The loss of the investors
2. A large part of the profits of promoter and of owners is unfairly taken from the investor. The larger modern business is less and less attached to particular neighborhoods. A much smaller proportion of investments is made in industries which the investor himself can control or even see in operation. Business, therefore, in these days is done largely on faith in other men. Especially the investor takes great chances. The prospectus announcing a reorganization is frequently misleading. It frequently misrepresents the sources of income and the probable dividends, conceals essential facts, and makes misleading statements. The capitalization often is absurdly high, compared with the value of the different establishments. In one case eight million dollars of stock were issued to represent factories whose combined value had been five hundred thousand dollars. So far as the capitalization is based on the increased profits due to the monopoly power, the profits of reorganization are taken out of the pockets of the public. But in fact even monopoly earnings cannot support such valuations, and from the outset if fair dividends are paid, they are falsely paid out of capital, not out of earnings. With the approach of bad times there must be a suspension of dividends, a fall in the value of securities, and a loss falling upon the investors. Such practices are a serious evil, for the stability of industry depends on the opening up of opportunities for safe investment to the average man.
The speculating trustee
3. Corporation officers and trustees, speculating in the stocks of their own companies, are reaping illegitimate gains. It is recognized by public sentiment and in law that for public officials to let contracts to themselves is bad morals and bad public policy. It is the duty of legislators not to make laws for companies in which they are interested. One of the greatest scandals in American public life, "the Credit Mobilier affair," was caused by the acceptance by members of Congress, virtually as a gift, of shares in a company that was seeking favoring legislation. Such action must be looked upon as a sort of industrial treason, comparable to the old form of political treason. Corporation officers are in a position of public trust toward the investors quite comparable to that of government officers toward the citizens. The power of directors and of other officers to manipulate earnings and dividends, and thus to affect the market value of the stock, leaves the investing public helpless. The practice by officials in great corporations of speculating in their own stocks, whose prices they can manipulate, is so common as scarcely to attract comment. Large fortunes result from this betrayal of the trust imposed by the shareholders. This is not legitimate speculation; it is like loading the dice, pulling the horse, drugging the pugilist—things despised and condemned even in gambling and sporting circles.
Two types of speculation
It appears, therefore, that in the complex conditions of modern business there is a legitimate concentration of risk in the more capable hands, but also a growth of opportunities for illegitimate speculation and for large dishonest gains that were not possible before. These two types of speculation should be distinguished, as far as possible, in thought and in practice; but this it not easy in concrete instances, which vary almost indistinguishably from the clear case of honest earnings to the other extreme of illegitimate gains.