A NEW AND FALSE PRINCIPLE IN HYDRAULICS--WATERED STOCK--ITS UNLAWFUL
PROFITS THE SOURCE OF EXTORTIONATE TARIFFS--THE "FAST DISPATCH" SWINDLE.
We have attempted to show some of the oppressions of the present
railroad system upon the agricultural interests of the country, and, at
the close of our last chapter, were treating of freights, warehouse
charges, &c. Closely connected with these latter charges is another
abusive and fraudulent practice, which threatens not only to still
further oppress the people, but also to more closely combine the power
now so rapidly and surely destroying our republic. I refer to what is
known as "Dispatch Companies." To fully understand the object and effect
of these companies it will be necessary to look a little further into
the management of railroads, and the methods adopted in their balance
sheets for showing the cost of their construction, the amounts of
paid-up capital, and their total indebtedness. These balance sheets do
not present the truth in any instance, and have not that purpose, being
only an exhibit that will apparently justify the many extortions and
deceptions practiced by these corporations. The actual cost of
constructing and stocking the roads is not given; instead, we have the
cost as represented by the stock and bonds issued and _watered_. For a
clear understanding of this book-keeping, let us examine the cost of
some of the roads as the same is given to the public, and compare it
with the actual cost as shown by other evidence. The "Central Pacific"
will do for one illustration.
The Central Pacific is eight hundred and eighty-one miles in length. The
cost of the road as given is $120,432,717, or $136,700 per mile. The
actual cost per mile, taking the whole length of the road into
consideration, was less than one-half the amount reported. This
information we get through reliable channels, and is undoubtedly
correct. The evidence induces the belief that the cost was less than
$50,000 per mile, and less than $50,000,000 for the whole road. The
company report a capital stock of $54,283,190, and a funded debt of
$82,208,000. They also report the liabilities of the road at
$136,491,190, being more than $80,000,000 above the actual cost, and
$16,000,000 more than the reported cost. The stock of this company was
watered to so great an extent, that to pay the interest on the funded
debt, and declare a dividend on the stock, and pay operating expenses,
and other contingencies, the road must earn at least fifty per cent per
annum. Or to put it in plain language, the company must defraud the
public in unjust and extortionate charges.
The "Sioux City & Pacific" is the pet road of Massachusetts and Iowa
congressmen. The cost of this road per mile, as shown by the report of
the company, is $34,547. This cost is represented by paid-up
capital--$2,067,600, and first mortgage bonds--$1,629,000. The road is
one hundred and seven miles long. The actual cost of this road was less
than $30,000 per mile.[C] Aside from these government bonds, the
reported cost of the road shows that the stock has been _watered_.
[C] NOTE.--This company received $16,000 per mile, government subsidy
bonds, amounting in the aggregate to $1,712,000, which does not
appear in the report.
The Chicago, Rock Island, & Pacific railroad company has, from Chicago
to Davenport, one hundred and eighty-four miles of road, and in Iowa
three hundred and sixty miles, making five hundred and forty-four miles
in all. The total cost as reported, is $28,496,999, or the sum of
$52,384 per mile. The actual cost of the Illinois portion, as shown from
official reports, did not amount to $30,000 per mile, and the Iowa
extension cost still less, but including the bridge at Davenport, the
cost will approximate to $30,000 per mile, making the total actual cost
$15,320,000, showing that the stock of this road has been watered to the
amount of $13,000,000. The Iowa portion of this road received a grant of
five hundred and fifty thousand acres of land, and aid by county and
city subscriptions amounting at least to $500,000, that do not appear
in the published statement.
The Iowa Falls & Sioux City road is under the special care of
congressmen. It has one hundred and eighty-four miles of road, but no
rolling stock. The total cost as given is $7,585,000, or $41,222 per
mile, while the actual cost was about $31,000. The stock was watered to
the amount of $1,800,000, and this, too, after having received a grant
of land to the amount of one million two hundred and twenty-six thousand
four hundred and six acres.
We might continue this list, but think we have referred to a sufficient
number for our purpose. It will be seen, and is now pretty well
understood, that the cost of railroads as reported by the companies is
not their actual cost, but includes large amounts that are pure
fictions--an increase of the capital stock, no part of which is used or
needed in the construction of the road, stock that is not even paid up,
but is distributed among stockholders in proportion to the amount of
_bona fide_ stock each one holds in the company. The capital stock of
the company, and bonds issued by it, are supposed to represent the cost
of the company's road, rolling stock, &c. But few roads in the country
fail to earn large dividends on this actual cost, and but for the custom
of watering stock, would show fair profits after running expenses,
repairs, &c., are paid. If these corporations were prohibited by statute
from increasing their capital stock above the actual cost of their
roads, less money would be required for transportation of freights, and
there would be no need of resorting to dispatch companies, or any other
ring combinations for the purpose of extorting unjust amounts for
transportation. But these combinations do not construct roads, simply
for the purpose of operating them; this is but a secondary
consideration. The main object is to speculate in stock and bonds.
Wall street being the grand center for this kind of speculation, the
company, in order to profit by sale of its bonds, must make a showing in
this grand mart of receipts sufficient to command public attention, the
rule being that stocks and bonds appreciate in value in market in
proportion to the dividends declared upon their earnings. They who
control these roads have two objects in view: first, to add to their
capital stock; and second, to make dividends upon such increase of
stock. If a line of road cost $2,000,000, and the company owning it can
by any means make it pay dividends on three or four millions, they can
issue to themselves stock representing this increase. Having thus
increased their stock, under the pretense that they wish to construct
more road, or improve or repair what they already have, they issue their
bonds to the amount of the increased stock (sometimes to an amount equal
to more than their entire capital) and put them upon the market. The
first object is to get dividends upon whatever stock they have paid up
(if any is paid up), and next to make their roads earn enough to pay the
interest on their bonds, and then, if possible, to force the earnings of
their roads to a point where dividends can be paid on the increase of
stock. Having increased their capital stock, and issued and sold their
bonds, they are in no haste to add to, or improve or repair, their
roads; for they have already consummated the object in view, to-wit:
made in cash the market value of their bonds. This same operation is
repeated as often as their capital stock will bear reducing, and in some
instances it has been repeated until the stocks and bonds became almost
worthless. This species of speculation does not add one dollar to the
wealth of the country, nor aid commerce. It only enriches that class of
speculators who prey upon the public.
We have shown that one and one-fourth cents per mile per ton will
compensate for transporting freights over railroads, provided the
business is conducted fairly and honestly, and we can now begin to
understand why such enormous rates are charged. The roads must earn
enough to pay the interest upon all the bonds sold and upon the capital
stock issued by these companies. The people, the producers, are taxed
for this purpose. One-half of the products of every farm in the west
goes into the pockets of these Wall street speculators, and the rates
for transportation are increased in the same proportion that these
stocks and bonds are increased. When more money is demanded in Wall
street, telegrams are sent throughout the country by these railroad
kings to their agents and employes to advance the rates on
transportation. This reduces the price of the farm products, and puts
the earnings of the farmer into the pockets of the railroad monopolist,
and the stock and bond gambler in Wall street.
It would look as though the combinations of this oligarchy were perfect;
that the system of extorting from the people and robbing the producers
could not be improved, and that these most unscrupulous oppressors ought
to be satisfied. Such is not the case. Either because they wish to have
fewer numbers with whom to divide the spoils, or because they have
reduced the value of their stocks and bonds until it is necessary that
their roads pass under other management, or because they must have still
higher rates for transportation, of late a new combination for
transportation has been formed, called Dispatch agencies or companies--a
kind of "Credit Mobilier" arrangement. These dispatch companies are
comparatively new in the west, and we know but little of their
organization save that it costs still more to ship with them than with
railroad companies. These dispatch agencies are not formed to compete
with railroad companies in the transportation of freights, nor are they,
in any measure, rivals or opponents of railroad companies. In the nature
of things there must be perfect accord between these two corporations,
for the railroad companies could and would at once destroy the dispatch
business, if the same in any manner conflicted with the interests of
railroad managers. The dispatch companies depend entirely upon the
railroad companies for cars, locomotives, and railroads for carrying
their freight. Enough is known of railroad management to satisfy the
most skeptical, that the organization of dispatch companies is for
purposes other than the more expeditious transportation of freight.
These dispatch companies are composed mainly of railroad directors and
superintendents, with a few figure heads to represent the outside world.
After the formation of the dispatch companies, contracts for the use of
cars, locomotives, and roads are made upon the same principle and for
the same objects as in the case of the Union Pacific railroad company
and the Credit Mobilier company. The directors of the railway company,
representing the company, contract with themselves as a dispatch
company, to supply themselves cars, locomotives, and roads for the
prosecution of the business of the dispatch company, and for a certain
consideration agree to pay themselves, as directors of the railway
company, for what is so leased to themselves as a dispatch company; and
then in order to promote the business interests of the dispatch company,
and secure to themselves as its directors higher rates for
transportation of freight, they make it a point at all times to give the
preference to the said dispatch company. As a result of this arrangement
the dispatch companies monopolize the principal part of the business.
They are in appearance opposition lines to the roads on whose tracks
they are carried, and are really so, when the interest of the railroad
stockholders not concerned in the dispatch companies are considered.
These stockholders get their dividends upon their capital stock and
their share of "watered stock" and bonds, but do not participate in the
profits of the dispatch business.
Like the Credit Mobilier, it pays large dividends which it extorts from
the people, charging even higher rates than the railroad companies; but
it only divides among its members, and not with the stockholders of the
railroad company whose track it uses. The interest of these stockholders
is not considered. They have built and equipped the road, and selected
their directors and managers; but these managers and directors turn the
road over to a hostile company, composed of themselves and select
friends. To promote the business of the dispatch companies, their trains
are transported from one end of the railroad to the other in less than
half the time required to transport a train of freight cars belonging to
the road. The effect of this course of procedure is obvious. Shippers,
finding that these railroad managers discriminate against the cars
belonging to the road proper, and that they grant extraordinary favors
and facilities to the _opposition_ lines, quit patronizing the former
and do business with the dispatch companies. The result is that the
dispatch companies now control the freight business, and the railroads
have, as a rule, quit providing themselves with freight cars. When
applied to for cars, the answer is, "We have none," while at the same
time the side tracks are filled with freight cars belonging to these
dispatch companies, demanding much higher rates than the regular
charges. At the first glance we fail to understand why a course so
suicidal to the best interests of the railroad company is pursued by its
directors and managers, nor can we readily comprehend why they permit
these dispatch companies to monopolize their tracks and destroy the
business of their roads. We think we can solve the problem. These
managers of the railroads, and such stockholders as are admitted to a
participation in the conspiracy, are the proprietors and incorporators
of the dispatch companies. After payment of the running and other
expenses of the road, and their own salaries (fixed by themselves) the
dividends on their railroad stock is small. Their position as
stockholders in both the railroad and dispatch companies is the same as
was that of the stockholders of the Pacific railroad companies and the
Credit Mobilier, who could well afford to sacrifice the interests of the
road and its stockholders who had no interest in the Credit Mobilier,
provided they received large dividends from their Credit Mobilier stock.
So, in organizing the dispatch companies and giving them the preference
over the roads, with the absolute control of the freighting business,
while the railroad stocks pay no dividends and depreciate in value, and
the roads and rolling stock are being worn out, the dispatch business
thrives and pays large dividends to this inside ring--comparatively
small in numbers--which controls the road, and in addition to preying
upon the public, so arrange the business as to exclude the stockholders
of the road from any share in the profits of the dispatch company.
Having oppressed the public by extortionate charges for transportation,
increased the stock of the railroad company to an amount that precludes
profitable dividends, even from the highest of tariffs, and issued and
sold bonds of the company to so large an extent as to make it impossible
to pay the interest on them, and at the same time meet the running
expenses of the road, including their own salaries as officers and
managers, having, in short, loaded the railroad companies with burdens
greater than they can bear, as a last master stroke of financiering they
organize themselves into dispatch companies, and while they enrich
themselves they reduce the railroad companies in which they are managing
directors to absolute bankruptcy. The stockholders who, confiding in
the integrity of these men, elected them directors and managers, are
swindled out of their legitimate dividends, their stock becomes
worthless, debts accumulate against the company, locomotives, tracks,
and cars are worn out in transporting freights for the dispatch company,
at rates ruinous to the railroad company, and as a grand _finale_ the
road passes into the hands of these conspirators, under the orders or
judgments of courts. In the meantime shippers are compelled to pay
double prices for freights, because the _railroad companies_ have not
the necessary facilities for shipping; all has passed into the hands and
under the control of the dispatch companies. By a mere fiction, the
managers of the road contracting with themselves as dispatch companies,
a competition is permitted to take the control of the carrying trade
over the road, control the track and rolling stock, as well as the
officers of the railroad company, destroy their business and drive them
into bankruptcy. Those not in the secret of the organization fail to
comprehend its necessity; why, for example, a train of cars run in the
interest of the dispatch companies can travel at double the rate of
speed of the trains run in the interest of the railroad company, or why
higher rates for transportation should be taxed and paid. The only
solution we can give is, that it presents additional means for taking
from the producer an additional portion of his product, in the shape of
charges supposed to be paid to a company organized for the purpose of
aiding in the transportation of freights, but which is, as a matter of
fact, a combination in the interest of the managers of the road with the
real purpose of making personal gain to themselves at the sacrifice of
the interests of the stockholders.
As a result of this new mode of conducting business, let us see how the
price of freights is affected. During the summer and fall of 1872 the
price of freights by water from Chicago to New York was $4.25 per ton,
and by railroad from $7.00 to $8.00. With the close of navigation the
rates, under the management of the dispatch companies, advanced to from
$25.00 to $28.00 per ton. While the railroad companies can carry for
$7.00, the dispatch companies charge $25.00. The margin for profit on
the stock of these dispatch companies promises to equal the dividends
of the Credit Mobilier stock, and from this showing we can have some
idea of the robbery being practiced upon the people, particularly the
farmers. Well may the producers of the west complain of these swindling
monopolies, and band together for mutual protection.