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THE GREAT COLLAPSE
HIGHER FARES
OR
PUBLIC OWNERSHIP
BY
LOUIS WALDMAN


Introduction by
SCOTT NEARING


BONI AND
PUBLISHERS 


LIVER I GHT
i.o     NEW YORK




COPYTGHT, 1919, BY
LoUIS WALDMA1
Prifttd in tAb Utid  BStat  of Admor








Or. 
14  ' ft.~V 
A A 3 -F9


Irmnsponort
Ubnai
ME
-'5t-(
\/J r

My Brother. Morris Waldman








PREFACE
THE general chaotic condition of our transportation facilities and the threatened and
accomplished bankruptcies have convinced the
writer of the supreme need for a popular explanation of the whole problem of private ownership
and management of public utilities. The persistent campaign of the traction trust for an increase in fares, not only in New York but in almost every large city in the country, has been
calculated to convey the impression that the railroad companies are great public benefactors imposed upon by an ungrateful public.
A concerted effort is being made, in many cases
successfully, to hold up the public for more loot.
In this city, although some ground has already
been lost by the extra charge for transfers, the
people are still holding out against further encroachment by the corporations.
To strengthen the hand of the people in their
fight, to equip them with arguments, facts and
general knowledge of the situation, is the purpose
of this book.
Although written with special reference to New
York it is nevertheless of general interest because
the essential features of the railroad problem in this
5




6


PREFA CE


city are the same as those in most of the cities in
the country. Moreover, the methods the corporations pursue, the modes of business organization,
the general laws of development of the traction
system in this city partake of the general character
of modern large industry. The suggestions for
legislative relief here made are, with slight variations, applicable to the national railroads as well
as to most of the other socially necessary industries.
Having in mind the difficulties the average person has in understanding technical business terms,
such as amortization, common stock, preferred
stock, bonds, corporations, leases, operating agreements and holding companies, it has been deemed
advisable to devote the first few chapters to an
explanation of the meaning of these terms and of
the modern instruments of business organization.
Once the reader has secured a clear knowledge
of these, he will have no difficulty in following the
facts related in the subsequent chapters.
This book will have achieved its purpose if it
succeeds in revealing the obscure operations of the
traction trust and throws some light on the perplexing problems which are pressing hard for immediate solution.




PREFACE


7


Armed with the knowledge of the methods the
capitalists employ, the reader will be able to judge
for himself whether the claims made by the defenders of the present order of private ownership
of social needs are correct, or whether the claims
of its assailants, the proponents of the new system,
the system of social ownership and democratic
management of industry, are correct.
The traction problem in New York presents
amazing incongruities.  Busy trains, crowded
cars, comparatively short trips, and yet the companies complain and show figures proving that they
cannot successfully operate on a five cent fare!
The following study exposes their deceptive and
vicious practices and shows their "proof" fallacious. It clearly demonstrates the financial possibilities of operating the lines successfully on even
less than a five cent fare.
The circumstances of the recent bankruptcies
are given at the very outset, in order to enable the
reader to see for himself the extent to which the
lords of high finance are permitted to go under
their own capitalist-made laws to cajole the public
into doing their bidding.
Many public documents and official reports
have been issued, containing all the facts of the




8


PREFACE


case, but owing to the bulk and dry nature of
these reports the facts have escaped the notice of
the public. The story stating the plain facts in
plain language has not yet been written. As far
as the writer knows this is the first attempt.
While it is undoubtedly true that private ownership and management of public utilities is the
source of the existing inconveniences, high rates,
and general chaos, it is not sufficiently convincing
merely to say so; such conclusion must be backed
by showing specifically where this private ownership is responsible for these evils.
And even this is not sufficient. It is necessary
to point the way out of the difficulties. General
proposals, such as "public ownership is the
remedy," may have been well enough when it
was confined to the domain of propaganda, but
not when it enters the realm of practical legislation. The time has arrived when it is essential
that we get a clear idea of what our proposals
really mean.
Only by educating people to the real meaning
of public ownership can there be created an enlightened public opinion to resist the enactment of
sham reform measures, parading under the popular
name of public ownership. The various phases of




PREFACE                   9
public ownership are discussed in the last few
chapters. It should be borne in mind, however.
that the suggestions there made are not offered as
ultimate solutions, but as steps to secure immediate
relief while the present system of private ownership still predominates.
In publishing this little volume, the writer is
indebted to Miss Sylvia Miller and Gertrude
Weil Klein for their kind assistance in preparing
the manuscript, and to his friend William Morris
Feigenbaum for his kind assistance and valuable
suggestions.
L. W.








INTRODUCTION


THE economic history of the United States is
wonderfully enriched by the records of the
street-railway organization.  Capitalism, at its
best and at its worst, is mirrored in the transactions
that have turned hundreds of millions in city
franchise values over to a clique of private exploiters, who have made it a point to use the advantage of their monopolistic position to fill their
own pockets. Through the whole story, there is
no known instance where the street railways, under private management, have been operated for
the purpose of furnishing transportation. Instead,
transportation was furnished as a means of making
money.   Profit-not service-is the aim of this,
as it is the aim of every other part of the capitalistic organization of our economic life.
The tale is simple, consecutive and dramatic.
The capitalists came; they saw; they appropriated. Thereafter they reaped millions in profits.
As the cities grew, and it became impossible
for people to walk or drive to their work, their
trade or their pleasure, a need arose for some
means of quick, dependable, cheap transportation. The streets were there-graded and paved.
11




12


INTRODUCTION


Plainly, those who could get the right to the use
of these streets, for the transportation purposes,
had a source of immense income value.
Promoters recognized the value of these franchises. Office-holders, as the trustees of the public
rights had it in their power to dispose of themalmost as they chose, until the immensity of the
issues at stake were called to public attention.
The result was easily foreseen. The politicians
sold, the financiers bought.  There ensued that
disgraceful period of corruption, during the forty
years following the Civil War, that has made the
municipal government of the United States a byword among students of public affairs in all parts
of the world.
The financiers, once in possession of the franchises, manipulated, leased, rented, consolidated,
merged, combined. Watered stocks flooded the
markets.   Preposterous contracts were made.
Millions in social values were pocketed by men
who never turned a hand to render a public service.
These financial transactions, and these contracts
form the basis for the demands that the streetrailway interests are at present making upon the
American public.
For years the people have been paying huge




INTRODUCTION


13


returns on stolen, inflated values. Now costs are
rising. It is becoming difficult or impossible for
the companies to live up to the robber agreements
planned and executed during the past fifty years.
So the people are asked to pay again.
No one has stated that passengers cannot be
carried at the present rate of fare. The Cleveland
experiment has amply proved the contrary. It is
contended that at the present rate of fare, vested
interests in stolen property cannot be compensated
at the rates agreed upon among the original
thieves.
The following pages tell this story for New
York, a story that every New Yorker must know
if he expects to deal intelligently with the traction
controversy during the next few months. The history of New York traction is typical-therefore
it is doubly important. It is a symptom-pointing,
inexorably to the disease.
The story of the street-railway debauchery,
told here for New York alone, has been repeated
with sickening uniformity in one American city
after another. The amounts involved in New
York are larger. The principle everywhere is
the same.
The experience which the people of New York




14           INTRODUCTION
and other American cities have had with their
street railways is broad enough and bitter enough
to convince even the most skeptical that the only
safe place for public property is in public hands.
Private ownership of public utilities means private
profits from public sources.  The people must
own if they are to rule.
SCOTT NEARING.




CONTENTS


Preface..................................
Introduction...............................
CHAPTERS


PAGE
5
11




I.  The Collapse.......................  17
II. The Corporation-As Instrument of Business Organization and Concealer of
Profits...........................  29
III.  The Combination...................  46
IV. The Holy Alliance.................. 53
V.  The Lease.........................  63
VI. The Holding Company............... 73
VII. Franchises-How They are Obtained....  81
VIII. Stealing the "Underground Hole"-Subway Contracts of 1900-1902........ 99
IX. The Notorious Partnership-Subway Contracts of  1913...................  111
X. "Dead Capital" Earning Money.... 125
XI. Punishing the Public for Its ToleranceAmortization the Means............ 135
XII. The Bankruptcy of Regulation........ 152
XIII. Municipal Ownership We Do Not Want. 166
XIV. Public Ownership and Finance......... 185
XV. Public Ownership and Administration... 197
XVI. Public Ownership and The Workers.... 205
KVII. Public Ownership and Socialism........ 209
15


J
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r








CHAPTER I


THE COLLAPSE
THE Brooklyn Rapid Transit System officially collapsed on December 31, 1918.
From the standpoint of service there had been
nothing to collapse. Its greatest efforts had been
in the direction of extracting nickels from the
people's pockets to the extent of almost $30,000,000 annually.
To the traveling public the B. R. T. has become a veritable torture. It is a common jest that
the B. R. T. is the railroad that makes walking a
pleasure. It is as safe to travel on a B. R. T.
train as it is to be on a ship sailing in mined waters.
Of late, accidents on this system have been a
common occurrence.
The bankruptcy of this company, therefore,
will not be mourned by many. The people see
in it a hope for relief. Perhaps, at last, public
officials will bestir themselves to solve the problem.
"Judge Julius M. Mayer of the United States
District Court," said Timothy S. Williams, president of the B. R. T., on January 1, 1919, "to-day
made an order appointing ex-Secretary of War
17




18     THE GREAT COLLAPSE


Lindley M. Garrison receiver of the Brooklyn
Rapid Transit Railroad Company, the New York
Municipal Railroad Corporation, and the New
York Consolidated Railroad Corporation, these
two being subsidiaries of the Brooklyn Rapid
Transit Company. The order was made upon
the application of the Westinghouse Electric
Manufacturing Company, a creditor, for material
furnished.  The companies did not oppose the
action, for they felt that they would be subserved
by a temporary receivership.*
"The immediate requirements were meeting,
January 1st, obligations for about $2,000,000,
and this could have been obtained,* but to complete the construction and equipment work now
under contract and to provide for additional expenditures for similar purposes during the coming
year, will require the raising of many millions
more, and the general situation affecting street
railroads, with their stationary fares and rising
costs, had injured their credit and made impossible up to the present time provision for the investment of fresh capital."
Col. Williams goes on to state that "the effort
on the part of the company to restore rates of
* Italics are mine.




THE GREAT COLLAPSE


19


fares authorized by their franchises or to get the
right to charge fares sufficient to meet the costs of
service, has thus far failed."
Three things are clear from this statement.
First-The company, for the B. R. T. is really only one company, contends that a five-cent
fare, which it had agreed to charge, is no longer
"sufficient to meet the costs of service," and that
all its effort "to get the right to charge" a sevencent fare "has thus far failed."
Second-That the company did not have to go
into bankruptcy at this time. It could have met
its obligations to the Westinghouse Electric Manufacturing Company, but chose this course because
of its apparent inability to raise money for probable needs in the future. It "felt" that its interest
"would be subserved by a temporary receivership."
Third-That President Williams did not oppose the application of the creditor company. On
the contrary, he joined in the petition of the plaintiff company that the Federal Court take over the
property for the protection of the creditors, bondholders and stockholders.
Professor Gerstenberg of New York University says that a receiver is supposed to be "an




20    THE GREAT COLLAPSE


impartial person* appointed by an equity court to
hold and administer any property which is the
subject of litigation."t
Travis H. Whitney, a former Public Service
Commissioner, was quoted in the New York Times
of January 1, 1919 as having said that Mr. Garrison was named receiver at the suggestion of
George D. Yoemans, counsel of the B. R. T.
Moreover, only one week prior to his appointment,
Mr. Garrison was selected by the company as its
representative on an arbitration committee to decide whether the large awards likely to grow out
of the terrible Malbone Street accident should be
charged against operating expenses.
Obviously Mr. Garrison does not exactly meet
the test of Professor Gerstenberg's definition. He
is an acknowledged friend of the Brooklyn Rapid
Transit Company.
All circumstances seem to indicate that this
receivership was staged for the benefit of a public
unwilling to grant increased fares to the traction
companies of the city.
On the 2nd day of January, 1919, taking advantage of the excitement caused by the collapse
* Italics are mine.
t Modern Business, page 164.






THE GREAT COLLAPSE


21


of the Brooklyn Rapid Transit System, Theodore
P. Shonts, president of the Interborough Rapid
Transit Company, sent a letter to the Public Service Commission and the Board of Estimate and
Apportionment renewing his former application for
permission to charge higher fares. He did better
than his sister companies, requesting an eight-cent
fare for his system. It was, of course, the psychological moment to insist that "the city can gain
nothing by starving the Interborough into bankruptcy."@
The New York Railways Company, a street
surface railway corporation, holding the club of
bankruptcy over a frightened public, came with a
like request. In a word, all the important traction
systems of New York received an irresistable impetus in their demand for increased fares. A systematic campaign has been launched in the press.
The statements of the companies, interspersed
with spicy and friendly journalistic arguments,
are published on the front pages.t
The reactionary section of the press, true to its
mission, has taken up the fight on behalf of the
* N. Y. Times, January 1st, 1919.
t Since this chapter was written, the New York Railways Company has been placed in the hands of a
receiver, Mr. Job E. Hedges.




22     THE GREAT COLLAPSE


corporations with great zeal. It employs the usual
tactics of appealing to the people's good nature
and extreme sense of fairness.  It understands
how the plain people abhor driving anyone to
ruin. Thus, the New York Times of January 3,
1919, in an editorial entitled "The City's Responsibility," said:
"The remedy of increased fares which has
averted bankruptcies in so many other cities is the
one indicated here."
In a long editorial protesting innocence of any
unsound financial dealings on the part of the companies, and bewailing the "loss and ruin to the
unfortunate investors," the New York Sun of January 3, 1919, said:
"Now there is only one way out of affording
relief to the companies. It is to convert the average loss on every passenger carried into an average
gain. The companies have no way of making
money save out of passenger fares. The present
fare nets the loss from which the companies are
perishing.  Obviously the fare must be raised.
Nothing seems to afford an alternative to this
course.
Fortunately, the concerted effort of the press
creates no impression on the people. The appeals




THE GREAT COLLAPSE


23


seem to fall on deaf ears. There is little sympathy
for the companies.
The Brooklyn Rapid Transit Company trains
run as usual, if not with greater regularity. There
is no difference as far as the public is concerned
whether the company is technically solvent or not.
The old conception of bankruptcy is obsolete.
It has changed with the introduction of new
methods in business organization. The railroads
are no longer in the hands of individual proprietors. They are now carried on by corporations.
When the individual proprietor was declared
bankrupt he personally suffered. There was a
human touch in his plight. Socially it was a
calamity to him. The debts he could not pay and
which drove him to bankruptcy he usually owed
to people he knew. They were members of the
same church, of the same club, of the same community with him. They thought highly of him
and he cherished their good will. He who had
been a reputable citizen in the community now
would be a marked man. Economically he was
even more to be pitied. It meant his complete
ruin. He would become absolutely helpless. His
entire wealth, including his personal property,




24     THE GREAT COLLAPSE


could be taken from him to discharge his obligations. It may have meant unmitigated poverty
for himself and his family. Such possibilities
evoked sympathy and fear.
The Brooklyn Rapid Transit bankruptcy or,
for that matter, most corporation bankruptcies,
are "business" affairs. There is no human element. The history of the traction system in New
York City is the history of bankruptcies and reorganizations. For the press to continue to play
the chord of sympathy is useless.
Public utility corporations in New York seem
indeed to thrive on bankruptcies. After each
failure, instead of reorganizing the business on a
sound basis, eliminating the causes that led to the
insolvency, just the reverse has been done. Not
only have the poisons that ate the system's financial
tissues, bringing it to ruin, been retained, but more
of them were added. They multiplied weakness
upon weakness with every reorganization. Every
attempt on the part of government commissions to
place the companies upon a solid footing has been
fought bitterly. The investors, bankers and trust
companies, the real controllers of the transit systems, seem to feed on the weaknesses of corporations, as vultures feed and grow fat on corpses.




THE GREAT COLLAPSE


25


The New York Railways Company, which so
loudly protests its innocence of corporate wrongdoing, is a classic example of corporation brazenness. This corporation is erected upon the ruins
of the Metropolitan Street Railway Company.
In 1911, when the organizers of the new corporation applied to the Public Service Commission,
then in its infancy, for permission to issue new
securities, the latter, upon a careful examination
of the properties and a study of its outstanding
debts, declined to grant the application. The Commission claimed that the securities the company
sought to issue would be far above the physical
value of the property; that if the securities as proposed by the companies were issued the system
would be based on a false foundation and would
lead either to excessive charges in the way of fares
or to bankruptcy. The companies, instead of disproving the contentions of the Commission, turned
to the courts for assistance. The courts held that
the Commission had no right to look into the securities issued by a reorganized company if the issue
did not exceed the aggregate debts of the constituent companies.
The New York Railways Company was quite
willing to avail itself of this decision to prevent




26     THE GREAT COLLAPSE


the Public Service Commission from protecting
"poor unfortunate investors," as well as the great
mass of fare-payers from being robbed.
One item for which the company issued securities was $4,740,000 to cover "Initial payments
for franchises" and "Interest on franchise security
deposits," which was never spent on these items;
at least, such an amount was never spent. The
company does not disclose who got this money.
Under the head of "Organization and Finance,"
the company issued securities to cover $8,149,580.
The items making up this huge sum consist of such
well deserved and indispensable expense as "Payments to underwriting syndicates,-$2,400,000."
The results of the issue of such securities will be
shown in detail in a later chapter.
The Commission refused to give its consent to
this gross imposition upon the public pocketbook.
It was later directed by the court to give its approval to the company's application, and it did.
The companies won. They did not win by
proving the charges of over-capitalization made
by the Public Service Commission to have been
false. They did not win by proving that for every
dollar of security issued there existed its equivalent




THE GREAT COLLAPSE


27


in property. They fought the Commission on a
legal technicality.
The court's decision has carried with it millions
of dollars to the promoters and bankers, excessive
fares, poor service to the public, and probably low
wages to the railway employees.
The outstanding fact is that these companies
now pleading financial embarrassment, threatening
bankruptcy, appealing to our sympathies in their
efforts to secure permission to charge higher fares,
deliberately chose to avail themselves of a legal
technicality when it suited their purpose to do so.
They reorganized the bankrupt business in a manner clearly carrying within itself the germs of future bankruptcy.  It was not done out of ignorance; it was done to make money. It paid to
cast sound business principles to the wind and
choose the path of speculation.
The Commission argued not only in the New
York Railways Company case, but also in the
case of the Third Avenue Railway Company,
that the companies could not succeed, for they
were loading the business more than the traffic
could bear. The organizers responded: "You
have no legal right to say that." They did not
claim: "You are not correct in your contention."




28       THE GREAT COLLAPSE
And now, with the echoes of the Commission's
warning still ringing in our ears, these corporations
impudently use the club of bankruptcy over the
public to exact permission to charge higher fares.
The impudence of the corporations is measured
only by the tolerance of the public.




_ __ ___,,_ _.;,. -— ; —T —__=I; —;;;;-I:-


CHAPTER II


THE CORPORATION
AS INSTRUMENT OF BUSINESS ORGANIZATION
AND CONCEALER OF PROFITS
A corporation is an excellent instrument for
concealing the true earnings of capital. The average man is not familiar with the intricacies of
modern business organization. He loses himself
in the maze of technical words. Common stock,
preferred stock, cumulative bonds, adjustment
bonds, are all so many mysteries to him. And
it is precisely here where the corporations prevail over the public.
A financial statement issued by a traction company, for example, will show conclusively that it
is losing money or that it is just "breaking even."
The public wonders how such a thing is possible
in a city where the cars are nearly always filled
to capacity, and in busy hours jammed beyond
human endurance. But figures are figures; figures
do not lie, although, it is said, liars do figure.
The proof is "conclusive," yet unbelievable.
Out of the mist of doubt arise vague and indefinite
ideas. In due time, by a constant presentation of
29




30    THE GREAT COLLAPSE


the "proof," the human mind begins to question.
After all, why should these companies be
singled out for ill treatment? Why victimize
them? Why should the investors be compelled to
lose money on the public? Everybody is compensated for services rendered-why not the railroad
companies? Transportation is most essential; and
if the figures show, and they do show, that a fivecent fare does not cover expenses, then there is
nothing left to do but to raise the fares. Such is
the reasoning of the average person. The question
of fair play does enter into his calculations.
The conservative citizen sees in this situation
more than that. He sees in it a justification for
his preconceived prejudice against collective ownership of industry generally and municipal ownership of railroads in particular.  Had the city
owned the transit system, he reasons, we would
have had a 7 or 8 cent fare long ago. In fact, the
companies in their campaign literature for higher
fares make precisely this argument. He is sure
that with a five-cent fare the city would either
go bankrupt, or burden the taxpayers with the
losses. In either case, it would be worse than
what we now have, and he is happy there is no
municipal ownership. Moreover, he is convinced,




THE GREAT COLLAPSE


31


now more than ever, that there never should be
municipal ownership.
These conclusions are logical deductions based
on information furnished by the companies. The
information is calculated to lead to just such conclusions. Those who furnish it know what they
are doing.
Nothing, however, could be further from the
truth than these conclusions. The cold facts are
that the roads are earning profits, big profits, even
now under a five-cent fare, notwithstanding the
financial statements of the companies to the contrary. The trouble is that the figures in these financial reports are not properly examined. The
actual is not separated from the alleged expense.
Interest on bonds to this or that bank, dividends
on preferred stock for this or that company, rentals
on leases, amortization of bonds representing no
actual investment in the business, are all thrown
into expenses, although in reality they are pure
profit.
These "expenses," which run into tens of millions of dollars annually, amount to almost half
of the total expense as shown in the Annual Report of the Interborough Rapid Transit Company
for the year ended June 30, 1918. The same




32     THE GREAT COLLAPSE


financial condition is true of the other transit companies in the city. Yet these "expenses" represent
nothing but fat profits.
In its early days capitalism was simple enough.
The game was an open one. Everybody comprehended its rules. Shrewd lawyers were not
needed at every step. Expert brokers were useless. When individual proprietorships and simple
partnerships prevailed it was easy to calculate
the profits earned.
If a business with an investment of $10,000 at
the end of the fiscal year, having paid and deducted all expenses, had $700 left, it was clear
to all that a 7 per cent. profit had been earned;
if $1,400 were left, a 14 per cent. profit. There
was no difficulty in finding out whether the business paid.
Not so with a corporation.   Ten thousand
dollars' actual investment in a corporation may
have had issued against it $10,000 worth of common stock, $10,000 of preferred stock and
$20,000 worth of bonds. Whatever profits a
corporation earns must be apportioned to the bondholders first, the preferred stockholders next and,
if there is any money left, to the holders of com



THE GREA T COLLAPSE


33


mon stock. If the corporation in question at the
end of a fiscal year, with expenses deducted, finds
$1,400 made, and if the interest on the bonds,
which are generally fixed, happens to be 7 per
cent., the $1,400 would be used to pay interest
to the bondholders. The stockholders of both
classes would receive nothing. No dividends to
anybody, yet a 14 per cent. profit would have
been made on the money invested.
How easy it would be for the corporations to
plead poverty before a gullible public! They
could show black on white that they were operating at a loss.
The instance here cited is by no means farfetched or overstated; on the contrary, it is the
corporation method of concealing profits in its
simplest and most innocent form. In practice the
manipulation is far more subtle. Losses are frequently shown on financial reports when, in fact,
profits are earned on the money invested.
Properly to understand the claims of our public
utility corporations and to know how much we are
gouged, it will be necessary to make a simple and
succinct statement of the meaning of the modern
instrument of business organization, the corporation. It will also be essential to unravel the hope



34     THE GREAT COLLAPSE


less and confusing situation of leases, partial control, full control, operating agreements and holding companies. The knots in our railroad system will be untied so that the length of the rope
may be seen by all.
It is difficult to define a corporation to include
all elements. "According to contemporary practice, a corporation is an association of natural
persons, or of other legally constituted persons
(other companies), authorized by law to act as a
unit, under a corporate name, for the accomplishment of certain definite and prescribed purposes.. It is a 'person' constituted by a law, separate
and distinct from its stockholders, and, in a certain sense, is a citizen."*
A corporation is an association of individuals
recognized by law as an entity. It has an existence of its own; it bears its own name, builds
its own reputation, leads its own life; it is a
"person," a creature of the law; it can become
insolvent, it can die, it can become revived; it
can do many questionable things without in the
least hurting or embarrassing those respectable
members of the community who constitute it.
* W. Allen, Modern Business Corporation, p. 1.




THE GREAT COLLAPSE


35


The value of the property of a corporation is reprepsented by what is known as stock. It is divided
into shares, usually, of one hundred dollars each.
A share is a certificate showing ownership in the
corporation. A holder of a one hundred dollar
share does not own one hundred dollars' worth
of property in the business.  He does own
one hundred dollars' worth of control in the corporation. A citizen of the United States does
not, by virtue of his citizenship, own any part of
the United States, but does own a right in the
government of the country. A stockholder, likewise, owns a right in the government of the corporation which owns the property.
Stock is generally divided into two classes, preferred and common. That class of stock earning
dividends before any other, having priority in the
assets of the corporation in case of failure, is
called preferred stock. The stock that lays last
claim on the assets in case of failure and earns
dividends after all other claims have been satisfied,
including the payment of dividends on preferred
stock, is called common stock.
The control of the corporation is usually in
the reverse order. The common stock gets first




36     THE GREAT COLLAPSE


control; preferred stock next, and under certain
contingencies, bondholders may step in.
A corporation may issue bonds to obtain
finances. They are usually secured by a mortgage on the property. Railroad corporations in
this state must obtain permission from the Public
Service Commission before issuing bonds.
A bond is a certificate of indebtedness bearing
a fixed and guaranteed interest which must be
paid periodically. In case of inability to pay such
interest, the court, upon the application of the
bondholders, declares the corporation insolvent,
takes the management away from the stockholders and places the business in the hands of a receiver to run it in the interest of the bondholders.
The bondholders stand no risk. Their earnings are definite. The lords of high finance refuse
to take chances. They will let the small fry
run the business, pride themselves on owning
things, give an opportunity to professors to write
books attempting to disprove the theory of concentration of wealth-they will permit all this,
but they will never allow anything to interfere
with their sapping the vitality of industry by drawing usurious interest, nor will they permit industry




THE GREAT COLLAPSE


37


to escape their control. Most of the railroad companies are financed by bond issues.
The courts describe corporations as being
"soulless." A glance at the history of our public
utility corporations will convince one that the
courts are right.
The law, creating a new substance in a corporation, apes nature. Chemical substances are generally distinct from their elements. Water is not
a sum of hydrogen and oxygen, it is their product.
It is not a gas but a liquid. A corporation, likewise, is not the sum of so many individuals, but a
product of them. Three men A, B and C form
a partnership, the result is a business of A + B +
C. Each partner is responsible for the entire firm.
If A is a prince and B and C are paupers, A
will be held responsible for the business transactions entered into by B and C on behalf of the
partnerships. The credit and value of the firm
is the sum of the three partners. Each partner
stakes his personal reputation and fortune in the
business.
If, however, A, B and C form a corporation,
the result is a business of A B C, a new creature.
Each member risks an amount equal to the par




38     THE GREAT COLLAPSE


value of the stock he owns, beyond which the
creditors cannot reach him. The business is carried on by a Board of Directors elected by the
stockholders.
Those who oppose socialism because it would
destroy "individual initiative" and "incentive" to
personal effort, thereby destroying the "foundation of modern society," must revise their views.
The corporation, the chosen instrument of capitalism, has already destroyed individual initiative
and incentive to personal effort. A corporation is
impersonal; it is an institution, a collectivity, legally possesing some attributes of a natural person carrying on its business activities through
hired brains. Where personal service is of the
essence a corporation cannot function. Thus, the
law in New York forbids dentists, physicians and
lawyers to carry on business as a corporate body.
A corporation is essentially a modern instrument of business organization.  Prior to 1776
only two business corporations had been chartered
in this country.
The first quarter of the nineteenth century was
the beginning o: the present industrial system.




THE GREAT COLLAPSE


39


Capitalism was in its youth.  It was vigorous,
enterprising, almost feverish in its growth. Then
corporations were given the greatest stimulus.
Many of the states, by enacting favorable statutes,
facilitated the organization of corporations. With
practically no legal check, the corporation in its
adolescent stages indulged in unspeakable vices.
It resorted to every trick known to the business
charlatan.
"It was asserted that a small clique of Boston
capitalists by improper methods perpetuated voting control of those corporations in which they
owned a comparatively small amount of stock.
They induced stockholders to sign proxies in their
favor when they signed their dividend receipts.
They also held annual meetings, in small rooms,
to which but a fraction of the shareholders could
get access, and called meetings of several companies at different places for the same day and
hour, in order to divide the oposition of independent men who owned stock in a number of
companies. Less than a score of Boston capitalists were said thus to dictate the fortunes of most
of the great manufacturing corporations of the
State, and one man was cited who was director
of 23 companies and president of all. The same




40     THE GREAT COLLAPSE


coterie owned a Massachusetts Life-Insurance
Company, which, with a capital of $500,000,
controlled nearly 10 times that amount of investment funds. Having forced factories by mismanagement to accept loans by this company, they
either foreclosed or used every power to depress
stock for their own benefit. The other spoil of
this control was high-salaried officers and exhorbitant agents' commissions."*
A similar story of early abuses might be told
with equal truth of New York traction companies.
Many evil practices exist even now, but such as
are pictured above are too crude for the modern
financiers. They can stifle opposition and obtain
control in a more "respectable" and "legal" way.
The modern is the scientific method of robbery.
The fact that the corporation can be used as
an instrument for corruption did not deter industry from selecting it as the most logical and adaptable instrument of business organization.  Between individual proprietorships, partnerships and
corporations there was a fierce struggle for existence, and the corporations won. Almost three* History of Manufacturers, 1607-1860, p. 460; quoted
in Moder Business, C. W. Gerstenberg, p. 9.




THE GREAT COLLAPSE


41


quarters of the wage earners of this land are employed in corporate industry. The basic industries
of the country are almost all in the hands of
corporations.
What is the real reason for the conquest of
the corporation over the individual proprietorship?
What is the efficient cause, as it were, for the
selection of the corporate mode of business organization?  Why do business men deliberately
choose this instrument as against all others?
While undoubtedly the vicious element in the
business world will at times prefer the corporate
method because of the opportunities it offers for
corrupt practices, the vast majority of business
men do it purely because of its superiority over
all other modes of organization. Any agency can
be abused and its purposes perverted.
Modern industry, especially the railroad business, required three indispensable elements: permanency, large size and limitation of risk. The
corporate method assures all these.
Permanency is essential in the railroad business.
It would be difficult to confer a franchise right
upon an individual or partnership, because the enterprise would be dependent upon the skill or lack
of skill, ability or inability, whims, fancies, and




42     THE GREAT COLLAPSE


the life of human beings. Upon the death of an
owner or a partner in whom, principally, trust and
reliance was placed, the business may descend by
inheritance or otherwise to individuals incompetent and untrustworthy.  Evidently, such possibilities and unstable conditions are impossible in a
business where permanent fixtures are built at great
expense and put to stay. The initial expense of a
railroad is very large and is growing larger daily.
A railroad cannot be moved about, or otherwise
subjected to disturbances. The life of the business cannot be measured by and should not depend upon the life of a human being.
A corporation, on the other hand, is not subject to the whims and fancies of stockholders. It
is run in accordance with certain prescribed laws.
The death of an investor does not in the least
affect the progress or life of the corporation. If
a stockholder cannot agree with the rest of the
investors the corporation is not dissolved, he simply sells his shares to someone else. The business
does not suffer thereby. Order, permanency, are
the law of the modern business world.
Of course, under certain circumstances, a corporation, too, can be dissolved; but its dissolution is a rare thing.  It is accomplished either




THE GREAT COLLAPSE


43


when it violates the purpose for which it was organized, and the state finds it necessary to interfere, or, on the decision of two-thirds of its
stockholders.
This is the age of big business. Even those who
rail against "monopolies" and "trusts" concede
that. President Wilson, in a masterly brief for the
middle class, said: "I am for big business, but
against monopoly."* Any instrument of business
organization that does not permit the assembling of
large sums of capital, the conducting of business
on a grand scale and the elimination of the tremendous economic waste due to a certain kind of
competition, is doomed to go. A railroad is, in its
very nature, a "big business." At the beginning,
when large individual fortunes were rare, few
railroads indeed would have been built if there
were no way of getting together comparatively
small investors to cooperate, raise a large amount
of capital, commensurate with the undertaking.
For that purpose any other agency save a corporation would have been cumbersome and illadapted. A corporation can draw capital from
tens of thousands of investors, assemble large sums
* The New Freedom, p. 180.




44     THE GREAT COLLAPSE


of money, engage in business on the grandest scale
with the same efficiency and economy as if it consisted of the fewest number of investors permitted
by law.
The limitation of risk is an essential ingredient
of modern business organization. The risk to be
discussed here is not the relative risk of corporation
investors usually the theme of much controversy.
It is to be understood here in a different sense.
The capitalist saw long ago the inadvisability
of staking his entire fortune in one establishment.
Business everywhere was so alluring that he
yearned to have his finger in more pies than one.
If he did not make out well in one enterprise he
made up for it in another. Moreover, it gave the
financier, the banker, an opportunity to take a
hand in every business that could be manipulated
to his own advantage. A controlling share in the
business was all he needed, the rest might be distributed among thousands of small fry, for all he
cared. Under individual proprietorship or partnership such practices would have been impossible.
A failure in one partnership, the inability of the
defunct business to meet all debts might mean the
ruin of the rich partner. His investments in other




THE GREAT COLLAPSE


45


business would not be immune from the claims of
creditors. In a corporation, in case of failure, he
is safe as far as his other investments are concerned. Capital must be free to move, invest itself
all over the country, in all kinds of industry, in all
parts of the world. Antiquated modes of business
organization must not impede its mobility. Encumbrances and risks must be at a minimum.
Industry realized its needs and acted accordingly. If the corporate method is best suited to
its development, it is selected as the prevailing
mode of organization. It is the old principle of
the survival of the fittest. There is no moralizing
about it. The question of good or bad does not
enter into the discussion at all. The corporation
was most adaptable to the needs of the railroad
business and it prevailed.  To attack and rail
against the "corporation," and consider it an evil
in itself is folly; to understand it intelligently is
important.




CHAPTER III


THE COMBINATION
If the first quarter of the nineteenth century is
marked by the introduction of the corporate form
of business organization, the last quarter of the
century saw the birth of the trust, the syndicate,
the pool, the holding company, the consolidation,
the merger, the "agreements," the deals and private understandings of all kinds. Industry was
unable longer to contain itself within the boundaries of the ordinary corporation. It sought to enlarge its business frontiers.
Rapid improvement in machinery gave rise to
new instruments of transportation.  New instruments of transportation and vastly improved conditions of travel facilitated communication. The
phenomenal growth of industry and commerce
have been both the effect and the cause of improved transportation.
Motive power has gone through several stages
in development. While the advent of each successive power has meant greater efficiency, economy
and speed, its introduction has been marked by
many difficulties and much expense. The modest
expenditures needed for the construction and
46




THE GREAT COLLAPSE


47


equipment of a short-distance street railway is no
longer sufficient. This is the age of Rapid Transit
systems, steel cars, elaborate stations and gigantic
power-houses. The initial expense for the construction of modern elevated and subway lines
runs into hundreds of millions of dollars. Competition in a business requiring such great initial expenses is an absurdity. Combinations took root
very rapidly.
During the great anti-trust wave which swept
the country in the first decade of the twentieth
century, the railroad business seemed to enjoy a
quiet privilege. Politicians, legislators and journalists, trading on their anti-monopoly attitude,
realized, less clearly at first but more and more
so as the years rolled by, that the railroad business is in its very nature a monopoly.  It has
thereby been exempted from the general stigma
attached to the industrial combination.
Railroads are distinct from most other business
by reason of their public character. From the very
beginning the railroad has been considered a public
convenience. The right to engage in the railroad
business requires more than the mere formal sanction of authority which corporations secure when
about to engage in an ordinary industrial pursuit.




48    THE GREAT COLLAPSE


Whichever the railroad is to be, surface, elevated
or subway, the company must get a special permit,
known as a franchise. A street, a public thoroughfare is the result of a slow process of development and of the expense of much time, labor
and money. The whole community contributes to
its growth; the public thoroughfare is, therefore,
the property of the whole community, a valuable
property at that. To disfigure the street by laying
rails on its surface, or to erect an elevated structure with its innumerable inconveniences, or to
build a subway with its threatening danger to
property and the necessary replacement of and interference with the various underground pipes and
mains obviously requires special permission from
the community.   The considerations for these
special rights and privileges and the methods the
companies have employed in obtaining them will
be discussed in chapter VII.
The outstanding fact is that once a franchise is
granted to one company, for that particular route
it has a practical monopoly. Moreover, if it is an
important route, the numerous side routes and extensions are very often valuable only to that particular company.  Some lines crossing sparsely
populated sections are run at a small profit, at cost,




THE GREAT COLLAPSE


49


or even at a slight loss by a company that has a
transportation system in the heart of the city. It
uses these lines as feeders. Only by taking the
system as a whole do the lines become profitable
enterprises. For other companies, each to run one
of these lines independently would be suicidal.
They would soon find themselves in the hands of
receivers. Competition, on this score alone, is
impossible.
And yet, there was competition or an attempt
at competition in the early days of railroad development. So far as can be learned, the competition
centered not so much in keeping rates down or in
giving better service to the public, as in grabbing
franchises.
The railroads learned the lesson of competition at a considerable price. The usual conditions
prevailed. More companies were organized than
could be profitably sustained. While on the surface things looked quiet and regular, underneath
there raged a fierce struggle for existence. The
companies possessing greater advantages in the
struggle succeeded in crushing the weaker ones.
Of the amazingly large number of companies
that were organized within the present limits of
New York City to operate routes very few have




50     THE GREAT COLLAPSE


remained alive and are doing business. And even
the few apparently independent operating companies are controlled, in the final analysis, by a
small group of financiers.
Darwin calculated that if one pair of elephants,
the slowest breeders among mammals, were permitted to propagate their kind for 750 years, and
if all the offspring lived and bred they would be
the ancestors of nineteen million elephants. Luckily the struggle for existence kills a sufficient number of elephants to leave a little space in this world
for the rest of us. So it is with the railroad companies. There have been so many of them organized in the short space of less than a century
that, had they all lived and funcitoned we would
now have a company for every 100 feet or so of
railway. A ride in New York, such as we get
now for five cents, would have been exceedingly
expensive and fearfully annoying. Thanks to industrial progress we have been spared that agony.
Up to July 1, 1913, seven hundred and twenty-six corporations had been organized to operate
routes in what is now New York City. More
than two-thirds of these died, too weak to put up
a fight, yielding to the inevitable without resistance. The 271 remaining companies struggled




THE GREA T COLLAPSE


51


hard. They fought to survive, to be successful.
After several years of warfare the battlegrounds,
when cleared, found only 76 companies alive.
The casualties were enormous, 195 out of 271 lost
their identity. They were merged or foreclosed.
Even the heroic 76 companies were not permitted
to have the field all to themselves. Thirty-one of
them chose to maintain a nominal existence only,
leasing their properties to the remaining forty-five.
These forty-five companies are further combined
by means of the holding company. The few
holding companies are, in turn, very effectually
controlled by a small clique of financiers, trust
companies, investing banks and insurance companies.  The process of merging, consolidating
and concentrating of control was phenomenal.
There is a complete monopoly in the transit system of New York.
The "independent" holding companies entered
into private agreements and understandings by
which the city became completely helpless and
entirely at their mercy. They divided the city
into "spheres of influence," in which each combination is to reign supreme. They are doing on
a small scale what financial imperialism does on a
large scale.




52       THE GREAT COLLAPSE
How are these nefarious activities accomplished? How does this bear on the question of
raising fares, and the entire tranction problem? Is
it a product of our policy of ignorant indifference?
If so, what should our policy be?
All these questions will be taken up in detail
to indicate the modus operandi of the concentration of control of the traction business and its consequent deep-rooted evils to the community. We
will explain briefly the "holy alliance" of financial monarchs, the intercorporate method of doing
business.




CHAPTER IV


THE HOLY ALLIANCE
Intercorporate relations is a practice well
known in the business world. It is a device by
which common control is established. Separate
companies are organized, but are all managed by
the same directors.  Separate corporations are
maintained in spite of the duplicate expenses and
obvious economic disadvantages because of the
opportunities they offer for obtaining certain
"rights" which may be permissible in law, but
surely wrong in equity.
A glaring instance of such an arrangement designed to defraud the city was detected as far
back as 1886. The Bleecker Street and Fulton
Ferry Railroad Company and the Twenty-third
Street Railroad Company were separate corporations, each having a franchise to operate a
railway on a different route. The franchises were
very valuable, and the Board of Aldermen, corrupt as that body was, did not dare to give them
away entirely free. Agreements were made between the city and each of the companies whereby
the city would be compensated for the franchises.
53




54     THE GREAT COLLAPSE


The Bleecker Street and Fulton Ferry Railroad Company was required to pay 1 per cent. of
its gross receipts annually, while the 23rd Street
R. R. Company paid a lump sum. By an agreement between the two companies to use certain
tracks jointly the receipts were so mixed as to
make it impossible to collect the assessments from
the Bleecker Street and Fulton Ferry R. R. Company. In that way the city has been defrauded
of tremendous sums of money annually.
The activities of a certain Jacob Sharp, of very
shady connections, to obtain an additional franchise on the same terms as the above companies
in:pelled the Mayor, who was in a row with the
Board of Aldermen, to investigate the composition of the corporations. IHe found the same
crowd controlling both companies by intercorporate directorates.*


Bleecker Street & Fulton Ferry R. R. Co.     23rd St. R. R. Co.
Pres. Jacob Sharp       Pres. Jacob Sharp
Sec. Thos. H. McLean    Sec. Thos. H. McLean
Treas. David J. King    Treas. Lewis May
* Meyer's History of Franchises in N. Y., p. 142.




THE GREAT COLLAPSE


55


DIRECTORS
J. Sharp
Lewis May
Eugene S. Ballin
Isaak Hendrict
David James King
John Downey
Henderson Moore
S. B. H. Vance
Thomas B. Rerr
Joseph Jacobs
John H. Selmes
Alex. E. Kursheidt
William Mangris


DIRECTORS
J. Sharp
Lewis S. Ballin
Eugene S. Ballin
Isaak Hendrict
David James King
John Downey
Henderson Moore
S. B. H. Vance
L. Marx
Lazarus Rosenfeld
James Lynch
John R. Flanagan
James Flanagan


Thus, two corporations, distinct in law were
practically the same in fact. They were both
steered and directed by the same hand.
Holy alliances between corporations, under
more forms than one, exist with us to-day on a
larger scale than ever and with more injurious
effect.
When the appearance of independence no
longer serves a "good" purpose, or when it is
necessary to take some small and ill-reputed company under the protective wings of a larger cor



56     THE GREAT COLLAPSE


poration having back of it some great financier
to enhance its credit, the companies fuse and assume the name of the favored corporation. Such
a consolidation is called merger.
In the famous Metropolitan Street Railway
Company merger, in 189:, the constituent members gave up their individuality. They gave up
their names, their existence, and assumed a new
name. The shareholders of the constituent dead
members received shares from the new company,
equivalent in amount to their previous holdings.
Of course, the position of the creditors of the constituent companies was precisely the same as before the merger. It is a well-established principle
in law that nothing the debtor will do can impair
the rights of his creditors in law or in equity. The
claim of the creditors is against the new corporation. It is, therefore, obvious that if the separate
companies were mismanaged, wasteful and reckless in their financial dealings, and if they mortgaged their properties at a great price, and if they
saddled the business with various bonded indebtedness bearing high rates of interest, the merger
would not do away with these evils, for it assumes all the obligations of its members. It retains all the weaknesses of its constituent memo




THE GREAT COLLAPSE


57


bers; it does not establish the business on a solid
financial basis.
The Metropolitan was just such a merger and,
therefore, could not endure long. On November
19, 1907, a receiver was appointed to take charge
of the properties.
The process of consolidation by merger became
widespread. No fewer than 117 companies, organized to operate routes in New York, gave up
their existence in merger.
The apparently innocuous trackage agreements
and contracts for supplies and equipment are
crowded with possibilities for fraud under intercorporate relations.  It must be remembered
always that the railroad companies are subject
to regulation more or less, even if it be only the
regulation of public opinion. Earnings must appear small, particularly so when employees demand higher wages, or when the public demands
a reduction of fares, an extension of transfers, or
when the companies demand an increase in fares.
Where intercorporate directorates exist trackage agreements, equipment contracts, leases-all
offer a splendid opportunity for diverting profits
into another company owned by the same crowd,
as a "consideration" for certain "rights," supplies




58     THE GREAT COLLAPSE


received, etc. In this way the expense of the
company subject to regulation is bolstered up
considerably. Then it is easy to plead poverty;
more than that, prove it by "financial statements."
The Nassau Electric Railway Company,
which absorbed 18 distinct railroad corporations
by merger and controls many by leases, furnishes
a classic example of manipulation designed to rob
the public. On the surface there appears nothing
wrong. Scratch the surface and the foul frauds
become evident.
It should be noted that this company is completely controlled through stock ownership by the
Brooklyn Rapid Transit Company. This control
dates back to February 15, 1899.
The company owns power houses in various
parts of New York and Brooklyn.
On February 28, 1907, the company leased
its power houses to a corporation known as the
Transit Development Company. On the same
day its sister companies, all controlled by the
Brooklyn Rapid Transit Company, joined it in
leasing to the Transit Development Company
their power houses and plants.
The Transit Development Company entered
into an agreement with the companies of the




THE GREAT COLLAPSE


59


B. R. T. system whereby "the Development
Company would take over and engage the employees and officers employed in these plants in
connection with their operation, also to furnish all
necessary labor and material for the maintenance
and construction of track, sub and super structures, poles, wires and buildings, etc., as required
by the several railroads companies, parties to this
agreement."*
The same day the leases were made the Development Company entered into an agreement
with its "landlords" to supply electrical power
for the operation of their cars at the cost thereof,
plus 5 per cent.  This contract is commonly
known as the "Power Consumption Contract."
The companies of the B. R. T. system were
operating cars across the Brooklyn Bridge. Some
time in 1907 they decided they wanted cars of
a select type for local bridge service. On December 23, 1907, they entered into an agreement
with their tenant, the Transit Development Company, to supply them with such cars and maintain them at operating efficiency, in consideration
of which, the Development Company would re* Documentary History of Railroads, P. S. C. Reports
for 1913, v. 5, p. 740.




60    THE GREAT COLLAPSE


ceive all costs, plus 10 per cent. Who is this
fortunate Development Company? Why does it
receive such fat contracts with guaranteed liberal
profits? Is it in any way related to the B. R. T.
Company?
The Transit Development Company is a corporation organized on April 22, 1902, for the
following purposes:
"1. To purchase or otherwise acquire and
hold, improve, operate, lease, rent, sell, grant and,
convey or exchange real property....
"2. To carry on the business of general contractors, including the contracting with other corporations or persons for the supply of power or
for the construction, equipment of railroads,
bridges, wharfs, tunnels and subways, and carry
out such contracts."*
The capital stock was to be $25,000 issued
in one hundred dollar shares. From the minutes
of a special meeting held by the company on
October 14, 1902 at its offices at 168 Montague
Street, Brooklyn, it appears that the B. R. T.
Company is the sole owner of all of its capital,
and, therefore, of the corporation itself.  The
* From incorporation certificate.




THE GREAT COLLAPSE


61


affidavit attached to the minutes reads: "I hereby certify that the Brooklyn Rapid Transit Company is the holder of all the capital stock of Transit Development Company, and so appears on the
books..."
The affidavit is signed by C. D. Meneley, secretary of Transit Development Company. Mr.
Meneley is now the vice-president, member of
the board and treasurer of the Brooklyn Rapid
Transit Company.
Another affidavit attached to the minutes
reads: "T. S. Williams, being duly sworn, says:
That he is one of the directors of Transit Development Company and was present at a special
meeting  of  the  stockholders  of the  said
company..
Mr. Williams, up to the collapse, was the president, and at the time of the special meeting was
the vice-president of the Brooklyn Rapid Transit
Company.
The minutes are exceedingly absurd. The participants in the meeting go through the legal motions in real mock-serious fashion. Mr. Williams,
as vice-president of the B. R. T. Company, the
sole stockholder, pompously resolves that, "we, the
undersigned, being all the stockholders of Transit




62     THE GREAT COLLAPSE


Development Company, together owning the entire capital stock of said company... do hereby authorize the directors of said company to
hold.. " a special meeting and do certain
things. Whereupon, Mr. Williams, as director,
in pursuance to instructions of Mr. Williams, "the
stockholders" acts with extraordinary dispatch.
"On a motion, duly seconded, a vote was
taken upon" a proposed resolution.  "Thereupon, stockholders representing two hundred and
fifty (250) shares of stock, being all of the capital stock of the said corporation, vote in favor of
such resolution and no stockholders voted against
this adoption, and thereupon such resolution was
declared duly adopted and the meeting adjourned."
Mr. Williams acted the various roles in true
Pooh-Bah style. All the stockholders were of
"one mind" and therefore were unanimous in
their decisions.




CHAPTER V


THE LEASE
Another instrument which has gained a foothold
in our railroad system is the lease.  It is an arrangement whereby one corporation transfers the
right to possession and use of its properties to another corporation.  It differs from a sale in that
the title to the property remains with the original
owner.   The owner of the property is called
lessor, landlord; the user of the property is called
lessee, tenant. Under the lease the well-known
relations of landlord and tenant exist.
There are many reasons why railroad companies prefer the lease instead of the sale, particularly when the landlord and tenant are the same
party; and if traced back far enough they are usually found to be the same. In the case of a sale,
if it is genuine, the purchaser scrutinizes carefully
the value of the property. He does not voluntarily pay for watered stock. He does not assume
heavy bonded indebtedness. He takes a physical
valuation of the road and pays what competent
appraisers in his employ tell him to pay. If the
sale is not genuine, some such procedure would
have to be followed if only to keep up appear63




64     THE GREAT COLLAPSE


ances; otherwise, the purchase would be a fraud
too plain to be concealed. The consideration in
a sale is a lump sum.
The lease is different. The consideration for
a lease is usually in installment sums, in rentals.
The lessee takes over the roads as they are, with
all encumbrances and obligations. He pays an
interest on the bonded indebtedness, taxes, salaries of officers and all expenses required by the
lessor company. In addition, the tenant usually
agrees to pay dividends to the landlord's stockholders.  As a rule the dividends are fixed.
They become part of the "expenses" of the operating company.
Thus, the Interborough Rapid Transit Company, whose president is so vociferous in his demand for a higher fare, giving the poverty of the
company as a reason, pays to its landlords, the
Manhattan   Railway  Company, "guaranteed
dividends-7 per cent. on Manhattan Railway
Company capital stock," amounting annually to
the enormous sum of $4,200,000.~ And yet
the company claims it pays no dividends. Besides these guaranteed dividends the Interborough
Rapid Transit Company pays:
* Annual Report of the I. R. T. Co. for 1918. p. 5.




THE GREAT COLLAPSE


65


*Interest on Manhattan RailwayConsolidated mortgage 4% bonds.... $1,627,360
Interest on Manhattan Railway 2nd
mortgage 4% bonds...........    180,920
Manhattan Railway (organization).  35,000
Total....................$1,843,280
The Manhattan Railway Company has an interesting history. Almost from its very birth,
December 29, 1875, it struggled to overcome the
opposition of two other companies, the New York
Elevated Company and the Metropolitan Elevated Railroad Company. By various arrangements, litigations and schemes the Manhattan
Railway Company absorbed the other two completely.
"January 1, 1903, this company leased its
property and franchises to Interborough Rapid
Transit Company, the lease to take effect from
April 1, 1903, and to run for a period of 999
years from November 1, 1875. The lease provided for a nominal rent of $10,000 and guaranteed to the stockholders on the Manhattan Com* Annual Report of the I. R. T. Co. for 1918, p. 5.




66     THE GREAT COLLAPSE


pany an amount equal in the aggregate to not
exceed 7 per cent. on that company's stock, and
to be not less than 6 per cent. and, after January
1, 1906, 7 per cent.; the Interborough to pay as
rent also the interest of outstanding debenture
bonds of the New York Elevated Railroad Company to the amount of $1,000,000, also the interest on $10,818,000 first mortgage bonds on
the Metropolitan Elevated Railroad Company,
and on $28,065,000 consolidated mortgage
bonds of the Manhattan Railway Company,
and of all bonds to be issued; the lessee to
pay all taxes and charges of a like nature."*
The Interborough pays the staggering sum of
$6,000,000 annually, of which more than twothirds is pure profit, the rest being interest to the
Manhattan Company for 999 years. Capitalism
takes a long lease unto itself, it figures without its
host, the people.
From April 1, 1903, to April 1, 1919, according to the lease, the Interborough has already
paid to the Manhattan Company $67,200,000 in
net profits, a sum many times the actual value of
the roads. If the present disgraceful partnership
between the city and the Interborough, of which
* P. S. C. Reports, 1st Dist., 1913, v. 5, p. 664,




THE GREAT COLLAPSE


67


more later, is allowed to run to the end, the public
will be obliged to pay to the Manhattan Company, through the Interborough, about $205,800,000 in net profits.
President Shonts complains his company is not
able to pay dividends. Does he deliberately overlook $6,000,000 which go annually and, if he has
it his way, will continue to go for 955 years
longer to the Manhattan Company?  When he
speaks of dividends, does he not know that as far
as the people are concerned, dividends paid under the name of "rentals" or any other name are
dividends none the less?
Another interesting case of manipulation by
means of the lease is the Bridge Operating Company. This company was organized May 21,
1904, for the purpose of operating local cars on
the surface tracks of Williamsburg Bridge at a
fare of three cents for a single ticket and five cents
for two trips. The company was organized by
the B. R. T. Company and the New York City
Railways Company. Its capital stock was to be
$100,000 to be sold in 1,000 shares at $100 per
share.
The B. R. T. Company and the New York




68    THE GREAT COLLAPSE


City Railways Company each agreed to take 500
shares and pay for them in cash, at par. Other
stipulations in the agreement seemed to show that
the two companies were to be equal partners in
this new corporation.
June 21, 1907, the Bridge Operating Company leased its properties to the Brooklyn Heights
Railway Company and the New York City Railway Company. In consideration for this the two
"tenants" were to assume all obligations and
duties of the "landlord" and guarantee six per
cent. dividends to the landlord's stockholders,
which in this case are no other than the tenants
themselves.
By a "gentleman's agreement" one of the tenants, the New York City Railway Company, left
the operation of the leased properties to its partner for a consideration, of course. "It seems that
actual operation of the Local Bridge service was
at once assumed by the Brooklyn Heights Railroad Company and has ever since that date been
carried on exclusively by that company. By an
exchange of letters it has apparently been agreed
that the Brooklyn Heights Company shall receive
$5,000 a year for general administration of the




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69


line and $2,500 a year for depot, storage and
shop facilities...."*
According to its annual report for 1918, the
Brooklyn Rapid Transit Company is in complete
control through stock ownership of the Brooklyn
Heights Railway.
For all practical purposes these transactions are
reduced to this: The B. R. T. Company organizes a corporation, allows it to live an independent
life for a little less than three years, in which
time it is made to acquire certain valuable franchises, it is made to enter into contracts and agreements, then it is made to lease all "its" rights and
possessions to the B. R. T. Company. As the
Bridge Operating Company, the B. R. T. is a
landlord receiving rent and a six per cent. guaranteed dividend; as the Brooklyn Heights, the
B. R. T. is a tenant cheerfully paying rent to its
landlord.
This absurd double role acted by one and the
same company successfully to conceal profits may
not have been tolerated in a less enlightened age,
but in modern times it is perfectly good business.
The accepted business ethics seems to be: If you
get away with it, you are entitled to it.
* P. S. C. Reports, 1st Dist., 1909, v. II, p. 130.




70     THE GREAT COLLAPSE


The excessive rentals paid by the Brooklyn
Rapid Transit Company are no mean contribution
towards its insolvency. The reasons for the financial "failure" are not to be sought in the low fares
-for they are not low at all; in fact they are
too high-but in obscure transactions, such as
these leases present. To pay large dividends under the guise of rentals, and at the same time plead
poverty, is little short of criminal fraud. But this
is the very thing that is artfully practiced by the
traction trust.
The Brooklyn City Railroad Company, one of
the "landlords" of the Brooklyn Rapid Transit
Company, received annually as large a dividend
as 10 per cent. upon its capital stock, not to exceed $12,000,000, and interest on its bonded indebtedness, not to exceed $6,925,000, all charges
of maintenance, taxes, etc., besides.
"May 14, 1893, the company leased its entire
road to the Brooklyn Heights Railroad Company
for 999 years from June 6, 1893, the date when
the lease took effect... The lessee agreed to pay
to the company an annual rental at the rate of 10
per cent. per annum upon the outstanding capital
stock of the company, not to exceed $12,000,000,
and the interest on the bonded indebtedness of




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71


the company not to exceed $6,925,000. All
charges for maintenance, taxes, etc., were to be
paid by the lessee. The lessee agreed, moreover,
not to reduce the fare charged on the road."*
Thus, it appears, the Brooklyn City Company
has received annually in pure profits the sum of
$1,200,000 since June 6, 1893, making a total up
to date of $31,200,000. This is another case
where the people have already paid in pure profit
a sum sufficient to pay for the entire capital stock
of the company more than two and a half times
over and still the roads remain the property of the
corporation with the right to draw $1,200,000
annually for 973 years longer or, in the aggregate, the stupendous sum of $1,167,600,000!
That it is absurd for a corporation capitalized
at $12,000,000 to draw a guaranteed profit of
$1,198,800,000 does not alter the fact that this
is the lease, the sacred contract to which the people have already given sanction and reality by
paying $31,200,000 without a protest. Whether
they will continue to do so, by raising fares if necessary, depends wholly on how intelligently they
understand the problem.
It should be remembered that these guaran* P. S. C. Reports, 1st Dist., 1913, v. 5, pp. 180-181.




72     THE GREAT COLLAPSE


teed dividends are payments made in addition
to all expenses and obligations of the "leased"
property, no matter how much it has been swelled,
and are to be deducted from the gross earnings
of the lessor. These rentals are not listed in the
financial statements as profits or dividends, but
rather as fixed charges. Yet, what are these rentals if not dividends in disguise?
The abuses here cited, practiced by means of
the lease, will furnish a bare glimpse of what is
going on behind the curtains of our traction systems. The extent of concealed profits made by
these methods alone will become clear when it
is realized that 31 companies in greater New
York are operated under leases, the terms of which
range between 99 and 999 years. The most important of them are for periods of 999 years.




CHAPTER VI


THE HOLDING COMPANY
Intimately connected with the lease is the holding company. It is the latest form of combination.
A holding company is a corporation having exclusive or part powers to purchase and hold stock
of other corporations. By acquiring a majority
interest in the stock of many corporations or an
amount sufficient to give it a controlling interest,
the holding company becomes the dictator of the
policies, financial and otherwise, of its members.
In that way, although maintaining nominal independence and a separate existence, most of the
railway companies in New York City are controlled by a very few individuals, invisible, relentless, greedy and indifferent to the public interest.
The holding company is the combine of combines. It is of recent origin. It sprang into prominence soon after the United States Supreme Court
handed down the decisions (1890-1892) in the
Oil and Sugar Trusts, declaring the trust form of
industrial combination illegal. Industrial development, however, decreed that business should
combine, the decisions of the courts to the contrary
notwithstanding. And business did combine.
73




74    THE GREAT COLLAPSE


If one form of organization is declared illegal
another will be devised. When the trust was
"busted" the legal acumen constantly at the elbow
of big business immediately found a new scheme,
the holding company, a combination no less effectual, no less monopolistic, no less given to possible
abuse than the trust. This, the lawyers said, was
a legal method because a corporation has a right
to hold property, and stock is property.  The
courts, at first, upheld this view unreservedly.
The public utility corporations, particularly,
are afflicted with the disease of the holding company. Due to the fact that they are generally
accepted as being natural monopolies, the railroad
combines have not been subjected to as much legislative hindrance or moral disapprobation on the
part of the public as have the industrial combinations. Taking full advantage of this partial immunity, the traction trust has known no bounds
in its spoliation.
"The total capital employed in electric, gas,
street, and interurban railway companies, commonly called Public Utility Corporations, in this
country to-day is estimated to exceed eight billion
dollars, and of this capital nearly five and one-half




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75


billion dollars are controlled by holding companies
and their subsidiary companies....
"Street and interurban railway companies represent a total capital approximately five billion
dollars. Of this sum it is estimated that not less
than twvo-thirds is controlled by holding companies.
In the 28 cities of the United States having a
population in excess of 2,000,000 the mileage of
track controlled by holding companies is in excess
of 61 per cent. Here, again, it is of interest to
note that only four of these cities have more than
one principal operating company and only two
of these cities have companies that are really independently and separately owned."*
These holding companies fall into two groups.
1. Those which own stock in other corporations
and also operate routes of their own. Such are
the Third Avenue Railway Company and the
New York Railways Company. Holding companies operating routes themselves are called parent companies; the corporations whose stock is
held are known as subsidiary companies.
* From a brief submitted on behalf of public utility
holding companies to the Interstate Commerce Committee of the United States Senate, in the matter of
Senate Bill No. 4160-reprinted in Gerstenberg's "Material of Corporation Finance," pp. 571-572,




76     THE GREAT COLLAPSE


2. Those created solely for the purpose of
owning stock in other companies. They own in
order to control; and are only administrative in
their function. Such are the Brooklyn Rapid
Transit Company and the Interborough Consolidated Corporation.
The holding companies are gigantic in scope.
They exercise a decidedly monopolistic control
over scores of corporations.
In "the Brooklyn Rapid Transit Company
system no fewer than 83 companies are represented. Of these 83 companies, 67 have lost their
identity through absorption, leaving but 16 distinct
companies. Of these 16 companies, 9 are operated under lease or agreement by other companies,
thus leaving but seven operating companies.
The seven operating companies are subject to a
common control through a single company, the
Brooklyn Rapid Transit Company."*
The Interborough Consolidated Corporation is
a pure and unadulterated holding company. It
exists solely for the purpose of controlling two of
the largest systems of roads in New York, which
are themselves holding companies. It controls the
Interborough Rapid Transit Company, by own* Preface, P. S. C. Reports, First Dist., 1913, v. 5.




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77


ing $33,812,800 worth of capital stock out of
the company's total capital stock of $35,000,000;
it controls the New York Railways Company by
owning $15,276,558.20 worth of capital stock
of the company's total capital stock of $17,495,060. These two systems have issued hundreds of
millions of dollars worth of bonds, and carry
almost half of all the passengers using local transportation in New York. The Interborough Consolidated Corporation is the largest holding company of its kind.
A clear realization of how completely the three
holding companies, the Third Avenue Railway
Company, the Brooklyn Rapid Transit Company
and the Interborough Consolidated Corporation
control the transportation system in Greater New
York, may be seen by referring to the three charts
appended to Vol. II. of the Annual Report of
the Public Service Commission for 1916.
The economic advantages of combination, unified control for the purpose of carrying on business
on a large scale, elimination of duplicate service,
duplicate overhead charges, etc., is not furnished
by the holding company; there is no scientific
unified management of the roads themselves al



78    THE GREAT COLLAPSE


though there is plenty of unity in the control of
their financial policy; in fact, there is more unity
of that kind of control than is good for the public.
The holding company, as far as the people are
concerned, is an instrument creating a complete
monopoly of an indispensable public necessity in
the hands of a few financiers. It retains all the
disadvantages and evils of a combination without
giving the compensating advantages.
Back of the holding company are bankers,
trust companies, insurance companies and such
other public benefactors. Their purpose in owning the stock of the roads is not so much the collection of dividends, although this, too, is quite a
consideration, but the large earnings which figure
as expenses on the financial sheet but are in fact
profits. This could not be successfully accomplished save through intercorporate control, such
as the holding company creates. There are financial loans to be made by the subsidiary companies
in which the financiers and other investing interests are vitally interested. They secure for themselves most favorable terms as bond holders.
There are those fat underwriting fees, promoters'
fees, organization fees, which run into millions of
dollars with every reorganization scheme of any




THE GREAT COLLAPSE


79


of the large companies. These fees, when paid,
are charged to the cost of the road. Such was
the case in the reorganization of the Metropolitan
Street Railway. Over $4,000,000 were spent on
those items. Such was the case when the Interborough was raising money when it entered into
the famous contract with the city in 1913.
It is an old practice for the banker-director to
make terms upon which he, as banker, would
advance money to the corporation of which he is
an influential director. This dual capacity of the
director makes the corporation a source of constant sapping for the financier. Louis D. Brandeis, now Justice of the United States Supreme
Court, says:
"A large part of these underwriting commissions is taken by the great banking houses, not for
their services in selling the bonds, nor in assuming
risks. Thus, when the Interborough Railwaya most prosperous corporation-financed its recent
$170,000,000 bond issue, J. P. Morgan & Co.
received a 3 per cent. commission, that is, $5,100,000, practically for arranging that others should
underwrite and sell the bonds."*
The financiers could not obtain such stupendous
* Other People's Money, by Louis D. Brandeis, p. 96.




80       THE GREAT COLLAPSE
sums of easy money with so little difficulty if
they did not immediately control those who control the holding company which, in turn, controls
the corporations.
The money loaned to pay these fees and interest thereon are to be amortized out of the
fares collected. Is there any wonder the corporations are "losing money" on a five-cent fare?




CHAPTER VII


FRANCHISES
HOW THEY ARE OBTAINED
The future generation, looking at the remains
of the haphazard lay-out of our transportation
lines, will say with a great deal of sympathy and
no little contempt: "What savages our ancestors
were! They should be pitied for having lived
in a world so wasteful, so unscientific and so
inconvenient." This would be the verdict of any
sensible person not accustomed to the helter-skelter
of New York life, who would take the trouble
to traverse this city. There is no system to our
street railways and scarcely any in our elevated
lines and subways. If rails, properly separated,
were thrown from the clouds to fall at random
in New York streets there could hardly have been
more confusion than there is to-day.
One of the principal reasons for this state of
affairs is the blind ignorance and corruption of a
certain class of politicians who have ruled this city
on and off for the past one hundred years. They
have had neither the intelligence nor the will to
perceive the city's needs. There has been no defi81




82     THE GREAT COLLAPSE


nite policy, no guiding principle by which the affairs of the city were conducted any more than
there is to-day.
The chaotic and anarchic condition of our railway facilities is not due to blind natural forces or
mere accident; on the contrary, it is the result of
conscious consent of authority. No railway can
be built without a special permission, without a
franchise.
"Franchises," says Chief Justice Taney, of the
United States Supreme Court, "are special privileges conferred by government upon individuals,
and which do not belong to the citizens of the
country generally of common right."'
There are four kinds of franchises-perpetual,
limited-term, short-term, and indeterminate.  A
perpetual franchise is one which is granted forever.  It is irrevocable.  The grantee becomes
vested of a right in the street of which he cannot
be deprived; and it does not matter if the grant
was obtained by questionable means. That it is
an absurdity for one generation to grant away
the rights of posterity is no concern of the law.
The limited-term franchise is one granted for a
definite time, at the expiration of which the com* Bank of Augusta v. Earle, 13 Peters, 519-595.




THE GREAT COLLAPSE


83


munity is re-invested with the rights it had given
away. A limited-term is considered a period of
between 99 to 999 years. To all intents and
purposes a 999-year term is perpetual. Most
street franchises in New York are either outright
perpetual or for a "limited-term" of 999 years.
A short-term franchise is one granted for a
period ranging from 10 to 99 years. Such grants
are looked upon with great disfavor by all sides,
because it prevents good service to the public and
is of no special value to the corporations.
The indeterminate franchise is one, the duration
of which is uncertain, depending upon the behavior of the company as well as the policy of the
municipality. It is a tenure during good behavior,
as it were. Such franchises usually provide that
the city has a right at any time it so decides to
take over the properties upon paying the then fair
value thereof exclusive of the franchise.  An
indeterminate franchise presupposes government
regulation.
What gives a man or group of men a superior
right, or as is more accurately designated, a privilege to use a street to the practical exclusion of
others? How do a few individuals obtain these




84     THE GREAT COLLAPSE


"rights" to capitalize a common need of a people
of a city, own and use it for their private profit?
The history of franchises in New York is
the darkest chapter in municipal history. If one
wishes to learn how much of a corrupting influence
private ownership subject to governmental control
is; if one desires to fathom to what depths of
criminal practices politicians will sink and how
far they permit themselves deliberately to betray
their constituencies; if one wishes to chill his faith
in the "rule of the people," let him delve into the
mire of franchise history in New York. Dr. Mila
Roy Maltbie, once a member of the Public Service Commission, and probably its ablest member
since its inception, in summarizing a "History of
Franchises in New York City," says:
"The preceding pages reek with instance upon
instance of corruption and robbery of the city, but
the half has not been told. If only the evidence
had been presented which is to be found in court
records and proceedings of legislative investigations, to say nothing of well substantiated reports
and the vast Augean stables closed to public eyes,
the reader would rebel and throw aside the nauseating narrative. Indeed, one is almost convinced




THE GREAT COLLAPSE


85


that not a single franchise in New York City, with
the exception possibly of many wharf and ferry
privileges, has been  gained  without corrupt
means."9  This leads one to ponder well whether
the claim may not be true, which is made by
ardent supporters of municipalization, that private
control of franchises almost surely leads to corruption, and that with all their official corruption
and dishonesty conditions would not have been
and would not be as bad, if municipal ownership
were adopted, as under private ownership."t
Long before the first railroad franchise was
granted, in 1832, the need of transportation facilities more adequate than the stage coach could
furnish, became imperative. In spite of the bright
prospects for profits in railroad investments capitalists stood aloof.
In the first place, industrial investments were
so remunerative that capital was not anxious to
venture into a new and doubtful field. Capitalists
do not make investments out of a desire to serve
the community. Their motive is profits.
In the second place, they held back in order
* Italics are mine.
t History of Franchises, Gustavus Myers, p. 200.




86     THE GREAT COLLAPSL


to secure the maximum advantages. The argument, so familiar to all was used then as it is now:
Capital is timid, it needs encouragement. The
people were so skillfully played upon that they
began to view the prospective railroad investor as
a great public benefactor. He was a heroic soul
ready to make all sacrifices for the people. He
was the industrial explorer discovering strange and
hitherto unknown fields. In true appreciation for
his devotion to the community, the man seeking
to build a railroad was given every opportunity to
accomplish his purpose. He was given the public
streets free, no rights were reserved for adequate
regulations, no time limit was set to his privilege
to keep the streets; he was even granted special
subsidies.
Meanwhile, the city was growing by leaps and
bounds. The influx of foreigners was enormous.
The political upheavals and famines in Europe,
coupled with the introduction of the steamship
about that time, making water transportation safer,
speedier and cheaper, accellerated greatly the
immigration to our shores. According to the Federal census the population of Manhattan Island
increased from 60,489 in 1800 to 615,000 in
1850, to 942,000 in 1870.




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87


The first railroad lines built proved to be very
successful. The profits were enormous. There
was a scramble for franchises. Though the public
was slow in realizing the value of its streets, the
politicians were not.  They discovered that a
franchise will command a price.
A new kind of politician sprang into existence.
His sole purpose in seeking election was to be able
to sell franchises. He looked upon his vote in
the Board of Aldermen, by which franchises were
granted, as his private property, and had a right
to sell it; in fact, what he was selling was not
public franchises at all, but his private vote, and,
therefore, committed no grave wrong. Bribing
aldermen became the common thing. It was as
conventional and natural for an alderman to accept a bribe as it was for the Russian administrators under the Czar.
Year after year men with heavy clouds of suspicion hanging over them, belonging to an organization recognized as the public school of corruption-Tammany Hall-were returned to office to
"govern" the city. Towards the end of 1852, rumors of rampant corruption and bribery in the City
Council were rife. The thieves fell out among




88     THE GREAT COLLAPSE


themselves, and, as usual, the truth came to light.
From an affidavit by a James A. Coulter, a
lobbyist, a man of the inside, the public learned
of the existence of thoroughly organized agencies
"to receive and distribute bribe money."  On
February 26th, 1853, the grand jury, after a
careful investigation, reported that Aldermen received bribes for granting various franchises, and
continued:
"It was clearly shown that enormous sums of
money had been expended for and towards the
procurement of railroad grants in the city, and
that towards the decisions and procurement of
the Eighth Avenue railroad grant a sum so large
that would startle the most credulous, was expended, but, in consequence of the voluntary absence of important witnesses, the grand jury was
left without direct testimony of the particular recipients of the different amounts."*
Such exposes were frequent. Every once in a
while the people would be mortally shocked by
some foul act of their representatives. The city
would rock with indignation.
* Documents of the Board of Aldermen, XXI, Part
II, No. 55 —quoted in Myer's History of Franchises,
p. 116.




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89


Unfortunately for democracy, the people have
extremely short memories. Moved by a wave
of temporary excitement they defeat the misdemeanants, organize some nondescript fusion ticket
and sweep it into office. Before long the wouldbe reformers, permeated by a large amount of
the old stock, become deformers; they find the job
of bartering away the people's interests very profitable. They usually out-tammany Tammany.
Things would become so bad that the people
began to long for the good old days. At the
same time Tammany Hall, the "bad man" in
politics, puts on the garment of virtue, gets unto
itself some "clean" leader, a "servant of the
people," re-enters the political fight, and, with the
aid of the dead and the babies, all of whom are
registered and voting, with the aid of stuffed
boxes, and such other political acts as are deemed
necessary, the "clean" candidate is "victorious."
This has been a repeated performance in New
York politics since the day when the memory of
man runneth not to the contrary.
By 1860 the Legislature, moved by a feelingon the part of some to relieve the people of New
York City from the irreparable injury being done
to them by a pack of organized crooks, and on




90    THE GREAT COLLAPSE


the part of others, by sheer envy at the lucrative
profits made by the Aldermen-passed a law
taking away from the council the power of granting franchises, and vesting it exclusively in itself.
Conditions were so bad in the city government
in those days that there was not a murmur of protest from any source against these violations of
home rule, except, of course, from the City Council itself, which felt aggrieved at being deprived of
such a valuable source for private enrichment. It
looked upon the Legislature as its foremost business competitor.
The people chose the lesser of two evils. To
permit the Legislature, sitting over one hundred
miles away from the city and composed of representatives from all over the state, to regulate the
streets in New York was deplorable; but, reasoned
the people, at least it will be an honest regulation;
if by reason of its distance from the city the Legislature errs in some things, it was preferable to
being constantly sold out and deliberately betrayed
by a corrupt Council at home.
What a smashing disappointment and terrible
disillusion this was! Within a month of the passage of the act the franchise lobbyists, railroad
advocates, promoters and schemers removed their




THE GREAT COLLAPSE


91


seat of operation to Albany. They beseiged the
capital.  Trained in the art of lobby warfare,
encouraged by years of victory, equipped with
the most poisonous weapon-gold-the invading
New York hoards overwhelmed the weaklings
stationed at the Albany post to guard the interest
of the people. The Legislature shamefully surrendered.
Dozens of bills granting' franchises to rival
companies were introduced. The flames consuming honest government at the City Hall enveloped
the capitol and reduced the good name of the
State to ashes. The legislators were even more
brazen and crooked, if such a thing were possible,
than the Aldermen. Criticism by the Governor
was listened to with impatience and contempt.
They took to graft as hungry wolves take to
their prey.
Five franchises, which, with the possible exception of Broadway, constituted the most valuable
remaining thoroughfares in the city, estimated at
that time to be worth between fifteen to twenty
million dollars, were delivered to speculators and
railroad sharks almost without any compensation.
"It was generally believed that the passage of
these five bills cost the projectors $250,000




92    THE GREAT COLLAPSE


in money and stock, distributed among the purchasable members of the two houses of the Legislature. Some persons, who profess to know, put
the cost of one-half million dollars."*
Competition brought down the price of an
assemblyman's vote considerably.  The Board
of Aldermen maintained a much higher standard.
Between $300 and $400 was all an assemblyman
was to receive for his vote on a Broadway bill,
a franchise which later netted $22,000 to each
Alderman for his vote. Besides the unpardonable
fault of selling their votes too cheaply, upstate
legislators measured up well to the standards
of "honesty" set by New York representatives.
They were not all averse to accepting bribes for
voting away New York City's rights. Republicans were no different than Democrats. The latter
had no monopoly on corruption. Lobbyists generally agreed that it did not matter who was
elected, for it cost less to buy a legislator than to
elect one.
On April 23, 1863, the Broadway railroad
bill came up for final passage. Charm and dignity were lent to the proceedings and deliberations
when the august statesmen were made aware of
* History of Franchises, Gustavus Myers, pp. 124-125.




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93


the presence of police, who came to the chamber
to enforce the law against the lawmakers.
"About 9 o'clock an officer of the city police
court appeared in the lobby with a large number
of subpoenas, addressed to members of the house
and gentlemen of the lobby, from which it appeared proceedings of some sort had been commenced in that court against Speaker Callicot, the
precise character of which seemed to be known
to no one.
"Up to midnight an intense excitement prevailed, and the officer in question continued to
search for those whose whereabouts could not be
ascertained. It was finally concluded on all hands
that the proceedings were nothing more or less
than a strategic movement having reference solely
to the Broadway bill...."*
The next day, only one day before the time set
for adjournment, marked by the usual confusion
and disorder of the adjournment of the August
legislature, "the final vote was taken amid vehement charges of corruption and all sorts of unworthy influences."t
This intolerable condition kept up unabated
* Albany dispatch, New York Times April 23, 1863.
t Albany dispatch, New York Times, April 24, 1863.




94     THE GREAT COLLAPSE


until 1874. The constitutional convention, held
that year, incorporated a provision in the Constitution to the effect that no franchises might be
granted without the consent of the local authorities and half the owners of property along the
contemplated route, failing the latter, the consent
of the General Term of the Supreme Court.
This amendment was adopted by the people and
went into effect January 1, 1875. It was a rebuke
administered to the Legislature by a resentful
people for the shameful betrayal of the people's
trust.
The limitations placed by law on the Legislature's powers were such as to make it almost
impossible to grant a franchise in New York without making a bargain with the City Council. As
a result, for nine years, all attempts at passing
railway grant bills, except the Rapid Transit Act
of 1875, proved futile.
In 1884 a law was passed again giving the
local authorities the power to grant railway franchises. The promoters and speculators worked
zealously for its passage. The same year, the
Board of Aldermen granted away what was at
that time the most valuable franchise in the city,
the right to run a railroad on Broadway. The




THE GREAT COLLAPSE


95


battle to "get Broadway," the street considered
at that time as the pride and the key of New
York, raged for over twenty years. The history
of the Broadway franchise battle, both in the
Legislature and City Council, abounds with criminal incidents. There were many competitors for
this prize.
As far back as May of that year "deals" were
entered into between the Aldermen and the companies on a resolution to be voted on August 6th.
Each competitor company offered a large compensation for the franchise, not to the city of
course, but to the Aldermen. The price an Alder.
man received for his vote was unusually high
$22,000.
Happily there were too many conflicting interests in this affair to permit full secrecy. The
truth leaked out. The Aldermen were indicted
and convicted. Three Aldermen, Duffy, Fullgraff and Waite, turned state's evidence. Some
of the sentences imposed by Recorder Smythe
were as high as nine years and ten months. At the
trial before Recorder Smythe, on November 19th,
1886, Alderman Fullgraff (significant name!),
testified thus:
"A special meeting of the Board was held in




96     THE GREAT COLLAPSE


my factory, on Fulton Street, in the month of
May, 1884. There were thirteen members present. They were, De Lacy, Dempsey, McLoughlin, Sayles, McQuade, McCabe, Kenney, Jaehne,
Cleary, Reilly, O'Neill, Duffy and myself. It
was proposed that the thirteen vote together on
everything that came up except on political issues.
"It was determined to have a meeting at
McLoughlin's house a week later. At this meeting
the same thirteen were present. The first subject
taken up was the Broadway franchise. It was
stated that a cable railroad company had applied
for the privilege. It was said that the company
had offered $750,000, half cash and half bonds,
and that the Broadway Company had offered
$500,000 in cash. I think Jaehne said that the
acceptance of the $750,000 would be risky, as
the bonds could be traced. He thought the
Broadway Surface people would be safer."*
The irony of this unspeakable crime is that the
law, the violation of which resulted in sending
the thieves to long terms at hard labor, protected
the criminals in their theft; it gave them the franchise. Although it was charged and proven that
the Aldermen received bribes for voting the way
* Quoted in Myer's History of Franchises, p. 139.




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97


they did, yet the public rights they gave away
were binding upon the city forever. Although it
was charged and proven that Jacob Sharp and
friends to whom the grant was given corrupted the
Board of Aldermen by paying to its members
large bribes, yet the grant which they thus obtained could not be taken away from them. That
is the law!
When the matter of annulling the stolen franchise came to the court, it held that the grant, the
interest in the streets, was perpetual and indefeasible; that it was a vested interest, and the directors
must act as trustees for the creditors and shareholders.
The plain people may not fully comprehend
how a "right" obtained by corruption and fraud
can become "vested," but then they do not know
the fine points of the law. The only danger in
this decision is that the people are likely to assign
to all "vested interests" a criminal and fraudulent
origin. Such a feeling, taking root among the
people, will do more to undermine the "foundation of modern society" than thousands of Socialist speeches.
A fruitful source of revelations of corruption
and graft was the exceptionally low depth to




98     THE GREAT COLLAPSE


which the Aldermen sank. They even failed to
observe the "honor" observed among thieves.
They became extremely undependable. They accepted bribes from one company to vote for its
project, then they would accept money from its
competitors to betray the former. They would
award the franchise to the highest bidder, but
they would accept both bids.
It is needless to go into further details to show
the manner in which railroad franchises were obtained in New York City. Suffice it to say that
the grounds upon which the companies established
their "vested rights" in the New York streets are
invalid; their successors must be treated as recipients of stolen goods with complete knowledge
of the facts; their title is, from every point of view,
faulty. The people will some day demand a
return of their stolen possessions.




CHAPTER VIII


STEALING THE "UNDERGROUND
HOLE"
SUBWAY CONTRACTS OF 1900-1902
Very few people know that New York City,
the metropolis of the world, owns the greater and
most important part of its transit facilities, the
subway system. Still fewer people know that
there was a referendum on the question and that
the citizens cast an overwhelming vote in favor of
municipal ownership. It is not strange that they
do not know, for, although the people voted for
municipal ownership, although the city spent hundreds of millions of dollars in building a rapid
transit system, the authorities lack courage, willingness and intelligence to make municipal ownership a fact in the life of our city. Not only that,
but they used the opportunity presented by the
vote for municipal ownership as a cloak for one
of the greatest steals in the history of our city up
to that time.
The first subway contracts known in official
language as contracts Nos. 1 and 2, are robberies
committed mid-day, in full view of all. Com99




100


THE GREAT COLLAPSE


pared to this all previous private acquisitions of
the city's possessions are mild and unimportant.
The curious thing is that in the consummation of
these infamous contracts, the devil managed to
bring together the well-meaning but short-sighted
reformer, the cunning financier and the vicious
politician. Considering who the midwives were
it is to be marvelled that the offspring is not actually worse than it is.
For a number of years after their construction,
in the eighties, the elevated railroads were ample
and satisfactory as rapid transit facilities. They
offered complete relief from the intolerable congestion existing prior to their advent.  Like all
things it carried within itself the elements of its
own destruction. By opening up new areas for
residential purposes it laid the foundation for a
greater congestion.
With the constant and feverish growth of the
city, the industrial centers and the residential sections grew apace.  In some cases people spent
extremely unpleasant hours in their daily travel
to and from their daily work.  Mere inconvenience soon became an intolerable burden. People
were herded like cattle into suffocating cars with
no adequate seating capacity. Only one taking




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101


the Brooklyn-bound elevated train on the Brooklyn Bridge in the six o'clock rush hour can fully
appreciate the agony and feeling of the people at
that time. The daily traveller began to view the
transportation facilities of the city as a hell on
earth. Demands were made with increasing persistence for better and more rapid transit. Rapid
transit was the issue of the hour.
The elevated railroads, the rapid transit of yesterday, became the horse-car of to-day. Having
covered the surface, having gone into the air, the
next step in quest for relief was the "underground
hole."
One of the greatest weaknesses in the structure
of our government is its irresponsiveness to the will
and need of the people. It takes the authorities
years before any popular demand is satisfied.
Officials move inconveniently slow.
Long delays result in increasing popular pressure. A point is reached when action must be
taken in haste to appease popular indignation.
Things done in haste are seldom done well.
Public needs held back until they become pressing, is good politics. What cannot be accomplished when people are frantic about something!




102


THE GREAT COLLAPSE


Vicious and discredited political organizations
are swept into power for "championing the cause."
When in power the condition of immediate necessity, action in a hurry is a justification for all sorts
of vicious designs to do evil.
In 1891, the State Legislature, in pursuance to
a strong popular demand, enacted a Rapid Transit
Act* providing for the appointment of a Board
of Rapid Transit Commissioners to investigate
whether the public interest required the construction of an underground rapid transit railway, and
if they found it did, to lay out the routes, establish
plans for constructions, get the necessary consents,
and sell at public auction the privilege of constructing the road, and operate it for a stated
number of years. All public offers to sell this
franchise for a "limited-term" of 999 years proved
futile. Only one bidder, said to have been irresponsible, appeared. He offered a ridiculously
small sum as compensation to the city, and the bid
was rejected. There seemed to be a conspiracy
not to pay anything for the greatest of all franchises. Why pay when it was reasonably certain
that the companies could get it for nothing, if they
waited? And they waited.
* Chapter 4, Laws of 1891.




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103


Those who proposed selling railroad franchises
at auction as the final remedy against public loot,
once again, and for the last time, saw how successfully their ideas failed. The "ring" was not
to be outwitted or outdone by auctions.  Responsible railroad companies would not bid.
There was no competition to secure the most profitable system of railroads!  Private understandings among the railroad interests are as effective
and binding as if they were bound by a sealed
agreement.
They declared an "open strike." With the
intolerable congestion unrelieved the "open
strike," the "folding of arms" on the part of the
capitalists, their refusal to invest in the building
of new lines, was bound to succeed. Such power
in the hands of an extremely small group of people, who do not hesitate to use it in holding up
the city, is dangerous.
When street cleaners or policemen employed
by the city, fold their arms and demand decent
human conditions and a living wage, they are declared to be outlaws. The wrath of the "public"
is upon them. The entire power of the government is used to crush the "arrogance" of the men
who engage in a "hold-up" of the city. But when




104


THE GREAT COLLAPSE


the railroad financiers refuse to build roads in
order to press the city against the wall, compel it
to grant most favorable concessions, hold up the
traveling public who have no option but to use
the roads, for fabulous profits, they are not declared outlaws; in fact, they are held out as the
most patriotic and "best people" in the community.
The first four years the Rapid Transit laws
of 1891 were a dead letter. They were years
crowded with discontentment. Abuses multiplied
in profusion, congestion on cars was growing
worse. The people were prepared to go to extremes to get relief.
In the confusion the reformers got on the job
and gained a footing.  They usually fish in
muddy waters. Former Mayor Hewitt, a staunch
advocate of municipal ownership of railroads-a
certain kind of municipal ownership, got on the job.
In 1894, the Chamber of Commerce, of which
Mr. Hewitt was a member and the moving spirit,
drafted a bill and had it introduced in the Legislature providing for municipal ownership of roads,
which should be leased to a private company for
operation. The bill, as passed, was amended
providing for a popular referendum on the ques



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105


tion. In the elections of that year municipal ownership of rapid transits was approved by an overwhelming majority, the vote being 132,646 for
and 42,916 against.
The commission made plans for the construction of the Manhattan and Bronx subways. The
courts did not like these plans.  They were
revised.
The city had a great deal of trouble in overcoming the constitutional limitation on its borrowing capacity. At that time, and even now, the
city was head over heels in debt. The margin of
credit appeared to be less than the estimated cost
of construction, which ranged between $39,000,000 and $50,000,000. The money problem was
partly solved by the successful consolidation on
January 1, 1898, into one city of Greater New
York, four counties and part of a fifth, four cities,
twenty-one towns and fifteen villages, all of which,
though having debts to be paid, had a combined
borrowing capacity for greater than that of Manhattan alone. Then the adoption a year later of
the constitutional amendments excepting certain
county debts from the 10 per cent. limitation of
the city's borrowing capacity widened the margin
of credit still further.




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THE GREAT COLLAPSE


When the city had money to spend, it soon
discovered that it had many friends ready to do
business with it. Accordingly, on February 21,
1900, what is known as Contract No. 1 was executed between the city and John B. MacDonald,
who later assigned his contract to the Interborough Rapid Transit Company. Briefly, the
agreement includes the following points:
1. The contractor, Mr. MacDonald, and his
successor, the Interborough Rapid Transit Company, were required to build the subways and lay
the tracks at the city's expense; the equipment to
be provided by the contractor at his own expense.
2. The contractor is to operate the road for
50 years, with the right of renewal for 25 years
more. During this period of 50 years the city is
to receive annually the sum equal to the interest
payable by the city upon the bonds it issued for
the purpose of raising money for subway construction and also an annual sum of 1 per cent.
of the entire amount so invested to be deposited
in a fund, which at the end of the 50 years will
be sufficient to retire all the bonds. If the company availed itself of its privilege to renew the
lease for another 25 years it was required to pay




THE GREAT COLLAPSE


107


an annual rental not less than the average amount
annually paid during the preceding 10 years.
3. At the end of the stipulated term the city
was required to buy from the companies its rolling
stock and other equipment in connection with the
subways, at a reasonable price; in case of disagreement, the price to be fixed by arbitration.
4. The equipment, the property of the contractor as well as the subway itself were exempt
from taxation. The fare was to be five cents.
The general relation between the city and the
company was that of landlord and tenant.
Contract No. 2, executed July 21, 1902, between the city and the Rapid Transit Subway
Construction Company, which, on August 10,
1905, assigned its contract to the Interborough
Rapid Transit Company, is substantially the same
as Contract No. 1, except that the term of the
lease is 35 years instead of 50 years. It also carries the privilege of renewal for 25 years. The
35-year provision was a concession to the protesting public against the injustice of the former contract. This subway was an extension from City
Hall, Manhattan, to Atlantic Avenue, Brooklyn.
These are no contracts, they are holdups. The




108


THE GREAT COLLAPSE


city builds the subways, spends tens of millions of
dollars of the people's money and gives them
away free for fifty years to a corporation to make
unheard-of profits on them.
This species of municipal ownership, so neatly
"put over" on the people, ought to serve as a lesson, and it should be a warning to the honest advocates and adherents of collective ownership not
to make alliances with, or place faith in politicans
ever ready to exploit a popular demand, to use a
healthy and sound principle as a vote-getter, and
then pervert it to an evil use. Alluring promises
in politics should be linked in with the general
actions, economic and social beliefs as well as
the past performances of those who make the
promises.
The whole contract is camouflaged by the fact
that at the end of 50 years the city will get the
subways unencumbered. But who is removing
the encumbrance? Did not the city pay for the
construction of the subways? And is not the
public paying the interest on bonds and building
a retiring fund out of the fares it pays?  What
contribution is the Interborough making to this?
None.
It is obvious that the company's allowance of




THE GREAT COLLAPSE


109


interest and sinking fund to the city is no payment
at all for the privilege it has received. For had the
company borrowed money on its own credit for
the purpose of constructing subways, the principal
and interest would have had to be paid in the
course of 50 years, just as other bonds issued by
the company. Such interests and sinking funds
are fixed charges.  They are taken out of the
fares of the traveling public and are considered
part of necessary expenses.
In a word, the lines are a pure gift to the Interborough.
To call these funds paid to the city "rentals"
is to add insult to injury. By no stretch of the
imagination can one truthfully call them a rental.
As a matter of fact, what really happened was
this: the city lent its credit to a private corporation whereby the corporation secured money not
to exceed $50,000,000 on bonds bearing 31/2 per
cent. interest instead of 5 or 6 per cent., as might
have been the case if the company itself, with its
inferior credit, had to borrow it. Consequently,
it is not the city that is getting any rentals, but the
Interborough Rapid Transit Company. In the
course of 50 years the company will receive from
the city on this item alone somewhere between




110


THE GREAT COLLAPSE


$26,000,000 to $47,000,000. Not only does
the company receive the franchise free, but it also
receives an enormous subsidy into the bargain.
As might have easily been foreseen, the subways proved to be a gold mine. The company is
earning up to this very day close to $7,000,000
profit annually, over and above all the excessive
rentals, such as the one paid to the Manhattan
Rilway Company for the elevated lines, all the
"fixed charges," and all the interest on bonds.
Eliminating unnecessary and swelled "charges"
the company is earning between 20 and 25 per
cent. profit on its actual investment. The city,
which built the subways, earns nothing.  It
donated its right and property to a private
corporation.
The returning of the roads to the city with the
provision requiring it to buy the equipments of the
company is not very alluring. With the rapid
changes in the art of transportation and the rapid
shifting of centers of population the old subways
may either enjoy the standing of the present horsecar system or they may be so out of range of the
traveling public as to become practically valueless.




CHAPTER IX


THE NOTORIOUS PARTNERSHIP
SUBWAY CONTRACTS OF 1913
Any problem not settled right is not settled
at all. When the first subway projects were being planned, the legal limitations of the city's
credit prevented the system from being comprehensive. The only two boroughs that were covered, and those not adequately, were Manhattan
and the Bronx. Brooklyn was barely touched at
all. Greater New York could hardly be satisfied
with existing subways.
Meanwhile, the meaning of the first and second
contracts was beginning to dawn upon the people.
Its details were learned with great astonishment.
It became clear that the city's interest had been
bartered away. A hue and cry went up against
any further dealings of that character. A wave
of indignation swept the city. The agitation became so persistent that in 1906 a law was enacted
forbidding the leasing of any new subways for
longer than 25 years.
In 1907 the Board of Rapid Transit Commissioners were succeeded by the Public Service
111




112


THE GREAT COLLAPSE


Commission. This body was to be appointed by
the Governor and was endowed with sweeping
powers. All franchises were to be granted and
public utility contracts entered into by the Commission on behalf of the city. Such agreements
would not be binding, however, upon the city until
the Board of Estimate and Apportionment had
approved them.
Generally the state government has been Republican, the city administration DemocraticTammany. The commission was created by a
Republican Governor, Mr. Hughes. At the time
the city was enjoying a Tammany Mayor, Mr.
McClellan. A Republican commission and Democratic Board of Estimate and Apportionment are
not likely to get along very sweetly. The dual authority was responsible for a great deal of unnecessary delay in the attempted solution of our
transportation  problem. For political reasons
each body sought to discredit the action of the
other, with the result that the city was scandalously neglected.
For eight years subway negotiations went on.
Plans were made and remade. Proposals acceptable to the Commission were rejected by the
Board of Estimate and Apportionment, and vice




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113


versa. Attempted schemes were dragged into the
courts on six different occasions to prevent their
execution. Demagogues on both sides played on
the people for all the problem was worth, and it
was worth a great deal. Politicians were made
great, were elevated to the acme of municipal
power, then dropped from the heights and consigned to the army of political pygmies in oblivion.
Reputations were easily made and as easily
destroyed.
The stake was indeed stupendous. The Rapid
Transit plans involved an expense of over $330,000,000 and an enlargement of the rapid transit
carrying capacity to 2,000,000,000 passengers
per annum, which is over 300,000,000 passengers
more than the total number carried in the year
1912 on all New York City local transit lines,
including the surface street cars. Such a stake
is worth fighting for. He who got tangled up in
these millions was caught in a golden net.
The struggle came to an end when, on March
19, 1913, the Public Service Commission for the
First District, on behalf of the city, with the consent of the Board of Estimate and Apportionment, entered into a contract with two companies,
the Interborough Rapid Transit Company and




114


THE GREAT COLLAPSE


the New York Municipal Railway Company, a
subsidiary of the Brooklyn Rapid Transit Company.
Generally, it may be said, the Interborough
Company was to operate in Manhattan and the
Bronx and touch a small part of the business heart
of Brooklyn and Queens, while the Brooklyn
Rapid Transit Company was to operate in Brooklyn and Queens. The former is known as Contract No. 3, the latter Contract No. 4.
The city acts in a dual capacity in these contracts, but that is not the reason the Rapid Transit
plan is called the dual system. On the one hand,
the city acts as a partner to each of the companies,
on the other as a landlord.
The city is a partner in contributing vast suma
of money, in furnishing franchises, and placing all
the power and prestige of the metropolis back of
the Rapid Transit system, but it is not a partner
in reaping the enormous benefits flowing from such
a system. For all practical purposes the partnership ends where benefits begin.
Having a voice in the management of the business or making provision for an equal division of
earnings is not in line with the politicians' conception of sound municipal policy. On these ques



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115


tions the city puts on the garb of landlord; the
operating company being the tenant. When the
subway employees were out on strike for human
conditions, the city authorities, even if they had the
willingness-a sin with which it would hardly be
fair to charge them-had no right "as a partner"
to act in the matter, excepting to exert pressure
indirectly such as any municipal authority would
be able to exert on a company operating a public
utility.
The contract is voluminous and involved, covering 700 printed pages. It goes into extreme details settling all questions imaginable, but hardly
touching the interest of the city. After reading
it one feels it is a document showing that New
York has made an "agreement with the devil and
a covenant with hell." Every stray dollar of the
city's money has been annexed by the diligent
companies while the annexing was good.
Mr. Shonts warns the city that unless fares
are raised the city will lose tens of millions of
dollars. His well-known friendship for the city
is only excelled by his desire to get an 8-cent fare.
Mr. Shonts perhaps remembers the arguments
made against the notorious dual contract. It was
then pointed out that the city will be a heavy




116


THE GREAT COLLAPSE


loser; that accounts could be so manipulated by
the company that even payment on interest and
sinking fund on the city's investments would become impossible; that these conditions would be
held up before the inhabitants of the city as an
urge to grant new concessions to the company
making the citizens believe they are doing it for
their city.
These arguments were made before the war
showing that the present financial "embarrassments" are not due so much to war conditions as
to the inherent weaknesses of the contract. The
outrageous demands of the companies must be
met by hurling into their face the contracts they
managed to impose upon the city.
The contract provides that the earnings of the
old and new lines be pooled. It will be recalled
that the old subways, built with city money, about
$60,000,000 in all, net the city an amount equal
to interest payable on the bonds issued for that
purpose, a sum for a retiring fund and no more.
This provision will continue until the end of the
new contract.
The Interborough Rapid Transit Company,
the operator with an actual investment of about
$48,000,000, is to receive interest on the bonds




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117


issued, a sum for a retiring fund, plus $6,350,000
annually, representing its average annual net profit
ending June 30, 1911. These $6,350,000 represent a little over 13 per cent. on the company's
money invested, and is to be a guaranteed profit
for a period of 50 years.
The companies made it certain that whatever
changes are made in the local transit system, however unimportant the old subway lines may become, however little the old lines may actually
earn because of having been superseded by other
lines, the stupendous profits made in the early
years of exceptional congestion and extreme neglect of property, should be guaranteed for its entire life. In other words, $317,500,000, almost
seven times the investment proper, will be taken
out of the earnings of the general rapid transit
system, between 1915 and 1965 and given to the
company as pure profit in payment for the successful robberies embodied in the contracts of
1900 and 1902.
It should be remembered further that the original contracts were to expire in 1954 and 1943,
respectively, with the privilege of renewal for 25
years. The new contract makes all subway leases
coterminus.  It "levels" them  up instead of




118


THE GREAT COLLAPSE


down. It makes a bad bargain worse. It extends
their terms considerably, making them last till December 31, 1965, and guarantees an annual preferential profit of $6,350,000 up to that date.
This stupendous sum is to be paid before the city
gets anything at all on its new investment; even
before it receives interest on the bonds it issued for
that purpose.
Although the city is an "equal partner," the
company receives 6 per cent. on all the money it
invests as a prior charge on earnings. When the
company is all fed and satisfied the city gets the
crumbs, if there are any. After all the company's "fixed charges" and huge preferentials
have been paid, if there is any money left, the city
is to get an equal share with that of the company
on the money it furnished for the new lines.
After the different funds have been paid and the
various preferentials have been paid, including the
city's share, if there is still any money left, it is
to be divided equally between the company and
the city. Only supreme optimists should expect
these divisible profits to come true.  It is to be
remembered that the lines and their finances are
administered by the companies, in whose interest




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119


it is to manipulate it so that there will be no profit
apparent. And so it has worked out.
Under this agreement the company can easily
swell the cost of operation, thereby precluding any
possible revenue to the city; not even the interest
on its bonds. Although the city is given the right
to challenge any item of expense, that is no guarantee against abuse, because a company powerful
enough to make the city officials enter into such
objectionable and unbeneficial contracts can easily
silence other officials when silence is necessary.
An instance, although in itself small, will illustrate how expenses can be manipulated. About
three months prior to the signing of the contract,
when it was fairly certain that it would be signed,
the salary of President Shonts was raised from
$50,000 to $100,000 per annum, and the salary
of Vice-President Hedley from $25,000 to $40,000 per annum. The salaries were almost
doubled, and yet, by reason of the new arrangement, the company did not lose anything thereby;
on the contrary, it gained $5,000. Formerly the
company spent $75,000 on the salaries of its
president and vipresresident. Now, with the city
as partner, though the salaries were almost
doubled, it pays only $70,000. By extending




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THE GREAT COLLAPSE


this method into all departments, the corporation
can pile up a deficit on the city, then stoutly claim
to be its warmest friend and demand higher fares
in the interest of the city itself.
The unsatisfied longings and forlorn hopes of
the corporations in the past 20 years were answered fully in the contracts of 1913. For years
the elevated railroad company tried hard to thirdtrack their lines. This was denied by different
administrations for different reasons.  The day
when the companies got what they wanted for a
minimum consideration (to the city) came. The
agreement gives the Interborough and the Brooklyn Rapid Transit Companies the right to rebuild
the old elevated lines wherever necessary and to
third-track them.
The new franchise for third-tracking is given
for 85 years and is indeterminate after the first 10
years. There is no compensation to the city for
these franchises. The Chicago plan, which is by
no means to be held out as a model, at least compelled "he companies to yield their perpetual franchises before the agreement was entered into in
1907.
New York, with the experience of Chicago
to go by, with the experience of Cleveland, which




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121


settled its transportation problem in 1907, with
the experience of every European city to learn
from, did not even secure this concession from the
companies. The policy of the city seemed to be:
A maximum of the city's rights for a minimum
consideration.
There is another point in the contract bearing
directly on the demand of fares. It is so strikingly
unjust to the people that its acceptance by the city
must have surpassed the fondest dreams of the
corporations. That is true of both contracts, the
New York and the Brooklyn. The enormous expense involved in the reconstruction and improvement of existing elevated railroads is charged entirely to capital account, fully amortized within a
period of 50 years, although the companies' franchises are for 85 years.
In other words, the fare-payers pay all costs,
all the expenses, establish a fund to maintain the
roads at the top-notch of efficiency, create an
amortization fund which in 50 years will be large
enough to buy out the entire reconstruction project, then had it over to the companies in perpetual possession. The public will cheerfully pay
for the operation and maintenance of the road but
it refuses, or rather should refuse, to buy a road




122   THE GREAT COLLAPSE


for the company. The company blows hot and
cold at the same time. It wants the fare-payers
to buy an elevated railroad for it, at the same time
it demands huge profits now, immediately.
The New York Sun says the only way "to convert the average loss on every passenger carried,"
-which is not true, by the way, as there is no
average loss-"into an average gain" is to raise
the fares. Even if there were an average loss
there is a far better way of converting it into an
average gain.  Let all the unnecessary charges
against the fare-payers be removed and the gain
will be substantial. The 1913 contract fixes the
fare at five cents. If the Sun believes the contract
ought to be changed, it will be strongly supported.
But the changes in the contract must not increase
the burdens of the public. Advantage should be
taken of this opportunity to release the city from
the grip of the corporations.
It is to be remembered that the agreement is
not over-generous to the public in its fare provisions. While the Interborough Rapid Transit
Company owns both systems, the subway and the
elevated lines, two separate fares are charged,
with no system of transfers, excepting at one unimportant point. In this respect again we are be



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123


hind other cities. Where transportation contracts
are so general, as the one concluded in 1913, the
one-city-one-fare principle has been established.
The company takes no risk at all in this "partnership." Should the city find at some later date
that certain extensions are necessary they will be
built on the same "partnership basis."  But if
there is a deficit in the enterprise the city is to
sustain it.
A great deal has been said about the recapture
clause in the contract. The city's right to recapture the new lines after the first ten years is an
absurdity; while sounding excellently on paper in
practice it is an impossibility. The new lines are
intertwined inseparably with the old ones. The
old lines cannot be recaptured. Of what value
will the recapture of part of the system be? Each
line will charge a separate fare. Little enthusiasm
could be worked up for a municipal ownership
that increases fares and inconveniences. The companies were fully aware of this practical difficulty
when they consented to the "recapture" clause.
It is the usual method in modern contracts between corporations and a city to have a few alluring and apparently beneficial provisions as a




124      THE GREAT COLLAPSE
sop to the "mob," then to vitiate their beneficial
effects by the insertion of some insurmountable
practical obstacle.
The people are demanding formal promises
rather than substantial relief.  This is easily
granted. The 1913 contract was supposed to
have been a great compromise by inserting a clause
giving the city the empty right to recapture the
lines after the first ten years. The people were
satisfied, the politicians chuckled, and the corporations got away with it.




CHAPTER X


"DEAD CAPITAL" EARNING MONEY
John Smith establishes a $2,000,000 business.
John Smith is very greedy. He does not insure
his business against fire. Insurance costs money.
It is a charge against earnings, generally considered a legitimate and necessary charge. But he
wants to pocket all the earnings, which, by reason
of a certain monopoly he enjoys, are substantial,
$200,000 per annum. Ten per cent. is considered a fair rate of profit and Smith is satisfied.
A  fire occurs.  Smith's business is half destroyed. He rebuilds it, placing it on the same
footing as before. This costs $1,000,000. Smith
figures his investment now $3,000,000.
The business earns the usual $200,000. This
time the rate of profit, according to the new capitalization, is not very large-6.66 per cent.
Smith refuses to profit by his experience. He
fails to take those elementary precautions for the
safety of his property which are considered indispensable by prudent business men. He again declines to insure the business against fire.  Now
there is an additional excuse for his action, his
rate of profit is low.
125




126


THE GREAT COLLAPSE


In the course of a few years another fire occurs,
more damaging than before. It practically destroys the entire plant. Unwilling to abandon his
valuable monopoly, his special privilege, Smith
sets out to rebuild his business. This time it costs
$2,000,000. According to Smith, his investment
is now $5,000,000.
The business earns the usual $200,000 a year.
The rate of interest, however, according to the
new capitalization is decidedly low, only 4 per
cent.
Smith raises a howl. He cannot afford to sell
his product as "cheap" as he did before; for he
is losing money. A business earning only 4 per
cent. profit on actual investment is a losing proposition. And Smith can prove with his books that
he has actually invested $5,000,000.
Is there a sane person who would say Smith is
entitled to a raise in the price of his product?
Who is there so naive as to contend that the public should compensate Smith for his ignorance and
greed? If there be such a person he should be
told that underneath the ashes of the "burnt capital" there lies a $2,000,000 business still earning
the high rate of profit of 10 per cent. and Smith
should have no complaint.




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127


The railroad companies are in the position of
Smith. They built their roads in the fifties and
sixties, some of them earlier than that. By reason of the revolutionary changes in the arts,
transportation machinery changed decade by decade. Motive power alone has undergone three
complete changes-animal, cable and electric.
The nature of the cars and equipment had passed
through many metamorphoses and there are still,
no doubt, many it will pass in time to come.
When the horse-car lines became obsolete and
had to be abandoned, and cable roads established
in their place, the companies simply issued new
bonds or stock, as the case happened to be, to
finance the change. The capitalization of the
road, assuming no inflated issues, was the original
cost of the horse-car lines, plus the additional
money required to rebuild the lines into cable
roads. When cars were badly worn, dilapidated
and useless, the company bought new cars. It
raised money for that purpose by issuing new
stocks and bonds, thus adding more book value
to the properties.
When the cable roads became out of date and
the lines were to be electrified, the companies
again issued stocks and bonds to meet the expenses.




128


THE GREAT COLLAPSE


This time the outlay was enormous because the
cost of electric lines was comparatively high.
Along with the change of motive power there are
what may be termed incidental changes in cars,
equipment, etc. The expenses to accomplish these
changes were always met by the issuance of new
stocks and bonds.
The net result of all this is a book capitalization
of the railroad properties far out cf proportion to
their actual physical value.
It is obvious that when the people used a cable
road they did not get more service out of it just
because it was built on the grave of a horse-car
line. When the traveler used a cable road he did
not at the same time use a horse-car line. They
should not, therefore, be expected to pay profits
on two roads.
Similarly, when people travel in an electric car
they do not get more service out of it because it is
founded on the outlived cable road. They surely
do not get more service out of an electric line built
on a street where a cable road operated formerly
than they would if it were an original line built
entirely new. Why, then, expect of them a fare
that will suffice to pay interest and profits on the




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129


new capital, as well as the capital that had been
invested on roads that have long ceased to exist?
Yet the rate of fare has always been determined on precisely such basis. And the demand
now being made to raise fares is largely because
the fare-payer is expected to pay interest and
profits, not only on investments in lines upon which
he travels, but also on investments on lines that
have long ceased to exist.
Capital that was invested in the now dead and
useless lines is dead capital; and dead capital cannot earn money.
To reserve a sufficient portion of the revenue
to replace capital consumed during the year, but
not requiring replacement within the year, is a
primary requisite and a conservative business principle. Such a replacement fund is considered part
of the capital itself. To divide the entire annual
surplus among the stockholders without first establishing a proper replacement fund is equivalent
to stealing a given sum annually from the capital
itself and dividing it among the stockholders. Put
that way, it is clear that the companies have been
committing a criminal offense; hidden under a
maze of business detail, the companies' practices




130


THE GREAT COLLAPSE


are excused on the ground of "mistaken business
judgment," etc.
If the companies, in violation of every business
principle, following a policy of "get rich quick,"
were too greedy to diminish their fat earnings by
laying aside annually a fund for the purpose of
meeting such obvious expenses as replacement of
old, worn out, dilapidated and obsolete roads, and
cost of equipment, should the people be taxed to
compensate them for their greed?
The companies knew that after a few years the
old roads would have to be scrapped and replaced
by new ones. They knew, as a matter of certainty, that things used fall into disrepair. Why
did they not prepare to meet these necessities, as
prudent business men should?
The case of Smith is less sinful. He gambled.
There was as much chance for his business to escape the ravages of fire as not. But the railway
companies knew that the destruction of their property was not a matter of accident but a matter of
use and time.  Yet they delibertely refused to
insure their property by failing to establish an adequate replacement fund.
Moreover, the profits of the companies in the
early days were fabulous. During the period of




THE GREAT COLLAPSE


131


horse-car operation the Third Avenue Company
paid at one time as high as 25 per cent. dividends,
the average being about 13 per cent.
During the operation of the cable roads, there
was already the dead weight of the horse-car lines
attached to the new capitalization. Yet the earnings still appeared large. It is estimated by the
Public Service Commission that "the company
could have amortized or accumulated by sinking
fund a sufficient amount to have paid off the entire cost of the road as set forth above, and still
have paid dividends of over 8 per cent.* and
founded a reserve fund besides."t
When the Third Avenue Company reorganized, after its lines were in the hands of a receiver
for over three years, it insisted upon capitalizing
the dead roads.  It issued securities for millions
of dollars over and above the actual physical
value of the property on the ground that the books
showed that its constituent members, also in the
hands of receivers, had invested that money in
lines now extinct. This they did contrary to the
commission's warnings that the securities "far ex* Italics are mine.
t Third Avenue R. R. Co. Case No. 1181, 2 P. S. C.
Reports, p. 347.




132


THE GREAT COLLAPSE


ceeded the value of the property and that the evidence as to net income did not indicate that interest and dividends would be earned upon the securities proposed."*
"The statement is made as to the Third Avenue Railroad Company proper, that in the present
book cost of road and equipment and in the liabilities which are outstanding, there is an amount
about $2,000,000 for horse-car lines and equipment and about $8,000,000 for cable roads.
These figures have not been proved, but whatever
may be the amounts, the question is whether the
new company should be allowed to issue securities
that do not represent any property acquired or necessary expenses connected with such property."f
The capitalizing of "dead capital" so definitely
established in the Third Avenue System is not
without its examples in other companies. Among
the colleagues of the Third Avenue company, indulging to excess in this vicious and deceptive
practice, is the New York Railways system, now
in the hands of a receiver, where it logically
belongs.
*Third Avenue R. R. Co. Case No. 1181, 3 P. S. C.
Reports, p. 21.
t Third Avenue Co. Case 1181, 2 P. S. C. Reports, p.
347.




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133


It should be noted that these two companies
between them control practically all the surface
lines in Manhattan and the Bronx, as well as
much of Westchester county.
The New York Railways Company is the successor of the defunct Metropolitan Street Railway Company. Upon the latter's reorganization,
the Public Service Commission, in analyzing the
securities about to be issued by the applicant's
reorganization committee, said:
"The applicants submitted an estimate of property that had ceased to exist, amounting to over
$13,355,000, apportioned as follows:*
Horse-car system............... $6,640,439
Cable system.................. 5,371,698
Compressed air equipment.........   386,794
Storage battery equipment.........  956,714
"The first item does not include all of the horsecar lines, only those that have disappeared entirely.
"It is unnecessary to discuss the accuracy of
these estimates, for it is admitted that the property does not exist;...'t
* Italics are mine.
t Re: Metropolitan Railway Company reorganization
case 1305, 3 P. S. C. Reports, p. 113.




134      THE GREA T COLLAPSE
Do the companies expect the "dead capital" to
earn dividends? Shall the people pay on an investment that does not exist? It may be of interest to have the companies explain whether these
false capitalizations have anything to do with the
present financial failures.
About half of the capitalization of old roads
consists of "dead capital" and investments never
made.   The companies insist that the people
should be compelled to pay a fare high enough to
pay dividends on this false capitalization.




CHAPTER XI


PUNISHING THE PUBLIC FOR ITS
TOLERANCE
AMORTIZATION THE MEANS
During the great financial crash of 1907 almost
all surface railway companies in New York went
into the hands of receivers. When the atmosphere
cleared, committees of bondholders for the benefit
of whom the courts were administering the various
properties, got together and decided to reorganize
the business and set them up on a normal basis.
They submitted their contemplated reorganization
plans to the Public Service Commission, then
young and inclined to be useful.
The reorganized companies assumed all bonded
indebtedness contracted in 20 years of reckless
and criminal gambling. Prior to the collapse the
railway companies were wild with speculation.
The rails of the street cars were worth their weight
in gold, as far as the debt and the interest it carried with it were concerned.
"The funded debt of all the leased roads, apart
from the Metropolitan Street Railway," reports
the Public Service Commission, "was increased
135




136


THE GREAT COLLAPSE


from $11,000,000 to $62,000,000. The bonded
debt of the Metropolitan Street Railway Company
was increased from $9,000,000 in 1897 to $44,000,000 in 1907, although this company has but
twenty-eight miles of electric tracks, so that the
bonded debt per mile of electric track wras $1,500,000, nearly twice the cost per mile of track
of constructing and equipping the present sub-,ay.*   In view of the condition existing it is not
surprising that the system broke down and that
receivers were appointed to take charge of various
companies.''
Upon a careful inquiry of the proposed securities to be issued by the reorganized companies and
a liberal appraisal of the properties by experts, the
Commission decided that the amount of securities
proposed to be issued was far out of proportion
to the real value of the property.
In the Third Avenue system the total securities
proposed to be issued amounted to $73,623,744.32, while the physical value and assets of all
the companies included in the reorganization
scheme, liberally estimated, amounted to no more
than $44,046,637.72. The excesses of securities
* Italics are mine.
t P. S. C. Reports, First District, 1909, p. 25.




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137


issued over the fair value of the property was
nearly $30,000,000. Naturally, the Commission
declined to permit the company to carry out its
plan. Upon an appeal to the court the company
secured a decision denying the Commission the
right to limit the amount of securities to be issued
by a reorganized company, even if the issue has
no relation to the actual physical value of the
property.
A similar course was taken by the New York
Railways Company. The total amount of securities it issued was $104,930,500 against properties liberally estimated to be worth no more than
$85,801,000. The excess of securities over liabilities here was $19,129,500, based upon the
most liberal estimates.
Having been directed by the courts to grant
the applicants' request, the Commission turned
from the futile and thankless task of defending
the interests of the people to the more appreciative
work of serving the property interests, the investing
bankers, the insurance companies. In upper circles there was universal approval of the Commission's action.  At last it had found its proper
sphere of activity and discovered its purpose for
existence.




138


THE GREAT COLLAPSE


At all expense, business must be made safe and
sound-became the policy of the Commission.
Securities once issued, whether they represent any
property or not, should be amortized fully.
Business should pay for itself. The aim of the
science of modern finance is to make industry selfsustaining and devoid of risk. Public utilities are
most amenable to such scientific financing because
of their being subject to regulation by government
bodies. Rates are raised and in some cases lowered, depending on the ability of the utility to pay
interest on its bonded indebtedness, maintain the
various reserve funds, and pay a "fair" dividend.
Should it appear that a public utility corporation, conducting itself in accordance with the
Commission's prescribed rules of accountancy,
doe not earn sufficient to show "fair" return on its
investments, rates will be raised by the government
and the people have no option but to pay as told.
This is the situation to-day in the local railroad
fare controversy.
Amortization, a sound business principle in itself, is now invoked by special privilege to shield
its criminal work just as other sciences are often
employed for vicious ends.
The principle of amortization is simple enough.




THE GREAT COLLAPSE


139


The management of the roads is to lay aside annually from earnings sufficient sums, separately
kept, to provide for (1) depreciation, wear and
tear and absolescence; (2) the redeeming of
bonds when due; (3) general reserve; (4) interest on bonds; (5) guaranteed dividends.
These are prime requisites. A corporation that
cannot meet these obligations is bankrupt. The
various sums requisite for each fund are determined by experts in the employ of the Commission.
The first fund is created to maintain the roads
in first-class condition, to insure good and efficient
service. It is also to be used for the purpose of
meeting the ever-changing development in the arts,
the introduction of new motive power, the replacement of wooden cars by steel cars, etc. That is
the theory.
The second fund is to be used for the purpose
of retiring the bonds issued to raise money to defray the first cost of construction, the building and
equipping of the roads. By means of this fund
the business buys itself out in a stated period of
time.
The other funds are self-explanatory.
There can be no objection to this principle of
finance under the present business system, except




140


THE GREAT COLLAPSE


when it is misapplied. The manner in which
amortization has been practiced on the New York
public is outrageous.
To grasp fully the meaning of this in its relation to the demand for higher fares, to appreciate
the effrontery of the traction trust, and its unsound
claims, it is necessary to examine briefly two
questions.
1. What is being amortized?
2. The railroads and equipments having been
fully amortized, paid for, who comes into possession of them?
In the first place, the investment in the surface
railway systems amounting close to $300,000,000,
is to be amortized fully out of the fare payers'
pockets within a period of about fifty years. The
same government body prescribing the rule for
amortization of bonds will also see to it that a
fund is created to maintain the lines at top-notch
efficiency. At the end of the fifty years or so,
the private companies will come into possession of
the street railway systems, all paid for.
If the public is made to pay for roads, upon
what principle should the companies come into
possession of them? It is not clear upon what




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141


theory the government bases such policy, except
possibly on the theory that it is the divine right of
corporations to sit on the backs of the people
forever.
The third-tracking of the elevated lines is another case of giving something for nothing. The
people amortize the cost of this expensive project
within fifty years only to give the lines to the companies entirely unencumbered.  This case has
already been more fully discussed under the head
of "The Notorious Partnerships."
If the tax annually placed upon the people for
the purpose of buying property, by way of amortization, for private corporations is unjust and burdensome, the amortization of all the accumulated
"dead capital," watered-stock and over-capitalization generally, is outrageous. And acutally to
demand higher fares for this purpose is, to put it
mildly, highway robbery.
The largest single item in the over-capitalization of the New York Railways Company's reorganization scheme, it will be remembered, was
"dead capital" amounting at the very least to
$13,335,645. Speaking of the class of securities
that must be amortized under its rules, the Commission said: "The mere statement of the prob



142


THE GREAT COLLAPSE


lem indicates that property which does not exist
must be included in that class.y If securities have
been issued for such properties to the extent of
$13,335,000, they certainly belong in the class to
be amortized."
But who pockets all these vast sums of money
that are being collected from the daily users of
our transit lines under the guise of "amortization"?
Who are these high lords to whom large feudal
fees must be paid submissively and without a protest? Who are these figures dimly seen moving
behind the curtains and wielding such a tremendous power over organized government, the press,
and even the people?
They are not the small stockholders. They
are not the petty investors. They are the princes
of high finance, in whose presence, we, the humble people, stand with bared heads and trembling
souls gladly offering our all.
Investing bankers and insurance companies,
generally, supply the money to the railroad companies. The bonds that are issued appear to bear
312, 4 or 5 per cent. interest. One should not fall
into the error of believing that this interest is all
* Italics are mine.




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143


the financiers get. There are more subtle ways
of receiving a usurious interest. The bankers seldom pay for bonds more than the actual physical
value of property represented by them, regardless
of their indicated value. When the time of redeeming the bonds arrives, however, the investors
receive not what they paid for the certificates, but
what their face value indicates.
Thus, when the Third Avenue Railroad Company offered its bond issue, according to the bondholder's committee's own statement, one class of
bonds amounting to $15,790,000, was selling at
about 80, another class of bonds to the amount of
$22,536,000 was selling at about 70, while the
$16,590,000 of stock was selling at 30. In other
words, the banker pays $70 for a bond, draws 5
per cent. interest on $100 annually, for 50 years,
and in 1960 he returns the bond to the company
receiving for it full value of $100. The farepayer, therefore, pays to the banker, through a
middle-man, the railroad company, a 5 per cent.
interest for 50 years on $100, when only $70
was borrowed, plus a special bonus of $30 upon
the bonds' redemption.
Heretofore this bonus was not as secured as it
is to-day, under government control. Now the




144


THE GREAT COLLAPSE


government sees to it that the public puts aside
enough money annually to amortize the bond at
par, even though it was sold at 70.
The total difference between the par value of
the securities issued in the Third Avenue System
and the actual value paid for them by the financiers is approximately $25,000,000. This has
gone to the bankers.
In the New York Railways system $104,930,500 bonds were marketed on a similar basis.
Even so rich a company as the Interborough, when
marketing its bonds allows a large bonus to the
bankers.
The net result of this is that the fare-payers are
obliged to pay interest on tens of millions of dollars
on money never borrowed, and also to amortize
this gigantic sum to be paid to the financiers as a
bonus when the bonds are redeemed. If a fivecent fare is not sufficient for all this an eight-cent
fare will cover it.
It is significant that the government, which is
supposed to stand guard over the people's interest,
is directly instrumental, through the Public Service Commission, in collecting this money for the
bankers and other investing interests.
The amortization of many millions of dollars




THE GREAT COLLAPSE


145


which were never invested is a new, scientific and
legal way of picking the people's pockets.
The Railroad Securities Commission in its report to the President of the United States strongly
urged that "no limitation should be placed on the
price at which bonds can be sold, but any discount should be cancelled or amortized during the
life of the bonds by the apportion each year out
of annual income or surplus accumulated after the
issue of the bonds of any less than the proportionate amount of the discount."*
The Public Service Commission agreed with
the Securities Commission entirely.
"It has been the invariable practice of the Commission to require the difference between the cash
proceeds of the bonds and their par value to be
treated the same as bank discount or interest paid
in advance and to be amortized within the term of
the obligation."
And it adds:  "the propriety of this requirement has never been contested by any of the corporations affected."t
Why should the corporations object?  They
* P. S. C. Reports, v. 3, p. 55.
t P. S. C. Reports, v. 3, p. 56.




146


THE GREAT COLLAPSE


lose nothing by it; on the contrary, they gain a
great deal. The people, and not they, pay.
When "no limitation" is placed on the price at
which bonds can be sold, the financiers, through
their bankers, buy bonds from their vassals, the
railroad corporations, for a next-to-nothing price
fully assured by the government that the bonds
will be redeemed, at par, with moneys collected
from the people, in annual installments, after a
stated term of years.
In the reorganization proceedings of the New
York Railways system there appears an item of
$4,740,000 under the head of "Franchise Payments" against which securities were issued. This
item is of extraordinary interest, not because of its
amount, but as an illustration of the effrontery of
the companies.  Chapter VII deals with the
methods employed by the companies in securing
franchises.
The companies stop at nothing. All means,
fair and foul, are employed. If money has been
spent, it has not been spent in paying the city for
franchises, but in bribing the Aldermen and corrupting the government.  The Public Service
Commission says that "Although a careful inquiry
was made, neither the applicants nor the experts of




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147


the commission have been able to find that any
company existing, whose lines are now operated
as a part of the system under discussion, has ever
paid the city anything for franchise rights, except
in two instances, totalling $150,000."~
There is only one theory upon which the company can justify the capitalization of franchises at
$4,740,000, for which only $150,000 were paid
to the city. The people being too timid to demand
a return of the stolen goods ought, in justice, be
punished by making them pay all expenses incurred in securing the theft, plus compound interest. And the penalty is inflicted with a vengeance.
Not only is the traveling public to pay interest for
the next 50 years on securities issued against these
"Franchise Payments," but also have it amortized,
so that, in 1960, somebody will get $4,740,000,
easy money.
This generation is hard hit, as far as transportation goes, for still another reason. The building
of the new subways involved a tremendous layout.
When the new subway contracts were being
planned, the city was in no financial condition to
build them itself or be an equal partner. Its total
* Re: Metropolitan Street Railway, reorganization, 3,
P. S. C. Reports, p. 113.




148


THE GREAT COLLAPSE


debt was so huge that the constitutional limitation
upon its borrowing capacity left a very narrow
margin for further loans.
The propertied classes, whose voices are usually
heard in legislative halls, and who are the determining factor in matters of public expense, found
themselves between the devil and the deep sea.
They were torn between two conflicting interests.
A better system of transportation means a
greater and more prosperous city. It means the
rise in the value of real estate and higher rents.
It means fat contracts for the construction companies, high interest to the investors, fat underwriting fees to the bankers, and large fees to promoters.  In a word, it means prosperity to the
money class. On the other hand, to issue municipal bonds for subway purposes may mean
higher taxes with which to pay interest, and build
a sinking fund for those bonds. There is little
choice in such an embarrassing situation.
It was finally agreed that the constitution be
amended to increase the city's power to incur indebtedness for such public utilities as should prove
self-supporting or profitable, as such debts would
impose no burden on the taxpayer.
The burden was shifted entirely from the tax



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149


payer to the fare-payer, the public. Between the
two the taxpayer wins, almost always.
According to this constitutional amendment in
which Governor Hughes, the Public Service Commission and most "civic bodies" concurred, the
bonds issued for subway construction have to be
fully amortized out of earnings, in order that this
debt be considered one incurred in a self-supporting industry.  Interests on these bonds and all
other charges, must be paid out of the same source
and for the same reason.
The contract between the city and the companies, therefore, provides that all bonds be amortized within 50 years, interest paid and every necessary expense borne by the traveling public. The
fare must be large enough to cover all these
charges; if it is not, the authorities can be dependent upon to see to it that it is. The companies' investment is to be amortized within these 50 years,
besides.
The people are being humored into believing
that they are getting subway systems and equipments free in 1965. The fact is they are to pay
for the subways and equipment out of their fares.
The company loses nothing.
Of course, the amortization of so gigantic a




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sum as the 1913 contracts involve when added to
the various unnecessary guaranteed profits in the
form of rentals and just plain profits in the form
of dividends, makes the burden upon the public
exceptionally heavy.
The fact is deliberately overlooked that the
property holders of the city, not only as part of
the general public, but as property holders, derive
a special benefit from the Rapid Transit facilities.
The cost of first construction should not, therefore, fall entirely on the fare-payers.
If the amortization of the costs of the subways
exclusively out of earnings, under the present
partnership is objectionable, if the amortization of
the third-tracking project on the elevated lines and
the actual physical value of the street railways
systems is unjust to the public, the amortization
of the watered-stock, "dead capital" and overcapitalization generally, exclusively out of earnings, is outrageous.
There is but one excuse for making the people
amortize everything in sight, that is, to save a tottering system. Gambling, speculation, appropriation of earnings that should have gone to maintain
the business, criminal mismanagement-all these
have brought the traction systems to ruin. The col



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151


lapse was inevitable. Something had to be done
to save the decayed system of private ownership.
The business had to be rehabilitated, placed on a
solid footing again.
The Government, therefore, created a Public
Service Commission. The courts hemmed and
hedged in its power so that it might not wander
into strange gardens and untrod paths. The Commission caught the "spirit in the air." It proceeded
to crystallize all the speculations, all the insane
economic adventures, all the vices of an irrational
system of private ownership of public utilities into
funds to be amortized, paid for by the people, in
installments, under the Commission's own gentle
guidance.
This is what may rightly be called capitalism
guaranteed by the government.




CHAPTER XII


THE BANKRUPTCY OF REGULATION
For a long time past two principles proposing
to offer relief from the unspeakable abuses of
private ownership of public utilities have been
battling for supremacy. One principle is that of
public ownership and operation; the other is that
of private ownership, subject to public regulation.
Each principle has enlisted for its support a
great mass of people of varied political opinions
and of various degrees of advocacy.
Both movements have conceded that something
must be done. Things could not go on as they
were. The constantly growing evil was too great
and too menacing to permit of indifference.
The collectivists, as the believers in public
ownership are called, range from the out-and-out
Socialists, who believe that all socially necessary
industries should be collectively owned and demomratically managed, to the mere municipal ownership reformers, who hold that only what can be
conservatively defined as public utilities-such as
water supply, gas plants, railways and the like152




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153


should be owned by the Government, while the
rest of the industries can best be taken care of
by private ownership and management.
The regulationists, likewise, are of varied degree. They differ on what should be subject to
regulation and on the extent to which the policy of
government interference in private affairs should
be permitted.
The principle of regulation won. It won because it received support from all sorts of elements.
It made its appeal to that portion of the population which honestly believe that the evils of private
ownership can be alleviated and social progress
best served by constant governmental guidance and
watch over the wicked corporations and the frailties of human nature. It made its appeal to the
great mass of frightened mediocrity who saw in
collective ownership the advent of the horrible
"red."  It made its appeal to the cunning apologists of special interests who saw in regulation a
means of diverting popular attention and preserving the present system.
Though carrying the day and in possession of
full power to follow their ideas, the regulationists
soon realized the hollowness of their victory. To
be in possession of power is not sufficient. It is




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more important to so use that power as to insure
its retention.
This they could not do because they were not
certain of their ground. They chose to attach
strings and limitations to their triumph.  There
was a feeling that their solution was temporary
and insufficient. It could not stand the test of
time.
The theory of regulation, briefly put, is this:
Public utilities are indispensable public needs.
Their private ownership and control results in
certain abuses and evils. Private owners cannot
be relied upon to serve the public disinterestedly.
Stipulations in contracts or in franchise grants are
no guarantee that the safety and convenience of
the public is assured, because what may be an
ample safeguard at the time relations are entered
into may prove a menace and a fetter years later.
conditions of the community change and with altered conditions arise new and different requirements. A rigid contract is entirely inconsistent
with the interests of an ever-changing and growing
society.
Therefore, a group of wise and trustworthy men
are to be appointed by the Governor, "by and with
the advice and consent of the Senate," for a term




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155


of five years to be the direct agents of the public
in its dealings with public utility corporations.
These Commissioners should be experts in the extremely complex problems of public utilities.
They are given sweeping power to hear, investigate and pass upon complaints against public utility
corporations, to prescribe rules for the proper conduct of the business, and decide upon rates to be
charged to the public.
The Commission is to be on guard constantly.
With every change in the life and development
of the community it is to prescribe such rules and
regulations as to meet with its new needs and
requirements.
It should be noted, incidently, that the theory
of regulation is contrary to our system of government based, as it is, on the system of checks and
balances. The Commission is the incarnation of
all three functions, legislative, judicial and administrative. It is what may be designated as government by commission.
This inconsistency explains the many conflicts
between the courts and the Commission in its
early days. Regulation carried to its logical conclusion is decidedly out of harmony with the recognized rights of "vested interests."'




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If regulation is reared on a contradiction in
theory, it is beset with insurmountable difficulties
in practice.
A sincere desire to be good, to observe the rules
of the game, and to demand that others be and do
likewise, may be sound and lofty idealism, but it
will not secure the ends sought, unless there is, side
by side with good intentions, a practical program
removing the material conditions which make it
easier and more profitable for men to do evil than
to do good.
The regulationists failed because they did not
have a practical program. They did not base
their theories upon fact. They did not take into
account the interplay of political and economic
interests under a system of private ownership.
They did not recognize the fact that corporations
control governors and legislatures and, therefore,
they can easily control commissions, which are the
mere appointees of these public officials. They
did not comprehend that the more corporation
interests will depend on the direct say-so of public
agents, the more reason there is for the corporations to exert their almost irresistible power to
secure governors and commissions who are subservient to their will,




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157


Regulation in practice, therefore, not only fails
to purify the economic lake, but aggravates the
situation by polluting the political waters.
Although in a vague and indefinite way New
York had regulatory bodies for many years past,
the beginning of regulation in the modern sense
in this city and state dates back to 1907.
The Public Service Commission, appointed
under the complicated Public Service Commission's law, divides the state into two Districts.
The First District operates in Greater New York;
it represents the city in its dealings with the public
utility corporations, except the railroads running
out of the city, and the telephones and telegraphs.
The salaries of the five commissioners, as originally organized, are $15,000 per annum; their
secretary and counsel are paid by the state, while
the rest of the expense is a mandatory charge on
the municipality.
Governor Hughes, the sponsor of the commission idea in this state, recklessly trampled on every
principle of municipal home rule in forcing the
commission upon the city.
The Commission for the Second District operates in the rest of the state and covers telegraphs




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and telephones for the city, as well as those railroads that terminate in New York. As far as
regulation is concerned both districts possess similar powers.
The people's experience with the Commission
is sad and disappointing. The Commissioners'
incompetence and unwillingness to represent the
people exceeded the forecasts of the worst regulation opponents.
The Commissions have kow-towed to the corporations from the very beginning. Their members
were either former employees of the corporations
they were set to regulate or they enjoyed lively
expectations and perhaps promises to be "picked
off" when their arduous tasks as commissioners
were over, or they were so incompetent and indifferent to their duties that their handling of their
duty bordered on the grotesque. Occasionally a
member of ability and character would find his
way on the Commission. But he would be continually out-voted, and if he made too much noise
he would be dropped.
When the Hon. John A. Dix, the Murphy
Governor, had to fill a vacancy on the Commission, he appointed George V. S. Williams, a
Brooklyn lawyer, who some years previously




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159


had been connected with the legal staff of the
Brooklyn Rapid Transit Company. He, of
course, showed healthy signs of appreciation of
his former employers' interests and generally lined
up on all questions on the side of the corporations.
He was a strong supporter of the notorious 1913
contracts.
William R. Willcox, chairman of the New
York Commission from the day of its creation
to February 1, 1913, upon his retirement from
duty, was "picked off" by the Hudson and Manhattan Railroad Company, a corporation Mr.
Willcox was supposed to have been regulating
for about six years, and he was made its counsel in a capitalization case before the Commission.
The New York Edison Company, a subsidiary
of the Consolidated Gas Company, also appreciated the value of having a former chairman of
the Commission appear as its counsel before his
former associates, and so it retained Mr. Willcox
in a big rate case.
Frank W. Stevens was the chairman of the
upstate Commission. His ability was soon recognized by the corporations appearing before him.
No talent is too brilliant or too costly for the
vested interests if it can only be purchased and




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enlisted in its defense. Before Mr. Stevens, upon
being retired to private life, had time to shed a tear
over his retirement, the New York Central Railroad Company retained him as its general counsel.
That the public utility corporations have been
taking their attorneys preferably from among former commissioners is not to be wondered at. It
is understood that they do not employ the commissioner, but the attorney; he having been well
trained, of course, at public expense. If, when this
attorney comes before the Commission in a rate or
capitalization case, he adds to the weight of his
legal talent his influence with his former associates
and wins a point, it is his privilege. The corporations see in it a mere coincidence.  Only evil
minds will criticise such innocent transactions.
Again, who will forget the famous appointment to the chairmanship of the First District Commission of the Honorable Edward E. McCall,
Tammany darling, chum of Murphy, and interested party in the Kings County Electric Light
and Power Company, a powerful corporation in
Brooklyn that he was set to regulate. As was
later learned, this man was appointed by the honorable and valiant William Sulzer, the "People's
Governor," at the behest of Murphy.




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161


McCall as a regulator not only by reason of
his personal interest in certain public utility corporations, but by general training and environment, typifies in his person the bankruptcy of the
entire regulation policy.
The Public Service Commission became the
football of politics. With every change of administration at Albany there has been an upheaval
in the Commission. The Governor has the right
to remove commissioners for cause. Invariably,
the Governor has sufficient ground for removal
if he so chose. When the statesmanly Dix became governor the Commission was investigated.
When Whitman, Republican, presidential aspirant, reigned there was an investigation and some
removals. Now, when Mr. Smith, Democrat, is
in power the usual investigation is proposed.*
The net result of the twelve years of the Public
Service Commission's life is a shameful surrender
of the city's interests.  A  system  of subways,
* Since this chapter was written the Commission for
the First District has been reorganized. At the suggestion of the Governor, the Commission now consists
of one. Lewis Nixon was appointed. He is spared the
inconvenience of having minority reports. He is unanimous on all questions.




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financed by the city, maintained and amortized
by, the public, has been tenderly handed over to
private corporations by the Commission for a
period of 50 years, to reap hundreds of million of
dollars in profits. It bartered away the valuable
right in the elevated third-tracking franchise without any consideration; and, moreover, it pledged
the public to buy out the roads for the corporations.
It has not reduced rates.  It has not improved
service commensurate with the expense and sacrifice the city has been making. It has not improved the safety of the traveling public. It has
not improved the conditions of the workers employed on the lines. It has long ceased to regulate the corporations in the interest of the public
and has very effectively regulated the public in
the interest of the corporations. Its function has
been reduced to guaranteeing and protecting corporation investments, proper or improper.
The Public Service Commission is one with
the corporation according to a bill recently introduced by Assemblyman Martin of Oneida
County, the purpose of which is the raising of
fares to 7 or 8 cents. The Commission filed an
extensive brief with the Legislative Committee to




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163


which the bill was referred, giving reason why the
bill should become a law.
Instead of the corporation engaging highly paid
counsel to argue and push its legislation, the
Commission receiving its pay from the people
does it ungrudgingly. Its services are so much
more valuable to the corporations because the
Commission is clothed with government authority.
Its arguments and pleas are weightier than those
of private counsel by reason of the mistaken view
that it represents the people.
Here is another case where a reform, sponsored
by a movement whose general purpose is to save
the present system, ultimately becomes a weapon
in the hands of the capitalist class.
The policy of regulations has failed, and failed
badly.
One of the signs-if not conclusive, at least
indicative-showing that regulation failed, that
the Commission is the bulwark of the public
utility corporations, that it is of no value to the
people, is the anxiety of the corporations to make
the Commission a permanent body, the existence
of which would be guaranteed by the Constitution.
Mr. Willcox, who cannot be accused of being




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unfriendly to the entrenched powers generally and
public utility corporations particularly, strongly
urged before the Constitutional Convention of
1915 that the Commission be made a constitutional body; its term to be 10 years.
Honest regulationists are now convinced that
regulation as a permanent policy is a failure,
others have been compelled to "see" it. Experience is the best teacher; and the costly experience
of regulation has taught the people its futility.
Spurred by the failure of their opponents and
superbly confident in the soundness of their principle, the collectivists are forging ahead. Their
adherents are becoming more and more numerous.
The movement is irresistible.
The regulationists realize their diminishing
strength and have started a policy of compromise.
They have taken for themselves the present and
frankly assign the future to the collectivists. They
have confessed the impotence of their scheme.
All franchises granted, all contracts entered
into between the city and the railway companies
bear testimony to these compromises. The 1913
contracts are extremely bulky, covering the relations between the parties in great detail.  But
this is the very thing the theory of regulation is




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165


supposed to avoid. It was intended to do away
with rigid agreements.
Throughout the contract runs the confession of
the inevitability of public ownership. There is
the acknowledgment that the future belongs to
the collectivists. The great bulk of the contract
is taken up with various details insuring the interest of the corporations in case the people get
impatient and demand the subways before 1965.
The possibility of such a demand was considered
imminent, not later than ten years after the beginning of operations. The recapture provisions,
though made impotent by the various conditions
smuggled into the contracts by the corporations
are, nevertheless, indications to what extent the
pressure of public opinion compelled the corporation controlled public officials to bow to the collectivists.
Private ownership of public utilities having
failed, the policy of regulation having failed,
public ownership and operation being inevitable,
what kind of public ownership shall it be?




CHAPTER XIII


MUNICIPAL OWNERSHIP WE DO
NOT WANT
All roads seem to lead to public ownership.
It is only a matter of time when ownership and
operation of public utilities by the government will
be considered as commonplace as government
ownership of the post-office, the schools, the fire
departments, the parks, the bridges, the streets and
the water supply, is looked upon to-day.
Besides the Socialist party, which in its larger
program includes municipal ownership, one of
the old parties, the Democratic party, in this city
and state is committed to municipal ownership.
"Specifically," says the Democratic city platform for 191 7, "we are in favor of public ownership and operation of all public utilities, including
tractions, gas, electricity and the telephone." Mr.
Hylan, Democratic candidate for Mayor, laid
great stress on this plank in his campaign.
In 1918, when Tammany again assumed control of the city, Senator Wagner, minority leader
in the upper house in Albany, introduced a municipal ownership bill giving the cities power, among
166




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167


other things, to build or acquire by purchase or
condemnation their transportation facilities and
operate them directly, if they chose. The bill
was killed in committee.
In the 1918 elections the Democrats won the
governorship, but failed to increase their strength
in the Legislature to any appreciable extent.
In addition to the flood of municipal ownership
bills introduced in the 1919 Legislature by members of all parties, Senator Foley and Assemblyman Donohue, minority leaders of the Senate and
Assembly respectively, introduced two enabling
acts, which are in principle the same as those
sponsored by their party the year previous.
One of the bills, Assembly Bill Int. No. 1102,
1919, short and to the point, ends by saying:
"When such determination shall have been so
made and approved it shall be unnecessary, anything in this act to the contrary notwithstanding,
to obtain the approval, consent or authority of
any other body or board pursuant to the provisions of any law, general or special."
This is meant for the benefit of the Public
Service Commission. Tammany, considering itself the destined ruler of the City of New York.




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resents interference by the Commission, a state
body, and usually Republican into the bargain.
Many Republicans, though frankly opposed to
municipal ownership, are seriously desirous of
passing such bills. They are of the opinion that
the passage of the bills would only embarrass the
Tammany administration. They do not believe
their opponents are prepared to go through with
the municipal ownership program. They hold,
and there is color to such view, that the real
reason for Tammany's insistence on municipal
ownership is the opposition to it by the Republicans.  Since the political game demands an
"issue," Tammany is quite willing to make municipal ownership "the issue."
This seems to be true, because in cases where
the city administration did have the power and
the opportunity to redeem its campaign promises it
failed to do so. The Tammany-public-ownership
worthies at the mere sight of a chance to enact
a public ownership ordinance drew their heads
into their private-ownership, corporations-ridden
shells.
"On February 28, the Socialist Aldermanic
delegation, through Aldermen Vladeck, Held




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169


and Wolff, introduced an ordinance providing for
the operation by the City of New York of passenger and other car service over the Williamsburgh Bridge.
"When the Socialists introduced their ordinance the company was operating under a permit
which was to expire on March 31, 1918-this
permit has since been extended six months-when,
it was expected, a new contractual arrangement
would be entered into between the company and
the city.
"The ordinance was intended to prevent this
by municipalizing the line....
"It was pointed out by the Socialists that the
company had been realizing a net annual profit of
approximately 100 per cent. on an original capitalization in 1904, when it was organized, of
$100,000. Its net corporate income for the fiscal
year ending June 30, 1917, according to the
company's own balance sheet, was $92,742.24.
"The Socialists further pointed out that the
bridge, the tracks on the bridge, the wiring and
terminals, were-and are-the property of the
city.
"Here was-and still is-an opportunity for




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the administration elected on a municipal ownership platform to prove its sincerity."*
The ordinance was emphatically voted down.
The Bridge Operating Company received another
extension.
This action casts serious suspicion on the sincerity of the Democrats.  In the light of these
facts, their loud demands for "permission" from
the Republican Legislature to enact municipal
ownership is almost as impressive as the frantic
demands of "Let me go!" made on a friend by
a man drawn into a fight, who, at heart, is too
cowardly to go through with it, but must put up
an appearance and "make a showing."
When a party in power, with no commendable
past in its favor, refuses to put into practice definite campaign promises-and what it still pretends
to strive for where it is prohibited by law-upon
an occasion such as was presented to it by the
expiration of the Bridge Company contract, an
occasion most favorable to the city, it is well to
be on guard before endorsing its kind of municipal
ownership.
Perhaps the desire of certain railroad corpora*The Socialists in the Board of Aldermen, by E.
Clark and C. Solomon, pp. 16, 17.




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171


tions to get rid of some old, dilapidated and unprofitable lines, or some such consideration, would
move the city administration to live up to its
campaign promises. Such practices would be
neither new nor striking.
When Mr. Gaynor, who (for a Tammany
candidate) was exceptionally intelligent and sincere, ran for Mayor, in 1909, his classic speeches
were largely able exposes of the 1900 and 1902
subway steals, and solemn promises to save the
city from similar transactions.
"And now," said Mr. Gaynor, in a speech
delivered in Tammany Hall, on October 19,
1909, "if I may get away from my notes, I will
say just a few words in regard to some of the
important issues of the campaign. My friends,
we are going to build subways, for the city is
going to build subways. We do not intend that
a single subway franchise for it shall be passed
over to those men who erected your street railways over here to have bonds and stocks sold out
to the community on the highest figures, and then
the road thrown into bankruptcy, the same as
your roads are over here to-night, and have been
for three years, not a dividend paid on them
meanwhile.




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"Oh, you men of Manhattan! I fear you do
not always know what is occurring right among
you-the most scandalous chapter in the history
of New York, and it has evoked very little public
indignation. The men that did it are said to be
good men. They hold their heads high....
"Nobody ever put a dollar into the building of
the present subways except the city; nevertheless,
the day it was opened and you met to celebrate
the opening of it, how many people in the city of
New York stopped to think that, although they
had put every dollar into it, they did not own it
when it was completed, but that those who got
into it have it for 75 years, before it comes back
to the City of New York.
"I can tell you that during the next four years
me mill build the submays for the city and none
of those people mill so much as get their little
finger into it."
This is a fair sample of the kind of campaign
speeches and promises made by candidate Gaynor. No doubt this issue as much as any other
was responsible for his election.
The people had a right to expect public ownership of the contemplated subways. They had




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a right to expect that the subways would be built
"for the city."
What actually happened has already been told.
"Those people" not only got "their little finger
into it," but their whole hand. In spite of his
pledges and promises, in spite of the tremendous
"public indignation" it has evoked, the same
Mayor Gaynor entered into the 1913 contracts,
which not only surrendered the subways that were
to be built but have amplified and guaranteed the
robberies of the first and second contracts which
he so eloquently attacked.
If the public ownership of Hylan is to be no
better than that of his, in many respects, much
worthier predecessor, the people will be thankful
to him if he leaves matters as they are.
It often happens that sincere advocates of
certain reforms most actively oppose these reforms
when introduced with a view of strengthening the
very interests they are designed to combat. The
German Social-Democrats, champions of social
ownership of the means of life, were the strongest
opponents of certain government monopolies.
They opposed Bismarck when he sought to create
a tobacco monopoly. They opposed Kaunitz in
his wheat monopoly project. They opposed the




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transformation of the Reichsbank into a government bank. The opposition was based squarely
on the ground that it would strengthen the arm
of the ruling class, the junker and capitalist elements, and would furnish them with facilities for
more intense spoliation.
The Socialists in this city, the foremost advocates of public ownership, may be faced with the
unpleasant task of opposing public ownership a la
Tammany.
Several questions will have to be carefully examined before public ownership, proposed by the
believers in the established order, is indorsed by
the working class generally and the Socialists in
particular.
1. Will the city take over only those lines it
deems necessary? Or will it acquire all lines,
taking the fat along with the lean? Or will it
take the lean and leave the fat to the corporations?
2. If the city takes over the entire system, will
it lease some lines to operating companies and
operate others directly, or will it operate all lines
as a unit, as one system?




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175


3. Upon what basis does the city expect to
acquire these lines?
4. How will the workers employed on the cityowned lines be protected? Will they be in no
better circumstances than other city employees?
The questions under the first head are important because the city will need to raise a gigantic
sum of money for which no preparation is being
made by those in authority. If the entire transportation system is not acquired, support of public
ownership will depend, among other things, on
the particular lines the administration seeks to
acquire. Even if the city is to take over the entire
transportation system care must be taken that this
move is not used as a cloak to relieve the companies of many useless and profitless lines. There
are some lines that cannot be properly placed in
a local transportation system.
The second question is of moment because
every bill now pending in the Legislature giving
the cities power to acquire public utilities expressly empowers them to lease these properties.
If the sponsors of the bills really mean to embark
upon a policy of public ownership, and extend it
to all fields where private ownership proves unbeneficial, they would not seek a right to do that




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which has so shamefully been employed for the
past 20 years as a means of robbing the city.
The subways in New York are "leased" to the
Interborough and the B. R. T. The people
had enough of "leases."
The kind of public ownership that would have
for its purpose the mere changing of lessors instead of abolishing them altogether should not
receive the support of true advocates of public
ownership. Here, again, the motives and future
plans of the old party public-ownership politicians
must be studied.
For many reasons the third question is the
most complex. Constitutional property rights, the
science of finance, the honesty of the appraisers,
the interference of the courts, the shrewdness of
the corporations, the breadth of vision and public
faithfulness of the administration are some of the
essential elements involved.
Excepting the provisions in the various bills
giving power to the cities to acquire the properties
by "purchase and condemnation," the proponents
of government ownership have not clearly indicated upon what financial basis they will acquire
the roads.
Senator Newlands, speaking before the joint




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177


committees on Interstate and Foreign Commerce
of the Congress of the United States, November
20, 1916, gave an intimation of the plan in view
for acquiring privately owned railroads by the
government.
"The plan of acquiring national ownership,"
said Senator Newlands, "would not be difficult.
It would not involve the entire readjustment of
the present system. It would be easy to authorize
the Interstate Commerce Commission to institute
suit and condemn the shares of stock of railroads
in the country engaged in interstate commerce,
leaving the bonds outstanding as a lien upon the
property. Thus the interests of the stockholders
would be purchased by the nation and the Interstate Commerce Commission could step into the
position of director of the various corporations,
with their present organization of officials and
employees, and could gradually work out a
method of national administration."
Thus, the acquiring of property by condemnation under the present complex relations of corporate industry is nothing more than the condemnation of worthless stock, the assumption of
obligations to pay interests on, and redeem, when
due, the entire outstanding bonded indebtedness.




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It should be borne in mind that the railroad
properties in this city are mortgaged several times
their worth. No matter how little the government
may pay for the stock, and even if it be acquired
without cost, the government would still be nothing more than the collecting agent for the capitalists. It would collect the mighty tribute capital has levied upon the people. It is doubtful
whether high finance, unless it refrains for political
reasons, will not become the staunchest supporter
of this kind of government ownership.  The
bankers would much rather have the government
as their debtor than private companies.
In stepping into the shoes of the private companies, the Government, as debtor, would have
to pay a high interest and heavy bonus to which
the bankrupt corporations bound themselves in
their worst days of financial helplessness. The
Government would also have to pay interest on,
and redeem, the bonds issued against "dead capital," and such other debts.
Although government ownership under these
conditions would eliminate millions of dollars
paid in dividends, still, it is doubtful whether
the responsibilities of guaranteeing bad debts,
badly incurred, running into hundreds of millions




THE GREAT COLLAPSE


179


of dollars, is worth the gain. Looking at it from
a class point of view, the capitalist class would
gladly give up dividends, consider them as a sort
of premium, paid annually to the Government,
for insuring its actual and alleged bonded investments.
Such seems to be the government ownership
about to be inaugurated by those who believe in
the preservation of the present system.
Three questions must here be answered:
1. Will this kind of government ownership be
an improvement, financially, upon present conditions? Not to any appreciable extent.
2. Will such kind of government ownership
be conducive to the movement seeking to transform society "by degrees" from capitalism to
Socialism? Indeed not.
3. Can advocates of public ownership, with
a view of extending its principle to other
socially necessary industries leading to the elimination of the capitalist system, support such government ownership? Hardly.
The assumption by the Government, in December, 1917, of the great railroad system of the
country with its 260,000 miles of railways, its




180


THE GREAT COLLAPSE


1,000,600 employees, and its investment of $17,500,000,000, might have proven the greatest argument in favor of permanent public ownership of
railroads and its extension to other public utilities
if not for the financial losses suffered by the Government in spite of the decided raise in rates. The
public is not aware, of course, that these losses are
largely due to the high tribute paid to the private
owners under the contract.
A concrete case like this serves as an excellent
weapon in the hands of reactionaries who readily
take advantage of the balance sheet to prove the
"failure" of public ownership, and particularly
public operation.
For the genuine supporters of the public ownership idea to try to explain this failure is good labor
lost. Public ownership must prove successful if
it is to serve as an example to those who want
"to be shown."   If it has not this value, then
private ownership should be preferred until such
time as the real thing-not the millennium but just
real public ownership-can be introduced.
Thousands of working men and women will
not support public ownership until the fourth
question is answered, and answered properly.




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181


The experience of workers in the employ of
the government is most disappointing.  Rights
they enjoy in private employ are denied them
when they are similarly employed by the government. The Federal employees are forbidden to
exercise their fundamental rights as citizens.
They are forbidden to engage in political activities, a right which private employers would not
dare to take away openly. They are generally
denied the right to organize, and when permitted
that, they are strictly forbidden to strike.
In the government employ, as we have it now,
the worker is paralyzed. His weapons are taken
away. His only means of redressing his grievances is the petition. This he refuses. He has
acquired enough self-respect to know not to crawl
and beg when he can demand and get.
Thus far, who is less free than the government
employee? Against the government it is almost
impossible to struggle, much less to win.
With the private employer the workers have a
better opportunity to win.  His comparatively
limited economic resources, fear of bankruptcy,
and a desire not to get "in bad" with the public
often make him concede to the workers' demands.
If the industry is well organized both contestants




182


THE GREAT COLLAPSE


have an even chance. The great mass of people,
conveniently designated as "the public," is a
neutral party and, of late, is even inclined to favor
the cause of labor.
Such is not the case when the workers face the
government.  On strike, they are branded as
traitors. They are confronted by the unconquerable economic strength, as well as the formidably
organized physical and moral power of the government.
The open shop, in government industry, is reinforced with the open jail.
The workers remember the street cleaners'
strike in this city several years ago, and the attitude assumed by the municipality at that time.
Nor do they forget the action of the Government
in the truck-drivers' struggle against a private employer who happened to carry United States mail,
a federal government industry.
In these struggles, the state assumed the attitude of defender of organized society.  It asserted its authority as a police-state when, as a
matter of fact, the workers were striking not
against the police-state, the state, defender of
public peace and order, but against the state as
employer of labor, the state as teacher, street



THE GREAT COLLAPSE


183


cleaner, highway builder, mail carrier and railroad
owner.
Labor will hesitate to support a public ownership which does not guarantee it the right to organize in its own defense, and strike, if necessary,
against the employer-state.
Thus, from every point of view, it will be seen
that public ownership per se is not necessarily even
a partial victory for the collectivists' program.
The establishment of a state industrial feudalism
may so paralyze the forces of labor, so weaken
it in its struggle, that its ultimate emancipation
will be postponed rather than hastened.
Only a public ownership that will strengthen
the arm of labor in its struggle for economic freedom, that will facilitate the transformation of society from capitalism to Socialism, that will
weaken the authoritarian state and strengthen the
industrial functions of the state is worthy of the
support of Socialists in particular and labor generally.
Public ownership is so imminent, there is so
much demand for it from all quarters, that it is
important to outline briefly the general principles
of a public ownership that should be demanded
and, nothing short of it accepted.




184


THE GREAT COLLAPSE


If we are to be spared a period of popular
lethargy towards the collectivists' demands likely
to result from the disappointment of an overexpectant people in public ownership, at least
these three elements indispensable to a sound program of municipal ownership should be insisted on.
1. A sound policy of public finance. This is
a troublesome question. Different groups in society advocate different policies, depending largely
upon their economic interests.
2. The establishment of a scientific administrative organization.  Inefficiency, lack of economy and corruption have been the stock arguments against public ownership.
3. The rights of those employed in the municipal or state-owned industry must not only not be
curtailed but liberally extended.
Each of these three elements will be discussed
in turn.




CHAPTER XIV


PUBLIC OWNERSHIP AND FINANCE
As a prerequisite to acquiring the surface, elevated and subway lines, the municipality should
appoint a commission of engineering experts, who
should be removed, as far as possible, from the
influences of the traction trust, to study the entire
transit problem.  Taking all matters into consideration, the commission should determine which
lines are essential to an efficient, unified and sufficient system of transportation for the people of
Greater New York.
Thereupon a Board of Appraisers should determine the actual present physical value of the lines,
rolling stock and equipment. But no single item
should be estimated under any circumstances to
be worth above original cost.
Franchises should not be valued at more than
what the city actually received for them. If the
city received no compensation there should be none
paid to the company, regardless of how much
the present owners allege to have paid for them to
the party to whom the franchises were originally
granted.
185




186


THE GREAT COLLAPSE


Real estate owned by railroad corporations, by
reason of the growth of the community, has in
most cases risen in value entirely out of proportion to the original cost. To the extent that these
properties are necessary to the transit system they
should be appraised; but their value shall not
exceed cost.
All leases, contracts and agreements should be
cut right through, until the original owners are
reached. All red tape and complicated dealings
must vanish, simplicity should take its place.
No fear need be entertained regarding the disintegration of the existing "systems."  There are
no systems now. Only when all necessary lines
come under unified control can system be instituted
in place of the chaos and anarchy that now prevail.
Working within the framework of present society with its established legal relations and constitutional guarantees, the city will have to
indemnify the owners for the roads. The basis
for such payment shall be the value established
by a Board of Appraisers. To raise money for
that purpose the city should issue municipal bonds.
As matters stand to-day, they will be bought
largely by the financiers.




THE GREAT COLLAPSE


187


During the life of the bonds, the holders will
be entitled to draw interest in the tens of millions
of dollars annually. This annual tribute to be
paid to the possessors of the money bags mirrors
the absurdity of a system under which a community is taxed to the extent of tens of millions
of dollars annually, by a small group of people
who have absolutely nothing to do with the productive, directive, or in any other constructive way
with the industry.
It is estimated there are $1,000,000,000 worth
of bonds outstanding against the properties of the
local transportation system in Greater New York.
Judging by the few companies of which some sort
of physical valuations were taken, over half of
these outstanding bonds are not represented by
property.
Evens Clark, director of the Socialist Aldermanic Research Bureau, prepared a table of figures from Reports of the Public Service Commission and the Tax Commsision for 1918, showing
the outstanding securities of the railroad companies upon which the public is expected to pay
interest and dividends and the values of the
properties upon which the corporations pay taxes.
The following is an extract from that table:




188


THE GREAT COLLAPSE


Securities  Value of Property
NAMES OF COMPANIES,.ui      Reported to Tax
_  Outstanding _ Commissioner
Hudson & Manhattan R. R. Co.l$122,360,183 $21,898,000
N. Y. Consolidated R. R. Co...1 102,550,000  38,501,539
Second Avenue Line...........  10,722,000  3,596,761
New York Railways System...1 95,838,889  57,511,301
Third Avenue System..........[ 70,333,961  25,935,223
Brooklyn Rapid Transit Systeml 66,620,962  45,047,792
These figures are self-explanatory.
Of the various lessons to be drawn from these
figures this stands out, namely, that the value of
the properties are far less than the outstanding
securities indicate. The probable present physical value of the roads in Greater New York, determined on the basis laid down for the appraisers,
would be less than $500,000,000.
Assuming the interest paid on the bonds now
outstanding to be only 5 per cent., and assuming
the municipality will pay as high a rate on its
bonds it will still save over $25,000,000 annually.
Added to this the millions paid every year in
guaranteed dividends and in rentals, the city
would save from $50,000,000 to $75,000,000
annually.
There are methods of obviating the private
bankers entirely. Other countries have paved the
way. Belgium solved its problem of finance for
municipal enterprises by organizing the "Credit




THE GREAT COLLAPSE


189


Communal," an inter-municipal bank. Belgium
learned by experience how not to pay millions of
dollars in interest to private bankers. It found
the collective credit of the municipality, properly
organized, to be just as good and better than the
private banks.
"In order to facilitate for the municipalities the
loans that they are often obliged to negotiate at
the time of undertaking any work of local utility,"
says E. Vendervelde, "the Government, at the
suggestion of a Socialist, Haeck, encouraged the
establishment of the 'Credit Communal,' a corporation having no other stockholders than municipalities;..." 
Scarcely had this bank been established when
its organizers were authorized to found another
bank, the General Savings Annuity Bank. These
banks are highly successful.
With all the hundreds of millions of dollars
going through private banks, annually, in the carrying on of municipal business in New York
State, an inter-municipal bank would be a most
powerful financial institution.
A corporation, organized under the laws of
* Socialism vs. the State, E. Vandervelde, p. 151.




190


THE GREAT COLLAPSE


New York, with municipalities as the sole stockholders, the inter-municipal bank would soon become a clearing-house for all municipal financial
transactions.  Branches could be conveniently
established in different cities.  The purpose of
this bank would not be to charge large underwriting fees, nor to hold business up for usurious
interests, nor to manipulate the financial market
for private profit, but rather to become a social
instrument to facilitate social effort.
The taking over of the entire transit system
would no doubt be the greatest single enterprise
yet undertaken. To leave the finances of a business involving hundreds of millions of dollars to
the city administration to be handled in the same
manner as the other municipal finances are handled, is deliberate business suicide. Even if the
city were not in the hands of Tammany with its
notorious appetite for things glittering, there would
still be objection to confusing the finances of the
Municipal-Governor with those of the MunicipalTransporter. There must be financial autonomy
for the railroad business. The budget of the Industrial-Government must be completely divorced
from the budget of the Police-Government.




THE GREAT COLLAPSE              191
Rules of strict accounting should be maintained.
The necessary funds for repair, deterioration, re
placement of properties, redemption of bonds, as
well as a general reserve fund for all sorts of
emergencies, should be established.
Bonds issued for the purpose of raising money
to pay for the roads or for building extensions and
new lines, must be amortized. Under the present arrangement the fare-payers must cover all the
expenses, including the amortization of the bonds,
which is another way of making them pay for the
first cost of construction.
This seems to be unjust and unsound. It is
sufficient if the fare is large enough to cover the
maintenance of the roads at top-notch efficiency,
the cost of operation, and the maintenance of a
reserve and replacement fund.
The owners of real estate in undeveloped or
partly developed sections of the city, as well as
those owning property in the business heart of
the city, should pay all or part of the cost of first
construction, in as much as the benefit derived
from a proper system of transportation accrues to
them in the form of increased real estate values.
Subways, such as the city has built and is now




192


THE GREAT COLLAPSE


in the process of building, extending as they do beyond congested centers, add very greatly to the
value of real estate in those districts which have
not been built up prior to the construction of these
subways because of lack of transit facilities. It
is a matter of common knowledge that the real
estate values in Washington Heights, The Bronx
and in the business section of the lower part of
Broadway, due to the building of the subways,
have risen enormously. Rent profiteering in The
Bronx particularly reached scandalous proportions.
Shall the real estate interests be permitted to
enjoy exclusive financial benefits from the community-built rapid transit? Shall the fare-payers
be taxed at both ends of the pole? Shall they
pay for the construction of transportation lines and
also pay higher rents because of having constructed these lines? Clearly, this is not just.
A commission should be appointed to make a
careful and scientific study of the areas and extent
to which real estate values have risen by reason
of the construction of transportation lines.
The "unearned increment" thus ascertained,
should be assessed to the full amount, and the
money used for an amortization fund to retire all




THE GREAT COLLAPSE


193


bonds issued by the municipality for the purpose
of purchasing the traction system. If these assessments are in excess of the funds needed for amortization, the residuum may be used to build extension routes and new lines in sparsely-populated
sections in order to develop this metropolis to its
full possibilities, and relieve its congested neighborhood in which people are herded like cattle.
The principle of assessing the rise in real estate
values due to public improvements should be applied to all extensions and new lines built.
If, however, these assessments do not yield
sufficient to cover the amortization of the first cost
of construction, or the bonds issued for the purpose
of acquiring the transportation system, the farepayers should supply the difference.
Another way of obtaining the same results is
by issuing assessment bonds against each piece of
property for the full amount of the "unearned increment," which would not be a lien upon the
city, but upon the property assessed. The only
objection to this method is the comparative difficulty the marketing of these bonds would present.
With an inter-municipal bank this difficulty would
be obviated.
The principle of assessment bonds is already




194


THE CREAT COLLAPSE


in operation covering local improvements. The
cost for street openings, pavements, sewers and
such other expenses is defrayed by assessing the
property in the vicinity benefiting therefrom.
There has been a tendency of late to establish
public ownership for fiscal reasons. When the
State, monarchical or republican, by reason of its
general extravagances and huge military and
naval appropriations swells the budget beyond a
point where, what is called legitimate taxation,
does not suffice to finance it, it embarks upon a
policy of government ownership of certain recognized monopolistic industries for what it can get
out of it.
With the tremendous war loans and the interests they bear there will be a strong temptation on
the part of our own government to go into public
ownership and use the profits for the purpose of
relieving the taxpayers. In municipalizing the
traction system in this city care must be taken,
therefore, that the fiscal considerations for governmental purposes shall play no part at all in the
arrangement. The principle of public ownership
is social service, convenience and safety to the




THE CtREAT COLLAPSE


195


public, and decent, human treatment and proper
pay to those employed in the system.
Under public ownership fares would be reduced instead of raised.
A derivative table of figures for 1918, prepared by Mr. Clark from data in the Reports
of the Public Service Commission, show, among
other things, the actual cost of carrying passengers on New York local lines and also the profits
made upon each passenger:


AVeraoe
Average Cost Profit Made
NAMES  OF COMPANIES        to carry Pa-  on Each
sengers in  Passenger
Cents    in Cents
Interborough Rap. Tr. System..    2.6        2.4
New York Railways System....      3.8        1.2
Third Ave. System.............    3.8        1.2
Brooklyn Rapid Transit System.    3.7        1.3
N. Y. Consolidated R. R Co...     2.8        2.2
Hudson & Manhattan R. R. Co.      3.7        3.3


These figures are highly illuminating in view
of the persistent demand for higher fares.
The outstanding fact is that with all the waste,
high salaries and bonuses to officials, the known
figures prove that the fares could be considerably
reduced.
Under a unified system of operation and con



196      THE GREAT COLLAPSE
trol the principle of one-city-one-fare could be
realized.
Autonomy of finance in government industries,
the divorce of the Industrial-Government from
the Police-Government has as its indispensable
compliment autonomy of administration.




CHAPTER XV


PUBLIC OWNERSHIP AND ADMINISTRATION
Along with the promise on the part of the leading railroad companies that they will go bankrupt, a promise they at this writing have redeemed,
there was instituted a powerful and incessant
propaganda against public operation of the roads.
The principal arguments used against the municipalization of the traction systems were these:
The government is incompetent. It cannot be relied upon to do practical work. Political corruption, political favoritism, political interference in
the management of this gigantic industry will result in inefficiency and lack of economy. The
service will be demoralized.
However true these arguments are, the companies are least qualified to make them. Their
testimony cannot be taken at face value because
they are interested witnesses. It is they and members of their tribe who corrupted public officials
by bribing them in order to get franchises. They
duped administrations to surrender to them the
city's traction system. They have financed and
197




198


THE GREAT COLLAPSE


supported the parties in power. They have bitterly opposed those who sought to effect a change
either in the form or substance of the present government. They have clamored for the imprisonment of those who wished to purify the government and purge it of its vices. They, therefore,
are not fit to hold up the government of their own
creation to ridicule and contempt.
Municipalizing the traction systems does not
necessarily mean politicianizing them. Undoubtedly, if the roads are to be municipalized there
must be complete separation between the political
administration of the city and the administration
of its railroads. It would be disastrous indeed if
the political ward-healers were to have power to
temporize with this industry.
The present method of extending government
functions is by erecting additional departments,
which become a part of the political state, subject to all the political influences and shortcomings characteristic of our government. This must
be guarded against in the public ownership of railroads. Although all precedent is in favor of the
department, results at home and the experience of
other countries argue against it.  A  distinction
must be made between the extension of a govern



THE GREAT COLLAPSE


199


ment function political in its nature and one that
is industrial.
It would be deplorable indeed if the department method of administration were pursued.
Should the Department need locomotives, or rails,
or coal, or anything else, it would have a resolution introduced in the Board of Aldermen. Some
diligent members of the majority happen to be absent. The minorities desirous of settling everpresent grievances against the party in power
would take advantage of the situation to block
the ordinance. While the Aldermen were playing politics, trying to find out whether the contract is to be made "with public letting" or "without public letting," the business would be hampered.
Department administration opens the door to
Tammany Hall, or for that matter, to any other
political organization happening to be in control.
A department is usually the servant of the majority party instead of the city as a whole. Formally, orders to the administrators of the department are given by the elected officials, actually the
orders are framed by the political boss. The election district captains and the district leaders who
need patronage to insure success at the polls would




200


THE GREAT COLLAPSE


multiply the present political corruption if they
had a department in charge of a half a billion
dollar business at their disposal. They could play
havoc with their opponents.
A corporation should be organized, an organization of a special kind, clothed by law with civil
personality, and act in its own name as owner of
the transit system. The corporations should be
governed by a board of directors consisting of
representatives of the city elected by the Board of
Aldermen and the employees of the lines.
Of the directors representing the city each recognized political party in the Board of Aldermen
should be entitled to representation proportional to
the vote cast for that party at the last regular election. In that way a true cross-section of the people's will can be secured on the Board of Directors. Such an arrangement will also remove from
the administration of the industry the absolute rule
of the majority so brutally and disastrously employed in the administration of the political affairs
of the city.
The employees must be represented on the
Board of Directors for their own protection and
for the best interests of the roads. Representation on the board will bring the working force




THE GREAT COLLAPSE


201


into direct contact with the shaping of the policies
of the industry.
The general legal features of a private corporation would characterize this public corporation,
except, of course, there would be no stock, no dividends, no profits and no selfish interests to be
served. The corporate method should be borrowed from capitalism because it secures autonomy, the only guarantee of success in public
ownership.
The corporation should have power to name
the management. Responsibility must be decentralized. Efficiency and economy depend upon
the avoidance of rigid bureaucratic rule.
"In the administrative, like the political order," says E. Vandervelde, a Socialist theoretician
and a practical man, "the characteristic of the
present system is centralization pushed to the extreme.
"From top to bottom, in almost any administration a system of management reigns looking much
more to decision than to execution, paralyzing initiative and suppressing responsibility. In the Belgian State railways, for example-and as much
might be said for other countries-an engineer in




202


THE GREAT COLLAPSE


charge of a shop cannot modify in any way the
processes of the system of operation in the service
which is directly entrusted to him without the authorization of his chief, who in his turn has to ask
the authorization of the management, which again,
in most cases, has to ask the approval of the council of administration.
"In short, every initiative has to pierce three
zones in which it has much chance of meeting obstacles in routine ignorance or hostility.  If it
starts from a man of much will power, it will overcome these obstacles, but as men of this type form
the exception the initiative quickly finds itself rebuffed, and oftener than not it ends by becoming
null."*
Those who have been employed by one of the
state or city departments and have been victimized
by its red tape and bureaucratic management will
appreciate the picture drawn by Vandervelde.
Private ownership, at the pain of extinction,
has learned to decentralize the management of
industry.  General decisions are made on top
while the initiative for particular application of
* Collectivism and Industrial Evolution, E. Vandepelde, p. 131.




THE GREAT COLLAPSE


203


these decisions are left to those who are entrusted
with the actual work.  Individual initiative and
responsibility go together.
As authoritarian a state as Prussia of the
Kaiser had learned to give its industries administrative autonomy. It could get results in no other
way.
A French engineer, M. Weiss, hostile to
government ownership of coal mines, has this to
say about the government-owned mining industry
of Sarre:
"Considered as a whole, the Administration of
Mines is endowed with a strong organization,
which permits it to compete in the industrial field
with the best managed private enterprises. We
must say that in spite of the habits of authority inherent in the race, in spite of what may be called
Prussian militarisms, the administration is highly
decentralized; responsibilities are well defined; a
large initiative is left to the agents rwho carry out
orders... The working force is well disciplined
and profoundly attached to the mine.     It is
through this solid organization that the Prussian
State, operating the largest mine field in the world




204


THE GREAT COLLAPSE


has arrived at brilliant results, in spite of the difficulties in all State operation."*
The phenomenal success of the Swiss railway
system is ascribed by the students of the question
chiefly to its complete administration autonomy
as regards the Central Government which owns it.
Although the members of the directing board
are appointed by the Federal Council, the Federal
Assembly and the different Cantons-all of which
are government bodies-the divorce of the administrative functions of the railroad system from the
functions of the government as such, is so complete
as to remove all political influence and bureaucratic red tape from the successful management of
the roads.
Municipal ownership of the transit system in
New York will be successful only when we,
profiting by the experience of other countries and
borrowing the good features of private ownership, will establish complete financial and administrative independence of the roads.
* Quoted in Socialism vs. the State. E. Vandervelde,
pp. 168-169.




CHAPTER XVI


PUBLIC OWNERSHIP AND THE
WORKERS
One of the most perplexing problems the proponents of public ownership must solve before
labor will embrace their program is the establishment of proper relations between the working
force and the government.
The old conception of a government employee
is incompatible with his modern status. When
the State was little else than a policeman its employees were functionaries. They were agents of
the sovereign power. In fact, while in office they
were the soverign power.
To have permitted these functionaries to organize into a union would have been equivalent
to permitting them to conspire against the public
powers, against the State. If the organization had
been effective it would have meant the setting up
of private interests against the general interest.
It was, therefore, perfectly logical to forbid public officials to organize.
But workers employed in government-owned
industries are not public officials. They are not
205




206


THE GREAT COLLAPSE


functionaries. There is a vast distinction between
the government as policeman, as soverign, and the
government as transporter, as employer, as business manager.
The corollary of financial and administrative
independence and their freedom from government
interference is the independence of the working
force and its freedom from the tyranny of rigid
bureaucratic rule.
The workers in a municipally-owned traction
system would be helpless if each individual were
left to himself to settle his grievances with the
management. His chance of securing a respectful
hearing would be remote indeed. Experience amply teaches that.
The workers should be guaranteed the right to
organize and strike, if necessary. They should be
permitted to affiliate themselves with the rest of
organized labor in order to augment their strength
and to compare well with the almost inexhaustible
economic strength of the employer-state.
Under private ownership, although the workers
are accorded the legal right to organize and strike,
their "right" is often of no great value to them
because of the gigantic and powerful corporations
they must fight. A mere right to organize and




THE GREAT COLLAPSE


207


strike under municipal ownership is not sufficient,
for the municipality being even more powerful
than any single private corporation could certainly
reduce that "right" to nothing by assuming a stubborn and hostile attitude to its working force. A
deliberate policy must be established of dealing
with the workers collectively. Working-class organization should be part of the organization of
the business proper.
Collective bargaining is now recognized as an
effective deterrent of strikes. Machinery should
be set up to settle disputes as they arise. The instrument should include representatives of the
working force, the management and a person
chosen by both sides.
It is to be presumed that along with a director
of equipment, a director of supplies, a director of
construction, etc., there would also be a director of
labor. This director of labor, or whatever name
the person in charge of labor be called, should be
elected by the workers and ratified by the board
of directors. An agent of the workers, by their
own unmolested choice, the director of labor
would enjoy their confidence. Being ratified by
the board of directors, he would become the link
between the workers and the board. By means




208


THE GREAT COLLAPSE


of this link, differences may be adjusted without
resorting to either arbitration or strike.
As mentioned in the previous chapter, the workers in their organized capacity should be represented on the board of directors by persons of
their selection. This would devolve responsibilities upon the workers. Conscious that the decisions spring partly from their direct representatives,
partly from their indirect representatives-for they
are part of the community at large whom the
Board of Aldermen represents, the workers would
strive to execute those decisions with a will and a
purpose that would insure successful service.
The demand for democracy in industry is growing more audible from day to day. If that be true
of privately owned industry, how much more true
is it of industries publicly owned?
The suggestions here outlined are a mere beginning. With time the entire management of industry should be in the hands of labor.




CHAPTER XVII


PUBLIC OWNERSHIP AND SOCIALISM
Public ownership is not Socialism. Even if
most industries were owned by the municipality,
state and nation, it would still not be Socialism; it
would be State capitalism.
Socialism is predicated on three propositions.
1. The nature of the State must change. It
must cease to be a power of coercion and of domination. It must become an organ of management
of industry, of the coordination of human affairs.
It must be constructive.
2. There must be established a system of collective ownership and democratic management of
all socially necessary means of production and
exchange.
3. All income derived from ownership must be
abolished. Only by one's labor, muscular or intellectual, shall one earn his livelihood.
To-day the primary purpose of the State is
domination; its secondary functions are the economic affairs of the people.
209




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THE GREAT COLLAPSE


Under Socialism the primary purpose of the
State will be the management of the economic affairs of the people; its secondary function will be
political.
The more functions of an industrial nature the
State assumes, the more it enfeebles its authoritarianism.
The change in the nature of the State may
come by degrees, peacefully, legally, or it may
come by violence. Socialists desire a peaceful
transformation, and they frankly say so. As to
whether such will be the process depends more
upon the powers that be than upon the Socialists.
If political liberties are infringed upon, freedom
of speech, press and assemblage denied, political
corruption at the polls permitted and even protected; if Black-Hundred organizations formed to
hound economic heretics are encouraged and even
subsidized; if workers are deported and sent to
jail for their views, there may develop among labor a feeling of mistrust, a lack of faith in the
entire legal machinery as an instrument of progressive social change and ultimate emancipation.
Working class tactics are generally determined
by those who make the rules under which the




THE GREAT COLLAPSE


211


workers find themselves rather than by their own
desire.
Public ownership of what is now generally understood as public utilities is not sufficient, the
Socialists claim. Modern industry has become
social in its nature, and what is social in its nature
should be socially owned. To leave such industries to private individuals is a menace. And
events have proved the truths of this.
Socialists do not propose that the miners own
the miners, the factory employees own the factories, or the railway workers own the railways.
They believe in collective ownership.
It may be put this way: Generally, if the industry is municipal-wide its ownership would
reside in the municipality; if it is state-wide the
state would own it; and if it is of a national character, the nation would own it.
The management of these industries, however,
should be in the working force. The workers
should elect their foremen, managers, superintendents, etc. They should have democracy in industry.
In discussing "Public Ownership and Finance," it appeared that under the present system




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THE GREAT COLLAPSE


of legal property rights and relations, even if the
municipality acquired the traction lines, it would
have to pay to the capitalists an annual tribute of
about $30,000,000 to $40,000,000 in the form
of interest. If Socialism merely meant the extension of this method to other industries, the capitalists would lose little, for the Government would
collect a large tribute from the people and deliver
it periodically to a parasitic class. Of course, that
is absurd.
Once society decides that the capitalist class is
useless in the scheme of things, that capitalism is
an anachronism, it will by the same force and
power sweep aside all former property rights and
relations, and will establish a code in harmony
with the new social conditions.
Under Socialism, income from legal possesion
will be abolished. Unless a person is incapacitated either physically or mentally, he will have
to work, to become useful.
No parasitism under Socialism.




















UNIVERSITY OF MICHIGAN
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