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tal, in railroads as well as in other forms of enterprise. Where invested capital is practically, though not nominally, earning twelve or fourteen per cent., he will note that such a result is especially liable to suffer from the changes and chances of this mortal life." Such a rate of interest is, of course, far less likely to be permanently sustained than a rate of four or five per cent. on a sound commercial security. It is at this point and in this connection that his attention will fasten on the question of unnecessary capital, which practically amounts to "water" in one form or another. It is plain that, if a railroad is to-day earning four or five per cent. on any given capital, including "water," while only (say) half of that capital was really and honestly invested in the undertaking, it is, in fact, earning eight or ten per cent. upon the capital invested. It is easy for our enquirer to perceive that the tendency of the times is adverse to the supposition that very heavily "watered" concerns can permanently and consistently pay large dividends on both genuine stock and on a large and light-hearted infusion of "water."

Special Contracts.

If our enquirer is wise, he will probably not be greatly intimidated by the idea of "ghost trains." But he will perhaps discover that, to a certain extent, discrimination. in favour of friendly cliques, under the guise of special contracts for transportation etc., is not a mere figment. Possibly he will do well to conclude that abuses of this kind are incidents of a speculative form of "control," but are emphatically discountenanced by every sound and conservative administration.

Let us take, for example, some familiar irregularities which would certainly have been restrained, if foreign

stockholders some fifteen or twenty years ago had been more careful about their direct representation on railroad boards. Let us suppose that a Director on a central board is interested in an unfinished leased line which his company desires to control, or holds shares in a rolling stock company from which his board proposes to hire cars, or has a heavy stake in an oil company with which a special contract is to be made. His personal interest points to a large capitalization and a liberal rental for a leased line, to a liberal rent for cars, or to a low rate for oil under any special contract that may be made. In short, his personal interests are in direct conflict with his fiduciary capacity. No doubt his faith in the value of the subordinate undertaking, in which he has become a shareholder, was the cause of his investing in it. But, just because his confidence in its merits is very great, his estimate of its value is apt to be somewhat sanguine. It would be by no means as critical as the view of a Director who represented exclusively interests which would be best subserved by strict economy.

A few years ago the European stockholder did not. know enough about American railroads to put his finger on the real points of leakage. He was credulous enough to believe that his railroad did not pay, because American engineers were incompetent, and American officials could not run a railroad efficiently and keep its accounts clearly. Our enquirer is very likely to infer from what he sees that, if European investors had concentrated their vigilance and attention on the wise and conservative administration of financial and board business, instead of worrying themselves about engineering and executive details, they would have saved untold millions of cash, which are today, so far as they are concerned, represented exclusively by a mournful experience.

He will pay some attention to the relation which subsists between the real owners of a railroad and the representatives by whom their interests are protected. Suppose him to have acquired his knowledge of railroad administration in England, it will appear to him incongruous that one set of people should have provided all the capital, and that quite another set should control it. In England stockholders commonly build a road out of their own resources; and when they have brought it to such a point of development as to constitute a real security for money, they mortgage it, in the form of bonds, for all that it will carry. Obviously, in such a case, stockholders are the real owners of the property, and the bondholders are their mortgagees. So long as the obligations of the mortgage are properly fulfilled, the bondholder has no reason for complaint, unless indeed the corpus of the security is wasted by the methods adopted for the raising of the interest. But in a great number of American railroads the stockholders had no means of their own out of which to construct and equip a railroad. The foreign bondholders supplied the money; the native stockholder was in clover. He stood to win, and not to lose. If the resources of the district not only grew up to the fixed charges, but made the railroad worth more than its funded debt, the excess of value was the stockholder's profit. If success stopped somewhat short of this, he disposed of contracts to intermediary construction companies, and stood in with them. But whatever profit he made came out of the bondholder's pocket, and, if the enterprise proved a failure, he lost nothing.

It is plain that burthens and privileges are closely correlated. Profit, power, control, patronage, are properly incident to the cash that builds the railroad. When foreign

investors furnished ten or twenty millions of dollars, why not, in every case, have provided for a strong confidential representation and protection of their own interests, with a condition that their representatives should be properly compensated as an incident of the capital which they provided-before stockholders, who found no money, were entitled to profit? Our enquirer will note that, either in the case of original investment or in a reorganization, the sort of control which will best serve his purpose is the control of the people who find the money, and not of the people who do not.

CHAPTER IV.

COMBINATION.

IT has often been said that combination of railroads would tend to undermine the rights of the people, and grievous disasters have been prophesied in its name. As a matter of fact, judging by a critical rather than by an emotional standard, we must admit that the disasters predicted have not, so far, come off in accordance with the programme of the alarmists. Whatever dangers may result to society, in a political point of view, from the concentration of vast fortunes in the hands of the few, combination has certainly not issued in the raising of rates. So far, the public at all events has no reason for complaint. It has indeed been objected to combination. that power would be centralized in fewer hands; that the limits of possible coups would be enlarged, and the inducement to institute them correspondingly increased; that ampler funds would be available for the caprice of a speculative board; that the representation of parallel and possibly conflicting interests would become less direct and less crisply defined. Further that it would become possible to subordinate the interests of one or another section of a combined undertaking to those of a particular section in connection with which a coup was projected.

Though experience shows that such apprehensions were not wholly unfounded, the obvious answer occurs that dangers of this kind are inherent in speculative control;

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