Fifty years in Wall Street

by Henry Clews

In those days railroads required relatively large capital; the risks were new and great, and some means of securing large profits had to be devised in order to tempt men of means to venture into such enterprises, which from their very nature involved a long wait for profit. Our earliest railroad builders were men of unbounded faith in the future, and they well knew that many years of patience and outlay would be necessary before such enterprises could become profitable. It is almost axiomatic to say that in this country our railroads have been the principal factors in national progress. In the United States, railroads were called upon to develop both population and traffic. In Europe, population and traffic were already in existence and simply awaited the railroad. When railroad building first began, England was already a closely settled country; and it was only necessary to construct the lines to obtain profitable traffic at once. No special inducements were necessary for the attraction of capital, and no preliminary period of waiting or loss was required to develop traffic. It was vastly different here; railroads had to be built across thousands of miles of new country, frequently over apparently insurmountable mountains where neither traffic nor population existed; and their builders, men of monumental ability and enterprise, knew full well that a generation must pass before such enterprises could be considered profitable and solid investments.

Under such conditions what inducements could be offered to overcome such overwhelming obstacles? While government aid was eagerly sought, it was restricted mainly to the Pacific roads where political reasons, such as unification of new territory, justified government support. Another form of national aid was the giving of large land grants to railroad corporations as a stimulus to the settlement of new territory and the building of roads adjacent thereto. Even those helps were insufficient.

Meanwhile, the treasures of the Great West offered irresistible attractions to new enterprise and settlement. The demand for more railroads was insistent; then came the devices of stock-watering and overcapitalization as inducements to new capital. Roads were often built entirely on bonds; and stock, having little or no value except for voting, was given away as a bonus with the bonds, or used for various purposes, often in speculation, and such stock frequently found its way back to the original promoters at bargain if not waste-paper prices. This era of speculative railroad building was naturally accompanied by all sorts of illegitimate operations; overcapitalization bearing a leading part. No one would now dare think of resorting to such practices as were common in those pioneer days. They were utterly indefensible, and yet as an expedient they served their purposes in raising much of the capital with which to develop our early railroad systems.

Our great railroad builders were fully entitled to great profits, since their boldness and skill developed the finest railroad systems the world has ever seen, and without them the United States would never have obtained its present magnificent position and prosperity. We must admit their methods were open to serious criticism, and would not be tolerated in these days of improved business standards. Nevertheless, they were the methods of the day, and must be judged as such. I do not wish to be understood as defending or apologizing for overcapitalization, for I consider it an economic evil of the most dangerous character, and its penalties—political as well as economic—cannot be averted.

It should not be forgotten that the great wave of grangerism and anti-railroad agitation which swept this country in the ‘80s was a direct revulsion of popular feeling against the burdens of overcapitalization and their tax upon traffic. These were the political results of such abuses. The economic consequences which followed—somewhat late to be sure—were witnessed in the reconstruction period that followed the panic of 1873, when vast millions of railroad capital were literally wiped out by the reorganization of railway corporations.

To-day most of our railroads are comparatively free of overcapitalization, both because much of the water has been eliminated by reorganizations, and because the increased value of terminals and other properties, as well as the large improvements that were paid for out of earnings, have increased the intrinsic value of shares which at one time may have been practically valueless. This process of accretion has been going on for many years, so that now there is comparatively little difference between intrinsic and market values. Of course, some recent striking departures from sound railroad financing can be cited; but I am speaking in broad terms, and have no hesitation whatever in asserting that American railroad investments are now sounder financially than any similar class of securities in the world, and this notwithstanding that railway companies are compelled to borrow enormous sums in order to meet the demands of a wonderfully expanding traffic.

A comparison greatly in our favor could be made with British railroads which have for years been inflating their shares by a policy of charging improvements to capital account; the American system being to charge such items against earnings. The result is that British railroad shares, which were once held up to us as models of soundness and honest capitalization, are now seriously threatened with an excess of water; and unless the present policy is changed, English stockholders will soon be discarding their home favorites for the bonds and stocks of more soundly managed American railroads.

I have dwelt considerably upon the overcapitalization of our railroads. Now a word about overcapitalization in another direction, where it is a vastly more serious affair. While we now have little to fear from overcapitalization of railroads, an inflation has taken place in our industrials of the most extravagant character, and this is one of the most serious menaces to our industrial and financial future. A feature of our national development which has attracted world-wide attention during the last ten years has been the consolidation of nearly all our great industries into a few “Trusts.” This era of consolidation, or “Trust-making,” must be classed as an industrial revolution of the highest import, containing tremendous possibilities for both good and evil. Within a few short years a large proportion of our industries were combined or turned into Trusts, and securities issued in exchange aggregating about $6,000,000,000.

Of course, many of the objects of these combinations were perfectly legitimate. The seeking of better and more economic methods of production and distribution was eminently proper, but the grasping for monopoly was not legitimate, and has proved more largely responsible for the political and social unrest of the times than any other single cause. Nothing has done more to stimulate Socialism than this unwholesome tendency toward monopoly and excessive centralization. On this feature, however, it is not my intention to dwell further; I must even entirely pass over the overcapitalization of public franchises as a subject of sufficient importance to demand special treatment.

All things considered, however, I feel safe in saying that there is practically no more reason for unrest on the part of the business community or the people of the nation, on account of the large aggregation of capital represented by Trusts, than from equally large sums in the hands of individuals; for both are equally controlled by law and influenced by public opinion, and public opinion is often more powerful than law in righting wrong. Moreover, public opinion makes the laws. As the Latin aphorism says, The People’s voice is the Voice of God!