1. Publicity of the railroad business.
It is held by some that the secrecy with which railroad business is at present transacted is the source of all evils. It is contended that if railroads were required to report to the public every item of income and expenditure, discrimination and extortion, as well as bribery and corrupt subsidizing, would soon cease. If the companies were compelled to render an account of all receipts, special rates and drawbacks could not safely be granted by railroad managers, or, if granted, would soon lose their charm for recipients, for it would be but a short time until others would demand and even exact the same privileges. An attorney would, as a member of the legislature, be slow to accept a retaining fee if the amount of such fee were made known to his constituents. Publishers would hesitate to apply for railroad subsidies if the companies were compelled to render periodically an itemized account of such expenditures, and railroad companies would, under similar circumstances, hesitate to pay subsidies, for the subsidized journal would soon be without patrons. If the items annually expended upon railroad lobbies were reported, these lobbies would soon be frowned, or even hissed, out of legislative halls. There can be no doubt that full and complete publicity in railroad business would correct a large number of existing abuses, and it should therefore be insisted upon as one of the first and essential features of railroad reform. It is questionable, however, whether railroad managers are so sensitive to public opinion that publicity could be relied upon as a cure for all railroad evils. To what extent it is desirable to supplement publicity by other measures of State control will be considered hereafter.
It will, of course, be urged by railroad managers that the State has no right to pry into the privacy of their business and that they should be guaranteed the same protection against intrusion that is enjoyed by other branches of business. To this we must reply that not even banks or insurance companies are permitted to conduct their business as private, and that controlling the highway and levying a transportation tax upon every article of commerce passing over it is essentially public business and unquestionably subject to public control. Every citizen is as much interested in it as he is in the transactions of the custom-house, or of the public treasury, and any transaction of a railroad manager that shuns public inspection can be set down as a public evil and should be suppressed. It may safely be laid down as a general rule that the refusal of a railroad company to give publicity to its transactions is presumptive evidence of wrong. The people are not alone interested in such publicity. Stockholders have likewise a right to be protected against the sinister manipulations of dishonest managers, and publicity furnishes them the best guarantee of honest management.
Stockholders should attend the meetings of their companies and should obtain full knowledge of the management of their affairs. If they will make thorough examination and get at bottom facts the chances are that contracts will be found with owners of patents, white lines, blue lines, refrigerator car lines, coal companies, ferry companies, manufacturing companies, packing companies and other kindred organizations, by which hundreds of millions of dollars are diverted from the treasuries of the railroad companies to the pockets of influential persons connected with the management of the roads.
It has recently come to light that the officers of a Pennsylvania railroad company, during fifteen years, by some means of secret rebates and other allowances, have taken about $100,000,000 out of the treasury of the company and distributed it as largesses to about half a dozen iron and steel establishments.
This is a method of getting wealthy at the expense of others not unknown to many another great fortune accumulated in the last twenty years. Railroad discriminations have been a fruitful source of those gross inequalities in wealth distribution which now agitate society and call people's parties and the like into existence. The modern millionaire appears to be an entirely natural creation. Perhaps this money taken in special rates from the Pennsylvania railroad's treasury, or, rather, from the pockets of the road's other patrons, and of the men who may have sought, without special rates, to compete with the favored ones in their business, only to be crushed in financial ruin, will be spent in a praiseworthy way, in accord with the principles of "the gospel of wealth." What we need now is the gospel of distribution of facilities for the accumulation of wealth, as well as the gospel of distribution of great fortunes.
Whether inspired by a bull or a bear interest or neither, all will concede the ability of Mr. Henry Clews to picture the evils of railroad management; and his lack of generosity in accrediting ability or honesty to legislators who are called upon to provide remedies for the wrongs that he so well depicts will not deter me from indorsing the following statement made by him in a magazine article which is pertinent to this discussion:
"One great difficulty that present railroad legislators have to contend with is the evil methods of railroad building and extension. A great deal of the mileage of the last two years has been premature, and doubtless for speculative purposes. Most of it has been constructed, however, by old companies who had good credit to float bonds and could raise all the money required. Hence there has been but little financial embarrassment arising from the too rapid construction. But people are beginning to find out that a great deal of this building has been in the interest of speculative directors and their friends, who, for a mere song, had bought up barren lands considered worthless because there was no means of transportation. But these lands soon become immensely valuable for sites of villages, towns and cities. The construction companies, by which these roads were generally built, raised the cost to the highest possible figures, in order, I fear, to make dividends for the construction stockholders. It is noteworthy that the directors connected with these construction schemes have been exceedingly prosperous, while the stockholders of the roads have grown poor in an inverse ratio. The dividends of the latter have disappeared. The new mileage, much of which, I apprehend, has been made on this principle, was about twenty-one thousand miles, which is greater than the entire mileage of Great Britain. There should be additions to the Interstate Law, or a special law regulating the methods of construction companies, which are probably doing more to demoralize the railroad system—and doing it very insidiously, too—than any other factor connected with these great arteries of the country's prosperity.
"Legislative reform is greatly needed in the matter of railroad reports, especially for the safety of investors, and to prevent speculative abuses among railroad officials and their friends and favorites. There should be statements issued annually, or perhaps more frequently, upon the truth of which everybody might rely. These should be sworn statements, and should bear the signatures of at least three of the directors. These directors should be required to call to their aid expert accountants, and should have placed at their disposal all the books of the company or corporation and all the other papers necessary to verify the accuracy of their report. The correctness of the statement, when issued, would then be a foregone conclusion, and an investor in London, Paris or Berlin could buy or sell on his own judgment, an experiment which, under existing arrangements, might prove very costly. It is proverbial that a railroad statement now is defective in the most essential particulars, and, to put it mildly, usually covers a multitude of sins. According to one plan approved by railroad companies, the statement published to-day, for instance, is made to show a surplus of many millions, but there is nothing said about an open construction account to which the surplus is debtor. On this favorable showing (with this suppressio veri) the stock goes up and the insiders quickly unload upon the investment public. The following statement, which comes out six months later, shows that the surplus has been used to settle the construction indebtedness. The surplus has disappeared; consequently the stock suffers a serious decline. Those who bought on the strength of the large surplus sell out, on being informed of its distribution. Then the inside sharks come forward again and purchase at reduced prices, probably at a depreciation of from ten to fifteen points or more, and keep their stock until the next periodical appearance of the bogus surplus. Thus the insiders grow rich, while the outsiders become poor. The only remedy for this abuse is a sworn statement at regular intervals, and if the directors should commit perjury they would render themselves liable to State prison. If a few of them should be tempted to fall into the trap, and be made examples of in this way, nothing would do more to work a speedy reform in this contemptible method of book-keeping.
"I would also suggest a change in the character of the directors. Those usually chosen for this office now are men who have vast interests of their own, more than sufficient to absorb their entire time and thoughts. They are selected mainly on account of their high-sounding names, to give tone to the corporation and solidify its credit, in order that the lambs of speculation may have proper objects in whom confidence can be reposed and no questions asked. The management of the affairs of the corporation is frequently intrusted to one man, who runs the business to suit his own individual interests."