Monopolies and the People

by D. C. Cloud

But for the interference of rings formed to prevent such a consummation, any company of men who desire a railroad in their locality, by pursuing an honest course, could organize a company and build their road. If the amount of stock necessary to build the road was in good faith subscribed, and the same was being paid up as the construction of the road progressed, any reasonable amount of money could be obtained by such company by making an honest showing to capitalists. The demand for railroads would be as regularly supplied, as for any other article of necessity. The laws of trade would regulate their construction. In all such cases capitalists would have the best of security, and the roads would pay fair dividends on paid-up capital and interest on the sum borrowed for legitimate purposes. But if there were no legitimate call for the road, if it were intended as a fraud, by a set of educated sharpers who desired to receive large dividends on stock not paid up, or to borrow money by the sale of bonds in an amount double the cost or value of the road when completed, then it could not be built under the new rules and The Nation's prediction would be verified. Any legitimate business not "cornered" or controlled by combinations or rings can be successfully prosecuted, and to say, as does The Nation in substance, that if railroad companies are forbidden to act dishonestly and corruptly, no more railroads will be constructed, is an admission that the whole system is a fraud, and is a strong argument in favor of immediate, prompt, and efficient action on the part of state legislatures and of the courts. If men must become dishonest in order to build and operate railroads successfully, the whole system is rotten and should be destroyed, and an honest plan substituted.

Fourth. But says The Nation: "The application of any such rule to roads already in operation, would be spoliation, pure and simple. * * * * It would not only violate a tacit pledge made by the state to individuals, but would deprive men of rewards already earned by running great risks." This is the old argument in favor of railroad companies, but with this difference: It makes the state a party to the dishonest practices of men who have enriched themselves at the expense of the public, and those to whom they have sold their bonds. We venture the assertion that, with few exceptions, all railroads in the United States that have been honestly and prudently managed have earned a fair per cent on the capital actually expended in building, equipping, and operating them, and that a scale of tariffs greatly less than the rates now charged would, as a rule, afford fair dividends on the actual cost of the roads. No instances can be shown, where the states, in granting charters to railroad companies, directly or in the passage of general incorporation statutes, have given to the companies the right to commit frauds upon the parties with whom they deal by using their credit to build their roads, and without payment of their subscriptions issue to themselves certificates as for paid-up stock. In all cases, individual stockholders are made liable for the debts to the amount of their stock. In contemplation of law the stock is paid up, and the roads are constructed by using the capital derived from this source. The stock is supposed to amount to as much as the cost of the road. The state, in giving the company a corporate or artificial being, enters into no agreement, express or implied, to make good the contract of the company, or to be responsible for their misconduct, further than to exercise such control over them as to prevent or reform abuses, by compelling them to act honestly—being the same control exercised over all other persons within its jurisdiction. The creditors of railroad corporations have no stronger claim on the state in case of the non-fulfillment of contracts by railroad companies, or in cases of fraudulent and dishonest practices, than have the creditors of individuals. If a man worth $2,000 represents himself to be worth $4,000, knowing that his representations are false, and obtains credit upon his property for twice its real value, he violates the law, can be punished criminally, and is also responsible in a civil action; but his creditor has no claim upon the state for payment of the sum loaned or credit given on those representations. Is the claim different when a railroad corporation is the party obtaining the credit? Is the state under any greater obligations in one case than in the other? But The Nation says the custom of doing business on this plan has obtained and been in use for thirty years, and from this draws an argument in favor of its legitimacy. Does this fact make it honest? or change the relation of the state to these corporations? A man has followed horse-stealing for thirty years, and is at last detected; he has been in the habit of selling his stolen horses to innocent parties; they have been reclaimed by the owners; can the purchasers, because this thief has so long followed his pursuit, claim compensation from the state? A man obtains goods under false pretenses, and before the owner can reclaim them, sells them to a third party; can the person defrauded claim compensation from the state? We cannot discover the distinction between the cases stated and that of railroad companies, who by falsely pretending that they have paid up their capital stock, obtain money on their bonds for an amount greater than the value of their entire roads. They all commit crimes for which they are liable to be punished, and all are liable in law to make good their contracts; but in neither case is there any pecuniary liability imposed upon the state or the public. Nor would the application of the rule to railroad companies already in existence, who have built their roads, be "spoliation pure and simple." It never can be wrong to compel men to do right. If railroad companies, by arbitrarily increasing their capital stock, and issuing certificates therefor without payment of any part of it, as is the general rule among them, are receiving dividends on such stock, justice to the public demands that the state legislatures should compel them to purge their stock, and at once cancel all such spurious and illegitimate issues. The duty the state government owes to the public demands this, that the oppressions under which the people suffer may be prevented in the future. But "it would deprive men of rewards already earned by running great risks." What these "great risks" are, is not readily seen. They certainly have not risked their money; they built their roads on borrowed capital, and have declared dividends to themselves on stock they have never paid. They extort from the public, in charges for transportation, money sufficient to pay the interest on the money borrowed for building their roads, and to pay dividends on their stock that has not cost them anything, and if they have run any risks they are the same that all men, who violate the law, have ventured upon. The pecuniary risks are all taken by the parties from whom they borrow.

The Nation says that the west during thirty years has wanted railroads, and that there was small chance of making them profitable for a long time. That "it encouraged eastern men and foreigners to make them in any way they pleased, running whatever risks existed, and pocketing whatever gain there might be—and they were made." The people of the west have vivid recollections of the manner in which the means were raised to make their railroads. They took large amounts of stock, and voted large amounts of local aid for which they were to receive stock and dividends. After contributing sufficient to pay at least one-half of the entire cost of their roads, their eastern friends mortgaged their roads and sold them out, and the "people of the west" got neither stock nor dividends, but they are to-day paying taxes to discharge debts contracted by them in building their roads after having been swindled by their eastern friends out of values, amounting in Iowa alone, to not less than $4,000,000. The Nation further says that "the investment then was one of great danger and difficulty; to treat it now as one of no difficulty and no danger, would be simple swindling." This journal evidently knew but little of the real facts in the case, or it would not have made this assertion. But if we admit that the undertaking was both dangerous and difficult, does that exempt from all responsibility the adventurers who came west and fattened off of the simplicity of the people? Does it absolve them from the effects of their dishonest acts? Are the states pledged to make good the dishonest contracts of these adventurers because of the danger or difficulty they run?

While the law should regulate the action of all railroad companies, would it be "simple swindling" for the legislature to compel these pioneer adventurers to purge their companies of fictitious or "watered" stock, or limit their rate of charges? We do not believe that the legislature ever intended to charter railroad companies to prey upon the people at pleasure and without restriction, nor is it true that any injustice would be done in compelling companies, whose roads are constructed, to reduce their stocks to the amounts actually invested in their roads, and to limit their rates of charges to a fair and reasonable compensation for the money so invested. Nor would it shake the foundations of social order to compel these men to act honestly.

But another difficulty is suggested in this circular. Our author says: "It is not possible for 'the people' or anybody else to ascertain the exact amount, on which, in abstract justice, the earnings ought to pay interest." True, it may be hard to ascertain what is the "exact" amount, but this fact presents no great difficulty. It is now known to nearly everybody about what railroads cost per mile. When a road that we know, in the nature of things, could not have cost more than $35,000 per mile, is by the "watering" process shown to have cost the sum of $75,000, it would not be difficult to approximate the amount of stock that should be cancelled; nor need the fact that the exact amount cannot be ascertained prevent legislative action. In all cases a large margin to cover any doubts might be allowed to the companies, and still great reductions could be made.

Fifth. The Nation, as it progresses, becomes more earnest. It takes up the oft repeated cry of "innocent purchasers," "widows and orphans," with their all invested in railroad stock. "Charitable corporations and banks" have invested in railroad stocks and "helpless people generally." It tells us that "this stock has been sold and resold, in open market, under the most solemn guarantees known to civilized society, with the understanding that it represents the bona fide ownership of the roads, with all their earnings, possible as well as actual. The laws, the courts, and public opinion, assured to it this character without reservation or qualification. * * * To throw any doubt on its value now would be to cause an amount of misery and alarm which no thinking man could contemplate without a shudder." That some parties would suffer financially by compelling railroad companies to reduce their stock to an honest standard cannot be denied, and in some cases it might work absolute financial ruin. But that any considerable amount of railroad stock is held and owned by poor people is rather improbable, and that "helpless people generally" deal in railroad stock is not true. That some purchases are made by innocent parties may also be true; yet in this day and age when the fact that at least one-half of all railroad stock is mere fiction and has no intrinsic value is known to the public generally, a third party must be "innocent" indeed to purchase it without knowing that its value is imaginary rather than real.

Most of the stocks and bonds of railroad companies are sold in Wall Street by the owners and managers, acting in their character of brokers and stock gamblers. The innocent third parties are generally the dupes of these brokers who are on the lookout for the unwary. These dupes are caught and stripped and turned loose without remorse, when the managers of the great railroad interests of the country are "loading or unloading," and no complaint is heard. The "innocents" are robbed without exciting a passing remark; but when an attempt is made to relieve the people from the onerous burdens imposed upon them, we hear on all sides the cry of "innocent purchasers!" and of the great wrongs about to be committed. They virtually admit their own dishonesty, but say in substance: "We have duped others and you must permit us to rob the people in order that 'innocent' third parties may not suffer." This is the pith of The Nation's argument. It goes further, and says: The law and the courts have sanctioned this dishonest course, and because of this, the same raid upon the rights of the people must be allowed to continue without interruption.

Neither the people nor the state are in any manner responsible for the acts of these railroad managers. All contracts for the sale of bonds or stocks are in the first instance made with the companies or their agents. They are responsible to the parties holding their bonds or stocks. Their roads are liable to their full value, and each stockholder is liable to the amount of stock he owns, and to that extent must make good the contracts made by the managers of the road. The purchaser had the means of knowing the value of the stock he purchased. If he suffer, his suffering is the result of the fraud of the directors of the road, and of his own negligence. None of these causes affect the right of the state to regulate the company, and to compel it to act honestly.

The cry of "innocent purchasers" will not avail. While the people can sympathize with those who are defrauded by the dishonest acts of the companies, and appreciate the helpless condition of widows and orphans who have lost by railroad rascality, the facts will demonstrate that they are few in number, unless we include among the "widows and orphans" Commodore Vanderbilt, Col. Tom. Scott, Daniel Drew, Jay Gould, and the Wall street brokers generally, who own and control most of the railroad stocks. If we admit all that is stated in the circular, the right of the people to be protected against the impositions and oppressions of the railroad companies remains unchanged, and the legislature, acting for the whole people, can control the management of the companies so far as it affects the public. If the doctrine advocated by the circular be true, railroad corporations are now able to defy the government and the people.

Sixth. The Nation, in its circular letter, says: "If the state wants to make the railroads common highways, it has the right to take them, but at their market value, paying the owners what other people would pay them, and not inquiring curiously and knavishly into their original cost. Between honest parties to a bargain, that, to use a common phrase, is neither here nor there." We get more light as we advance. As we understand the principles of our government, the states possess the right of eminent domain. But they have no power to buy and sell, like corporations or individuals. They may condemn private property for public use, if the public good requires it. The value of property for public use is ascertained in the manner prescribed by statute. The Nation is inconsistent. It says in one paragraph that the state has no lawful right to regulate railroads and restrict the action of railroad companies in the issuing of stock, etc., and then declares that the state can take the railroads from the companies should it desire to do so. But for cool assurance The Nation is entitled to the champion belt when it says the state must take the roads at their market value—at what other people would pay for them—without inquiring "curiously and knavishly" into the original cost! In other words, these corporations are so potent that should the state attempt to exercise its right of eminent domain, they can dictate the terms upon which they would be willing to surrender their roads to the public. The terms are that the state must pay the companies' value for all the watered stock with which they have loaded their roads, as well as for all the bonds the companies have sold, and do this without asking questions. If the people or the states should stop to inquire into their cost, they would be acting knavishly. True, the companies could not build their roads without special grants from state legislatures, but having obtained the privilege of locating their roads where they pleased, and having, by false pretences, obtained local aid and defrauded the people who helped to build the roads; having piled up their fictitious stock by the billion, and by onerous and dishonest charges reduced the farming population to poverty, their champion, The Nation, tells the states: "If you want the railroads, you can take them, but you must not be curious to know what they cost; this would be a knavish act; you can have them by paying the companies the full amount of money they claim to have invested, including fictitious and watered stock." This kind of impudence is sublime. The railroad companies, through this hired spokesman, propose to quit business provided the states will pay them just what they are pleased to call the value of their roads, and ask no questions. It is usual for the thief, when seeking immunity for his crimes, to propose to return a part of the stolen property, but these corporations, who have been robbing the states and the people for years, offer to close their career by forcing upon the parties robbed what is left of their booty, provided the states will pay to them not only the cost of the roads, but allow them par value for all their bogus or fictitious stock.