New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1916-10-29


dends, on the other hand, are paid
only if they are earned. a railroad
like the Erie may go on for years
ond years and remain solvent with
out paying dividends 20 its stock
holders, because it is able 10 pay the
interest on its bonds. It behooves
railroad, therefore, to be very care
full about assuming liked interest
charges. Bankruptcy is invariably
owing to the inability of a corpora
ton to meet its obligations to cred
itors. 1t may reduce dividends to the
stockholders or discontinue them en-
TREY, and that does not matter. In
good year, when earnings are bet
ter, it can perhaps be made up to
them. Tho other side Of it is that
the bondholders are limited to a GER
tain rate of interest, i, > or 6 per
cent, as the agreement is, whereas
the participation of stockholders in
the profits over and above fixed
charges is unlimited. They may take
10 or 20 or so per cent, if the profits
are so large, and that is their own
business. 1t is like any other bust
ness. First you pay the interest on
your borrowed capital, and all the
rest is yours to do with as you please.
You nay take it out and spend it, or
you may put it back into the bust
ness for greater returns deferred,
or you may use it pay off your cred
itors.
1t is like any other business in
another respect, as well. When you
90 out to borrow money, whether
you are a farmer and borrow it by
selling somebody a mortgage on
your land, corporation and borrow
it by selling bonds to investors, or a
merchant and borrow it by selling
your notes at bank, you have to
pay the prevailing rate Of interest.
That will be determined by the num-
ben Of people who are in a position
t. lend-that is to say, by the sup
ply Of capital-and by the number
OF people who are trying to borrow
that is to say, by the demand for
capital.
The world is now full of borrow
ers. England is borrowing from us
for the first time in her history, and
she is paying over 6 per cent to
those who will lend her money.
France, Russia, Italy, the Latin
American republics, Canada, Swift
zerland, everybody, is borrowing,
and as the demand for capital has
increased faster than the supply the
rate of interest prevailing in the
world has been rising. Two years
ago a railroad like the New York
Central could borrow capital, or,
which is the same thing, it could sell
its bonds, at per cent or less,
whereas now it might have to pay 8
per cent. To assume a fixed charge
a. 6 per cent for a long term Of
years is inadvisablc. Nobody knows
how much higher the rate of inter-
est will 90, nor what will happen
when it begins to fall again, as some
time it probably will do. The better
rclicy obviously is to avoid increas-
ing your Indebtedness at & per cent
and increase the number of your
share proprietors, who will be con-
tent to share ratably in the profits,
whatever they are. If earnings
should rise they would be entitled
10 more; if earnings should fall they
would have to be satisfied with less.
That is elastic. Dividends are what
a corporation can afford to pay. In
terest is rigid.
It is sometimes easier to sell
bonds than stock, and it is some
times the other way. If the railroad
business is thought to have bright
prospects, then people are more will
ing TO bug stock, to become share
proprietors, and trust to dividends
for the return on their investment.
If the railroad business seems for
any reason an unattractlye field for
the investment Of ones money and
profits are expected to be thin, then
people will prefer to buy bonds and
become creditors, instead of pro-
prietors. For perhaps ten years the
proportion of railroad capital OBJ
tanned from the sale Of bonds has
been rising, and the proportion OBJ
tanned from the sale Of stock has
been falling in the same degree, so
that the fixed charges of the rail-
roads have been increasing faster
some have thought, than was desira-
bic or wholly safe. Now this is
beginning to change. Railroad
profits are running very high, there
is a large margin over dividends,
and. most important Of all, the gov
errment is committed to the theory
that freight rates must be such as
10 Weld a reasonable return on the