At the time of Keene’s failure he was chief of a syndicate which had purchased 25,000,000 bushels of wheat, which would soon have netted many million dollars of profit, if it had been firmly held, but one or two of his partners in the pool became timid and sold out. The syndicate went to pieces, and both profits and capital vanished. He laid his misfortune mainly to the newspapers which raised such a universal cry about the immense “corner” that was being manipulated in wheat, threatening a famine in the great staple of human life.
Keene was next shaken out of his stocks. This was done chiefly by an ably concocted scheme of the bears, and he had the mortification of seeing the stocks which he had held advance within a few months’ time to a point that would have enabled him to realize ten million dollars, if he had been able to hold them.
CHAPTER XXVI.
OUR RAILROAD METHODS.
Deceptive Financiering.—Over-Capitalization.—Stock “Watering.”—Financial Reconstructions.—Losses to the Public.—Profits of Constructors.—Bad Reputation of our Railroad Securities.—Unjust and Dangerous Distribution of the Public Wealth.
The following chapter, on the subject of “Our Railroad Methods,” was delivered by me as a Fourth of July address at Mr. H. C. Bowen’s Annual Symposium at Woodstock, Conn., to an assemblage of over 3,000 people. It was so favorably received by the press and the public in general, that I have been encouraged to publish it in this book without any material changes:
In the whole range of our law-making there is no one branch in which there has been such an utter lack of judgment, foresight and just regard for the rights of the citizen, as in the legislation provided for our railroads and railroad companies. For the most part, the statutes relating to this class of corporations are a set of general enactments, loosely defining the large powers granted to the incorporators, comparatively silent on the duties and obligations of the companies to the public, and conferring upon them a virtual carte blanche as to their methods of finance and of conducting their business.
In a country whose products are mainly bulky, and have to be carried to markets hundreds or thousands of miles distant, it is of the first moment that its railroads should be built with the strictest economy and on the lowest possible capitalization. The low cost of land and the cheapness of material for road-bed are especially favorable to our securing this advantage; but the laws have permitted a system of inflated financiering which neutralizes these natural adaptations and immensely increases the cost of transportation.
As railroads have to be largely built with borrowed money, their construction in this country afforded an opportunity for establishing credit relations with the great lending centres of Europe, which might have been of incalculable value in promoting the development of our vast resources in various directions. England, Holland and Germany have indeed loaned us very large amounts for railroad enterprises; but the law has permitted these undertakings to be conducted with so much concealment, misrepresentation and actual fraud, and has so disregarded the rights of the bondholders, that American credit has become a scandal and a by-word on the European bourses. The result is, that foreign capitalists are seeking other fields of investment; and their respective Governments are encouraging them by opening up new colonies, and thus getting fresh sources for the supply of products which otherwise would have continued to be readily taken from the United States. Such are the rewards of immoral financiering; and these bad methods are directly traceable to the encouragements afforded by our negligently constructed railroad laws.
Perhaps I may best succeed in making myself understood on this subject by illustrating the way in which our railroads are usually built. Under the laws of the State of New York—which are a fair sample of the laws of most other States—a number of persons form a company under the general railroad laws, registering at Albany the proposed route of the road, the amount of capital stock and bonds to be issued, and a few other particulars required in the papers of incorporation. The incorporators then proceed to form themselves into a syndicate or company, for the purpose of contracting to build and equip the road. Here comes the first step in the system of “crooked” financiering. In their capacity of incorporators, the same men make a contract with themselves, in the capacity of constructors. Of course, they do not fail to make a bargain to suit their own interests. They would be more than human if they did. Usually, the bargain is that the construction company undertakes to build the road for 80 to 100 per cent. of the face value of the first mortgage bonds, with an equal amount of stock, and sometimes also a certain amount of second mortgages thrown in, virtually without consideration. The first mortgages are supposed to represent the real cash outlay on the construction and equipment; but, as a matter of fact, the true cash cost of the work done and materials furnished ranges from 60 to 80 per cent. of the amount of first lien transferred to the constructors. The Construction Company disposes of the bonds, partly by negotiating their sale to the public through bankers, at an advance upon the valuation at which they had received them, and partly by using them in payment for rails and equipment. Beyond the profits made from building the road for the first mortgage bonds, there remains in the hands of the constructors the entire capital stock and any second mortgage bonds they may have received, as a clear bonus, to be held for future appreciation, and to keep control of the Company and be ultimately sold on a market deftly manipulated for that purpose.