New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1903-09-29
FICTITIOUS BUSINESS"

Some recent occurrences in the business world
point a strong moral concerning the possible
overriding Of the holding company system. In
its SIMPLEST form that system is substantially
as follows: company is conducting Isl
ness on let us say, S1,000,000 capital and is
making per cent profits with gratifying regu-
larity. Time was when men would have been
content with such business. They are not
now So q second company is formed. often or
practically the same men as the first, TO guar
antee upon the securities of the first a fixed rate
Of dividends. At the same time the new COM
pany issues. say. S1OO0OOO more stock Of its
own, upon which also it seeks TO get dividends.
II the second company is successful in paying
dividends upon both these lots of stock. a third
cCmi any IS formed, which guarantees dividends
on the stock of the second and issues another
81. 100000 Of stock of its own. upon which il in
turn tries to get dividends. There is no reason,
save such as is found in the earning power Of
the business, why the process should not he
continued to a fourth and fifth company and
SO on TO what mathematician would call the
Nth company.
In some cases a single business concern is
thus repeatedly exploited by series Of COM
panies. In others several concerns are united
under n single holding company" In both
cases the essential aim is the same. II is TO get
several sets Of dividends from n single business.
Let us continue the supposititious example al
ready cited. The original company had actually
invested 100000 capital and earned per
cent on it. The second company guarantees
continuation Of these dividends, and also under
takes TO pay per cent on its own new "capi-
tar of 100000. But this latter capital exists
on paper only. 1t has not actually been in
vested in the business. for the enlargement Of
the business and the increase Of its earning ca
Tacity. The transaction therefore amounts to
attempt to get 13 per cent dividends out of
a business that has been paying only :, or Is
per cent on the original S1.0000oO capital. OF
course, as the earning power Of the business
has not been increased. these increased divi-
bends can be secured only through reduction
of expenses. In some cases, in which several
concerns are consolidated, such reduction can
be legitimately effected. But in too many cases
il is effected if at all. chiefly ny lessening the
efficacy Of the service to the public, cheapening
the quality Of goods or arbitrarily cutting down
the wages of employes-processes which, in
such circumstances and for such purpose, are
not TO be approved.
We are not, of course, intimating that all
holding companies" pursue such practices
They do not. Some Of them are entirely Iegitl-
mate in object and method But It is notorious
that some of them do So not only too many-for
even one would be too many-but enough Of
/ them 10 throw suspicion on the whole system
and to cause widespread trouble in the business
world. We are firm believers in the rights Of
/ capital-in the right Of every man to seek fair
profit uron every dollar he has invested in bust
! ness But that is a very different thing from
/ getting profits on imaginary capital which is not
actually invested in productive enterprises at
/ all. The latter is a fictitious and sophisticated
! business. which cannot command admiration
! when it succeeds and which cannot enlist SYM
pathv when ii meets with disaster