Fifty years in Wall Street

by Henry Clews

In this very active period of business reform overcapitalization is an evil that must be classed with rebates, railroad discrimination, and other corporate abuses. This also applies almost equally to both the industrial and railroad systems. However much this evil may have been regarded and thought inevitable in the past, owing to peculiar and lax conditions in the pioneer days of railroads and industrial upbuilding, it is intolerable now, and should be made impossible in the future. There is not the slightest doubt that a great deal of the public unrest has proceeded from this source. But, with the stoppage of the evil, it ought to subside.

Overproduction of any kind is a detriment to trade and leads first to extravagance and then to disaster; overfeeding produces disease; overtraining of an athlete weakens him and causes his defeat; overstudy racks the nerves of the student and unfits him for usefulness. Overwork kills man and beast, and ruins even our locomotives and machinery. Too much rain, too much wind, and too much sunshine spoil our crops; too much confidence or too much caution prevents a business man from achieving success. There is a happy medium in all things which produces good results and promotes success. Under our modern system of financing our railroads and industrial corporations overcapitalization has in many instances run riot and produced an overplus of undigested securities. This system of financing will surely lead to disaster if not curbed and conducted in a rational manner. If a company needs additional funds for legitimate purposes, such capital is a necessity which stockholders will willingly provide; but the managers of corporations should be compelled to state exactly and definitely for what purpose such funds are needed, and should also be compelled to make a clear and definite report.

Centralization of power in the hands of an able executive is a good idea if he prove worthy of the trust his colleagues confide in him, but, on the other hand, makes him a master, and them slaves, if he be unscrupulous and crafty.

Happily, the days of overcapitalization are seemingly over, and an aroused public opinion will, no doubt, be expressed in whatever prohibitive laws are necessary, if those already enacted prove insufficient.

In, at least, some instances the existing laws seem inadequate. It is likewise due to the sound corporations of the country, as well as to the public, that something further should be provided to overcome the feeling of suspicion toward them, and to keep the people informed as to their existing methods and the true condition of their affairs.

The remedy for corporation wrongdoing is found in publicity! This publicity is the great need of the present and the future, and the public should demand it. It is a lamp that we should always keep burning.

In a recent address delivered by me before the Wharton School of Finance of the University of Pennsylvania, I urged that the New York Legislature, as well as the Legislatures of the other States, should respond to the popular agitation for this publicity by passing laws requiring all corporations to make at least semi-annual reports of their condition, certified to by registered public accountants, with power invested in the State superintendents to order special examinations by such accountants at any time when deemed necessary, that is, whenever any of them were suspected of being unsound or irregular in their business methods.

The question now to decide is what remedies can best be adopted to prevent a repetition of stock-watering. My plan is for the Government to appoint a salaried director in each of the interstate roads, this director to be on the executive committee also. His duty should be to act as a watchdog, and he should be required to report to the Interstate Commerce Commission all crooked acts or suspicions of any; besides which the interstate roads should be compelled by law to issue sworn statements of their exact condition semi-annually. Officials of railroad companies found guilty of any illegal acts whatsoever should be punished by imprisonment. Money penalties are of no use in stopping wrongs of wealthy corporations.

Railroad discriminations and other abuses were incident and owing to our extraordinary development during the last half century, and especially to the striking failure of our Legislatures to keep pace with national progress.

Let us briefly look into a few of the causes which were responsible for this railway abuse. Both before and after our recent Civil War this country was greatly in need of more railway transportation than it had, and national development was impossible without it. We had millions of square miles of territory rich in natural resources, but totally undeveloped and awaiting population, capital and transportation. Of course transportation had to be provided before either population or capital could venture with any freedom into the Great West. In those days it was vastly more difficult to raise $1,000,000 for a new railroad enterprise than it was to procure $100,000,000 in more recent times. The public was not accustomed to such ventures, and the country did not then contain the large number of wealthy men who must now be depended upon to back such great enterprises.