4

vania.1 The Cleveland Railway 5% bonds are part of an outstanding issue of $5,495,000, are secured by a first mortgage on all the lines, and are followed by $25,784,900 capital stock representing property. The company operates, under excellent franchise arrangements, the entire street-railway system in Cleveland, Ohio." The Detroit Edison first 5% bonds are part of a closed mortgage for $10,000,000, and are secured by a first lien, direct or indirect, on all the property and franchises of the company in the city of Detroit. The replacement value of the company's property is estimated as somewhere near $31,000,000. The company does all the commercial electric-lighting and industrial-power business in Detroit, Michigan. The Laclede Gas Light first 5% 1919 bonds are part of a closed first mortgage for $10,000,000, and are followed by $12,500,ooo junior bonds, by $2,500,000 preferred stock, and by $10,700,000 common stock paying dividends of 7% per annum. The company has an unusually strong franchise, and does all the gas business in St. Louis, Missouri. It is to be remembered that no issue of publicservice corporation bonds, or of any other kind of bonds, is perfect in all respects. Each issue must be judged after taking into consideration all the factors entering into its safety.

In the early days of public-service corporation bond issues, conservative bankers, in their desire to make an issue as strong as possible, often drew up a financial scheme which was Financial plan too narrow and too rigid. For instance, many of the corporation bond issues were limited in total amount authorized to a figure which later proved to be entirely inadequate

should be broad, flexible

and firm

1 See Poor's Manual of Public Utilities (1915), pp. 781, 785, and 2265, and Railway and Industrial Section of the Commercial and Financial Chronicle, June 26, 1915, p. 159.

2 In the valuation of the property by Judge Taylor, as a basis for the franchise granted in 1909, $3,615,844 was allowed for franchise value. (See Electric Railway Section of the Commercial and Financial Chronicle, May 22, 1915, p. 31.)

'Poor's Manual of Public Utilities (1915), pp. 862-64, and Electric Railway Section of the Commercial and Financial Chronicle, May 22, 1915, p. 31.

Information from dealers. The company is having made, for the Michigan Railroad Commission, an appraisal of its property.

5 Poor's Manual, pp. 1894-97 and 2252, and Railway and Industrial Section of the Commercial and Financial Chronicle, June 26, 1915, pp. 147-48, and dealers' circulars.

• Poor's Manual of Public Utilities (1915), pp. 1099-1100, and Railway and Industrial Section of the Commercial and Financial Chronicle, June 26, 1915, p. 154.

for the needs of the corporation. Modern practice favors an authorized issue large enough to take care of all the legitimate future needs of the company, but limits the actual issue of bonds in such a way as to keep the debt reasonable compared with the value of the property and otherwise make secure the loan. This enables the corporation to finance on a satisfactory basis reasonable extensions of its plant and service, and at the same time it protects investors.1 In general, it may be said that the financial plan of a public-service corporation should be at one and the same time broad, flexible, and firm.

One thing more remains to be said. The prices of public-service corporation bonds during the past ten or fifteen years, like the Prices of public- prices of all other bonds, have shown a considerable decline. This decline has been much less in the

service corpo

ration bonds case of public-service corporation bonds, however, than it has been in the cases of state, municipal, and railroad bonds. Even since the war, some of the very strongest publicservice corporation bond issues, like New York Telephone 4 per cents, Cleveland Railway 5 per cents, and Detroit Edison 5 per cents, are selling near the highest prices at which they have ever sold. This is a recognition on the part of investors of the various features of strength and stability which we have tried to point out in this chapter.

2

Final test is willingness of bondholders to take the

property for the bonds

As a final word, we would say that the issue of public-service corporation bonds based on a property and business which the bondholders would be glad to take, if necessary, for the bonds is the issue which investors should be willing to buy.

1 For further elaboration of this idea, see Stone & Webster, Public Service Journal, August, 1914, pp. 99–106.

2 Some of the less well-secured bonds, on the other hand, and bonds on some of the smaller properties have shown since the beginning of the war a considerable decline.

CHAPTER VII

INDUSTRIAL BONDS

INDUSTRIAL bonds, as the term will be used in this chapter, comprise bonds of manufacturing and trading con- Definition of

cerns.

industrial bonds

development of industrial

The issue of industrial bonds is a development mostly of the past fifteen years. The very existence of a form of industrial organization suitable for public financing is comparatively Origin and recent. In the early history of this country, business combinations took the form of partnerships.1 Not concerns until 1811, when the New York Legislature passed a General Incorporation Act, did the movement for carrying on business by means of the corporation attain any importance. This act was followed by similar legislation in other States. At the beginning of the nineteenth century, there were in America probably not more than one hundred corporations of which at least one half were in Massachusetts. By 1840, corporations had multiplied "with a flexibility and variety previously unknown."4 Among the earliest industrial corporations of importance later, were the Standard Oil Company of Ohio organized in 1870, the Westinghouse Electric and Manufacturing Company incorporated in 1872, and Swift & Company,"

5

6

1 Robert L. Raymond, in Harvard Law Review, vol. xvi, p. 8o.

2 Laws of New York 1813, vol. 1, p. 245. (34th Session, chap. LXVII, passed March 22, 1811.) The first business corporation in the United States, however, was chartered in Pennsylvania in 1768: "The Philadelphia Contributionship for Insuring Houses from Loss by Fire." (Laws of Pa. chap. DLXXVI.) See Harvard Law Review, vol. ¤, p. 165.

Public Acts of Connecticut 1836-43, chap. LXI, p. 49, approved June 10, 1837. Laws of Michigan 1837, no. CXXI, approved March 22, 1837. Until 1851, no corporation could be organized in Massachusetts without a special act of the legislature. A general law governing the organization and conduct of corporations created by special act was passed in 1808. (Stats. 1808, chap. 65.) See Report of the Committee on the Corporation Laws (1903), p. 16. P. F. Hall, The Massachusetts Business Corporation Law of 1903 (Boston, 1908), p. 1.

Francis Lynde Stetson, in Atlantic Monthly, vol. cx, pp. 31-32.
Poor's Manual of Industrials (1913), p. 1615.

Ibid. (1914), p. 1112.

Ibid. (1914), p. 955.

incorporated in 1885. The combination in one form or another of the interests of individual corporations was a natural step from this. Between 1899 and 1902, the movement attained large proportions. During this period the American Can Company, the American Woolen Company, the International Harvester Company of New Jersey, the United Fruit Company, and the United States Steel Corporation were formed by combining the business of many other corporations. Such units as these were large enough to need financial assistance from the public and important enough to appeal to the public with chance of success. In 1910, according to Poor's "Manual of Industrials," there were outstanding for the account of manufacturing and miscellaneous companies bonds amounting to $2,585,694,207 and stock amounting to $8,233,035,721, a total capitalization of $10,818,729,928.2

Fluctuating

nature of the business done

by manufactur

concerns

In discussing industrial bonds, the first great difference which strikes one between such bonds and practically all other classes of corporation bonds is the greater degree of fluctuation in the business: that is, whereas the gross business of steam railroads is likely to fall off in periods of deing and trading pression from five to fifteen per cent and the business of street-railway, gas, or electric light and power concerns varies in times of general depression from a small decrease to an increase, say, between five and ten per cent, the profits of industrial concerns at such times are likely to show a decline often of between twenty and fifty per cent. We give in the tables on pages 253-55 the item corresponding most nearly to net earnings of some of our leading industrial concerns engaged in many different kinds of business for the years 1903 and 1904, 1907 and 1908, and 1913 and 1914, together with percentage of change.3

The total period between 1903 and 1914 is too short to be conclusive or to be much more than an indication as to the fluctuation in any given business. Owing to the fact that very few of our large industrial concerns reported earnings much before 1903, it has been thought hardly worth while to go back of that date. An examina1 For organization of above corporations see Poor's Manual of Industrials (1914), pp. 33, 102, 1008, 1041, 1296.

2 Ibid. (1910), Introduction, p. x.

For combined table showing percentage of change in net earnings for the three periods, see Appendix, pp. 308-309.

• Two months estimated.