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FROM MAIN STREET TO WALL STREET

BY WILLIAM Z. RIPLEY

ONCE upon a time, and it was n't so long ago, either, - down in Boothbay, Maine, there were two brothers, John and James. Their last name was Doe. John, the elder, was quiet-eyed, slowmoving, and comfortable, temperamentally. James was more jumpy, nimble-witted, ambitious to get on. One stayed on the farm; the other naturally gravitated to the city. In due season John's boy prepared to enter the academy at Damariscotta. Said his father: 'Son, you're getting grown up. Suppose I die - you ought to have something all your own. I'm going to give you that best Jersey heifer. But you must remember to keep her well fed and healthy so that the milk will be pure. And keep her horns cut, in case she gets pernickety. Remember also that the fence in the northeast corner of the pasture is getting shaky. She might wander out on the highroad and upset somebody in a Ford. Because she's all yours, it's up to you to see that she behaves herself.'

About the same time James, in the library of his city house, thus delivered himself to his son: 'Now, Junior, before you go to college I want to give you my investment in the Boothbay Harbor Electric Light Company. This concern serves our old neighbors and friends, and I want you to feel a continuing interest in, and a responsibility for, our share in this local enterprise. If properly managed it should be a

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benefit to this community; and it will yield you an income to be applied to your education through the next few years. But you must never forget that you are partly responsible for this undertaking. Our family had a hand in starting it. That responsibility is an inseparable part of your ownership. I read something the other day, in an opinion by Justice Brandeis of the United States Supreme Court, which bears this out: "There is no such thing to my mind . . . as an innocent stockholder. He may be innocent in fact, but socially he cannot be held innocent. He accepts the benefits of the system. It is his business and his obligation to see that those who represent him carry out a policy which is consistent with the public welfare." He is right in that. This accountability for wealth underlies and justifies the whole institution of private property upon which the government of our great country is founded.'

Thus did two men, good and true according to their several lights, recognize the public obligation that attaches to wealth. But how different were the results! The son of John, under the old simple conditions, continued to cherish, and in the community to stand sponsor for, his Jersey heifer. But with the son of James complications speedily developed. First of all, the Central Maine Power Company, heading up in Augusta, induced a majority of the stockholders in the

local corporation to exchange their holdings for shares of the larger concern. There was nothing else to do but to follow along. Then a great consolidation was announced. It was headed by the Middle West Securities Company, incorporated in Delaware, which took over the Central Maine Power Company and made it a part of an intermediate corporation, known as the New England Public Service Company, which through the Manchester Traction Light and Power Company and the National Light and Power Company (which latter itself owned the Twin State Power Company and the Vermont Hydro-Electric Company) covered all northern New England. Thus, by the close of 1923, the son of James had become a partner with 53,999 others in a joint investment of over $52,000,000 in stocks alone. The main office of the company had moved to Chicago (the annual meeting still being held in Delaware, however). The little New England corporation was now indissolubly bound up with five others in Illinois, three in Indiana, three in Kentucky, two in Oklahoma, one in Oklahoma and Texas, one in Missouri, one in Michigan, two in Nebraska, two in Virginia, one in Wisconsin, and one in Tennessee. This was the chain, constituted of many links, which made up the sole and tenuous connection between the son of James and his original electric-light investment. It began to look indeed as if the days of the simple life and of direct responsibility of ownership were by way of passing in the field of public utilities in New England.

James and his son, thus lost in the shuffle of public-utility corporations, turned to the field of private enterprise, in which, as they had been told, personal initiative still held sway, free from the deadening influence of governmental supervision. They perused

the offerings of securities in the press by well-known and responsible firms. Might they not hope to acquire direct ownership in corporations which themselves managed the business? The first stumblingblock was the holding corporation. They had become used to this complicated financial device in the large concerns like the United States Steel Corporation or the General Motors Company. They sought for less stupendous undertakings. One banking house offered gold notes which invited participation in the affairs, not of the Kaufmann Department Stores, Inc., 'conducting the largest department-store business in the city of Pittsburgh,' but only of a holding company, the Kaufmann Department Stores Securities Corporation, a finance or intermediate company. Another offering was of Stern Brothers, New York, 'one of the oldest and best-known department stores in the United States,' but 'to ensure continuity of management and policy the common shares will be placed in a voting trust.' Perhaps they sought an interest in the biggest hardware company in the United States. They found, however, that the Associated Simmons Hardware Companies merely controlled an immense business in St. Louis, deriving their status as a legal trust from Massachusetts. The DeForest Radio Company offering was yet otherwise eviscerated of all possible voting power by another kind of voting trust.

Coca-Cola sounded refreshing. A company chartered in Georgia turns out some 25,000,000 gallons of a popular beverage, presumably at a profit. The stock is publicly listed and very widely held. But some 251,000 of its 500,000 shares were found to be lodged in the hands of a knot of insiders, incorporated as the Coca-Cola International Company. No shares of this corporation which held control were

listed or available as a purchase to James or his son. Answering an advertisement of securities of the Associated Gas and Electric Company, they found that its business was really conducted at the office of the Associated Gas and Electric Securities Corporation-another finance company? From Armour and Company of Delaware, whose common stock was all owned by Armour and Company of Illinois, down to the latest offering of a dairy-products concern, everything was tied up in this way. Hopeless indeed did it appear that any uninitiated public investor could understand, much less participate intelligently in, any of these affairs.

Nor was James wholly to blame for the loss of direct contact and responsibility between his son and his investment. For, finding himself getting on in years and being mindful of the mutability of human affairs, he might have taken out a charter as 'James Doe, Ltd.'- better, perhaps, than 'Inc.,' because carrying the suggestion, among other things, of a limited liability for inheritance taxes. His son and his wife holding practically all of the stock in this immortal creation, no investments coming to them upon his death would cause a ripple in the Probate Courts. Or, possibly, he put his possessions in a private trust, managing it himself as trustee during his lifetime, thereby splitting up the income and still further reducing taxes. Or the management of this 'living trust' might have been turned over to a professional trust company. And any one of these agencies might in turn have purchased 'Collateral Trustee Shares in the New England Investment Trust, Inc., the First National Bank of Boston, Trustee,' or some similar investment concern, properly enough intended through diversification to spread the risk. And, finally, there was the life-insurance policy, based

entirely upon investments to be handled by these great fiduciary corporations for him as agent, at the longest possible

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What an amazing tangle this all makes of the theory that ownership of property and responsibility for its efficient, farsighted, and public-spirited management shall be linked the one to the other. Even the whole theory of business profits, so painstakingly evolved through years of academic ratiocination, goes by the board. All the managers that is to say, the operating men are working on salary, their returns, except on the side, being largely independent of the net result of company operation year by year. The motive of self-interest may even have been thrown into the reverse, occasionally, so far as long-time upbuilding in contradistinction to quick turnover in corporate affairs is concerned. And what has become of the relation between labor and capital? What guaranty may possibly be given by the real owners to the working class that there shall not be taken from it an opportunity for future welfare and development as a result of these changes? Veritably the institution of private property, underlying our whole civilization, is threatened at the root unless we take heed. The situation is not inaptly described by the colored candidate for the ministry, confronted by the request of the examining Board of Preachers to name some character in the Bible and then to relate all that he knew about it. 'Ah thinks Ah'll take Jezebel. Jezebel, she was a hussy, a-settin' up at a winder when David come down along th'u' Jerusalem. An' she hollered at 'im. An' he said, "Ef I got a frien' up there, let him th'ow 'er down." An' 'e had a frien' up there, an' 'e th'ow'd 'er down. An'

David said, "Let 'im th'ow 'er down again." An' 'e th'ow'd 'er down again. An' David said, "Let 'im th'ow 'er down seventy times seven." An' 'e th'ow'd 'er down seventy times seven. An' she busted into a thousand pieces. An' they gathered up the fragments that nothin' be lost. An' de question are: Whose wife am she at de Reserrecshum?' It is a query which might well be propounded at this time to several millions of our fellow citizens, in so far as they are part owners in the $70,000,000,000 capitalization of American corporations, according to the Federal tax returns, in the year of our Lord 1923.

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Thus far, however, the multiplication of these entanglements constitutes no innovation. They have been going on for a long time, insidiously undermining the principle of accountability. The individual and partnership forms of business organization disappeared in favor of the corporation even before the war. Well-nigh a thousand companies are now listed on the New York Stock Exchange alone 163 railroads 163 railroads and 763 other corporations in 1924. But since the World War, and particularly in this heyday of prosperity, the facile initiating and legal minds have hit upon something better yet - and something, furthermore, which puts once and for all at rest the last vestige of power of participation of the owners of property in prudent and efficient management. These last two years, 1924-25, promise to go down in history like the Year of the Plague, or the Year of the Big Wind-as the Years of the Split Common Stock and the Vanishing Stockholder.

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Even before the World War the practice was not uncommon, outside of railroads, of setting off preferred shares as nonvoting. The amount of these issues was in those days adjusted to the tangible assets, leaving the

VOL. 137-NO. 1

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common shares to represent the equity, which depended upon successful management to be secured by the exercise of the voting rights. The late invention now splits up these common shares. To be in the mode one has, let us call it, a Class A participating' common stock, with a first lien on earnings after satisfaction of all prior claims of preferred stocks and bonds. This leaves a 'Class B' common stock representing, according to circumstances, the cream, the scum, the froth, or the sediment of the business; for the full voting rights attach exclusively to these Class B common shares, none, or only a minority, of which are offered to the public at all. The appetite for the preferred shares may sometimes be whetted by a flavoring of the Class A common shares, but not of those which carry votes. The recent 'Dodge Brothers, Inc.,' is typical. A banking house buys up a private business for, it has been said, $146,000,000 or thereabouts. This sum, and more too, they recover if the plan works out - by the sale to the public, for $160,000,000, of bonds and preferred stock at par and 1,500,000 nonvoting shares of Class A common stock. But not a single one of the 500,000 Class B voting (no par) common shares are thus sold. The promoters have virtually paid themselves a handsome profit for the assumption of the entire directorial power, having mortgaged the property to the full amount of its original cost through outstanding bonds and preferred stock, including both assets and capitalized earning power. And the amazing thing is that this final deathblow to the exercise of voting rights by the general public has brought no voice of protest. Yet the plan bears every appearance of a bald and outrageous theft of the last tittle of responsibility for management of the actual owners by those who are setting up these

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latest financial erections. Is n't it the prettiest case ever known of having a cake and eating it too?

Perhaps the baldest case is of an artificial-silk concern, the Industrial Rayon Corporation, with 598,000 shares of nonvoting Class A stock distributed to the public, with the reservation of the remaining 2000 out of 600,000 shares, as Class B stock, carrying exclusive voting rights. Or the invitation to participate in a well-known root-beer enterprise with 180,000 shares of Class A and Class B common shares with the concentration of control in 3872 'Management Shares.' It savors rather of supererogation to add in the prospectus, "The management of the company will remain unchanged and continue in charge of the members of the Hires family.' Or take, if you please, a wellknown theatre enterprise, said to have over $20,000,000 in assets. There will be 4,000,000 shares- 3,900,000 Class A shares to be sold to you and me, and 100,000 Class B shares, in which will be vested exclusive control through voting rights. Furthermore, the Class A and Class B stock will divide the net earnings 50-50.

There is no concealment about all this. It is perfectly open and aboveboard. But who, we ask, under these circumstances has really given a hostage to fortune, to the public, or to the employees for honest and economic management of the business? The promoters stand to lose only the amount of their stake-a minus quantity in a minus quantity in dollars in so far as the nonvoting shares have been made to cover not only the value of the tangible assets but the prospective capitalization of earnings. It is the public stockholders, the consumer and the wage-earner, who stand to lose in event of misdirection. How can there be other than a whirlwind of abuse of power under such conditions? under such conditions? Nor is it our great basic industries

which are being swept by this plague. Most of the great combinations had their rise twenty-five years ago, with a minor outbreak in 1911-12. To-day it is neither the Steel Corporation nor the Harvester Trust nor the railroads which are following these newly beaten paths. Look at the newspaper offerings! The public is buying out the mail-order, chain, and department stores, foodstuff manufacturers, the makers of washing machines, refrigerators, confectionery, make-believe-silk stockings, toilet and beauty preparations, music, tags and napkins, phonograph records, pianos and radio outfits, theatres daily bread, our ice cream, root beer, cake, and even our homemade pies. At this rate every conceivable article of direct or indirect consumption will soon be more or less in the hands of the general public.

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Most disconcerting is it when this latest financial development invades the field of public utilities, already sufficiently cluttered up with holding companies and trusts. The older and conservative companies are above criticism. But one takes exception to the offerings of the Southern Gas and Power Corporation, with an authorized note issue of $2,000,000, preferred stock $5,000,000, and Class A 250,000 shares, leaving the exclusive voting power, except in case of default in cumulative dividends, in 100,000 shares of 'common stock, without par value.' It is these last which are not offered to the public at all. This organization controls operating companies in thirtyseven communities, scattered over eight different states. Was there ever a clearer case in an essential public industry of what has been well defined by an expert as 'one of the besetting sins of modern corporations ... the custom of trading on a thin equity, control resting in the hands of common stockholders, while the funds

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