tained, practical railroad men would see no insuperable objection to pools.

On the other hand, it must be borne in mind that there is no pool without a leak. Although the trunkline pools in this country have been greatly helped by the immense ability and exhaustive knowledge of Mr. Fink, experience shows the enormous difficulty of keeping fairly in hand such a vast mass of conflicting interests. The truth is that, comparing mileage with tonnage and practicable rates throughout the year, there is not enough to go round so as to satisfy everybody. The stronger company reasonably contends that a pool is devised for the benefit of the weaker. But it is an incident of weakness to fail in seeing ourselves as others see us; and, if the weak ask too much, the strong are driven to rely on their own force, and to adopt an independent policy. If in a trunk-line pool all parties could agree to abide by the decision of an extraordinarily able Commissioner, and recognize that two and two make four, it is probable that the success of pools in this country would be assured. But, if they are of opinion that two and two make seven, their arbitrator, however able and honest, must necessarily have an up-hill game.

So long as our observer takes note of the practical relation which a pool bears to the securities in which he proposes to invest, he will find no difficulty in protecting his money; and he may leave the theoretical merits or demerits of the modern pool to the exponents of political economy and railroad administration. He will probably conclude that the necessity for a pool indicates a certain amount of weakness somewhere, and that this weakness is most likely to make itself severely felt in the experience of the feebler corporations.

CHAPTER VI.

WATER.

MUCH has been written about the ethics of stockwatering, and from this point of view the subject has been pretty well threshed out. But its effect on investment has produced such serious results that it may be thought to deserve a short notice.

Let us suppose that a going concern finds itself in a position to earn 15 or 16% on the capital invested. The first impulse of its managers will probably be to observe strict reticence on the subject of its profits. To advertise or publish them without reserve would be to directly invite the investment of new capital in the same field, and to produce serious and possibly ruinous competition. A ready solution of the difficulty presents itself. If the capital on which dividend is paid be doubled, and the new stock issued to the original shareholders, instead of paying 15% on (say) $10,000,000, it will pay 7% on $20,000,000. Now, if there existed any law which restricted the amount of dividend payable on a going concern, this process would obviously be a fraud as against the law which created such restriction. But suppose no such law exists in a given case, the infusion of water becomes a question of commercial or corporate tactics. The managers of an industrial enterprise do not profess to be philanthropists. If they can make a large profit without transgressing the law of the land, it is their business to do so in the interest

of their shareholders. If a railroad board can distribute large dividends, their interest in the public is necessarily subordinate to their interest in their own corporation. They may properly contend that all the features of their organization-adjustment of their capital, status of their funded debt, mode of administration, distribution of profits etc. are all parts of a mechanism which is not an end in itself, but a means to an end. The ultimate assets owned by the company are neither increased nor diminished by the infusion of water. But its component parts are expressed or represented on paper in different terms. It may be that the holders of $20,000,000 of stock paying 7% dividend can do better with it on the market than with $10,000,000 of stock paying 15 %. If the administration be honest and conservative, the infusion of water will not interfere with the productiveness of the concern. If it be speculative and adventurous, more frequent and liberal opportunities will occur for the manipulation of financial coups. To take a well-known instance: before the immense infusion of water into the N. Y. Central system, it was plainly earning an enormous dividend on the capital invested. Even after the infusion of 100% of water, it paid such large dividends, and was such a strong and flourishing concern, that the projectors of the West Shore Railroad were tempted to scramble for a part of the profits, and were willing to spend a good deal of money for the exercise of that privilege. Whatever may have been the moral or social merits of the late Commodore Vanderbilt's coup, there can be no doubt whatever that the stockholders of the railroad did not eventually lose thereby. So active is the desire of keen trading communities to transfer capital from fading industries to those which appear to be unusually remunerative, that the owners of

very profitable going concerns hold their tongues about their profits till they are ready to sell out to a joint-stock company. It is not the morality of stock watering to which our observer will address himself, but rather the numerous disguises to which it gives occasion, and the disastrous mistakes which it invites and promotes. Millions of dollars have been invested on foreign account in American railroads under conditions which excited the amazement and mirth of the native investor. During one period of great "inflation," it seemed as if a liberal infusion of water rather increased than diminished the value of shares which were unloaded on Europe.

To determine with any thing like precision what relation nominal capital bears to capital actually, honestly, and economically invested in a concern is perhaps too serious an undertaking for the ordinary investor. Life is not long enough, nor opportunities for searching investigation sufficiently accessible, to render such exhaustive research feasible. But, in a superficial survey of American railroads, many instances occur of so striking and unmistakable significance, that very cursory observation may suffice to prevent the more serious class of mistakes. If a railroad company, which has honestly expended (say) $25,000,000 and has a road worth (say) $30,000,000 to-day, expects to provide for an indebtedness of (say) $50,000,000 or $60,000,000, paying a fair rate of interest, (say) 44%, it can only do so on the assumption that it does now earn, and will continue hereafter to earn, some 9% on capital really invested. The signs of the times distinctly tend to show that such a result is improbable in the last degree. Great as have been the benefits conferred on the public by the constructors of railroads, the public, which they have served well and in the face of immense risks, will not

pay them at any thing like the rate of 9% or 10% for the capital which they have invested and the services which they perform. If the public will not permanently pay interest on "water," the investor will do wisely to take this circumstance into account. As it may properly be asked, what indications in this direction are afforded by the railroad situation of to-day, the answer is not far to seek. Amongst other leading facts, may be mentioned the drift of State legislation; the institution and expressed views of Railroad Commissioners; the tendency of the people to regard railroad charters as benefits conferred on constructing companies, rather than as unfortunate bargains on the part of the grantees; and the tendency of the courts to push beyond its legitimate limits the regulative power of State Legislatures and of Congress.