks and bonds, expenses for the sale of securities, improper charges to profit and loss, at least 10 stock dividends, one of which was equal to 100 per cent, cost of construction inflation, revaluations, and so on.

Referring to the Reading Co., the head corporation in the anthracite monopoly and which combination the courts only recently decreed should be dissolved as being in defiance of law, the commission says:

Here is an example of a huge issue of securities, amounting to nearly $250,000,000, representing in their capitalization no value which did not previously inhere in the securities of the corporations absorbed.

The commission adds:

It is difficult to discover any economic justification for the existence of these holding companies and for their enormous issues of securities.

This Reading Co. was organized for holding not only securities of railway companies but also stocks and bonds of industrial corporations. The capitalization of the Reading Co. having been issued for the purpose of carrying these other company securities, there is resulting duplication and nearly always inflation. There is inflation when the par value of the total capitalization of the holding company is greater than the par value of the securities of other companies which it holds. There is inflation when the par value does not represent an equal amount of capital invested.

Take the New York Central & Hudson River Railroad Co. The commission, in its "Intercorporate relationship of railways," says:

The capital stock contains $57,000,000 par value for which nothing was ever paid. The dividends paid upon this capital stock for the last 40 years will probably average 6 per cent. During that time there had been actually paid in dividends to the holders of this $57,000,000 of stock at least $120,000,000. Had the New York Central & Hudson River Railroad Co. invested them in its property the funded debt of that company might have been reduced by $120,000,000, not having reference to interest. If account be taken of interest, the amount would be much larger. The company had, therefore, as a result of this transaction a capital stock of $57,000,000 in excess of what it would be and either a funded

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