§ 777]

A BUSINESS AGE

647 ica is rich, but too many Americans are horribly poor. And this modern poverty is harder to bear than that of colonial times because it seems less necessary. Then there was little wealth to divide. Now the poor man is jostled by ostentatious affluence marked by wasteful and sometimes vicious expenditure. Moreover, in the early day, when no man was very rich anyway, there was always one lever within reach to help lessen the inequalities, namely, free land at every man's door. Since 1800 this condition has been more remote, appertaining to a

distant frontier. Since 1890 it has disappeared from American life.

777. Combination in the management of industry follows naturally from modern facilities like the railway and telegraph. It makes possible the use of costlier machinery, utilizes former wastes into by-products, and saves labor of hand and brain. This ought to mean a cooperative saving for all: in actual fact, it has meant too often a monopoly privilege of plunder for a few. The problem of the age is to secure the proper gains of inevitable and wholesome combination and at the same time to restore to the individual his industrial and political liberty. For a generation after the war that freed the slave, moral enthusiasm had small place in politics. Commercialism held the reins. New evils grew upon the life of the people with little check, so long as they threw no immediate obstacles in the path of "prosperity's" chariot wheels. But about 1890 a new tide of moral earnestness began to swell in American life, comparable only with that which marked the days of Abraham Lincoln. Again the people heard the call to line up in a struggle for off-nor, indeed, the average employer. According to the careful investigation of the Bureau of Labor, the average workingman was only a fourth better off, while great multitudes were vastly worse off. Nine tenths the vast increase of wealth went to one tenth the population, while at least two tenths of the people were reduced to a stage of poverty where health and decency are imperiled. (For some details, see American History and Government, § 444.) The tenth at the apex of the social pyramid contains real "captains of industry," but it contains also pirates and parasites. Service to society has less to do with its revenues than plunder and privilege have. The two tenths at the base of the pyramid contain many men whose poverty results from physical or mental or moral lack (though these qualities are quite as often a result of poverty as a cause); but it contains also multitudes of willing, hardworking, sober men and women who deserve a chance, now denied, at decent, useful, happy lives.

Social Justice against Vested Wrong and Special Privilege, which, like the Slave Power, reaped where they had not sown. The Nation awoke shamed; but it awoke in the dark, enmeshed in a net of intangible chains, and found itself for a time curiously unable to grapple with its enemy. The struggle is best seen in the story of the Railroads, of the Trusts, and of Political Corruption.

FORGING A RAILWAY CAR AXLE, at the Howard Axle Works, Homestead, Pa. The drop-hammer, about to strike upon the white-hot axle, weighs three and a half tons, and is one of fourteen such hammers in these works.

I. RAILROADS

778. In the '70's, railway construction (§ 728) had outrun the real business demand, and the roads were driven to ferocious and ruinous competition. In '73 came a "panic," properly known as a "railroad panic." Railroad presidents explained it on this ground of over-investment; but another cause, at least as important, was over-capitalization. The operating companies really were poor; but the men who had built the roads, and

§ 779]

WATERED STOCK

649

"inside" manipulators like the Goulds and Vanderbilts, had become fabulously rich. Often they had put in practically no money, building the roads from National or State grants,1 or with money borrowed by bond sales, secured on the future road. Then they had sold stock, to any amount which they could persuade a credulous public to buy, pocketing the millions of proceeds, and leaving the corporations upon which they had "unloaded" to extort in rates from the people the interest not only on the legitimate investment, but also on this "water."

779. Excursus: "Watered Stock.". - When the stock and bonds of a corporation equal the money actually invested, the value is fully "capitalized." To make the legitimate investment "pay," it must secure an income sufficient to pay running expenses and good interest on this capitalization, and also to set aside a fair amount to cover “depreciation ' (as in the wearing out of engines or their passing out of use because of better inventions). Whenever more capital is put into improvements, it is proper for a board of directors to sell more stock or to issue more bonds, representing the increased value. But to sell stock or bonds upon an old investment already fully capitalized is to dilute values improperly. This is a fraud upon either the purchasers or the public, usually the latter, since it is compelled to pay interest on this "water."

The public-service corporations, such as railroads and city gas companies, have peculiar facilities for selling such over-issues of stock because of the monopoly privilege conferred upon them by society. Indeed, "watered stock" upon which dividends can really be paid, represents monopoly, natural or artificial. Whenever dividends become so large as

1 Before 1873, more than 150 millions of acres had been granted to railroads out of the public domain (about as much as passed to settlers under the Homestead Act up to 1900; map, p. 595), besides lavish "bounties" paid by rival towns along possible routes. In 1872 every party platform demanded that such grants cease. President Cleveland's first Message (1885) dwelt upon the shamelessness with which the nation's "princely grants" for public uses had been "diverted to private gains and corrupt uses," and Congress then enforced the forfeiture to the government of many million acres, for non-fulfillment of contracts by the companies. The worst offenders, however, could no longer be reached. When Mr. C. P. Huntington (one of the magnates who had wrung vast fortunes out of Pacific railroad manipulations) was told that the government would take possession of his road if he failed still to keep his contracts, he answered callously: "Quite welcome. There is nothing left but two streaks of rust."

to incur danger from popular indignation (say 12 per cent), it has been the practice of public-service corporations to disguise their profits by issuing more stock (each holder receiving perhaps two shares for one). The company then claims the right to charge enough to pay a “reasonable" dividend of at least 6 per cent upon this "water," urging especially the rights of "widows and orphans" who have acquired stock by innocent purchase. Such dividends represent an unreasonable tax upon the community, including multitudes of other widows and orphans, who are forced to pay higher prices for almost all commodities. Until quite lately, little attempt was made to prevent stock-watering, and public control is not yet efficient. In general, when the "water" has once been marketed, the courts have protected the corporations in their claims to dividendpaying rates.

780. In the five years following the panic of '73, half the railway mileage in the country was sold under the hammer or passed into the hands of "receivers." This condition gave special opportunity for strong lines to absorb weak ones, and explains the rapid consolidation of that period (§ 728). That consolidation put an end to the worst of the old cut-throat competition for freight business. Still further to prevent ratewars, the roads within a given territory (as between Chicago and New York) adopted the plan, about 1880, of throwing all earnings into a common "pool," to be divided according to a set ratio. This device restored the railroad to its natural place as a monopoly.

781. True, with the swelling of business, freight rates continued to fall but not so fast as did the cost of transportation, because of bigger engines, larger train-loads, and longer hauls. The public did not get its share of the saving. Railway profits rose so as to permit high dividends upon the watered stock, even after wasteful management.

1 In 1865 the average rate for one ton one mile was about 2 cents. By 1877, it was 13 cents, and in 1900 only of a cent. But in spite of these low averages, many localities paid much higher rates. Moreover, long hauls, as in carrying Montana cattle to Chicago, or Kansas wheat to New York, cost so much less than small local business that the roads made huge profits at the lowest rates while even those "low" rates confiscated the inland farmer's profits. Since the World War, rates are much higher.

§ 782]

PUBLIC REGULATION OF RAILROADS

651

In fixing rates for localities where one road controlled the freight business, the maxim early became "all the traffic will bear." The road, existing by virtue of a franchise from the people, and sometimes built by other gifts from the people, extorted from the people all their surplus profits above what it seemed advisable to leave them in order to induce them to go on producing more freight. Roads used their power, too, to destroy one city and build up another, sometimes perhaps to give a chance to those "on the inside" for profits in real estate. Often they favored large cities at the expense of small ones, and gave lower rates to large shippers than to small ones.

This last and worst abuse was secret, and the companies were sometimes the unwilling victims themselves. To get the business of great shippers, they felt compelled to submit to demands for secret rates; and sometimes they even favored such a shipper by imposing a particularly high rate upon a competing shipper. At one time the growing Standard Oil Company ordered a railway to "give another twist to the screw upon a rival oil company which it desired to put out of business.

782. For long the intense desire for railway advantages prevented attempts at public regulation of these abuses. The region northwest of Chicago and west of the Mississippi in the sixties and seventies was peculiarly the creation of the railway. While these communities were in their hopeful youth, they had eagerly offered every possible inducement to railway promoters, often unwisely. Later, especially in periods of business depression, they began to feel keenly the mastery of the railway over them and their fortunes, and to agitate against it. In the early seventies, over the Northwest there sprang up organizations of farmers calling themselves "Patrons of Husbandry," or Grangers, to do away with unfair railway discrimination and unduly high rates. They held the railway a

2

1 In 1885 a committee of the United States Senate asserted that railroad rates generally were based, not on cost of service, but on "what the traffic would bear."

2 Each local organization was a "Grange." It was a farmers' club; the men talked politics at the meetings, while the women got a picnic supper ready. These "granges' were federated in State organizations. The