Omaha daily bee., 1902-08-03
ROCK ISLAND REoAPIrALlzATIuN

AC1h Aa1AAO nv AkANH
Governor Cummins of Iowa has
sounded the alarm to awaken the coun-
try to a realization OF the perils in the
reorganization Of railroads, that II not
checked would precipitate a financial
crash more destructive than any the
world has ever witnessed. The pro-
posed recapitalization of the Rock Island
system is in many respects much more
dangerous than the proposed merger
through the Northern Securities com
pany, which has been up to this time
so vigorously resisted by Governor Van
SAINT Of Minnesota, backed by the over
whelming sentiment Of the people of
the Northern Star state.
The menace to public safety lies In the
conversion Of watered stocks into inter
est-bearing bonds that will constitute
from the day Of their issue part Of the
fixed charges of the railroad that issues
them. When it is understood that a
railroad bond is not merely a mortgage
upon the railroad and its equipment,
but upon every acre of land and every
I uuildI : NOIAH vi pIOuuCt VI lHc StCNlou
tributary to it, the criminal enormity
of this bond imitation can best be APP
preciated.
This system, first introduced in this
country in the exchange of the Burling-
ton railroad stocks at 200 cents on the
dollar for bonds bearing 4 per cent
interest, and more recently in the. con
version of Steel trust stocks into Steel
trust bonds, embodies the germs of de-
struction to our entire financial fabric.
The over-capitalization Of corporate en-
terprises by the issue of watered stock
which has been so common for many
years, is within itself most pernicious
because of it's tendency to stimulate un-
healthy imitation, transportation, ex-
cessive tolls and exorbitant charges.
1t is but natural that stockholders
should strive for large dividends even
when they buy their stocks way below
par, and the managers of every over
capitalized corporation feel 1t incumbent
upon them to exact what the traffic
will bear in order to satisfy the
stockholders. In prosperous times
many, If not most, of the over
capitalized corporations are able to
earn dividends without seriously
disturbing the commercial interests.
In times of depression the holders Of
inflated stocks are compelled to forego
their dividends, and in times of distress
they are compelled to sacrifice their
stocks at any price they will bring in
the market.
While mutations Of the stock exchange
and shrinkage in stock values may
seriously embarrass great corporations,
it does not necessarily wreck them, but
when a corporation converts its stocks
into bonds it creates a fixed charge and
compels the corporation to meet that
charge promptly and regularly at the
risk Of going into the hands of a re-
ceiver. When the earnings fall below
the cost of operation these fixed charges
cannot be met except By borrowing, and
such loans are always made when
money Is scarce and dear.
This is the condition into which the
reorganization of the Northern Pacific
and Burlington merger, and the re-
capitalization Of the Rock Island would
invariably lead. The conversion of Bur-
lington and Rock Island stocks into
bonds compels the owners of these prop
critics to meet enormously increased
fixed charges at stated periods and fail
ing to do so, their corporations would
be forced to the wall. SO long as pres
ent prosperity continues they would
doubtless encounter no difficulty, but
should another era Of depression set in
their failure to meet the fixed charges
would bring on a tremendous panic that
would carry wreck and ruin in its wake
from the Atlantic to the Pacific and
clear across the ocean.
Whether Governor Cummins will be
able to prevent the contamination Of the
Rock Island deal is problematic. The
new method Of bond-watering may not
have been covered by national, inter
state, or antitrust legislation, or stat(
regulation of railroads, but Governor
Cummins has struck the keynote. The
new system Of conversion of stocks int
bonds should be made a high crime, an(
; every man convicted of organizing oil
!. financing such deals should receive the
penalties that are melted out to en-
, bezzlers and highway robbers. If Gov
| ernor Cummins succeeds in nothing
more thar in awakening the country t.
its peril he viii be entitled to the graft
tude of the American people.