LETTER VI
My dear Judd:
Figure to yourself a man pumping water from the ground, filling a tank to supply his house. There is an abundance of water, and the pump is big and powerful, and every time the man pushes the handle many gallons go rushing towards the tank. The man works all day, yet when he goes to the house in the evening, he discovers there are only a few drops of water in his tank. Some men have tapped the pipe, all along the way, and have diverted the water to their own tanks; so the man has to supply hundreds of gallons to others before he can get a few drops for himself. Would you not say that it was worth while for that man to find out about those tap-lines; how much they take off, how they got to be there, and by what right they remain?
Well, Judd, that is the position of the American laborer and the American farmer. The tap-lines are called rent, interest, dividends, profits, royalty, taxes, tariffs, speculation, manipulation, inflation, stock dividends, stock watering—a vast tangle of pipes. Let us pay one more visit to the jungle of Wall Street, and trace a few of these biggest tap-lines, which make it necessary for you to break your back all day pumping water for idlers and parasites, before you can get a mouthful to drink.
When they teach you about corporation finance in high school and college, this is how they picture it: Some men put their savings, earned by honest labor, into a company, and buy machinery, and manufacture goods, and sell them at a competitive price, and so of course the profits belong to them, and it all is fair and square, and a beautiful system, under which the public gets an abundant supply of cheap goods. Such a pretty picture these capitalists manufacturers of school text-books prepare—with money they get from Wall Street, and which they parcel out, in the form of commissions to school boards and school superintendents!
But what are the real facts? Well, the first thing the big corporation financier does is to seek out some form of special privilege, some opening through which he knows that he can make quick and certain profits. Understand, I am not talking about the fake schemes, got up by fellows whose purpose is to unload worthless stocks. The Department of Justice estimates that such operations have taken three billion dollars from the public since the war; but that is merely small change, compared with the gains of the real insiders, the perfectly legal and respectable gentlemen who finance our business affairs.
Perhaps it is a franchise or public privilege you are seeking; in that case you buy it from a legislature or city council. Or perhaps it is land; in that case you employ shrewd lawyers and commit wholesale evasions of public land laws. Or you buy tariff favors; or you get a patent from an inventor by giving him a few shares of stock; or you get secret favors from railroads or other corporations, by giving stock to the officials. There are so many ways and combinations of ways, that I should need a volume to tell about them. Whatever the “good thing” may be, you get it, and then you take it to your friend the big banker, and “let him in” on it. He gives you in return a supply of that life-blood of industry which he dispenses—not real money, of course, but credit, based upon the real money which other people have deposited in his bank. With this you can go out and order all kinds of real wealth—an office, a factory, raw materials, labor—everything will come to you, Aladdin’s magic was nothing compared to it. Carpenters will come, Judd, with their saws and hammers and toil for days and months and years; it is a “job!”
Profits are certain—you have seen to that; and on the basis of this certainty you have fixed your capital. Understand, you never put up a dollar of real money—the big insiders never do, they would laugh at the idea. You fix your capital as a function of your expected profits. That sounds complicated, but is really very simple. Wall Street profits average about 7%; therefore you fix your capital stock at fourteen times what your profits are going to be. After you get started, and your graft works, you may find you are making twice what you expected; if that happens, you call your capital twice as much. If you make $70,000 during the year, your capital is $1,000,000. If next year you make $700,000, you increase your capital to $10,000,000. If you make $7,000,000, your capital becomes $100,000,000. You, poor old laborer, will surely think I am joking in such a statement; you cannot conceive such things taking place outside of a dream. Yet, I pledge you my honor, this is the regular routine of Wall Street today, and I could fill pages of this book with a list of companies which have done this very thing, quite as a matter of course.
Take the Standard Oil Company of New York. I recall how, before the war, this concern’s stock was quoted on the market at $700 a share, or seven times its par value. What did that mean? It meant that the Rockefellers were old-fashioned, and afraid of the new corporation tricks; they kept their concern at its old capitalization of $15,000,000, while its profits were 70% on that amount. But the time came when the public clamor got so intense that the Rockefellers had to hide like the rest; and what did they do? Well, in 1913, the Standard Oil Company of New York declared a “stock dividend” of 400%; that is, it gave its stockholders four additional shares for each one they already had; so the company now had a capitalization of $75,000,000, where formerly it had $15,000,000. Naturally, then, its profits didn’t look so big; they had to be divided among five times as many shares. And then again, in 1922, the capital was multiplied by three, becoming $225,000,000. The company now pays 14% and that seems bad enough; but what would you say if you figured on the old capitalization and knew it was paying 210% every year!
This is the device known as “stock dividends”—paste it in your hat, Judd! And paste this also: Stock dividends are not profits, according to a decision of the United States Supreme Court! And when you have diluted down your capitalization like this, you are no longer making excess profits, and so you no longer have to pay the excess profits tax! And so, of course, all the corporations hasten to adjust their paper securities; in 1922, more than $2,328,000,000 dollars were distributed in the form of “stock dividends” to happy stockholders. The Standard Oil Company of Indiana paid 2,900% stock dividends in one year. The Brown & Sharpe Company, which makes tools for carpenters like you, Judd, paid stock dividends of 16,000% in 1922! Don’t you see how they’ve got you hog-tied?
Consider our mighty steel trust, Judge Gary’s pet, and the darling of our government. I knew intimately the lawyer who was paid a million dollars to form it, and he showed me a lot of “inside stuff”; for example, John W. Gates, Wall Street “plunger,” taking a private car load of steel magnates, prostitutes and champagne bottles on a three day orgy, riding about the country and buying steel plants for a joke, at any price the owners cared to ask! Well, when the joke was over, Morgan took the whole outfit away from him—he didn’t consider Gates a sufficiently sound man to carry such a great responsibility! So Morgan employed my friend, James B. Dill, to make the trust law-proof, and he put out the common stock of $500,000,000, all pure water and a swindle on the public. I knew an elderly widow who put all she owned into it, and it went to six cents on the dollar! But out of its monopoly of raw materials the trust made good in the end—in two years of the war its net profits were equal to the full amount of the original capitalization, something over $888,000,000!
Or take the beef trust. Armour and Company started with $160,000, and all the rest has come out of profits. In a single year they distributed stock dividends of $80,000,000! Or take that Aluminum Company of America, the family pet of the Mellons, that gets so many kinds of favors from our government; they once declared a stock dividend of 500%, and yet they can only pay their workers $3.36 per day! Or take the bread trust, Wall Street’s newest peace baby; the General Baking Company has increased the value of its investment 67,500% in nine years! And out of what? Well, if you are an insider, and can go to the right banks and get a sufficient “line” of credit, you can build huge electric ovens, which will bake bread so fast and so cheaply as to wipe the little hand bakers off the map; they will come to you as wage-slaves, and you will have a monopoly of fresh bread in a great city, and out of your profits you can pay lawyers and aldermen and editors and labor-sluggers, and be safe against every form of attack.
There is no use piling up examples, Judd. Suffice it to say, that every big business in America is owned and run under that system; and you pay for it. During the war you got your dollar an hour wages, and you thought it was next door to heaven; but you see, for every dollar you made, these Wall Street fellows were making tens of millions; and when it came to the spending of the money, each one of their tens of millions was just as powerful, just as legal and as sweet-smelling, as your pitiful one!