The Labor enquirer., 1886-12-11
wArrR1se STOCKS.

i
An Eminent Capitaiist Paper Gives =
| @Crank's" Answer to Per.
/ tinent Question.
The Chicago Inter Ocean prints col
umn called: Curiosity Shop" in which
questions are answered. The following
sample reads like shrek from hor-
rid. crazy labor paper, edited in the in
terest of the dangerous classes:
| CLAY CENTER, Kansas.
What is the process of watering stock?
What are its results, and whom does it
afect2 ]. NJ.
Answer The process of watering
stocks was originated by the elder Van
derbilt. 1t consists simply in estimat-
ing the stock of the road at figure
greatly above its real value. For in
stance, when Vanderbilts, in 1858, Sc
cured control of the New York Central
as well as the Hudson River railroad, !,
the combined capital stock of the two
roads was only about $50, 100000, Early
in 1859 he declared a tremendous divi-
dend of new stock to the stockholders,
and raised the estimated value of the
two roads to S9O,0OO,OO0.
AT first glance, it might be supposed
that there was no harm in this, any
more than in putting purely fictitious
value on any article of ones property.
Thus, if man should buy an old scrub
of a horse for 500. and Immediately
raise its price to $500, we might say that
he wronged no one, as no man could be
found foolish enough to paw the fancy
price for the animal But the action Of
Vanderbilt had purpose which took 1t
quite out of the realm of eccentricities.
such as estimating an old horse at 1000
per cent or 50 above its real value, The
general railroad laws of the state of New
York provided that when the dividends
of any railroad corporation should reach
10 per cent the state could declare how
the surplus above the 10 per cent should
be applied. This provision, it Is plain,
was rendered nugatorY by Vanderbilt's
scheme, as if a railroad can at any tim 9
declare stock dividends with NJ refer
ence whatever to the cost of construc-
ton and repair, a dividend of 10 per cent
NAV never be declared, though the road
may he actually earning 80 or 40 per
cent upon its actual cost.
This scheme of watering stock has
since been carried to great extent by
the managers of our railroads, as it puts
into their hands the means of enriching
themselves at the expense of the public |
in many ways. For instance, branch |
line Of 100 miles is to be built. 1t is as
certained that the cost and equipment |
of the road will be about 500, 900 per
mile. Aid from the towns and coun-
tries through which the road is to pass
is promised, in the form of the purchase
of the stock of the ,ad. The object of
the railroad, managers is now to give as
little value as possible in return for this
money aid, and the corporation, there'
fore, IN stead of making its contract upon
the basis of cash issues to the construc-
ton company, which has been organized
to build the road, issues first mortgage
bonds of, say, $25 900, and perhaps sec
ond mortgage bonds of $20,0s0 mile.
and stock of al equal sum, making to-
tai capitalization Of $65,000 a mile, in
stead of the $4,000 per mile, which rep
resents the actual cost of construction of
the road.
1t may be that the road is wholly built
and equipped on the issue of the first
mortgage bonds alone The road is now
in order to secure apparent
solvency, to earn over and above run
ming expenses, interest on a funded
debt, which is double its cost, and also
to earn dividends on stock beyond that
sum. That this rate of earning has been
frequently. is an evidence
of the enormous growth and general
of the country, but the gene
ra. public has sufereu for it: 1t may be
said that the real or pretended cast Of a
railroad has not much to do with the
rates charged for freight between DIS
tant and competitive points. 1t has,
however, much to do with the fixing of
the local rates, and is a constant incen-
tive to increase the rates for the pur-
pose of paying interest and return upon
all the capital issues of tae road.
This scheme of watering stock has
worked its natural result n creati ng
general distrust OF railroad stocks as a
form of investment. 1t is needless to
say that where local traffic is not Orisk
railroads do not paw dividends, often not
even the interest on the stock which has
been issued and sold on basis of
wholly fictitious value.
37I4 Danced.
Wright assembly held Its ball on