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 OCT 12;?^2 
 
 1762S-S
 
 THE CORPORATION PROBLEM 
 
 THl- PUBLIC PHASES OF CORPORATIONS, THEIR USES, 
 
 ABUSES, BENEFITS, DANGERS, WEALTH, AND POWER, 
 
 WITH A DISCUSSION OF THE SOCIAL, INDUSTRIAL, 
 
 ECONOMIC, AND POLITICAL QUESTIONS TO 
 
 WHICH THEY HAVE GIVEN RISE 
 
 WILLIAM W. COOK 
 
 OF THK NHW YORK BAR, AUTHOR OF " A TREATISE ON STOCK AND STOCK- 
 HOLDERS AND GENEKAI. CORPORATION LAW " 
 
 G. P. PUTNAM'S SONS 
 
 NEW YORK LONDON 
 
 «7 WEST TWENTY-THIRD ST. S; KIM; WIILIAM ST., STRAND 
 
 i\H $nickrrbochrr prrss 
 1893
 
 Copyright, 1891 
 
 BY 
 
 WILLIAM A. COOK 
 
 Ebe Iknicfterbocfeer press, Iftew ^ovti 
 
 Electrotyped, Printed, and Bound by 
 G. P. Putnam's Sons
 
 PREFACE. 
 
 The author, in the course of the preparation of a 
 treatise on corporation law, became famihar with 
 many facts and principles relative to corporations, 
 which, however, did not come within the scope of a 
 work on law. The law of corporations is a subject 
 distinct from that of the public phases and business 
 methods of corporations. Accordingly the author 
 separated the two, and having completed a treatise 
 on the former, he now presents a book on the latter. 
 
 The many questions, social, political, industrial, 
 and economic, that have arisen in, connection with 
 corporations, constitute together what is known as 
 "The Corporation Problem." This problem em- 
 braces the uses, abuses, benefits, dangers, wealth, 
 and power of corporations, and no attempt has been 
 made heretofore to consider these matters collec- 
 tively and by themselves. The task has proved 
 somewhat difficult, and, in order to shed as much 
 light as possible on the subject, frequent quotations 
 from others are given in connection with the text. 
 If the work results in awakening a more general 
 interest in those topics than now exists, the author's 
 purpose will have been answered. 
 
 No. 15 Wall St., Nkw Y«»kk. 
 Jtiiie I, iSqi. 
 
 iii
 
 CONTENTS. 
 
 Introductory 
 
 CHAPTER I. 
 
 CHAPTER II. 
 
 Various Controversies to Which Corporations 
 
 Have Given Rise. 1 1 
 
 Reduction of railroad charges — "Watered" stock and 
 bonds — Discrimination between individuals— Rebates and 
 secret rates — Discrimination between towns — Charging 
 more for a short than for a long haul — Discrimination be- 
 tween articles — Charging what the traffic will bear — Free 
 passes — *' Pools" — Railroad wars — Useless paralleling of 
 railroads — Foreclosures and reorganizations — Stock gamb- 
 ling — "Strikes" — Frauds on stockholders and creditors — 
 Municipal aid to railroads — Limited liability of stock- 
 holders and directors — Taxation and exemptions from 
 taxation — Incorporating in one State and doing all busi- 
 ness in another State — Special charters — Exclusive privi- 
 leges and monopolies — Political corruption — The remedy 
 
 CHAPTER III. 
 
 Remedies for the Railroad Proble.m . .120 
 Co-operative or profit-sharing associations and railroad 
 insurance as remedies — State socialism as a remedy — State 
 ownership of railroads as a remedy — Periodical leasing of 
 franchises by the State as a remedy — State regulation cf 
 railroads as a remedy — Railroad consolidation as a remedy. 
 
 V
 
 vi CONTENTS. 
 
 CHAPTER IV. 
 
 PAGE 
 
 Corporations as the Owners of Natural Mo- 
 nopolies ..... . . 182 
 
 What is a natural monopoly ? — Natural monopolies as the 
 source of great fortunes — Remedies of the public. 
 
 CHAPTER V. 
 
 Trusts . . . . . . . . .214 
 
 Causes of trusts — Definition and explanation of the various 
 kinds of trusts — The legality of trusts — The tendency of 
 business towards large concerns, combinations, and con- 
 solidation — Are trusts to be justified as a legitimate mode 
 of doing business on a large scale ? — The monopoly feat- 
 ure of trusts — The dangers which are besetting the trusts 
 — Transformation, reorganization, and disappearance of 
 trusts into large corporations. 
 
 CHAPTER VI. 
 Corporations and the Republic . . . 246 
 
 Index . . . . . . • . 255
 
 THE CORPORATION PROBLEM 
 
 CHAPTER I. 
 
 INTRODUCTORY. 
 
 Corporations, arc a creation of modern times 
 and their rise has been as rapid as it has been 
 remarkable. In the colonial days of America no 
 instance of a corporation for business purposes can 
 be found. The Bank of North America was organ- 
 ized in 1 78 1, while the Massachusetts Bank and the 
 Bank of New York were not incorporated until the 
 year 1784. In those days there were no railroads, 
 no telegraphs, no manufacturing, mining, or business 
 corporations, and merely the germ of the idea of a 
 corporation was in existence. In Great Britain there 
 were the Bank of England, the Bank of Ireland, and 
 three banks in Scotland. Business was done on a 
 small scale and large enterprises were not under- 
 taken. The century of industrial development, of 
 great affairs, and of colossal projects had not yet 
 been entered upon. 
 
 Since that time such projects have demanded new 
 and improved business methods. Corporations have
 
 2 THE CORPORATION PROBLEM. 
 
 arisen from the necessities of business. Partnerships 
 and individuals have been unable to furnish the 
 aggregation of capital required for modern under- 
 takings. 
 
 Moreover the partnership has been found to be 
 clumsy, dangerous, and insufficient. If unsuccess- 
 ful it brings ruin upon all of its members, because 
 each partner is liable absolutely for all debts. Any 
 member may bind the firm by his contract and each 
 one has an equal voice in deciding its policy. Its 
 capital and credit, and consequently its amount of 
 business, are limited necessarily by the capital and 
 credit of a very few men — the members themselves. 
 The death of a member or the transfer of his inter- 
 est dissolves the firm. Any member may arbitrarily 
 cause a dissolution at any time, and the insolvency of 
 a member renders the partnership property subject 
 to levy of execution for his debt. Upon the death 
 of a partner the surviving partners have the sole 
 charge of winding up the business and the executor 
 of the deceased partner is not allowed to come in. 
 A partner may withdraw his money only at a sacri- 
 fice, or by long and expensive proceedings. He can- 
 not conveniently sell his interest or borrow money 
 upon it. New partners cannot readily or safely be 
 admitted. 
 
 The partnership is restricted in its capital, danger- 
 ous in its liabilities, narrow in its exclusion of new 
 members, too free in its mode of making contracts, 
 and too contracted in its opportunities for withdrawal. 
 It is becoming obsolete as a mode of doing business 
 on a large scale.
 
 INTRODUCTORY. 3 
 
 In a corporation all this is changed. The mem- 
 bers are not liable for the debts. The amount 
 already invested may be lost, but the private for- 
 tunes of the stockholders are not involved. The 
 business is done and contracts made, not by all, but 
 by a select few, called directors. A large capital is 
 created by the union of funds from many sources. 
 A person may safely invest in many enterprises and 
 yet not take part in the management nor watch the 
 business of any one of them. The leading spirit in 
 an enterprise may hold a majority of the stock and 
 may admit associates, employees or strangers, as 
 holders of a minority of the stock, and yet he will 
 retain the management as though he were the single 
 owner of the concern. Persons may easily buy into 
 or retire from the enterprise. Dissolution is not 
 brought about by the death or withdrawal or dis- 
 satisfaction of a stockholder. The insolvency of a 
 stockholder does not affect the business of the cor- 
 poration. Upon the death of a stockholder his ex- 
 ecutor votes his stock and has a voice in the continu- 
 ation of the business. A stockholder may sell or 
 pledge his interest readily and intelligibly by reason 
 of the reports, dividends, and market quotations of 
 his stock. The corporation is a protection in that 
 the liability is limited ; it is capable in that it ren- 
 ders possible the collection of a great capital ; it is 
 efficient because the directors and they alone govern 
 its policy and its contracts; and it is convenient 
 because it is easy to sell or buy or pledge or bequeath 
 one's interest in the concern. Under its protection 
 and concentrated power men will undertake great
 
 4 THE CORPORATION PROBLEM. 
 
 enterprises involving great risks or losses or gains. 
 The corporation has rendered possible the modern 
 era of industrial development. 
 
 It is by reason of all these facts that corporations 
 have come into universal use. They have absorbed 
 the railroad, banking, insurance, manufacturing, 
 mining, telegraph, telephone, gas, express, water- 
 works, commercial, turnpike, bridge, canal, steamship, 
 financial, and other industrial business of the coun- 
 try. They have built the railroads, dug the canals, 
 established the factories, carried the ocean com- 
 merce, taken charge of the banks, assumed the risks 
 of insurance, constructed the telegraph, the tele- 
 phone, the water-works, the gas plant, the electric 
 lights, and the street railroads, and are conducting 
 some of the largest of our mercantile interests. They 
 are acquiring the wealth of the country and are the 
 means of investment for the savings of the poor as 
 Avell as the capital of the rich. The railroads alone 
 of the United States are over 167,000 miles in 
 length ; cost over $9,000,000,000 ; employ over 700- 
 000 men directly, and indirectly over 1,000,000 men, 
 being one twelfth of the adult male population of 
 the country ; receive annually about $1,000,000,000 ; 
 and distribute this vast sum in wages, improvements, 
 interest, and dividends. And, in addition to this, 
 the banks, insurance companies, manufacturing com- 
 panies,' and the multitudinous corporations of the 
 land all have their capital, employees, and earnings. 
 The benefits derived from corporations are un- 
 doubted. They have cheapened the necessaries of 
 life, given quick and easy connection between dis-
 
 INTRODUCTORY. 5 
 
 tant points, developed agriculture, mining, manufac- 
 turing, and commerce; created employment for 
 labor, marketed the products which before were not 
 worth the cost of transportation, lowered the cost of 
 living in Europe and America, transformed the 
 uninhabited wildernesses into rich farms, towns, 
 cities, and States; found land worth nothing and 
 made it worth millions, and caused an interchange 
 of the manufactures, luxuries, literature, arts, sci- 
 ences, and ideas of the world. 
 
 As an intellectual spur and stimulus, the railroads 
 have done for this century that which the discovery 
 of America did for the sixteenth century. They 
 have brought the ends of the country together, 
 excited ambition, opened avenues for enterprise, 
 developed community of interest, and. made a 
 nation diversified in its pursuits and ideas, yet 
 homogeneous in its government and progress. They 
 have quickened the intelligence and broadened the 
 minds of men. Not only have they created energy 
 and intellectual activity among the people, but they 
 have peopled the country itself, and in some instances 
 have caused rude and ungovernable communities to 
 put aside their violence, provincialism, feuds, and 
 uncouth manners for the life of the civilized world. 
 Corporations have given wealth to man, and thereby 
 given to him the opportunity for intellectual growth. 
 And even from a moral point of view the corpora- 
 tions are not utterly and irretrievably bad. The 
 redeeming act in the life of Faust was the building 
 of a dyke and the draining of a swamp. The 
 builder of a railroad which opens new lands for set-
 
 6 THE CORPORATION PROBLEM. 
 
 tlement is a philanthropist, in the broadest sense. 
 The great capitaHsts of modern times, who have 
 built thousands of miles of railroad, peopled whole 
 territories, cheapened the price of food, enabled 
 millions of men from the overcrowded parts of the 
 world to find homes and a livelihood, increased the 
 wealth and well-being of a great and growing popu- 
 lation, and made possible the occupation and civil- 
 ization of the American continent, are the greatest 
 benefactors of the age. It is true that they and 
 their corporations are not philanthropic institutions. 
 They do not cultivate the benevolent side of life. 
 They are not moral instructors either in precept or 
 example, nor are they to be recommended as a 
 school of ethics. But they have enabled whole 
 States and communities to reach higher and better 
 ideas of life. They have bettered the condition of 
 men and thereby have enabled individuals to be- 
 come better men. 
 
 Without corporations America would be a different 
 nation and have had a different history. The Civil 
 War would have been more dangerous to the Re- 
 public. The present railroad system could not have 
 been built, and the Pacific Coast and the Eastern 
 States would not have been bound by ligaments of 
 steel to a common interest. 
 
 Who can wonder then that the many corporations 
 of America, with almost unlimited wealth at their 
 command, and directed by the highest talent, should 
 have a firm grasp upon the industries of the country ; 
 that they should mould its political, social, and indus- 
 trial features ; that they are deeply affecting its intel-
 
 INTRODUCTORY. f 
 
 lectual life, and even to a large extent are dominating 
 the government itself ? 
 
 And even in an international way the corporations 
 have had a wide influence. They have aided in the 
 abolition of war, and have rendered a prolonged fam- 
 ine impossible. A " Thirty Years* War " in these 
 times would bankrupt the richest of nations. Rail- 
 roads have made war swift, expensive, and deadly. 
 In addition to this the corporations, as methods 
 of international investments by way of stocks and 
 bonds, have brought nations into more friendly 
 communication with each other, and have knit more 
 closely the financial, social, and family ties that 
 exist between Europe and America. 
 
 And yet notwithstanding all the advantages, ma- 
 terial, intellectual, and moral, which have been de- 
 rived from corporations, there is much to be said 
 against them. And they have two peculiarities 
 which have led to these abuses. These are, first, 
 the ease with which all responsibility for bad acts 
 is placed upon the corporation itself, while the real 
 perpetrators are concealed ; second, the separation 
 of the stockholders from the corporate agents, of the 
 investor from the investment, of the principal from 
 the agent, with the expectation on the part of the 
 investor, the principal, the stockholder, that profits 
 will be made, honestly if possible, but that profits 
 will be made. 
 
 The particular evils to which they have given rise 
 will be referred to hereafter. Some of the corpora- 
 tions have been guilty of bribing judges, buying 
 legislatures, corrupting public officers, and sapping
 
 8 THE CORPORATION PROBLEM. 
 
 the integrity of public life generally. Some of them 
 have taught men that dishonesty is respectable and 
 even honorable, provided it is successful. Some of 
 them conduct business, not on a basis of honor, but 
 on that of knavery. Some of them perform con- 
 tracts only when it is more profitable to perform 
 than to violate. The sense of honor of some of 
 them does not inspire that easy confidence and 
 mutual good faith which lie at the basis of most 
 business transactions. Written contracts are not al- 
 ways strong enough to hold them, and the fear of 
 the penitentiary not always able to deter them. 
 The pole-star of the existence of many of them is, 
 not what is honest, but what is profitable, and the 
 result is that not only are corporations a source of 
 alarm to the conservative, and a subject of doubt to 
 the thoughtful, but there is a deep-seated hostility 
 against them on the part of the plain people of 
 the land. 
 
 The railroad corporation has been the chief male- 
 factor. It has given secret discriminations in rates ; 
 bribed legislatures and public officers by free passes 
 and money ; charged more for a short haul of 
 freight than for a long haul ; demanded extortionate 
 rates ; issued " watered " stocks and bonds ; favored 
 one city and ruined another ; entered into " pools,'* 
 and usurped valuable franchises by fraud, bribery, and 
 unscrupulous practices. Not only is it audacious and 
 skilful, but it employs the highest order of adminis- 
 trative ability. Indeed, it is one of the curious facts 
 of American history that the American talent for or- 
 ganization, executive management, and the invention
 
 INTRODUCTORY. 9 
 
 and adoption of means to ends, a characteristic talent 
 that formerly was engrossed in the political affairs 
 of the nation, is now very largely engaged in the 
 development and management of the American rail- 
 roads. With energ}% enterprise, daring, and sagacity, 
 the American railway has been built, improved, con- 
 solidated, and perfected. This has been done fre- 
 quently far in advance of even the remarkable 
 growth of the country itself. And to a large extent 
 the practices of railroad men have been honest and 
 creditable. But not always has this been the case, 
 and often they have resorted to fruitful cunning and 
 bad practices in accomplishing their ends. To such 
 an extent have these practices been carried that even 
 the railroad men themselves have come to denounce 
 the prevalent methods of managing railroads. 
 
 Public opinion, however, is beginning to decrease 
 the present abuses of corporations. And the power 
 of public opinion over corporations and railroads is 
 much greater than is generally supposed. The most 
 powerful corporations of the country seek its com- 
 mendation and fear the effects of its disapproval. 
 The Granger legislation, the withdrawal of the Cen- 
 tral Pacific Railroad Company from California poli- 
 tics, the attempt of the Standard Oil magnates to 
 change public sentiment, the wild haste of the vari- 
 ous '' Trusts " to change their mode of organization, 
 on the one hand, and the results of the honest and 
 conservative management of the Vanderbilt and 
 other great systems of railroads on the other, are 
 examples of the power and effect of public opinion. 
 
 And there is another tendency which augurs well
 
 lO THE CORPORATION PROBLEM. 
 
 for the future. The days of irresponsible, reckless, 
 and dishonest management of corporations are pas- 
 sing away. These practices have been found to be 
 dangerous, unprofitable, and ruinous. Honesty tow- 
 ards the government, the people, and the investor 
 is becoming the settled policy of the great corpora- 
 tions. The integrity as well as talent of America is 
 beginning to assume the control and management of 
 these colossal aggregations of capital. Corporations 
 and railroads are being placed in the hands of con- 
 servative men, and the great questions of the " Cor- 
 poration Problem " are not only decreasing in number 
 and intensity, but are being settled largely by the 
 character, honesty, and honor of the men themselves 
 who manage the corporations.
 
 CHAPTER II. 
 
 VARIOUS CONTROVERSIES TO WHICH CORPORATIONS 
 HAVE GIVEN RISE. 
 
 Reduction of railroad charges — " Watered'" stock and bonds 
 — Discrimination betiveen individuals — Rebates and 
 secret rates — Discrimination betiueen toicns — Charging 
 more for a short than for^ a long haul — Discrimination 
 betiveen articles — Charging 7vhat the traffic will bear 
 — Free passes — " Pools " — Railroad wars — Useless 
 paralleling of railroads — Foreclosures and reorganiza- 
 tions — Stock gambling — *' Strikes " — Frauds on stock- 
 holders and creditors — Mu7iicipal aid to railroads — 
 Limited liability of stockholders and directors — Taxa- 
 tion and exemptions from taxation — Incorporating in 
 one State and doing all business in another State — 
 Special charters — Exclusive privileges and monopolies 
 — Political corruption — The remedy. 
 
 REDUCTION OF RAILROAD CHARGES. 
 
 Probably of all the differences that have existed 
 between the railroads and the public, the first, the 
 greatest, and the most prominent has been that of 
 reducing railroad charges. Upon this question 
 there has been for twenty years a course of uninter- 
 rupted legislation, litigation, and pressure of public 
 opinion. From State legislatures and courts the 
 
 II
 
 12 THE CORPORATION PROBLEM. 
 
 contest has been carried to Congress and the 
 Supreme Court of the United States. Reductions 
 in rates have been brought about partly by means 
 of this agitation and legislation and partly by reason 
 of competition between the railroads themselves. 
 But the question is as vital a question to-day in the 
 Western States as it was twenty years ago, and the 
 legislatures are again making radical reductions in 
 railroad rates. It is interesting to inquire how this 
 contest arose, and why the reduction is demanded. 
 
 Fifty years ago the Western States and the 
 Upper Mississippi valley were practically unsettled. 
 The rich lands of the West were capable of becom- 
 ing the granary of Europe and America, but without 
 cheap transportation they were valueless. In those 
 early days the farmer could not sell and could not 
 afford to haul his crop to market, and corn was 
 burned for fuel. The farmer had no money, and 
 he could make no improvements. The Western 
 pioneer was cut off from civilization, from comforts, 
 and even from the necessaries of life. 
 
 The railroad was necessary — necessary to furnish 
 a market and to populate the plains. 
 
 The railroads were built and the great territory 
 was traversed and covered. Tens of thousands of 
 miles of road were required and were built in an 
 incredibly short space of time. They were built by 
 Eastern and European capital, and this capital knew 
 that it was embarking in a dangerous speculation. 
 It therefore very naturally insisted upon great re- 
 turns, and these returns consisted : first, of gifts of 
 municipal bonds from the cities, counties, and towns
 
 CONTROVERSIES. 1 3 
 
 along its route ; and second, of vast quantities of 
 " watered ** stock and bonds. 
 
 The gift of municipal bonds to railroads has been 
 denounced by the greatest American jurists of the 
 age as unjust, improvident, unnecessary', and illegal. 
 Such is their opinion, although the Supreme Court 
 of the United States, in its efforts to protect inno- 
 cent investors, and to preserve the honor of Ameri- 
 can credit, has sustained the legality of such bonds. 
 But the hardship of their issue did not at first 
 appear. It was not at first realized that the rail- 
 roads were built largely from the sale of these 
 municipal bonds. The bonds were given because if 
 not given the road would not be built at all, or 
 would be built through a rival town. No bonds 
 — no railroad. After the bonds were issued they 
 were sold by the railroad builders to Eastern or 
 European capitalists. They were sold for what 
 they would bring, and always below par. In addi- 
 tion to the location of the railroad, the town or 
 county usually received some of the stock of the 
 railroad itself. But this stock was soon made worth- 
 less by the foreclosure of the mortgage on the rail- 
 road. As a net result the town had a railroad, to 
 be sure, but it had a large bonded debt, and its stock 
 in the railroad was without value. The railroad 
 had been built partially by municipal bonds, but the 
 railroad itself was owned by capitalists in Eastern 
 States or abroad. It was true that land had risen in 
 value and crops could be sold. But these municipal 
 bonds had to be paid, principal and interest at par. 
 They were a mortgage on the present and future gen-
 
 14 THE CORPORATION PROBLEM. 
 
 erations. Taxes began to be high. And then the 
 question arose — were the railroads acting fairly ; were 
 they contenting themselves with a reasonable profit; 
 were they charging proper rates, or were they charg- 
 ing more than their cost would justify? 
 
 Here it was that the watered stock and bonds of 
 the railroad came into notice. And they made the 
 problem one that has caused endless discussion, legis- 
 lation and litigation during the past twenty years. 
 The peculiarities of watered stock and bonds 
 will be considered hereafter. The early railroad 
 builder, promoter, and manipulator was as crafty 
 and many-sided in his methods as Ulysses him- 
 self. He was skilled in the art of issuing watered 
 stock and bonds. By devices, well known to the 
 corporation lawyer, he generally managed, if his road 
 actually cost $1,000,000, to issue $2,000,000 of stock 
 and $2,000,000 of railroad bonds secured by a mort- 
 gage on the road itself. He accordingly had $4,000,- 
 000 of stock and bonds, and of this, $3,000,000 was 
 pure "water." In the course of time these bonds 
 and stock were sold. They passed into bona-fide 
 hands. The result was that a railroad costing $1,- 
 000,000, part of which was raised by municipal bonds 
 given to the railroad itself, had obligations outstand- 
 ing for $4,000,000 upon which it endeavored to pay 
 interest and dividends. Even though a foreclosure 
 took place, the new issue of stock and bonds was 
 equal to or greater than that existing before. Exor- 
 bitant rates for transportation were necessary in order 
 to pay the interest alone, and, generally, for many 
 years there was nothing for dividends on the 
 watered stock.
 
 CONTROVERSIES. 1 5 
 
 But population grew and business increased. The 
 income became greater and greater. Nevertheless 
 the rates were not reduced. They were used to pay 
 dividends on the watered stock, and, if the income 
 became too large even for this, then by certain 
 other devices, well known to the astute corporation 
 lawyer, further issues of watered stock and bonds 
 were made.* 
 
 Then came another factor in the problem. The 
 American farmer no longer obtained high prices for 
 his grain.' The wheat of Egypt, India, and the Black 
 Sea reduced the price in Liverpool, and the price in 
 
 * The argument is sometimes made that the amount of railway 
 capitalization has but little influence upon passenger and freight 
 charges, and that those charges are determined by the competition of 
 waterways and other railways, and by the rates of connecting rail- 
 roads into other States and foreign countries. 
 
 This may be true, but, as will be shown hereafter, when with the 
 growth of population the business of a railroad increases to such an 
 extent that its charges, governed though they may be by the above 
 causes, pay an extravagant rate of profit on its cost, then the 
 watered stock and bonds conceal the real rate of profit that 
 the railroad is paying, and consequently a reduction of rates 
 becomes almost impossible. The railroad contests the reduction, 
 first in the legislature and then in the courts, and its plea always is 
 that its existing rates pay no more than interest on the bonds and fair 
 dividends on the stock, when the fact is that part of the bonds, and 
 generally all of the stock are " water." 
 
 ' For instance, in January, 1890, shelled com was selling in Kansas 
 at sixteen cents a bushel, while at the same time it was selling in 
 Chicago for twenty-eight and one half cents a bushel. Twelve and 
 one half cents went to the railroads. At sixteen cents a bushel the 
 farmer made little or no profit. 
 
 The Interstate Commerce Commission says in its reports (vol. iv. 
 p. 76) that " the price paid for Nebraska corn by the buyer in £ast< 
 em markets is in the larger part paid for transportation charges."
 
 l6 THE CORPORATION PROBLEM. 
 
 Liverpool fixes and will fix the price in America so 
 long as America exports wheat. The farmer found 
 that the halcyon prices of old were gone and were 
 not to return. He found that the railroad charges 
 were consuming a very large share of his crops. 
 He was working for the railroads, and corn was 
 being burned for fuel on the Western prairies. Hard 
 times prevailed. 
 
 This was the situation : land had risen in value, 
 crops could be sold, communication with the outer 
 world had been established, and a flood of immigra- 
 tion had populated the country. But the crops 
 could not be sold at a profit ; the railroads, which 
 had been built largely by municipal bonds, had 
 issued large quantities of watered bonds and stock; 
 heavy rates for transportation were charged in order 
 to pay interest and dividends on all these : and the 
 railroads were receiving a great income on their first 
 cost, while the people at large were poor. 
 
 Why did not the railroads reduce their charges ? 
 Because the owners of the railroads were non-resi- 
 dents, and insisted upon every dollar that could be 
 wrung from their investment. 
 
 " Practically none of the stocks and bonds of the railroads in Nebras- 
 ka are owned by Nebraskans. The owners and controlling officers 
 of the road are non-residents. This absenteeism increases the popu- 
 lar dislike of the roads. It is felt that any unearned profits not only 
 injure individuals but impoverish the community as a whole, while 
 the representatives of the roads within the State are looked upon as 
 mere hirelings, owing to the companies duties which are inconsistent 
 with good citizenship." ^ 
 
 ' Prof. Amos G. Warner in the Political Science Quarterly^ vol. vi., 
 No. I. In the report of the Union Pacific Railroad Company for 1888 is
 
 CONTROVERSIES. 1 7 
 
 The stockholders and bondholders wanted their 
 income, and were too far distant from the inv^estment 
 itself to understand or have any sympathy with the 
 situation. The corporation officers were their agents, 
 and the tenure of office of those agents depended 
 upon the profits that were forthcoming. Neither 
 the owners nor their agents saw any occasion for a 
 reduction of rates. Nor was the natural competi- 
 tion among the railroads themselves sufficient to 
 reduce rates. Some reductions were made from this 
 source, but not many. It was to the interest of the 
 railroads not to compete. They were all prospering, 
 and there was nothing to be gained by great reduc- 
 tions. In the cities, where there should have been 
 competition, the railroads formed combinations, 
 called *' pools," and by these they divided the busi- 
 ness and maintained high rates. In the smaller 
 towns and the country districts there was no com- 
 petition at all. 
 
 Moreover, the old theory that the laws of compe- 
 tition will induce railroads to reduce their rates has 
 been exploded. A railroad becomes a monopoly in 
 spite of competition. Few care to risk their money 
 in paralleling it. If a parallel line is built, even in 
 the old and rich communities, a railroad '' war " of 
 rates takes place, part of the capital is irretrievably 
 
 given the distribution of that company's stock. Out of a total in 
 round numbers of 600,000 shares, one third is held in New England 
 and one third in New York. Of the States through which the road 
 runs, 500 shares are owned in Nebraska, 100 in Utah, 27 in 'Wyo- 
 ming, and 5 in Colorado. Thus all the States last-named own but 
 one tenth of one per cent, of the stock of this company.
 
 l8 THE CORPORATION PROBLEM. 
 
 lost, foreclosure of the new line follows swiftly after, 
 and a consolidation takes place, always with a loss. 
 The Nickel Plate road from Buffalo to Cleveland 
 brought loss to Vanderbilt, its purchaser. The West 
 Shore road from Buffalo to New York brought ruin 
 to its builders. In both cases the old monopoly has 
 become a greater monopoly than ever. The truth 
 is that a railroad is a natural monopoly. The laws 
 of competition do not regulate it, and so far as the 
 farmer is concerned, railroad competition leaves him 
 worse off than before. After consolidation or " pool- 
 ing " there are two roads where only one is needed, 
 and the stock and bonds of the two are double the 
 burden that existed before. 
 
 There was another plan for effecting a reduction 
 of rates. This also has been exploded. It was the 
 old and futile device of having the charter or statutes 
 limit the dividends on the stock to a fixed percent- 
 age. Such a restriction has proved a delusion and 
 a snare. If the dividends reach the limited point, 
 watered stock or bonds are issued, and always 
 sufficient in quantity to absorb the increased profits 
 without exceeding the prescribed rate of dividends. 
 Both in England and America this device has failed. 
 Worst of all, it promised well, and by its promises 
 caused the public to waste valuable franchises and to 
 desist from the search for other plans of relief, and 
 there are still other objections to such a statutory 
 restriction. 
 
 ** It takes away all motive to develop new business. But the desire 
 to develop such business has been the most potent factor in reducing 
 rates. Take it away, and you tend to keep rates up rather than to
 
 CONTROVERSIES. 1 9 
 
 lower them. By trjing to prevent a railroad from dividing all it can 
 earn, you defeat your own puqioses. . . . Limitation of divi- 
 dend prevents reduction of rates instead of stimulating it. 
 
 " This is no theor)-. It rests on actual experience. The plan of 
 limiting dividends has been more widely tried in England than in 
 America. Sir Thomas Farrar, for a long time Secretar)- of the Board 
 of Trade, and the highest authority on the subject in CIreat Britain, 
 if not in the world, does not hesitate to pronounce the attempt a 
 complete failure. He says that * in Parliamentary limitation of di\'i- 
 dend they have gone on a wrong tack and involved themselves in a 
 maze of absurdities,' that ' the principle is in itself faulty,' that ' so 
 long as the charge is not too high the public have no interest in the 
 reduction of dividend : their interest is in the reduction of price, 
 which is a ti>tally different thing. The fallacy lies in supposing that 
 what is taken from the shareholders necessarily goes into the pocket 
 of the consumer. It does no such thing.' This is the result of thirty 
 years* practical experience in the effort to control corporations in 
 Europe." ' 
 
 ' Railroad GazetU, March 15, 1889. 
 
 There are many ways of distributing profits without declaring divi- 
 dends. In fact, whenever it is an object for a railroad to observe a 
 limit on its dividends, it is remarkably successful in doing so. For 
 instance, ever since the incorporation of the Wilmington and Weldon, 
 the Raleigh and Gaston, and the North Carolina Railroad Companies 
 in North Carolina more than fifty years ago, these corporations have 
 been exempt from State and county taxation until their dividends 
 amount to eight per cent. One of the many attempts to show that 
 more than eight per cent, has been made by these corporations was by 
 a legislative committee in 1890. There was a great hue and cry by 
 the Farmers' Alliance against the three companies mentioned, and 
 this organization insisted that this exemption should not exist any 
 longer. Without regard to future tax, the Raleigh and Gaston Com- 
 pany paid into the State treasur)' $17,000, and stopped the investiga- 
 tion into its afTairs, 
 
 A still more decisive proof of the failure to accomplish any good 
 by limiting dividends is that of the New York Central Railroad Com- 
 pany. Formerly this Company was practically limited to ten per 
 cent, dividends on its stock, and was prohibited from increasing its 
 capital stock. Nevertheless, in 1868, an "interest certificate" divi-
 
 20 THE CORPORATION PROBLEM. 
 
 Hence it was that to the western farmer there 
 seemed to be but one remedy — the power of the leg- 
 islature. Consequently statutes were passed arbitra- 
 rily reducing railroad rates. Sometimes the statutes 
 provided for the appointment of State Railroad 
 Commissioners, and gave power to these commis- 
 sioners to reduce rates. In Iowa, Wisconsin, Illinois, 
 Ohio, Missouri, Minnesota, and Michigan various 
 statutes, known as ''Granger Laws," were enacted. 
 The movement was bold, radical, and sweeping. 
 But the statutes were at once contested in the courts 
 by the railroads. The railroads claimed that the 
 statutes were unconstitutional. The old Dartmouth 
 College decision of the Supreme Court of the United 
 States, which had thrown a sort of halo of legal 
 sanctity about a corporation charter as being a con- 
 tract that could not be disturbed, was appealed to. 
 That decision had proved to be a rock upon which 
 many a State statute regulating railroads had gone 
 to pieces. The Supreme Court of the United States, 
 however, when the question came before it, de^ 
 cided that the '* Granger Laws " were legal and con- 
 stitutional. The farmers had won their fight. 
 
 Charles Francis Adams has said, in regard to this 
 subject : 
 
 ' ' Of the Granger episode little now needs to be said. That it did not 
 originate without cause has already been pointed out. It is quite safe 
 to go further and to say that the movement was a necessar)' one, and 
 
 dend, being the same thing in effect as a stock dividend, was declared. 
 It amounted to $23,036,000, being an eighty per cent, dividend. At 
 a later date the " interest certificates " were called in, and full paid 
 shares of stock were issued in exchange. See Bailey vs. R. R. Co., 
 22 Wall, 604.
 
 CONTROVERSIES. 21 
 
 through its results has made a solution of the railroad problem possi- 
 ble in this countr)'. At the time that movement took shape the rail- 
 road corporations were, in fact, rapidly assuming a position which 
 could not be tolerated. Corporations, owning and operating the 
 highways of commerce, claimetl for themselves a species of immunity 
 from the control of the law-making power. . . . They had thor- 
 oughly got it into their heatls that they, as common carriers, were in 
 no way bound to afford equal facilities to all, and, inileed, that it was 
 in the last degree absurd and unreasonable to expect them to do so. 
 The Granger method was probably as good a method of approaching 
 men in this frame of mind as could have been devised." ' 
 
 Such, in brief, has been the history of this phase of 
 " The Corporation Problem." And even yet it is 
 not ended. The Granger episode is again being 
 repeated in the Western States. Hard times prevail 
 there among the farmers and the railroads are again 
 being assailed. New reductions in rates have been 
 made. The Supreme Court of the United States 
 has recently decided that a reduction in rates must 
 still leave to the railroads a living profit, but the 
 Interstate Commerce Commission seems to repu- 
 diate the rule that railroad charges must not be 
 reduced so low '' that carriers would be left unable 
 to pay interest on their obligations and something 
 by way of dividend to stockholders, after maintaining 
 the road in proper condition and paying all running 
 expenses." 
 
 ' Adams on " Railroads," pp. 127, 128. 
 
 * Among other reasons, showing that this rule is impracticable, the 
 Commission says : 
 
 " But over and beyond all this the attempt to apply the rule sug- 
 gested would be absolutely futile for the reason that the rates pre- 
 scribed for one road would necessarily affect all others that either 
 directly or indirectly came in competition with it. If, therefore, of 
 two roads competing for business between important points, one were
 
 22 THE CORPORATION PROBLEM. 
 
 The latest victory of the western farmer has been 
 the decision of the Interstate Commerce Commission 
 
 very largely indebted, so that at rates fixed by the official board it 
 were barely able to pay running expenses and interest, and the other 
 were free from indebtedness and able to pay large dividends, any ac- 
 tion of the public authorities whereby the rates of the last-named road 
 were reduced, and at the same time the rates of the other not affected, 
 would be plainly and obviously impossible. The one must put down 
 its charges when the rates of the other are forced down." — "Fourth 
 Annual Report," p. i8, etc. 
 
 The Interstate Commerce Commission in its decisions (vol. iv., pp. 
 65, 73) says : '* The Chicago, Santa Fe, and California and the Chicago 
 and Alton roads run side by side between Chicago and Kansas City. 
 The Alton is capitalized at $46,000 per mile, the Santa Fe at $92,000. 
 Their rates must necessarily be the same. Must they be such as to 
 yield income on the basis of the Alton's capital and obligations, or on 
 the capital and obligations of the Santa Fe which are double as much ? 
 The bonded debt and capital of the Burlington and Missouri River in 
 Nebraska is $37,000 per mile, and of the Tremont, Elkhorn, and 
 Missouri Valley $36,000. They parallel on either side of the Union 
 Pacific, capitalized at $105,000 per mile. The bonded debt of the 
 Union Pacific per mile is $71,840 and is nearly double both bonded 
 debt and capital stock of either of the other two roads. The three 
 must of necessity carry on the same terms. The bonded debt, saying 
 nothing of the capital stock of the Union Pacific, is double its original 
 cost, or the cost of replacing it with its $17,000,000 terminals. . . . 
 The New York, Lake Erie and Western with a bonded debt of more 
 than $132,000 per mile could make rates on the same basis with the 
 Chicago & Northwestern or the Chicago, Burlington, & Quincy with 
 funded debts but slightly exceeding $20,000 per mile for one and 
 $24,000 for the other. The funded debt of the Illinois Central but 
 little exceeds $23,000 per mile, and the Chicago, Rock Island & 
 Pacific less than $16,000. That of the New York Central is $85,000. 
 Their reported tonnage cost and capitalization are nearly in like pro- 
 portion. The reported cost of service is less on the Illinois Central 
 and more on the Rock Island than on the New York Central." 
 
 In Michigan the highest court has recently decided to be consti- 
 tutional a statute by which all Michigan roads whose gross passenger 
 earnings are $3,000 per mile per annum shall charge passenger fares
 
 CONTROVERSIES. 23 
 
 reducing the railroad rates for the transportation 
 of grain.* 
 
 This much seems to be clear. If railroad rates 
 had been reduced in times of depression, and raised 
 in times of prosperity ; if the railroads had sought 
 only to pay a fair profit on their actual cost ; if there 
 had been less arrogance and lordliness on the part of 
 railroad officials in dealing with the public ; if there 
 were more sympathy between the real interests, pros- 
 perity, dealings, and communications of the railroad 
 owners and officials on the one hand, and the rail- 
 road patrons on the other ; if there were more honesty 
 on the part of the railroad official, and less corrup- 
 tion of legislatures, less granting of free passes, less 
 discrimination, and a less lengthy list of evils which 
 railroads are guilty of; then the question of ex- 
 orbitant railroad charges and reductions thereof 
 by States would not have arisen. The American 
 people are honest, generous, and intelligent. They 
 
 of not over 2 cents a mile ; those whose earnings are between $2,cxx) 
 and $3,000, 2| cents, and all others 3 cents, special exceptions being 
 made, however, for upper Peninsula roads. 
 
 ' The Interstate Commerce Commission goes a great ways when it 
 says in its decision In the Matter of Excessive Freight Rates (4 Inter- 
 state Com. Rep., 64) : " Iowa farmers make no impertinent inquiry 
 when they ask why they should pay 7 cents a bushel more to market 
 their corn than is paid by their Illinois neighbors. Seven cents to 
 them is more than five millions of dollars on the year's surplus. Nor 
 is it surprising that corn growers west of the Missouri should be urgent 
 in demanding the reasons which require them to pay double as much 
 as their neighbors in the corn States east of the Mississippi pay to 
 reach a common market in which all must sell at the same price. 
 There is nothing in these very proper inquiries to justify any imputa- 
 tion that they imply menace to the property rights of investors in 
 railroad property."
 
 24 THE CORPORATION PROBLEM. 
 
 would appreciate and reward railroad honesty, but 
 the abuses and usurpations, of which corporations 
 have been guilty, have rendered wellnigh impossible 
 an unprejudiced and impartial attitude on the part 
 of the public. 
 
 WATERED STOCK AND BONDS — STOCK DIVIDENDS. 
 
 When it is borne in mind that probably every 
 railroad in this country has issued watered stock 
 or bonds; that it is the universal custom for gas 
 companies, water-works companies, telegraph, tele- 
 phone, electric-light, and all other quast-puhlic cor- 
 porations to do the same ; and that the object 
 of these issues is to cover up the percentage of 
 profits of the enterprise in order to prevent any 
 statutory reduction of rates, it will be clear why it 
 is that the people have endeavored to prevent the 
 watering of stock and bonds. 
 
 Watered stock is stock which is issued as fully 
 paid up when in fact its full par value has not been 
 paid into the corporation. Hence it is that all stock 
 or bonds, whose full par value has not been paid 
 into the corporation, in money or money's worth, 
 are watered to the extent that the par value 
 exceeds the amount actually paid in. An issue of 
 such stock and bonds is made in one of three ways : 
 for cash ; for property ; or by a stock dividend ; and 
 the liabilities and dangers incurred by each method 
 vary according to the skill with which the legal work 
 is done. The usual method is by an issue of prop- 
 erty, the property being taken by the corporation 
 at an over-valuation. Frequently shares of stock
 
 CONTROVERSIES. 2$ 
 
 whose par value is a million dollars will be issued as 
 fully paid for by land, factories, plant, patents, or 
 construction work, the real value of which is less 
 than one hundred thousand dollars. Indeed, hun- 
 dreds of millions of dollars par value of railroad 
 stock and bonds have been issued as full paid, in 
 exchan<;e for railroad construction work that was 
 worth not over one third of that par value. 
 The Interstate Commerce Commission says : 
 
 " It is believed that cases are now comparatively rare in which the 
 capital stock of our railroad companies, as the same now exists, was 
 actually issued for cash to bona-fuie investors in the same. In many 
 cases roads have been built by the issuance of stock to the contractors 
 or construction companies ; frequently by the creation of bonds to an 
 amount nearly or quite sufficient to cover the actual construction cost, 
 the stock being in the nature of a bonus or profit, or being employed 
 as compensation for services or expenses collaterally attending the 
 construction of the road." • 
 
 There is still another device adopted for issu- 
 ing watered stock and bonds. A prosperous and 
 solvent railroad often issues a vast quantity of 
 watered stock and bonds in payment for another 
 road which is purchased or leased. Still another 
 plan is for a prosperous railroad to water its 
 stock by a stock dividend. Commodore Vanderbilt 
 adopted this latter device in his New York Central 
 Railroad Company. Soon after he had consolidated 
 the eleven lines into one the earnings increased to 
 
 ' Second annual report, p. 63. Mr. Poor said in 1885 that the 
 
 actual cost in money of all the roads in the United States did not 
 
 exceed 153,787,000,000, and that the fictitious capitalization was 
 $3,708,000,000.
 
 26 THE CORPORATION PROBLEM. 
 
 such a remarkable extent that a stock dividend was 
 declared, and the New York Central Railroad to-day- 
 is paying dividends on nearly double its original 
 cost/ 
 
 The Western Union Telegraph Company also, a 
 few years ago, declared a stock dividend of 
 $15,000,000, and the New York Court of Appeals 
 declared it to be legal. 
 
 The abuses of watered stock and bonds are not 
 denied, nor defended. First of all the investing 
 public are injured. A bond or stock that is sup- 
 posed to represent value, and is purchased on that 
 supposition, is subsequently found to represent 
 nothing of the kind. It is found that although the 
 corporation has nominally a large capital stock, yet 
 that its capital stock is mostly water. Then follow 
 insolvency, foreclosure, receivership, reorganization, 
 and a general loss or reduction of the old stock and 
 bonds. The investor is a victim of watered stocks 
 and bonds. 
 
 The business public also have a grievance herein. 
 A newly constructed railroad, built upon a large 
 issue of watered stock and bonds, is almost certain 
 to become bankrupt. Sooner or later the crash 
 comes. The railroad cannot earn enough to pay 
 expenses and interest on its watered bonds. Its 
 projectors and builders probably never expected it 
 would pay, but they built it to sell to the public or 
 
 * As already stated elsewhere, the New York Central Railroad 
 Company in 1868 declared a stock dividend, but called it an " inter- 
 est-certificate " dividend, of $23,036,000, it being a dividend of 
 eighty per cent, on the capital stock. See Bailey vs. R. R. Co., 22 
 Wall, 604.
 
 CONTROVERSIES. 2/ 
 
 some other railroad. When the road fails to pay 
 interest the inevitable foreclosure and receiver conie. 
 If the railroad is a large one a shock is given to the 
 business world. Nor is this the worst. The receiver 
 enters upon the operation of the road. It matters 
 not to him whether the road earns anything or not. 
 He carries traffic at reduced figures. Heavy losses 
 are suffered by the investors and real owners of the 
 road. General business is deranged and imperilled. 
 Watered bonds have done the evil. 
 
 President Roberts of the Pennsylvania Railroad 
 is reported to have said in 1886: 
 
 "If State legislatures and Congress would pass proper laws for the 
 protection of railroads, no pools would be necessary. We are com- 
 mon carriers, and it is proper enough that the government should 
 exercise supervision over us : but it should at the same time protect 
 us by proper laws. Under the general railroad law of Pennsylvania, 
 and its recent amendments, the railroads of the State are at the mercy 
 of speculators. Under the law any one can build a railroad and issue 
 stocks and bonds to an unlimited extent and at any rate, to the amount 
 of four or five times the cost of the road. The securities are sold. 
 The road cannot earn the interest on its securities, and goes into 
 bankruptcy. No responsible company can compete with an irre- 
 sponsible company. No company managed by its owners can com- 
 pete with one managed by a receiver. It makes no difference to the 
 receivers whether the road he manages earns 5 cents or $5." 
 
 Still another wrong results from this watering 
 process. When the foreclosure of a railroad takes 
 place, by reason of the large issue of " watered " 
 bonds, then the stock which has been given to the 
 cities, counties, and towns, for their gifts of municipal 
 bonds to the railroad, is entirely wiped out. Often, 
 indeed, this is the very result which is sought for by
 
 28 THE CORPORATION PROBLEM. 
 
 the manipulators and builders of the road. And it 
 it is a method which is swift, certain, and profitable. 
 It is the natural result of a large issue of " watered " 
 bonds. 
 
 At a notable banquet of the New England Society, 
 held in New York in December, 1890, Congressman 
 A. B. Cummings, of Iowa, said, in regard to this 
 subject : 
 
 '• The people of Iowa, not inclusive of those who are intimately con- 
 nected with these enterprises, have contributed either voluntarily or 
 involuntarily more than $25,000,000 in money to aid in the construc- 
 tion of railways within the borders of the State. This was not designed 
 as a donation. It was the intent of the law under which these aids 
 were authorized — I had almost said extorted — from a community illy 
 able to make the investment, that those whose money helped to create 
 should share in ownership, and to that extent at least the property 
 should not be alien. It was intended that the people should always feel 
 the pressure of their legislation and observe in their own persons the 
 prosperity or adversity of the interests they help to build up. But 
 the beneficent plan has woefully miscarried ; for under the rapid, 
 though accurate manipulations of promoters, projectors, and wreckers, 
 and the dispiriting influence of receivers, their stocks and bonds have 
 disappeared like a morning mist ; and they hold the East accountable 
 for the transformation. The reckoning has just begun. 
 
 " Under their direction Congress gave to railways of their patrimony 
 millions of acres of the most productive land that ever invited plow 
 and seed, but that, too, has gone and left no other trace behind it 
 than the advantage of general development, and they look in vain to 
 see any perceptible diminution in interest-bearing obligations by 
 reason of this magnificent endowment, and they hold the East ac- 
 countable for that. They saw that the prime motive of those who 
 originated and carried forward substantially every road built through 
 the State was not a fair return for the carriage of freight and passen- 
 gers, but their own immediate enrichment, and they do not discern 
 the difference between present and past proprietors. Year after year 
 they were witnesses of a system of discrimination which paralysed 
 their industries, and for which it was hard to find even a shadow H 
 justification, and they hold somebody accountable for that."
 
 CONTROVERSIES. 29 
 
 But the greatest abuse and wrong brought about 
 by the issue of watered stock and bonds by rail- 
 roads, gas companies, telegraph, telephone, electric- 
 light companies, water-works, and other {//fasi-[)uhlic 
 corporations remain^o be stated. The people have 
 given to these corporations valuable franchises ; have 
 permitted them to take land arbitrarily upon pay- 
 ment therefor ; have empowered them to collect 
 tolls ; have limited the liability of the stockholders ; 
 and have excluded all outside parties from placing 
 cars on the tracks of a railroad, although those tracks 
 are public highways. In exchange for all this, the 
 people have a right to expect that the charges for 
 service shall be reasonable and low ; that such charges 
 shall not be such as to pay extravagant profits on 
 the actual cost of the property, and that w^hen, by 
 increase of population, the profits become great, 
 then that the rates shall be reduced. All this is 
 what the people have a right to demand, and yet all 
 this is what the corporations prevent from taking 
 place by issuing watered stock and bonds. 
 
 This is the greatest of all objections to watered 
 stock and bonds. They are issued to represent thel 
 future increase in the earning power of a public fran- 
 chise. A public franchise owned by a corporation 
 increases in its profit-earning capacity with the in- 
 crease of population. This increased value is due to 
 the franchises which the people have given away to 
 the corporations. The people are entitled to the 
 benefits of that increase, and it could be readily se- 
 cured to the people by a reduction of charges. But 
 by stock dividends, based on this increased value of 
 the franchise, the railroad is able to divide all profits
 
 30 THE CORPORATION PROBLEM. 
 
 and yet not declare more than a six or eight per cent, 
 dividend. The smallness of the dividend prevents a 
 legislative reduction of rates. If, however, no stock 
 dividend were allowed, and the large profits of the 
 increased earning capacity were employed in improv 
 ing the property or in making extravagant dividends, 
 a reduction of rates would be inevitable. 
 
 In reply to this view, however, it is urged, and with 
 some force, that about three out of four railroad en- 
 terprises are a total loss to their projectors, and that 
 the fourth should be made to pay more largely, by 
 reason of the risk incurred. It is also urged that 
 large capital and great ability in managing enter- 
 prises of such magnitude should be richly compen- 
 sated, and that if the compensation be taken away 
 railroads will not be built. 
 
 Alexander says with much force : 
 
 " It is asserted that much of the stock of our railroads is not legiti- 
 mate, but is water. Such an argument may apply against any par- 
 ticular railroad that earns exorbitant dividends, but against the system 
 as a whole it does not. For it would be easy to show that for every 
 dollar of water in existing stocks, two dollars of the money of railroad 
 investors has been lost like water spilt in the sand. Much of it was lost, 
 doubtless, by bad judgment ; but the fact remains that our existing 
 system of railroads, as a whole, has cost fully as much as it is capital- 
 ized at. Scarcely one of them was originally built as it stands to-day. 
 The earlier ones have been rebuilt and re-equipped three or four 
 times, as experience pointed out necessary improvements. Many of 
 them, too, were built before the business really demanded them, and 
 the loss from this source has been enormous. ... If the State 
 would guarantee the interest upon money legitimately invested in rail- 
 road construction, investors would readily furnish all that might be 
 desired, and railroads could and would be built without watered 
 stock. But the State very properly refuses to assume any risk, and 
 leaves it to be borne entirely by the investor. The latter, then, hav-
 
 CONTROVERSIES. 3 1 
 
 ing all the risk, naturally demands to have also all the chances of 
 profit if the road turns out a success. He discounts the future, and 
 takes watered stock to represent what he hopes will be his earnings. 
 That is the only way that communities wanting railroads can induce 
 investors to supply the funds. . . l!ut I record my conviction 
 
 that the practice of stock-watering shoulil be prohibited, without much 
 hope of ever seeing it done, and more on the grouml that it is against 
 public policy to make it easy for men to buiUl railroads, or float any 
 enterprises with t)ther people's money, than from the fear of railroads 
 being enablei,! to practise extortion by the possession of watered 
 stock." ' 
 
 And Swann presents an ingenious argument on 
 this question when he says : 
 
 ** The assertion by a State of a right to fix rates and limit dividends 
 by ex-post-facto legislation, without regard to existing charters and 
 without compensation or indemnity, is, in fact, the barely disguised 
 assertion of a right to confiscate to a greater or less extent the incre- 
 ment of value legitimately accruing to a going concern. In connec- 
 tion with a railroad the increment of value cannot with any semblance 
 of propriety be described as an ' unearned * increment. In a vast 
 number of instances an American railroad may be said to create the 
 settlement of population which is destined to furnish passengers and 
 produce freight. Reflex activities are of course stimulated, and 
 contribute in their turn to the development of traffic ; but in many 
 instances the railroad itself primarily constitutes the determining 
 condition of settlement in a particular place, and of the transporta- 
 tion of passengers and merchandise through a particular channel. 
 Subject to the restraints of equitable regulation, the right of a con- 
 structing company to the increasing benefit of the business which it 
 builds up by its outlay and its skill is no less real than that of the 
 founder of a purely commercial or professional business to the in- 
 creasing benefit of his capital or ability." ' 
 
 ' Alexander on " Railway Practice," p. 37. 
 
 *" Investor's Notes on American Railroads," p. 42. 
 
 Atkinson on " The Distribution of Products," 2d ed., 1885, p. 259, 
 says : " The elimination of what has been called * watered stock 
 and bonds," against which the silly crusade of the so-called anti-
 
 32 THE CORPORATION PROBLEM. 
 
 Although it is easy to point out the evil, it is diffi- 
 cult to point out a remedy. Constitutional provisions, 
 declaring watered stock and bonds to be void, have 
 been enacted in Pennsylvania, Illinois, Nebraska, 
 Alabama, and other States. But such a law does not 
 accomplish the desired result. The courts will not 
 enforce it. They nullify it by judicial construction. 
 The remedy is so sweeping in its effects and so dis- 
 astrous to innocent holders of corporate securities, 
 that the courts uphold the watered stock and 
 bonds. The fault is in the remedy itself. It seeks 
 
 monopolists has been directed, is, therefore, in process of accomplish- 
 ment by methods far more potent than any possible legislative acts, 
 namely by the triple competition of : water-ways ; second, the com- 
 petition of one railway with another ; third, the competition of 
 product with product in the great markets of the world." 
 
 The Railroad Gazette of June 27, 1890, speaking of the charge that 
 sliippers are charged an unnecessary amount in order to pay divi- 
 dends on watered stock and to cover liabilities on unprofitable sec- 
 tions of railroad or unwise lines of business in which the company- 
 has engaged, says : 
 
 " The objection concerning dividends on watered stock needs but 
 brief notice. ' My dear boy,' said the minister, ' don't you know 
 that it is wrong to catch fish on Sunday ? ' The boy looked sadly 
 at his basket and simply said, ' Who 's catching any fish?' The 
 whole theory that a railroad man makes his rates high because he 
 has high nominal capital, or large outside burdens, or unprofitable 
 branch lines, has no relation to the facts. The roads with the lowest 
 rates are quite generally those that are apparently worst off in these 
 respects. The Baltimore & Ohio does not charge high rates on 
 account of its branch lines, nor the Erie on account of its water. 
 They must charge rates low enough to keep their lines profitably 
 occupied with traffic, and they do, in fact, charge very low ones." 
 
 The New York Evenuig Post says : 
 
 ** When a new road has brought settlers and given value to farm 
 lands or village lots otherwise worthless, it is not correct to say that
 
 CONTROVERSIES. 33 
 
 to cure the evil after the evil is done rather than to 
 prevent its occurrence. 
 
 It is beheved by the author tliat there is but one 
 way of preventing the issue of watered stock and 
 bonds. The hiw should prohibit all issues of stock 
 or bonds for labor, property, or contract work, unless, 
 before such issue, it shall have been decided by a 
 court or State commissioners that the labor, property, 
 or contract work so received is equal in value to the 
 par value of the stock and bonds issued for it.' 
 
 the * increment' in its own value, produced through the increasing 
 traffic, is * unearned,' for in a commercial sense the road has itself 
 created the business from which both farm and railway vahies spring. 
 The same is true to a certain extent of oKlcr States also. A single 
 illustration may be given. The census of 1880 gives the average 
 value of improved land in Central Illinois at less than $37 per acre. 
 The report of the Illinois Board of Agriculture for 1890, in its esti- 
 mates of cost of production for the various crops, puts the use of land 
 at $3.68 per acre, or a valuation of not less than $50. Making 
 allowance for any over-estimate by the Board, it is probable that the 
 farming lands of Illinois have increased in value 20 or 25 per cent, 
 during the decade. An increase in railroad dividends during this 
 period would, therefore, only show a profit corresponding to other 
 enterprises in the State ; and if made through an issue of unpaid 
 stock, might still be without prejudice to any farmer's interest. 
 
 *' But all stock-watering is not as innocent as this. There are 
 many instances in our railroad history where issues of share capital 
 liave been so made as to give large and illegitimate gains to the 
 (>;»erators, or else to turn control of a railway over to men who have 
 paid little or nothing for it." 
 
 ' Attorney-General Leese of the State of Nebraska, in his report to 
 the Governor, December, 1890, voices the radical sentiment of that 
 State when he says : 
 
 " The rates charged to-day are large enough to yield a dividend 
 amounting in some cases to 8 per cent, on stock tliat cost the stock- 
 holders nothing whatever but the printing ; and the officers of these 
 roads use every effort and strain every point to have the stockholders
 
 34 THE CORPORATION PROBLEM. 
 
 DISCRIMINATIONS BETWEEN INDIVIDUALS REBATES AND 
 
 SECRET RATES. 
 
 It was a principle of the old Anglo-Saxon law that 
 a common carrier must not charge one person more 
 than it charged another person for the same service. 
 This principle runs far back into English history and 
 English common law. It was applied to stages and 
 canals, and in these latter days it has been applied 
 to railroads. It is the public duty of a public carrier. 
 
 Notwithstanding this, the American railroads, for 
 many years, have discriminated between individuals. 
 They have given secret reductions, rebates, and ad- 
 vantages to the large or favored shipper. The extent 
 
 of their roads receive their annual dividends, and they have to do 
 this to hold their jobs. It is a notorious fact that the roads in Ne- 
 braska are now openly violating the plain provision of our funda- 
 mental law embodied in section 5 of article 2 of the constitution, 
 which provides that no corporation shall issue any bonds or stock 
 except for money, labor, or property actually received and applied to 
 the purpose for which the corporation was created, and that all stock 
 dividends, and other fictitious increase of capital stock or indebted- 
 ness of any such corporations shall be void. It is an admitted fact 
 that the railroads in this city have outstanding stock to a very large 
 amount that has not been issued for money, labor, or property, and 
 the several reports of these roads show dividends on all such stock. 
 
 " I would recommend a law forbidding any railroad corporation 
 from issuing any mortgage bonds or stock until an itemized account 
 of the cash, labor, or property, duly sworn to, has been presented to 
 some officer of the State for examination, and if found to be a true 
 account of the money, labor, or property received, to register and 
 certify to the same as issued in pursuance of law, and as constituting 
 a part of the capital stock of such corporation. Such a law would 
 strike out all fictitious increase of capital stock of all roads now in 
 operation as well as those to be formed hereafter." 
 
 On the other hand the report of the Railroad Commissioners of
 
 CONTROVERSIES. 35 
 
 of these discriminations was unsuspected until the 
 Hepburn investigating committee in New York some 
 eleven years ago disclosed over six thousand illegal 
 discriminations by the New York Central Railroad 
 alone. 
 
 "At one time, when a legislative investigation was ordered, there 
 were in existence on the line of the New Vork Central Railroad 
 upward of 6,CKX> different contracts varying in the most arbitrary 
 manner the published schedule rate for the carriage of local freights. 
 . . . They were granted as the caprice, the whim, or the interest 
 of the railway freight agent dictated at the hour." ' 
 
 Under such a system as this, permeating as it did 
 the whole railroad traffic of America, business be- 
 came utterly demoralized. No merchant knew what 
 
 Kansas states that the Chicago, Kansas, & Nebraska Railroad 
 Company, comprising 1,388 miles, cost for road and equipment 
 $21,083 per mile; that there is no "water" in this cost; and 
 that the Kansas lines as a whole have cost more than this. "It 
 is quite common, however, for inflated orators to assert that from 
 $8,000 to $10,000 per mile is all that a railroad legitimately costs 
 and that all capitalization above that is water." The Board then 
 shows that during the year the total net income of all Kansas roads 
 sufficed to pay 4J per cent, upon the bonded debt, leaving the stock 
 out of the account entirely. The Board adds : "A railroad thrown 
 down upon the prairie at a cost of $10,000 or $12,000 per mile is no 
 criterion of the cost of a road over which immense trains run with 
 safety thirty or forty miles an hour." 
 
 ' " Encyclopedia of Political Science," vol. iii., p. 519. 
 
 For a very full and detailed statement of the manner in which 
 special rates, rebates, drawbacks, underbilling, and reduced classifica- 
 tions were granted by railroads to favored shippers, prior to the In- 
 terstate Commerce Act, see the first annual report of the Interstate 
 Commerce Commission, pages 5-7. 
 
 Concerning the existing practices of the English railways in 
 allowing rebates and underbilling, see an article from The Financial 
 Times in 8 Ry. & Coq)., L. J., 519 (1890).
 
 36 THE CORPORATION PROBLEM. 
 
 rate his competitor was obtaining. He merely knew 
 that the rate was a secret reduction, and that he also 
 must obtain a reduction in order to meet competi- 
 tion. Every wholesale concern had its expert manipu- 
 lator and negotiator to look after the railroad rebates 
 and secret rates. It was a contest in which the prize 
 was won by the keen and unscrupulous. Favoritism, 
 bribery, and corruption of railroad agents were the 
 order of the day. As a result, the most favored 
 business house crushed out the competing concerns. 
 The great shipper demanded and obtained the great- 
 est rebates, under threat of giving all his business 
 to a competing railroad. The railroads themselves 
 began to be devoured by the evil which they .had 
 created. As for the small shipper, the legal principle 
 that rates should be the same for all persons became 
 a mockery. Power, fear, and corruption were the 
 forces that had displaced the law. It was out of 
 such a maelstrom of secret discriminations as this 
 that the Standard Oil Company arose. That com- 
 pany did a shipping business of millions of dollars 
 annually. It gave its business to the railroad that 
 gave the greatest reductions, rebates, and secret dis- 
 criminations. It is no wonder that competing oil 
 refiners were ruined. Not only did the Standard 
 Oil Company demand a rebate on its own shipments, 
 but it had the unparalleled impudence to demand a 
 rebate on shipments made by its competitors. ^ 
 Professor Richard T. Ely has said : 
 
 ^ Lest this statement should seem incredible, reference is made to 
 the opinion of Judge Baxter of the United States Circuit Court in 
 Handy vs. Cleveland, &c., R. R. Co., 31 Fed. Rep., 689 (1887).
 
 COXTROVERSIES. 37 
 
 " It is stated that even such delay in shipment and such annoyance 
 as a railway can inflict on a business man not in favor, is at times 
 sufficient to cause his bankruptcy. All this involves immense waste 
 of economic resources. Talent in business, accumulation of capital 
 in various forms, and organizations extending over a wide area, all 
 of which ought to have been a blessing to the laboring population 
 and the entire countr)', are annihilated. The best-known example is 
 the Standard Oil Company. It received, as already stated, $10,000,- 
 000 in eighteen months in rebates. If it had done business at what 
 would have been cost for others, it would still have had that enor- 
 mous sum as profit. If it had transacted its business at such terms 
 as would have involved the loss of $5,000,000 for others on the same 
 amount of business, there would still have been an equal sum for 
 distribution among the members of the company. It is a matter of 
 course that its competitors were ruined, and idle factories, old pipe 
 lines no longer used, and business wrecks throughout the country 
 give evidence of enormous economic waste. . . . At the time of 
 the investigation of the New York Hepburn Committee, .it was 
 found that special rates were the rule, and the regular tariff existed 
 only for the weak and inexperienced." ' 
 
 Ex-Governor Larrabee, of Iowa, has said in refer- 
 ence to discriminations in Iowa : 
 
 "It was from the first the policy of Iowa to encourage railroad con- 
 struction. Favorable laws, land-grants, subsidy taxes, and liberal 
 donations, all contributed to make this State an El Dorado for rail- 
 road builders. More than fifty million dollars in value was donated 
 to aid in the construction of the Iowa lines. In no other State have 
 those who own the railroads paid a smaller proportion of the cost of 
 their construction than here. This, however, seemed to have but little 
 weight with railroad managers. Iowa has no great city interest to 
 protect her shippers against their rapacity, and the chiefly agricultu- 
 ral regions have always been singled out by them for the recouping 
 of losses sustained by perilous competition in large business centres. 
 Our farmers, miners, manufacturers, and jobbers were alike made 
 the victims of a stupendous system of discrimination. In many por- 
 
 ' Harper s Ma^azitu-, August, 1 886.
 
 38 THE CORPORATION PROBLEM. 
 
 tions of the State the freight to Chicago on grain and cattle M^as from 
 50 to 80 per cent, higher than from points west of the Missouri River. 
 Minneapolis millers were enabled to import wheat from Dakota, 
 manufacture flour from it, and undersell at his own home the Iowa 
 miller, who received his grain from the same source by a direct route. 
 Davenport shippers found it to their advantage to have their West- 
 bound freight carried across the Mississippi and shipped from Rock 
 Island. It cost $130 to have a car-load of wheat hauled from West- 
 ern to Eastern Iowa, and only half as much to have it hauled twice 
 as far, to Chicago. Iowa jobbers, owing to the difference in rates, 
 were undersold by their Chicago rivals in nearly every town and 
 hamlet in the State. Illinois coal could be carried 500 miles from 
 its place of origin and sold with profit almost in the very heart of 
 Iowa, and within fifty miles of our coal-beds. . . . No one 
 could engage in certain lines of business with any prospect of success 
 without the permission of the railroad authorities, and this one could 
 not obtain without incurring the obligation of serving them in one 
 way or another. 
 
 " Leading papers of both political parties were either owned or 
 subsidized by railway managers, and corporate favors were even 
 extended to publishers of cross-road papers who were disposed to 
 criticise existing abuses. Annual passes were given to all State and 
 county officers, executive, legislative, and judicial ; to all prominent 
 politicians ; and in some instances even to township assessors and 
 jurymen. Railroad power made itself felt everywhere ; every shipper 
 realized it. Men of energy and self-reliance would fail in business, 
 while railroad favorites accumulated a fortune in a few years. The 
 rules which had always controlled trade seemed to be inverted." 
 
 At length the system became intolerable. Busi- 
 ness men could not calculate as to the future, nor be 
 certain even of the present. Small concerns were fast 
 going to the wall. Great monopolies were arising. 
 Courts and lawsuits were slow, tedious, and expen- 
 sive. Something had to be done. 
 
 Many of the States enacted radical and stringent 
 prohibitions against discriminations. In this move-
 
 CONTROVERSIES. 39 
 
 ment New York designed the j)lan, and the Western 
 States very quickly adopted it. ' 
 
 But even this was insufficient. The Supreme Court 
 of the United States held that such a State law 
 could not regulate traffic coining into or going out 
 of the State — In other words, could not regulate 
 interstate traffic. When this decision was an- 
 nounced, it became clear that Congress must deal 
 with the problem. Hence it was that the Inter- 
 state Commerce Act was enacted. By this act dis- 
 criminations of all kinds were prohibited ; and such 
 is now the law of the land. Nevertheless the Inter- 
 state Commerce Act has not cured the evil. This 
 subject, however, is considered elsewhere.' 
 
 ' Hudson in his work on " Railways and the Republic," p. 362, says 
 in regard to the Hepburn investigations : 
 
 " It was the result of a searching investigation which occupied 
 nearly eight months. The committee took some five thousand pages 
 of testimony, made a report, which was recognized as one of the 
 ablest presentations of this question yet given to the public, and 
 accompanied it by bills which were embodied in the New York anti- 
 discrimination bill of iSSo. The essential provisions of this bill 
 were : First, requiring pul)licity of rates. Second, prohibiting 
 preferential rates. Third, prohibiting drawbacks and rebates. 
 Fourth, enacting that no more should be charged for a shorter haul 
 than for a longer one over the same line. Fifth, declaring pools 
 illegal, and sixth, establishing a board of commissioners to see that 
 these provisions are enforced, to investigate complaints, and to secure 
 justice between shippers and carriers." 
 
 Alexander on " Railway Practice," however, takes the following 
 view on this question (p. 59) : 
 
 Discrimination between individuals "can only be abolished by 
 removing the temptation to commit it. This can only be done by 
 division of territor)', by pooling, or by consolidation." 
 
 ' In regard to the English Act of Parliament prohibiting railroads 
 from giving better rates to one description of traffic or one person
 
 40 THE CORPORATION PROBLEM. 
 
 DISCRIMINATIONS BETWEEN TOWNS — CHARGING MORE 
 FOR A SHORT THAN FOR A LONG HAUL. 
 
 . Discriminations against individuals have already 
 been explained. A second class of discriminations 
 is that of discriminations against one town as com- 
 pared with another town. These two methods of 
 discrimination are equally bad, and yet are different 
 in their character. The former w^ere secret, the latter 
 were open ; the former were by reductions, rebates, 
 and underweighing, while the latter were by char- 
 ging more for hauling freight to a town near at hand 
 than to a town far away. For instance, the railroads 
 charged more for hauling a car-load of freight from 
 Chicago to Pittsburgh than they did for hauling the 
 same freight from Chicago right through Pittsburgh 
 on to New York. The charge was greater for the 
 short haul than for the long haul, and Pittsburgh 
 was discriminated against. 
 
 Why was this ? It was because the railroads had 
 a monopoly at Pittsburgh, but not at New York. 
 The ocean, the Erie Canal, and a half dozen trunk 
 lines of railroads created a competition at New York 
 that led to low rates. But Pittsburgh, like many 
 another American town in the interior, was at the 
 mercy of the railroads, and the railroads used their 
 powder. They combined to keep up the rates. The 
 
 than another, Jeans on " Railway Problems," p. 521, says : " It is not 
 pretended that these enactments have been scrupulously observed. 
 On the contrary, they are broken every day, by nearly every railvi^ay 
 company in the country. Their strict observance has, in effect, been 
 declared to be impossible, even by Commissioners and Committees 
 appointed to inquire into their operation."
 
 CONTROVERSIES. 4I 
 
 same thing happened also in numberless villages and 
 towns that had but one railroad. That railroad had 
 a monopoly, and took advantage of it by imposing 
 high rates. ' 
 
 Hence the pernicious practice arose of charging 
 high rates wherever the railroads had a monopoly 
 and low rates where they did not have a monopoly, 
 even though the haul to the former place was very 
 much shorter than the haul to the latter place.' 
 
 Mr. Acworth, the English writer, gives an instance 
 of charging more for a short than for a long haul as 
 follows : 
 
 " An Oriental despot, a Baber or an Aurungzebe, did not make 
 and unmake cities with a more absolute and irresistible power than an 
 American railway king. Few campaigns in history have been more 
 momentous than the great ' Rate War,' fought by the New York 
 Central under Vanderbilt, and the Erie under Jewett, to protect the 
 ocean trade of New York against the encroachments of Baltimore and 
 Philadelphia. But those wars could only Have been carried on — and 
 even now they are not altogether things of the past — on condition 
 that the local stations furnished the sinews of war. Chicago possibly 
 gained by sending its wheat to the seaboard at 7^. a ton, but the inter- 
 mediate points, which simultaneously were paying perhaps five or six 
 times as much, unquestionably suffered. We are often told that the 
 American railways have ruined the English farmer ; people forget 
 that they have ruined the American farmer also. Between 1870 and 
 
 ' For instance, the railroads, prior to the Interstate Commerce Act, 
 gave Council Bluffs a rate of from $25 to IL4.5 per car to Chicago on 
 hogs and cattle, while other Iowa towns on these same roads were 
 forced to pay II70 per car for a less service. 
 
 ' " On the first day of January, 1887, there were, according to the 
 Chief of the Bureau of Statistics, 33,694 railroad stations in the 
 United States, of which 2,778 were junction points, /. ^. , are points 
 where there are more than one railroad, leaving 30,916 stations where 
 there is but one railroad." — Senator Cullom's speech, January, 1887.
 
 42 THE CORPORATION PROBLEM. 
 
 1880, in spite of an increased area of two million acres under cultiva- 
 tion, agricultural land in the State of New York alone depreciated in 
 value to the extent of ;^45, 000,000 sterling. And all this while the 
 American people looked on and did nothing — it cannot be said they 
 made no attempt — to stop it." ' 
 
 The railroads have an ingenious defence for this 
 practice of charging more for a short haul than for a 
 long haul. They argue that at points, like Chicago, 
 water competition makes rates very low — so low, in 
 fact, that the railroads can make a very small profit 
 at that rate, but not profit enough to pay interest or 
 dividends. Hence the railroads ask, shall we lose 
 the business and make no profit at all, or shall we do 
 the business at a very low profit and rely upon our 
 business at other points to pay interest and dividends ? 
 Better, they say, get a small profit than no profit 
 at all. 
 
 This argument is plausible. But it is unjust and 
 unsound, and for two reasons. First, the railroads, 
 when allowed to discriminate at all, abuse their 
 power. The luckless town wherein they have a 
 monopoly is subjected to extortionate rates — rates 
 as high, in fact, as can be paid. Second, if a fair 
 share of interest and dividends on the railroads can- 
 not be obtained from business between points having 
 water communication, then let the traffic go by water. 
 It is a natural law of commerce that the cheapest 
 mode of service shall survive. Railroads are not 
 justified in exacting their interest charges and divi- 
 dends from one town, and at the same time carrying 
 traffic from another town at a price that pays a very 
 
 1 << 
 
 The Railways and the Traders," p. 221.
 
 CONTROVERSIES. 43 
 
 small part of interest charges and no dividends at all. 
 Unless a fair profit can be made, the business should 
 stop and the legitimate tendencies of trade be allowed 
 to prevail.' 
 
 Least of all is there any defence for a discrimina- 
 tion between an interior town having two railroads 
 and a town having but one railroad. If competition 
 reduces rates at the former place so as to prevent a 
 fair price being charged, this is the fault of the rail- 
 roads themselves, and should not excuse higher rates 
 at the latter place. It is no excuse for one railroad 
 to say that the others are cutting rates, and that 
 consequently it will reduce rates at the competitive 
 point, but nowhere else.' 
 
 ' The Interstate Commerce Commission, in its second annual 
 report, p. 15, says, concerning this subject : "It can hardly be 
 for the public good that carriers by water should be subjected to 
 unreasonable and excessive competition ; they ought, as much as the 
 carriers by rail, to be allowed to charge remunerative rates ; and the 
 carrier by rail does not therefore make out a complete case, when 
 called upon to justify extraordinary differences between his rates at a 
 point of water competition and at other points, when he shows that at 
 the former he made the very low rates because otherwise he would 
 not have obtained the business. It may be that when the case is 
 examined in the light of the public interest it will be manifest that he 
 ought not to have had it ; that in taking it he had pressed the compe- 
 tition to an extreme which, while it harmed the carrier by boat, was 
 harmful also to points on the railroad by reason of the great disparity 
 in rates which it created, and also because of its producing so little 
 revenue that the burden upon other traffic was increased in conse- 
 quence." 
 
 For the opinion in general of the Interstate Commerce Commission 
 on this subject of discrimination against towns, see the first annual 
 report, p. 7. 
 
 ' By far the ablest presentation of the right of railways to discrimi- 
 nate against places is presented by Mr. Alexander, in his work on
 
 44 THE CORPORATION PROBLEM. 
 
 Discriminations against places — charging more for 
 a short haul than for a long haul — finally roused to 
 action the people of the towns and States that were 
 discriminated against. Statutes were passed pro- 
 hibiting these discriminations. As already stated, 
 the Supreme Court of the United States declared 
 the statutes unconstitutional, so far as they applied 
 to interstate commerce. Congress was then called 
 upon to remedy the evil, and the Interstate Com- 
 merce Act, which had been before Congress in many 
 shapes and for many years, was finally passed. It 
 prohibits an interstate railroad from charging more 
 for a short haul than for a long haul, under sub- 
 stantially the same conditions. To a certain extent 
 this act is being enforced. As will be shown here- 
 after, however, this act has not and cannot accomplish 
 that which is expected from it. 
 
 " Railway Practice," pp. 8-10 (1887). His argument is that Nature 
 has discriminated against places, and that railroads are continually 
 decreasing that discrimination. Discrimination ' ' is almost universally 
 the result of natural features or geographical locations." As regards 
 places located on waterways, he says : ' ' Nature has, so to speak, 
 discriminated in their favor, and given them what we may call natural 
 transportation. But she has discriminated against inland places, and 
 left them dependent entirely upon artificial transportation, by horse 
 or man power, slow and expensive. In fact, the railroad is built, in 
 general, only for the service of the inland party, and it sells, as it 
 were, its surplus power to the maritime party for any price it will 
 bring. An example will illustrate. New York and San Francisco 
 have always enjoyed water transportation, for freights from one to the 
 other, slow, but very cheap. No one would ever dream of building a 
 railroad between those cities for the sake of through business it could 
 get in competition with the ocean. But between them lie wide 
 stretches of lands against which nature has discriminated in the 
 matter of transportation, while endowing them with great and varied
 
 CONTROVERSIES. 45 
 
 DISCRIMINATIONS BETWEEN ARTICLES CHARGING WHAT 
 
 THE TRAFFIC WILL BEAR. 
 
 There is a third class of discriminations — discrimi- 
 nations between articles. A railroad charges more 
 for hauling a car-load of freight worth $1,000 than 
 for hauling a car-load of freight worth $100, although 
 both cars are loaded at the same time and place, 
 weigh the same, are carried by the same train to the 
 same place, and are delivered to the same person. 
 The difference in the charge is not due to the differ- 
 ence in risk of loss by collision or otherwise. It is 
 due to the fact that the $1,000 freight can afford 
 to pay a greater charge than the $100 freight. 
 The $100 car-load is charged all that it can stand, 
 and the $1,000 car-load is charged all that it can 
 stand. This frequently happens in the mining 
 
 wealth in agricultural, mineral, and other resources. Her discrimina- 
 tion was so heavy that only narrow margins of this vast territor)- could 
 be utilized and developed with ordinary land transportation. To 
 overcome this natural discrimination, railroads were built into the 
 interior in every direction, and with their gradual improvement in 
 machinery and in methods of work, they have pushed into the re- 
 motest sections, and, making connections in each direction, at last we 
 have through lines from New York to San Francisco. 
 
 " As the railroads advanced, they enormously reduced the discrimi- 
 nations of nature throughout this inland territory. Thirty years ago 
 it cost over a dollar a pound to carry from New York machinery and 
 tools to work the mines of Utah, and the trip consumed the whole 
 summer, during which the purchaser lost the use of most of his money. 
 Now the trip requires but two weeks, or less, and the rate is about 
 two cents. Comparing these rates, and considering the character of 
 the present service as compared with the old, it is not an exaggeration 
 to say that the railroads have removed about ninety-nine one-hun- 
 dredths of the discrimination against Utah which nature ordained in 
 surrounding her with deserts and mountains."
 
 46 THE CORPORATION PROBLEM. 
 
 regions where the railroad rate varies with each car- 
 load, according to the assay value of the ore on 
 that car-load. A car-load of ore worth $1,000 is 
 charged correspondingly more than a car-load of ore 
 worth $100. 
 
 What arguments do the railroads advance in de- 
 fence of this practice ? Their argument is similar to 
 that on discriminations between towns. They say 
 that only the high grade of ore can afford to pay 
 rates that yield interest and dividends to the rail- 
 road ; that the low-grade ore must be carried at a 
 very low rate of profit to the railroad, or else it will 
 not be shipped at all ; that it is better to carry the 
 low-grade ore at a small profit than not to carry it 
 at all ; but that the high-grade ore must pay regular 
 charges and high charges if the railroad is to be 
 built and operated and payment be made of interest 
 and dividends. The railroads argue that they are 
 justified in reducing the regular rate down to the 
 point where the shipper can afford to ship, and that 
 such reduction is right provided there is some profit 
 in the business, however small that profit may be. 
 In other words, the charge should be whatever the 
 traffic will bear — high if the shipment is valuable ; 
 low if it is of little value.' 
 
 ' Charging what the traffic will bear " adjusts the burdens where 
 they can be borne, and develops a vast amount of business which 
 could not otherwise exist." — Hadley on " Railroad Transportation," 
 p. 76. Compare, however, an article in the Railroad Gazette, March 
 29, 1889, to the effect that charging what the traffic will bear is per- 
 haps wrong ; that charging on the cost of service is not advisable ; 
 and that charging according to the necessities of the case is the true 
 rule.
 
 CONTROVERSIES. 47 
 
 Here, too, there is force in the argument, but dif- 
 ficulty in the practice. If the railroads are permitted 
 to make a discrimination based upon the value of the 
 article, they at once charge all that the traffic will 
 bear. By this rule the valuable article is rendered 
 not much more valuable to the owner than the cheap 
 article is to its owner. The railroad takes all except 
 the small margin which will induce the owner to 
 transport the article instead of throwing it away. 
 Give the railroad this right, and it does not hesitate 
 to practically confiscate the chief value of the prop- 
 erty transported. And if it has a complete monop- 
 oly in a district, it leaves little for the inhabitants of 
 that district. Even in England the difficulty of the 
 problem is recognized, but no solution has been 
 found. 
 
 " The avowed principle of railway-traffic managers — to impose on 
 the traffic such rates as it can bear — is a principle of discrimination. 
 There is no pretence of charging rates according to the cost of the 
 service. The railways have got rid of this good old standard of 
 charges, and have adopted instead the basis of charging all they can 
 get. That principle does not look well on the face of it, but it may 
 be the only one that is practically workable. Upon the point we 
 ofifer no opinion." 
 
 Such is the conclusion of Jeans, the great English 
 authority.' 
 
 In America the railroads were allowed to charge 
 what the traffic would bear until the rapacity of the 
 railroads became intolerable. Statutes were then 
 passed by the legislatures of the various States, 
 attempting to regulate the evil. These statutes did 
 
 ' Jeans on '* Railway Problems," p. 524.
 
 48 THE CORPORATION PROBLEM. 
 
 not and could not accomplish their purpose. It has 
 been found that great judgment, experience, and 
 capacity are required in classifying the different 
 kinds of freight so that each class shall bear its 
 due proportion of railroad charges. ' In fact, the 
 classification of freight is one of the most formida- 
 ble difficulties that face the Interstate Commerce 
 Commission to-day. The final analysis of the prob- 
 lem seems to require a separate consideration of each 
 article of commerce, and on each article the question 
 is whether the rate charged for transporting it is too 
 high.' 
 
 FREE PASSES. 
 
 A free railroad pass to a public official is a bribe, 
 open, shameless, and flagrant. Its purpose is to 
 
 ^ The Interstate Commerce Commission says in its decisions, vol. 
 iv., p. 75 : " We think no better rule applicable to the matter under 
 investigation than that applied by railroads themselves, in accordance 
 with which rates are so adjusted as to secure the largest interchange 
 of commodities. This rule is approved by its frequent application in 
 the movement of Western grain through the voluntary action of the 
 roads. Put such a rate on corn as will encourage and warrant its 
 movement if such a rate is fairly remunerative. While rates should 
 not be so low as to impose a burden on other traffic, they should have 
 reasonable relation to cost of production and the value of the trans- 
 portation service to the producer and shipper." 
 
 The Interstate Commerce Commission has considered and dis- 
 cussed this subject very carefully in its annual reports, and has recog- 
 nized the fact that the solution of the question of classification of 
 freight in respect to the rates charged for its transportation requires 
 time, care, experience, and labor. It is a question which the Com- 
 mission is earnestly endeavoring to settle. See the fourth annual 
 report of the Commission, p. 14, etc. ; also pp. 31-36. And for a 
 vigorous criticism thereon, see Railroad Gazette, Dec. 19, 1890, 
 p. 878.
 
 CONTROVERSIES. 49 
 
 prevent legislatures, city officers, and public men 
 generally from insisting upon and enforcing the 
 rights of the people. Yet the coolness with which 
 these passes are given to legislators and judges and 
 the complacency and openness with which they are 
 received are remarkable. There are few or no de- 
 fendants of the iniquity, and no railroad attempts to 
 justify it, yet there are few railroads which have 
 abolished it. It is a cheap mode of bribery. 
 
 There have been various statutes relative to it. 
 The Interstate Commerce Act forbids free passes, 
 but this act applies only to interstate railroads. 
 The legislature of Delaware regularly passes a resolu- 
 tion of thanks to the railroads " for passes to the 
 members." In New York, where the free passes to 
 the legislature are distributed openly and notoriously, 
 the Railroad Commissioners for years have endeav- 
 ored in vain to have certain laws enacted to remedy 
 well-known flagrant railroad abuses in that State. 
 Nevertheless the railroads are not always to be 
 blamed. In Michigan, a few years ago the railroads 
 decided to withdraw the free passes from the 
 legislature. Immediately a bill was introduced by a 
 member to reduce railroad rates. The railroads there- 
 upon restored the passes, and the bill was dropped. 
 In the State of Nebraska a well-known anti-monopo- 
 list, when questioned on the stump as to why he 
 rode on a free pass, promptly replied, '' Certainly I 
 do ; forage on the enemy ; forage on the enemy." 
 
 Pennsylvania in its famous Constitution of 1 873, 
 
 prohibited free passes, and other States have followed 
 
 her example. New Jersey has tried another remedy, 
 4
 
 50 THE CORPORATION PROBLEM. 
 
 and with characteristic directness has enacted a law 
 that all railroads must give free passes to the legis- 
 lature and certain public officers, thereby changing the 
 gift from a favor to a right. Connecticut has recently, 
 with true Yankee ingenuity, inaugurated a different 
 plan, and a specified state officer is required, upon 
 application therefor by a member of the legislature, 
 to purchase transportation for him, and to pay for it 
 out of the State funds. 
 
 The free-pass bribery of public officials is becoming 
 too flagrant and too indefensible to endure or to be 
 endured. It will be abolished, however, not by any 
 virtue of the railroads, or of the officials themselves, 
 but by the force of public sentiment. 
 
 Another abuse of the free-pass system was that 
 under the old plan the rich and powerful rode free 
 while the poor man paid. Those palmy days, how- 
 ever, of free passes to large shippers and to every 
 person who had influence with the railroad have 
 nearly gone by. The railroads have found that such 
 liberality does not pay. The provision of the Inter- 
 state Commerce Act which prohibits the free pass, 
 counts but little with the average railroad official. 
 But the fact that there is no profit in it to the rail- 
 roads themselves will abolish the free pass so far as 
 business men are concerned.' 
 
 ^ The following statement appeared in the Railroad Gazette late in 
 the year iSgo : 
 
 " The Chicago roads have made an agreement for passes for 1891, 
 the principal features of which are : No annual or time passes to 
 employes of roads except upon request of officials ; half-fare permits 
 to be good in only one State ; no time passes to agents of roads en- 
 gaged in the sale of coal or other commodities ; no passes, mileage
 
 CONTROVERSIES. 5 1 
 
 POOLS. 
 
 Many years ago it became clear to railroad men 
 that at every town where two or more railroads com- 
 })eted with each other for the transportation business 
 of that town, there would be secret as well as open 
 reductions of rates, railroad " wars," general demoral- 
 ization of the business, and finally no profit at all to 
 any of the railroads. It became clear also that the 
 agreements of the railroads to maintain a certain 
 rate were utterly worthless ; that the agreement was 
 no sooner made than it was broken ; and that a rail- 
 road contract to maintain rates was the same as no 
 contract at all. It became clear further that if the 
 railroads touching at any town should agree among 
 themselves on a division of the traffic to and from 
 the town, and should agree also as to the rates to be 
 charged, then that the agreed rate might be main- 
 tained ; otherwise not. Accordingly such agree- 
 ments were made, and they were called " pools." 
 
 A railroad pool is an agreement between part 
 or all of the railroads running into a place, to charge 
 certain railroad rates, and to divide the business 
 in specified proportions. The pool is organized to 
 prevent competition between the railroads. In most 
 
 tickets, or other forms of transportation to be issued to influence either 
 freight or passenger business. The regulations concerning trip passes 
 are somewhat less rigid than the above. The World's Fair commis- 
 sioners, Grand Army officers, and employes of refrigerator car 
 companies are specially cut off in both sections of the agreement." 
 
 Concerning the abuses growing out of the free-pass system, see also 
 the first annual report of the Interstate Commerce Commission, pp. 
 7, S. The subject of free passes is considered also in the third 
 annual report of the Interstate Commerce Commission, pp. 9-13.
 
 52 THE CORPORATION PROBLEM. 
 
 of the towns along a railroad line, the railroad has a 
 complete and permanent monopoly because great 
 capital and great loss are involved in paralleling 
 that line. The pool creates a monopoly in towns 
 where two or more railroads run. It is a combina- 
 tion of the railroads running into a town.^ 
 
 These pools sprang rapidly into existence. Where- 
 ever two or more roads competed, there the pool 
 was formed. The system soon became a vast net- 
 work overspreading the country. Every railroad 
 was a member. The whole country was divided 
 into sections for convenience in organizing and carry- 
 ing on the pool. Every town covered by the pool 
 was called a '' pooled town." Even New York, Chi- 
 cago, and the great cities generally were pooled. 
 The pool gave as complete a monopoly as though 
 but a single railroad ran to a town, except at 
 points where water transportation came into com- 
 petition. 
 
 Naturally the railroads argue in favor of the 
 pool. They claim that the pool prevents ruinous 
 railroad Avars ; makes staple and reliable rates ; en- 
 ables shippers to calculate with certainty on rail- 
 road charges ; does away with secret cutting, 
 discriminations, and underbilling ; places towns with 
 one railroad on an equality with towns having many 
 railroads ; prevents the railroad bankruptcies, which 
 are disastrous to the investor and business com- 
 
 ' Hadley on "Railroad Transportation," p. 76, says that a pool 
 exists where competitors agree (i) to divide the field, (2) to divide 
 the traffic, or (3) to divide the earnings ; and that a railroad pool is 
 generally a mixture of the last two.
 
 CONTROVERSIES. 53 
 
 munity ; and enables the railroad to charge a fair 
 rate, and thereby pay interest and reasonable 
 dividends. 
 
 Jeans, the English authority, after remarking that 
 the American pool has no exact counterpart in other 
 countries, summarizes the advantages of the pool, as 
 follows : 
 
 "It seems to be generally admitted that, in the United States, 
 pools have not been without beneficial influence ; they have pre- 
 vented unjust discriminations, through special secret rates, to favored 
 freighters ; they have prevented, similarly, unjust discriminations 
 against towns and cities, and against particular States or sections of 
 the country ; they have tended to put an end to constantly fluctuating 
 rates ; they have prevented the absorption of the weaker lines by the 
 stronger, and have thus conserved the elements of competition ; they 
 have tended to prevent the bankruptcy of the great railroad corpora- 
 tions, and the consequent shocks to the financial interests of the 
 country. Moreover, they have not hindered, but rather assisted to 
 promote, the extension of transportation facilities, the reduction of 
 rates, and the development of traffic." * 
 
 ' Jeans on " Railway Problems," p, 517. 
 
 Alexander on " Railway Practice," pp. 23-24, says that the pool 
 is justifiable as " removing the tempation to give rebates," and that 
 " not only are the rates lower, more uniform to all shippers than ever 
 before, and less liable to fluctuations, but uniformity of classification 
 is increasing, and harmonious arrangements between different lines 
 are promoted, which greatly facilitate business." — p. 30. 
 
 The Railroad Gazette, December 28, 1 888, says : 
 
 "We are told that 'the pool was never an adequate preventive 
 against rate wars.' Very true. The pool was never allowed sufficient 
 legal recognition to give it adequate power for the purpose. In those 
 countries where it has been given adequate powers, it has proved an 
 adequate preventive. Where it has been tolerated, it has proved a 
 partial preventive. Now that it is totally forbidden, we have no 
 preventive at all, short of actual consolidation. . . . The pro- 
 hibition of pools was intended by the majority of those who favored 
 it to make the maintenance of rate agreements more difficult ; in other
 
 54 THE CORPORATION PROBLEM. 
 
 All this may be true temporarily, but it is not the 
 permanent result. A pool is but a truce. It is 
 only a cessation of hostilities. It generally ends a 
 railroad war, and ends with a railroad war. Not 
 even while it is in existence does it prevent secret 
 cutting, discriminations, and all the practices by 
 which one railroad seeks to get business away from 
 another railroad. 
 
 The old and great trunk lines have begun to see 
 that the pool is a good thing for their weak rivals, 
 but a bad thing for themselves. A railroad war 
 means ruin to a new railroad, because the war 
 reduces rates below the cost of running the trains. 
 But the pool prevents war ; sustains the new road ; 
 enables it to establish its finances ; gives it time 
 to gather local business ; creates confidence in its 
 future ; and enables it to sell its bonds to investors. 
 The pool gives the weakling an opportunity to 
 grow strong. The great trunk lines are beginning 
 to see the folly of the pool, so far as their interests 
 are concerned. It is true that this development 
 of weak trunk lines by the pool is an advantage 
 to the public, but it may safely be said that this 
 incidental advantage to the people is not the object 
 of the pool. The railroads are not run for philan- 
 thropic purposes. 
 
 words, to increase the liability to their violation. That it has had 
 that effect we see not the slightest reason to doubt." It is also said 
 that if a person "will take the trouble to look into the history of 
 European railroads, where pooling experiments have been carried 
 much farther than here, he will find that permanent agreements have 
 tended to check new construction, while their absence has been 
 accompanied by a marked, and often disastrous, increase of such 
 construction."
 
 CONTROVERSIES. 55 
 
 The Interstate Commerce Commission has said of 
 pools : 
 
 " The pooling system was looked upon with distrust by the pub- 
 lic, mainly because it seemed to be a scheme whereby competition 
 between the roads \:ould be obviated, and rates for railroad service put 
 or kept up to unreasonable figures. But if railroad managers sup- 
 j)osed that by this scheme they were to stop competition among 
 themselves, the result has not answered their expectations. The 
 competition has still gone on ; each road striving to obtain as large a 
 share of the business as possible, and no agreement among them 
 could altogether prevent a yielding to the pressure of shippers for 
 lower rates." ' 
 
 The public have always been hostile to the pool. 
 It fixed rates arbitrarily without consulting shippers 
 or shippers' interests. It was subject to sudden 
 fluctuations without notice. It created a monopoly 
 without responsibility. The regulating power of 
 competition was done away with and nothing in be- 
 half of the public was put in its place. Moreover it 
 divided and diverted traffic. A large shipment sent 
 to one railroad was liable to be delivered at its des- 
 tination by a different or several railroads with all 
 the delays and troubles incident to each. 
 
 Public hostility to pools culminated in 1887 in 
 the Interstate Commerce Act. By one of its pro- 
 visions, pools are prohibited. As to the effect of 
 that prohibition there is a wide difference of opinion. 
 There is no doubt that the breaking up of the 
 pool has promoted competition among railroads, 
 but it has also increased discriminations, secret rate- 
 cutting, and other nefarious modes of getting busi- 
 ness. Consequently a strong effort is now being 
 made by the railroads to repeal the anti-pool pro- 
 
 * First annual report, p. 34.
 
 56 THE CORPORATION PROBLEM. 
 
 vision on the ground that the pool may be bad, 
 but it prevents things that are worse. There is 
 little indication, however, that the American peo- 
 ple are inclined to allow such a repeal. The people 
 at large do not favor the railroad plan of curing one 
 evil by another. For the things '^ that are worse," 
 other remedies will be found and those remedies 
 will be efficacious. The pool is believed to be iniqui- 
 tous, demoralizing, and dangerous. It will not be 
 revived. In its place, however, will arise a more 
 substantial union of railroad interests, the character 
 of which is considered elsewhere.* 
 
 RAILROAD WARS. 
 
 A railroad war is a war of rates. It is competi- 
 tion broken loose. It is a contest between two or 
 more competing roads to see which one can endure 
 longest the carrying on of business at a loss. The 
 war is caused by secret cutting of rates, or by loss 
 of business, or by the advent of a new road seeking 
 business, or by a stock-gambling project or by the 
 determination of an old road to crush a new com- 
 peting road before the latter becomes established. 
 
 These wars sometimes do a little good. Fre- 
 quently it happens that after one of them the rates 
 are never increased to former figures. Such has been 
 
 ' See Chapter III. Since the enactment of the Interstate Com- 
 merce Act prohibiting pools, there have arisen certain agreements 
 between the railroads for the purpose of regulating rates. These 
 agreements also are explained and considered in Chapter III, 
 
 For the railroad argument that pooling should be legalized, see 
 the letter of George R. Blanchard, Chairman of the Central Traffic 
 Association, 8 Ry. & Corp. L. J., 518 (Dec, 1890).
 
 CONTROVERSIES. 57 
 
 the case with wars on rates between New York 
 and Chicago, and also on rates from the Pacific 
 coast to tlie East. The war itself is not the cause 
 of the permanent reduction however. The cause 
 lies further back, and is due to the increase in the 
 number of railroads, the increase of business, the 
 better facilities for handling traffic, or the better and 
 cheaper traffic arrangements with connecting lines. 
 
 But in general a railroad war does much harm. 
 It brings some of the roads to the very verge of 
 bankruptcy ; it jeopardizes the payment of interest 
 on railroad bonds ; it stops dividends ; it causes 
 panics in the commercial centres ; and it unsettles 
 business, finances, and general prosperity. True it 
 is that while the war lasts, the persons using the 
 railroads save considerable money in railroad rates. 
 But this saving is offset partly by the fact that un- 
 necessary travel is indulged in, and partly by the 
 fact that the persons thus benefited form but a 
 small proportion of the whole people. A general 
 railroad war brings confusion and financial distress 
 to railroads and business interests. Sooner or later 
 the whole country is disturbed.' 
 
 But how are they to be prevented ? It is clear 
 that the railroads themselves cannot refrain from 
 going to war. They have a quarrelsome and bel- 
 ligerent nature. When not engaged in fighting the 
 people, they are prone to fight among themselves. 
 There is no hope of relief from that quarter. 
 
 ' A very full and detailed statement of the evils arising from rail- 
 road wars and unreasonably low rates is given in the second an- 
 nual rei)ort of the Interstate Commerce Commission, pp. 19-24 ; 
 and the fourth annual report, p. 21, etc.
 
 58 THE CORPORATION PROBLEM. 
 
 ' ' War is the natural state of an American railway towards all 
 other authorities and its own fellows, just as war was the natural 
 state of cities towards one another in the ancient world. " ^ 
 
 The railroads claim that pools are the surest pre- 
 ventives of wars. But the pool is worse than the 
 war. Moreover, railroad wars broke out in spite of 
 the pools and would do so again if pools were re- 
 established. The pool began when a war ended, and 
 ended when a war began. 
 
 A railroad clearing-house has been proposed to 
 prevent railroad wars. Such a clearing-house is an 
 old institution in England, but is yet to be seen 
 in America. Moreover, when once established in 
 America, as it soon will be, it will be found to be 
 nothing more nor less than a book-keeping concern. 
 It cannot prevent railroad wars. 
 
 " It is the fashion to speak of the English clearing-house as though 
 it had stopped rate wars. It undoubtedly had an indirect effect of 
 this kind, but its indirect influence was small. In fact, the officials 
 of the clearing-house have taken special pains to arrange this settle- 
 ment in such a manner as not to be required to touch disputes 
 between individual companies with regard to traffic questions." ' 
 
 * Bryce's " American Commonwealth," vol. ii., p. 514. 
 
 ^Railroad Gazette, Feb. I, i88g, and the same journal, January 1 1, 
 1889, says : 
 
 " Apart from the question of rates, the existence of such a clearing- 
 house is of great value to almost all parties concerned. To the rail- 
 roads it saves the necessity of partial payments on shipments of 
 through freight, and enables the different companies to settle with 
 one another by book credits and balances, instead of by actual cash 
 payments. In short, it does for the whole system of freight accounts 
 what a fast-freight line does for the settlement of car-mileage 
 balances. We are so used to the existing system that many of us 
 fail to appreciate the unnecessary work involved in the collection of 
 back charges ; but it is an antiquated and cumbrous method of doing
 
 CONTROVERSIES. 59 
 
 The railroads are beginning to claim that the In- 
 terstate Commerce Act should prohibit railroad 
 wars, inasmuch as it prohibits railroad pools, — the 
 preventives of wars. If the present tendencies 
 continue, this apparently extreme view may come 
 true, inasmuch as the time seems not far distant 
 when the Interstate Commerce Commission will be 
 given power to reduce railroad rates. There is much 
 force in the argument that if the power to reduce 
 rates is given to that Commission, the power should 
 also be given to prevent a sudden and extreme re- 
 duction of rates, — in other words, to prevent a war 
 in rates. 
 
 Relief, however, is coming from another quarter, 
 and by no means with a leaden heel. It is coming 
 as it came in England and France. It will be by 
 the unification and consolidation of competing rail- 
 roads, and this will put an end to railroad w^ars 
 peremptorily and beyond question. This subject is 
 considered elsewhere.* 
 
 business, and it is astonishing that it should have been allowed to 
 continue so long. 
 
 " To railroads and shippers alike a clearing-house furnishes a 
 welcome means of locating loss or damage, and even of tracing lost 
 articles. In these respects the existing freight lines are far from 
 satisfactory. It sometimes seems as if nobody were responsible for 
 anything. In these respects the old-fashioned freight line, like the 
 Merchants' Dispatch, was better than all the modern co-operative 
 ones. 
 
 " But all this does not prove that the clearing-house can maintain 
 rates. As far as the facts go, they prove the contrary. The man- 
 agers of the English clearing-house have habitually taken the utmost 
 care not to interfere in rate agreements. It not only makes no rates, 
 it does not even take the initiative in dividing them." 
 
 * See Chapter III.
 
 6o THE CORPORATION PROBLEM. 
 
 USELESS PARALLELING OF RAILROADS. 
 
 Under the general laws prevailing in most of the 
 States for the incorporation of railroads, only a cer- 
 tificate need be filed in order to obtain a charter. 
 No legislature need be bribed or convinced ; no 
 State officers need be consulted ; no large expense 
 need be incurred for " influence " ; and no hostile 
 railroad can prevent the incorporation. 
 
 This ease of incorporation, together with the 
 periodical eras of abundance of money in the market, 
 of reckless speculation and inflation, and of " boom- 
 ing " times generally, has had a curious effect. It 
 has enabled adventurers, promoters, and irrespon- 
 sible speculators to build railroads parallel to old 
 railroads for the sole purpose of compelling the lat- 
 ter roads to buy them out. This is blackmail on a 
 gigantic scale. Not only this but the new railroad 
 is often built to invade the territory of an old and 
 valuable railroad, under pretence of building a com- 
 peting line, but for the sole purpose of " floating off " 
 on to the public great quantities of stocks and 
 bonds. 
 
 If such railroad building resulted in an independent 
 competing line the public would have no cause to 
 complain. But such is not the case. Usually the 
 new road is built to be sold to the old one, and even 
 when it is not, the old road sooner or later absorbs 
 the new one. This absorption generally takes place 
 after a disastrous railroad war, that throws the 
 new road into a receiver's hands. If not in this way, 
 then it takes place by consolidation. 
 
 The most notable instance of this was the West
 
 CONTROVERSIES. 6l 
 
 Shore and the Nickel Plate Railroads, one of which 
 fell into the hands of its competitor after a railroad 
 war, and the other by purchase and practical con- 
 solidation. By the laws of trade based on natural 
 laws, which are stronger than the laws of men, two 
 or more competing railroads sooner or later cease to 
 compete, and they become a monopoly by agreement 
 or by consolidation.' 
 
 And when the consolidation or agreement takes 
 place the effect is ruinous. There are two railroads 
 where there should be but one ; two roads to be 
 sustained ; two roads to consume money for interest 
 and dividends, and two roads for whose maintenance 
 the rates must be kept up, instead of being reduced, 
 as they could be if there were but one. 
 
 It is with reason that the Kansas Railroad Com- 
 missioners say of the railroads in that State : 
 
 "After the 'boom 'the 'boomerang.' The companies found 
 themselves confronted with fixed charges on non-paying trackage ; 
 the municipalities equally unhappy under a debt of aid bonds and 
 extravagance in public expenditure. The one could not find relief 
 through resort to excessive charges, nor the other through a repudia- 
 tion of contract obligations ; the majesty of the law would not permit 
 it. Time, the one great healer of all curable wounds and ills, can 
 alone set things right. Indeed, it has already done much to correct 
 the errors and ills of this overdoing in Kansas enterprise. A phe- 
 nomenal growth in population, agriculture and other productions, and 
 rapidly accumulating wealth, together with the more prudent methods 
 bom of adversity, have done much already to relieve the strain, and 
 will, we are confident, bring complete relief at no distant day. 
 
 " This recital of facts, connecting the evils of the present with 
 their cause in the past, is not for amusement, but to invoke a more 
 careful and intelligent action than comes of passionate appeal and 
 vindictive assault. We have 1,500 miles of railroad which is worse 
 
 > Q 
 
 See Chapter III.
 
 62 THE CORPORATION PROBLEM. 
 
 than worthless to its owners, and a burden upon the commerce of the 
 State as a whole, although a blessing to the country along its line. It 
 came by invitation, encouragement, and support of the people, and 
 cannot be ignored in the discussion of rate-making for the rest." 
 
 In England such a thing is impossible because in 
 that country no railroad can be built until it has 
 passed through the crucible of a parliamentary com- 
 mittee and has obtained a special charter from Parlia- 
 ment. But this restriction is worse than no restriction 
 at all. Such an ordeal is ruinous to the new railroads, 
 even to those which should be built. The parliamen- 
 tary expense r.lone in England in getting a charter 
 would be enough to build an American railroad. 
 Nearly a half million of dollars have been paid for 
 the parliamentary expenses of a single railway in 
 England — the Great Western. Hence it is that the 
 old railroads in England have a monopoly that can- 
 not easily be disturbed or broken. America will 
 never go back to the old plan of granting special 
 charters to railroads. 
 
 The established railroads of America are in favor 
 of the consent of railroad commissioners before a 
 railroad can be built. Already in New Hampshire 
 such a restriction exists. No construction is per- 
 mitted until the commissioners shall have decided 
 that the new road is needed.^ 
 
 The argument against giving such power to com- 
 missioners is a strong one. The unrestricted right 
 to build railroads is a constant check on the high 
 charges and poor service of all roads. It is a menace 
 
 ' See Chauncey M. Depew's testimony before the Senate Committee 
 on this subject, in the Railroad Gazette, May lo, 1889.
 
 CONTROVERSIES. 63 
 
 that induces the old road to reduce its charges rather 
 than leave open the temptation of possible competi- 
 tion. And there is another objection to the New 
 Hampshire plan. Restrictions by commissioners 
 mean the corruption of those commissioners. The 
 money, power, and influence of great systems of 
 railroads are not easily withstood. By their tamper- 
 ing with the commissioners they soon would render 
 new construction an impossibility. The history of 
 what unscrupulous railroad methods have been in 
 the past tells plainly what their methods will be in 
 the future. The danger is that restrictions on con- 
 struction will be worse than no restrictions at all. 
 The railroads themselves will manipulate the re- 
 strictors. 
 
 On account of these reasons there is little likeli- 
 hood that many States will allow the railroad com- 
 missioners to veto the building of new railroads. 
 The remedy for the useless paralleling of lines will 
 be found in the consolidation of present systems 
 and a consolidation to such an extent that the black- 
 mailing projects will not dare to contend against the 
 formidable strength of established roads. 
 
 FORECLOSURES AND REORGANIZATION OF CORPORATIONS. 
 
 In an epigrammatic way it has been said that a 
 new railroad is not in a sound physical and financial 
 condition until the bondholders have closed out the 
 stockholders and a receiver has closed out the bond- 
 holders. This is an extreme statement, and yet it is 
 rare that a newly constructed railroad is able to 
 avoid insolvency and foreclosure. The money for
 
 64 THE CORPORATION PROBLEM. 
 
 its construction is obtained from its mortgage bonds, 
 while its stock is generally pure "water," and repre- 
 sents nothing except a hope of future value. This 
 hope is unfulfilled. Interest is not even paid on the 
 bonded debt. Foreclosure of the mortgage takes 
 place, and so often has this been the case that rail- 
 road bankruptcies, foreclosures, receiverships, and 
 reorganizations have come to be looked upon in 
 America as inevitable accompaniments of railroad 
 construction. 
 
 The injury done by all this is great and incalculable. 
 Heavy losses fall upon the investors ; confidence in 
 other securities is weakened ; banks become fright- 
 ened ; credit is curtailed ; a railroad war is frequently 
 precipitated by the bankrupt road or its receiver ; a 
 panic and crash sometimes result ; and, in all cases, 
 general business is injured by- the widespread dis- 
 trust. When it is recollected that from 1876 to 1889 
 nearly four hundred and fifty railways in the United 
 States were sold under foreclosure, the losses and in- 
 jtiry therefrom may be imagined if not understood. 
 
 These foreclosures, however, do not proceed 
 smoothly to judgment and sale. The stockholders 
 and officers of the corporation interpose all manner 
 of defences and dilatory proceedings in the suit, and 
 frequently several years are consumed in completing 
 a single foreclosure.' 
 
 The result of all this is great loss of property and 
 disturbance of business, and these losses and disturb- 
 ances have gone to such an extent that the question 
 has arisen whether railroad foreclosures are not 
 
 * Concerning this subject, see an article in i Ry. & Corp. L. J,, 
 97 (1887).
 
 CONTROVERSIES. 65 
 
 productive of more evil than good, and whether they 
 ought not to be abolished altogether. 
 
 In England, foreclosures of railroad mortgages are 
 not allowed, and receivers' certificates have no exist- 
 ence. Railroad mortgages are a lien, not on the 
 property, but on the income. And the statutory 
 law of England prescribes that when a certain pro- 
 portion, generally two thirds of the stockholders and 
 bondholders and general creditors of an insolvent 
 railroad company, shall agree upon a plan of re- 
 organization and a court shall approve of that plan, 
 then the remaining one third are bound to consent, 
 and the reorganization takes place. 
 
 In America no such law exists, but there has 
 grown up a business settlement of these foreclosure 
 suits. These settlements are called reorganization 
 agreements, and they are fast supplanting the fore- 
 closures of railroad mortgages. A reorganization 
 is an agreement by which the stockholders and gen- 
 eral creditors of an insolvent company agree to 
 reduce the amount of their claims against the corpora- 
 tion and also agree to contribute money towards re- 
 establishing and carrying on the business. There is 
 an infinite variety of plans of reorganization, and each 
 plan differs in some particular from all others, but 
 all reorganizations have the same general purpose.' 
 
 ' Among the most recent and favored plans is one whereby the 
 bondholders cancel their bonds wholly or partially and take in 
 exchange the preferred stock of the corporation. This plan resem- 
 bles the present policy of many strong railroads to take up and pay 
 ofT their bonds from moneys received by new issues of stock. As 
 regards this the Railroad Gazette, February 8, i88g, says : 
 
 " In a general way, it is a good thing that railroad investment 
 should be, as far as possible, in the form of stock. The stockholder 
 S
 
 ^ THE CORPORATION PROBLEM. 
 
 The object of a reorganization is to avoid fore- 
 closure, and the prospect of a foreclosure is the 
 cause of a reorganization. Frequently the reorganiza- 
 tion is made after a foreclosure has been commenced, 
 the object of the foreclosure being to cut off these 
 persons who refuse to come into the reorganization. 
 Sometimes the reorganization practically does away 
 with the necessity of foreclosure, and this is the ideal 
 condition towards which the times are tending. 
 
 The time probably will come when reorganization 
 without foreclosure will be compelled by the law in 
 America the same as in England. The very fact 
 that American reorganizations have sprung from 
 the necessities of business ; that they have grov/n 
 up outside of the law ; that, though voluntary in 
 their creation, they have supplanted foreclosures; 
 and that they are fair and necessary to the business 
 world, leads to the conviction that foreclosures of 
 railroad-mortgages will soon be prohibited by statute, 
 
 exercises more immediate control over the management than the 
 bondholder can. He is thus able to look out for himself, and take 
 risks with his eyes open. Bonded debt ought, in theory, to be so 
 small as to be subject to very little risk. The moment the margin 
 of safety is approached, a conflict of interest arises between stock- 
 holders and bondholders ; and the stockholders, having the board of 
 directors under their more immediate control, are at an unfair 
 advantage." 
 
 The advantages to the railroad are : the decrease of its debt, the 
 changing of its liability for interest to a liability to pay dividends in 
 case they are earned, the increased value of all the stock by reason of 
 the cancellation of debts, the avoidance of future foreclosures, the 
 being prepared for hard times and for railroad wars of rates, 
 and the possibility of borrowing more money and giving a new first 
 mortgage to other persons in the future.
 
 CONTROVERSIES. 6/ 
 
 and that reorganizations under the sanction of the 
 law will take their place. 
 
 STOCK GAMBLING. 
 
 Tacitus, the Roman historian, writing of the 
 Germanic races in the year 99 A.D. said : ''In the 
 character of a German there is nothing so remark- 
 able as his passion for play. Without the excuse of 
 liquor (strange as it may seem), in their cool and 
 sober moments, they have recourse to dice, as to a 
 serious and regular business, with the most des- 
 perate spirit committing their whole subtance to 
 chance, and when they have lost their all, putting their 
 liberty and even their persons upon the last hazard 
 of the die. The loser yields himself to slavery. 
 Young, robust, and valiant, he submits to be chained, 
 and even exposed to sale. Such is the effect of a 
 ruinous and inveterate habit. They are victims to 
 folly, and they call themselves men of honor." 
 
 It was from these Germanic tribes that the Anglo- 
 Saxon race sprang. The daring propensities of the 
 race have led to the enterprise and marvellous 
 achievements of the English-speaking people, but 
 these propensities have also been the cause of gam- 
 bling, speculation, and frightful losses. Ever since 
 shares of stock came into existence — nearly three 
 hundred years ago — stock-gambling has been an evil 
 among the people. As long ago as the year 1720, a 
 whirlwind of stock speculation swept over England, 
 and when the " South Sea Bubble " exploded, it 
 unsettled the finances of the kingdom. 
 
 The periodical regularity with which the English
 
 68 THE CORPORATION PROBLEM. 
 
 nation goes into wild speculations and loses its 
 money is remarkable. One of the most striking 
 instances of this was prior to the panic of 1825. The 
 Annual Register of that day described the scenes as 
 follows : 
 
 "All the gambling propensities of human nature were constantly- 
 solicited into action, and crowds of individuals of every description, 
 the credulous and the suspicious, the crafty and the bold, the raw and 
 the experienced, the intelligent and the ignorant, princes, nobles, poli- 
 ticians, patriots, lawyers, physicians, divines, philosophers, poets, 
 intermingled with women of all ranks and degrees, spinsters, wives, 
 and widows, hastened to venture some portion of their property in 
 schemes of which scarcely anything was known except the name." 
 
 In these latter days stock-gambling still prevails. 
 It has assumed colossal proportions and has ac- 
 quired a certain respectability by reason of its asso- 
 ciation with stock investment. Stock gambling and 
 stock investment, however, are two very different 
 affairs. The former is the purchase of stock in the 
 hope that the price will quickly go up or down so as 
 to yield a profit. The latter is a purchase of stock 
 in order to hold it for dividends or for an eventual 
 rise. 
 
 Stock gambling is carried on chiefly through two 
 mediums — stock exchanges and '' bucket shops." 
 
 A stock exchange is a place where stocks, bonds, 
 and other corporate securities are bought and sold. 
 The exchange consists of brokers. They alone have 
 the privilege of buying and selling in a particular 
 exchange, and frequently an exchange is composed 
 of several hundred members. The amount of stocks 
 bought and sold on one of these exchanges in a
 
 CONTROVERSIES. 69 
 
 single day is remarkable. It sometimes reaches 
 1,000,000 shares. And yet it is estimated that only 
 one eighth of these transactions is for investment, 
 the remaining seven eighths being pure gambling. 
 
 That one eighth part, however, is of great conse- 
 quence to the country. Without the stock exchange 
 railroads and corporations requiring great capital 
 could not sell their securities, and their construction 
 on the modern scale would be impracticable. The 
 stock exchange is the connecting medium between 
 the unknown small investors and the great captains 
 of industry'. Through it, persons with a little sur- 
 plus find convenient investments ; those who have 
 stocks, which they must convert into cash, find a 
 ready market ; staple prices for securities are made ; 
 violent fluctuations in the whole list of stocks are 
 prevented ; rascality in corporate management is 
 exposed ; full reports of the corporate condition are 
 brought to light, scrutinized and criticised ; informa- 
 tion as to values is widely disseminated ; probable 
 changes in values are anticipated and prepared for ; 
 and through the stock exchanges, and the taking of 
 stocks as collateral security, the conservative influ- 
 ence of the banks is felt in regulating the finances 
 and business of the country. 
 
 Some idea of the magnitude and scope of the busi- 
 ness of a stock exchange can be obtained from the 
 following article which appeared in October, 1890: 
 
 " The magnitude of Wall Street monetary transactions sinks into 
 insignificarce when compared to the business daily done on the Lon- 
 don Stock Exchange. The number and the quantity of the stocks 
 handled in the British capital are remarkable. Id this market the
 
 70 THE CORPORATION PROBLEM. 
 
 whole world is brought into financial proximity, and the business 
 enterprises of the entire globe are made the medium of speculation. 
 The reports of the business done on any day in the London Stock 
 Exchange show this to be the truth. Indeed, the foreign and colonial 
 securities dealt in here — governmental, railway, banks, and miscel- 
 laneous industrial — far outnumber those of the United Kingdom. 
 
 " In colonial government inscribed securities there are quoted above 
 par those of Canada, the Cape of Good Hope, Natal, New South 
 Wales, New Zealand, South Australia, Tasmania, Victoria, and 
 Western Australia. In foreign government securities are found in 
 one close neighborhood the Argentine Republic, Brazil, Buenos 
 Ayres, Chili, China, Costa Rica, Egypt, France, Greece, Hungary, 
 Italy, Mexico, Portugal, Russia, Spain, Turkey, Uruguay, the United 
 States, and Virginia. Of these securities the United States 4 per 
 cents lead all others in value. In railway securities, stocks, bonds, 
 and obligations, the list is almost interminable, and the roads repre- 
 sented lace the globe. 
 
 " Every road in the United Kingdom is represented in the daily 
 dealings, and the American list includes everything of prominence 
 in the United States, Canada, Mexico, and Central America. There 
 are quotations of no less than eight different Indian railways, and the 
 names of the Bengal-Nagpur, the Bombay, Baroda, and Central 
 India, the Rohilkund and Kumaon, and the Great Indian Peninsular 
 are as familiar to the London stock-broker and the London speculator 
 as the names of our own great railways are to the Wall Street operator. 
 There are a dozen or more South American railways listed and liber- 
 ally dealt in, and close beside them, in the quotations, are found the 
 Ottoman, from Smyrna to Aidin, the South Austrian, the Dutch 
 Rhenish, the Charkow-Krementschug, and many others that sound 
 odd and strange to New York ears. 
 
 " In bank stocks the array is imposing, and the names suggest bonds 
 of commercial interest between London and the rest of the world. 
 There are the Anglo-Egyptian Bank, the Bank of Africa, the Bank 
 of Australasia, the Bank of New South Wales, the Bank of New 
 Zealand, the Bank of South Australia, the Bank of Tarapaca and 
 London, the Chartered Bank of India, Australia, and China, the 
 Hong Kong and Shanghai Bank, the Imperial Bank of Persia, the 
 Imperial Ottoman Bank, the London and San Francisco Bank, and 
 the London Bank of Mexico and South America. In mines the 
 transactions are large and extend from the gold fields of South Africa
 
 CONTROVERSIES. 7 1 
 
 to the silver diggings on the western slopes of the Rocky Mountains, 
 and from the diamond mines of Brazil to the copper finds of Lake 
 Huron. Telegraph and telephone stocks are dealt in, and the quota- 
 tions show a juxtaposition of the Anglo-American, the Direct United 
 States Cable, the Cireat Northern of Copenhagen, the Western and 
 Brazilian, and the West India and Panama. 
 
 "Corporation stocks represent such distant places from London as 
 Melbourne, Buenos Ayrcs, and the city of Mexico. In foreign 
 stocks, bonds, etc., coupons payable in London or abroad, there are 
 copiously represented the Argentine Republic, Brazil, Buenos Ayres, 
 Chili, China, Colombia, Cordova, Ecuador, Egypt, Greece, Costa 
 Rica, Guatemala, Hungary, Mexico, Nicaragua, Paraguay, Portugal, 
 Russia, Spain, Sweden, Turkey, and L^ruguay. Breweries are made 
 a conspicuous means of investment and speculation, and we find the 
 Chicago, Frank Jones, and St. Louis breweries quoted with those of 
 Allsopp, Guinness, Bamsley, Ohlsson's Cape, and Watney & Co. 
 
 " Commercial and industrial enterprises have a wide range, and 
 extend from the forges of Leeds to the water supply of Buenos Ayres. 
 Financial, land, and investment enterprises embrace concerns operat- 
 ing in America, Australia, New Zealand, the Transvaal, Peru, and 
 numerous other countries remote from each other, and having no 
 interest in common except those created by the London stock market 
 and existing on the London Exchange. 
 
 *' In addition to these dealings in foreign securities, stocks, bonds, 
 mines, railways, land investments, and commercial and industrial 
 enterprises, the business done in British railways, banks, financial 
 trusts, gas companies, insurance concerns, tramways, omnibus com- 
 panies, water-works, and other domestic and local stocks is stupen- 
 dous. The daily transactions of the London Stock Exchange disclose 
 a marvellous diversity of interests spreading over the entire civilized 
 globe, and yet focused in one place for the purposes of investment 
 and speculation. It is a wonderful community of interests, a mar- 
 vellous transformation of the business world into one close neighbor- 
 hood, and it suggests the idea that the people of Great Britain not 
 only have a great deal of money, but they are anxious to use it in 
 either investment or speculation." 
 
 But the gambling portion of the stock exchange 
 business causes unutterable woe and ruin. Thou- 
 sands of men fall into that maelstrom ever>^ year.
 
 72 THE CORPORATION PROBLEM. 
 
 Stock-gambling is a mania that unsettles the minds 
 of men and unfits them for serious, earnest business. 
 It breaks up homes, disgraces families, beggars the 
 rich, and often leads to suicide. Men, whose legiti- 
 mate income is decreasing and whose expenses are 
 increasing, resort to the stock exchange in despair, 
 and risk all on the venture. Moreover, the whole 
 country is affected when a great syndicate are 
 gambling in a particular stock on a colossal scale, 
 and are jeopardizing vast business interests. The 
 credit of banks and the solvency of railroads are the 
 pawns with which they are playing. If their gam- 
 bling does not win, there comes a collapse of their 
 credit and business, a " run " on banks, railroad 
 foreclosures and receiverships, wars in rates, and 
 widespread disaster. The South Sea Bubble of 
 1720 has been frequently repeated, and one of the 
 latest instances was the collapse of the West Shore 
 Railroad syndicate, which created a panic in Wall 
 Street and carried down the Metropolitan Bank. 
 
 The bucket shop is worse than the stock ex- 
 change, in that it has no redeeming features. It is 
 purely and simply a gambling den and sink of in- 
 iquity. It is the kindergarten and hospital of the 
 stock exchange. It does more evil than a stock ex- 
 change, because it is cheap, it deals in small stakes, 
 and it establishes itself in the smaller as well as the 
 larger cities, villages, and towns. It enables impecu- 
 nious clerks and employees to gamble with facility. 
 Moreover, it is never the medium of investment. 
 There are about five thousand of these bucket 
 shops in the country. They take stakes as low as
 
 CONTROVERSIES. 73 
 
 five dollars, but their aggregate business amounts to 
 millions daily. They get telegraphic quotations of 
 prices from New York and Chicago, and they take 
 orders from customers for the purchase of any stock. 
 The customer does not pay for his purchase, but he 
 deposits money to pay the loss in case his purchase 
 declines in value before the deal is closed. If his 
 purchase goes up, then the customer is entitled to 
 the gain, in addition to receiving back his deposit. 
 If it goes down he loses his deposit. It is gambling, 
 and gambling of the worst type. 
 
 Various remedies have been tried to prevent stock- 
 gambling. Statutes have been passed. In Illinois, 
 Ohio, Pennsylvania, and other States, the courts 
 favor these statutes, and by enforcing them have 
 rendered stock gambling somewhat dangerous. In 
 New York and other States the courts have lent little 
 aid in the suppression of the vice. Recently, how- 
 ever, a new and stronger enemy of the bucket 
 shop has been very active. The business of the 
 stock exchange has been dwindling away. One 
 cause of the decline is the flourishing condition of 
 the bucket shops, which seem to be doing nearly 
 all the business. Accordingly the exchanges are 
 waging war on them by withholding quotations, 
 and are trying to root them out. This curious 
 and interesting struggle has the approval of the 
 public. 
 
 STRIKES. 
 
 One of the most important features of modern 
 times is the rise of the laboring classes to political
 
 74 THE CORPORATION PROBLEM. 
 
 and industrial power. Their political power is seen 
 in the passing of laws lessening the hours of labor, 
 creating more holidays, prohibiting the competition 
 of prison work, regulating the employment of women 
 and children, and a host of lesser laws. This politi- 
 cal power of the workingmen is due to the power of 
 the ballot. Their industrial power is of more recent 
 origin. It is due, not to co-operation or profit-shar- 
 ing, or the saving and investment of wages, but to 
 the power of the '' strike." 
 
 A strike exists when a number of employees quit 
 work until their wages are raised, or hours of labor 
 decreased, or some other grievance is righted. 
 Formerly every strike was made by itself, and the 
 group of laborers involved in it were not aided by 
 or connected with any other group of laborers. 
 But within the past few years the laboring men 
 have learned the power of organization. They have 
 united, and the labor organizations of the present 
 day possess a membership of hundreds of thousands, 
 and have extended their power over the entire 
 country. The Knights of Labor is the largest of 
 .these organizations, including in its ranks all grades 
 of manual workmen. The Brotherhood of Locomo- 
 tive Engineers is another widespread but more 
 conservative organization. And there are others, 
 fantastic in name, but similar in their purpose of 
 increasing wages, decreasing hours of labor, and 
 promoting the well-being of the members. 
 
 A strike is not always resorted to in order to ac- 
 complish these ends. Demands are first made upon 
 the employers ; then come negotiations and argu-
 
 CONTROVERSIES. 75 
 
 ments ; and compromises and arbitrations arc often 
 brouglit about. If all these fail, the strike follows. 
 The men lose their wages, but the employers must 
 stop their business wholly or partially. The ques- 
 tion then is who can afford to wait the longer, 
 the men or the employer. The employer seeks to 
 employ other men, but these are generally unskilled 
 and unsatisfactory. Moreover the strikers seek to 
 dissuade the new men from w^orking, and sometimes 
 attack, terrify, and prevent them from continuing 
 work. 
 
 Corporations are peculiarly subject to strikes, be- 
 cause corporations carry on the great enterprises of 
 the countr}'. Especially is the strike a common oc- 
 currence on railroads. The Pittsburgh strikes of 
 1877 led to riots, bloodshed, the interference of 
 troops, and the destruction of $30,000,000 of railroad 
 property. The engineers' and firemen's strike on the 
 Chicago, Burlington, & Quincy Railroad in 1887-8 
 lasted for months, caused a loss in the company's 
 business of millions of dollars, and by reason of the 
 employment of new men led to many fatal accidents 
 and collisions. In both of these instances the 
 strikers were beaten. But frequently they succeed. 
 The statistics of the Bureau of Statistics of Labor of 
 the State of New York, published in 1890, show that 
 of all the strikes in five years, 47 per cent, were suc- 
 cessful, and 15 per cent, were compromised. Of the 
 strikes for high wages, and for or against changes in 
 hours of labor, 54 per cent, were successful, and 18 
 per cent, were compromised. Of strikes against dis- 
 charge of union men and others of this class, 34 per
 
 76 THE CORPORATION PROBLEM. 
 
 cent, were successful, and 27 per cent, were com- 
 promised. ' 
 
 A successful strike is a gain to the laboring man. 
 It enables him to work less hard, or for a shorter 
 time, and it increases his wages, or gives him more 
 time for recreation, self-improvement, and rest. All 
 these things tend to improve the physical, social, 
 mental, and moral life of the laboring people, and it 
 is to be borne in mind that anything which tends to 
 improve them tends to improve the character and 
 protect the future of the American nation itself. 
 
 It is very doubtful, however, whether strikes or any 
 other power can prevent the wages of the unskilled 
 labor of America from going down to the level of Euro- 
 pean wages. The unskilled labor of all nations com- 
 bined is like avast sea which continually seeks a level. 
 If wages are higher in America than in Europe, Euro- 
 pean labor will flow into America until a level in 
 wages is reached, either by the raising of wages in 
 Europe or the lowering of wages in America. A 
 prohibitory law excluding immigration, such as ex- 
 
 ^ The New York Record and Guide for September 6, i8go, says : 
 ' ' The business of transportation is among the very few industries 
 in which strikers usually inflict greater injuries than they suffer. 
 From twenty-two thousand strikes investigated by the National 
 Bureau of Labor, it was estimated that the employees suffered a loss 
 aggregating about $51,800,000, while from the same strikes the loss 
 suffered by the employers was only about $30,700,000. These 
 strikes were distributed through thirty-eight industries, and in all but 
 three or four of these the balance of loss was on the side of the 
 strikers. Among the few in which the balance was on the other side, 
 almost the only important industry was that of transportation. In 
 this industry, the aggregate loss to employees was $2,089,494, while 
 to the employers the loss was $6,267,558."
 
 CONTROVERSIES. 7/ 
 
 eludes the Chinese, would prevent this flow and 
 equalization of labor. But such an exclusion of 
 European labor is impracticable, and the unskilled 
 labor of all lands is destined to meet on a level. A 
 protective tariff cannot prevent it. Neither can the 
 strikes of American labor prevent it. The strikes 
 may possibly aid skilled labor, and it may even im- 
 prove, temporarily, the condition of unskilled labor. 
 Education will lift to a higher level those who have 
 its advantages, but eventually the natural increase of 
 population and the great immigration from Europe 
 will regulate wages. As against these powers the 
 strike will sink into impotence and insignificance. 
 
 But, meantime, the strike is interfering with busi- 
 ness, and is causing great loss to employer and 
 employee. Hence one of the leading questions of 
 the day is how to solve the problem of the strike. 
 
 State boards of arbitration have been proposed, 
 and such a board exists in New York State. But the 
 trouble is that the decision of the board is not binding 
 on the parties. The board may compel witnesses to 
 testify, but cannot compel the parties to submit to its 
 decision. Public opinion may be affected by the 
 decision, and a flood of light may be let in on the 
 facts of a particular strike. But unless the parties 
 voluntarily obey the decree, the decision of the 
 board is worthless. 
 
 Insurance by the railroads of their employees 
 against accidents, sickness, and loss of life, is being 
 tried. The Pennsylvania, and the Chicago, Burling- 
 ton, & Quincy Railroads, particularly, are making 
 far-reaching experiments in this direction — experi-
 
 78 THE CORPORATION PROBLEM. 
 
 ments which, if successful, will in large part weld 
 together the interests of railroads and their em- 
 ployees/ 
 
 Still another remedy is that of giving the em- 
 ployees some portion of the profits of the business. 
 Various methods of effecting this result have been 
 proposed, and some of them have been tried. In 
 the case of manufacturing, mercantile, and industrial 
 enterprises, a certain degree of success has been 
 attained in this direction ; but in railroads the em- 
 ployee is still far from being a stockholder. Never- 
 theless it is true that if the day ever comes when 
 the wage earner is the wage sharer in railroads, the 
 railroad strike will be a thing of the past.' 
 
 Finally another and radically vicious remedy has 
 been proposed. It is, as usual, a plan for further 
 legislation, with all the mistakes and incompetency 
 that such legislation generally involves. It has been 
 proposed that the legislature shall enlist railway 
 employees as soldiers, and punish a striker as a de- 
 serter ; or shall require notice of a strike to be given ; 
 or shall punish all railway strikes as penal offences ; 
 or shall give the boards of arbitration the power to 
 enforce their decisions, and to punish a refusal to 
 abide by them. But all these schemes ill accord 
 with Anglo-Saxon ideas of personal liberty. The 
 
 ^ The details of these insurance plans are given in Chapter HI. 
 
 Charles Francis Adams suggests as a remedy for strikes : (i) the 
 establishment of an employees' fund, (2) railroad educational insti- 
 tutions, and (3) a tribunal consisting of a small committee of the 
 employees to meet the directors in reference to disagreements and 
 complaints. See Scrihier s Magazine, April, i88g. 
 
 'See Chapter III., infra, on this question of co-operation.
 
 CONTROVERSIES. 79 
 
 inherent right of a man to unite with others, and to 
 go and come, and work when he pleases, is of greater 
 consequence than the business prosperity of rail- 
 roads or the convenience of the public. Although 
 there are times when personal liberty must yield to 
 the necessities of the state, yet never should it be 
 sacrificed to the necessities of railroad transporta- 
 tion.' 
 
 *' Two ways of dealing with these evils have been tried in Europe, 
 either of which seems to be a partial remedy, but neither of which 
 seems to commend itself to Americans. The first is to impose a 
 heavy per diem fine, or even forfeiture of charter, upon any corpora- 
 tion that fails to perform its public functions. This forces the com- 
 pany to make terms of some kind with the strikers. . . . The 
 second European method of guarding the public against the loss of 
 strikes is to make it a misdemeanor for any employee to quit work 
 without giving (say) five days' notice." ^ 
 
 ' A special report of the New York State Board of Arbitration, in 
 1890, urged the enactment of a law that entrance into railway service 
 shall be by enlistment for a definite period, upon satisfactory exam- 
 ination as to mental and physical qualifications, with oath of fidelity 
 to the people and to the corporation ; that resignations or dismissals 
 from such ser\-ice shall be permitted for cause, to be stated in writing 
 and filed with some designated authority, and to take effect after a 
 lapse of a reasonable and fixed period ; and that any combination of 
 two or more persons, to embarrass or prevent the operation of a rail- 
 road in the service of the people, shall be a misdemeanor. See Ry. 
 & Corp. L. J., Feb, 7, 1S91. 
 
 It may be well to consider whether such a body of industrial 
 soldiery would be conducive to the continuance of republican institu- 
 tions and the independence of these citizens themselves. 
 
 ' Professor Amos G. Warner, of the University of Nebraska, in the 
 Popular Science Monthly, July, 1890. 
 
 The Xew York Record and Guide for Sept. 6, 1890, says : 
 
 " In some European countries it is against the law for a workman to 
 quit work without giving five days' notice. If he violates this law he
 
 80 THE CORPORATION PROBLEM. 
 
 If the legislatures will cease to interfere, the labor 
 question will be solved by the American railroads 
 themselves. Events are moving in that direction 
 rapidly and effectively.' A solution is inevitable 
 and must be had, and the intellect and clear vision 
 of the railroad managers, brought to bear upon this 
 question by their interest, are far more competent 
 to deal with the problem than are the political 
 time-servers of State legislatures. 
 
 The American public, with characteristic good-na- 
 ture, endures the inconvenience and loss of business 
 incident to strikes, and believes that the problem 
 should solve itself; that State legislatures are neither 
 intended nor competent to cope with it ; and that 
 there should be no legislation subservient to railroad 
 interests. 
 
 FRAUDS ON STOCKHOLDERS AND CREDITORS. 
 
 In these money-making and money-seeking times 
 the immense gains and profits of corporations have 
 
 is subject to fine or imprisonment. After the Burlington strike, one of 
 the religious weeklies wrote to, or interviewed, various leading rail- 
 way men and labor leaders regarding the feasibility of introducing 
 such a law in this country, coupled with a provision for compulsory 
 arbitration. The representatives of the labor organizations, among 
 whom were Messrs. Powderly and Arthur, seemed more willing to 
 accept the double proposition than the railway men. The latter held 
 that the part of the law tending to curb the workmen could never be 
 enforced, and that, therefore, the advantage from the double enact- 
 ment would be all on the side of the laborer ; if the arbitrators to 
 whom a matter in dispute was given decided favorably to the men, 
 the road must abide by the decision, but if the decision favored the 
 road, the men could not be compelled to abide by it." 
 * See Chapter III,
 
 CONTROVERSIES. 8 1 
 
 not always been honestly preserved and adminis- 
 tered for the benefit of those who are entitled there- 
 to — the stockholders of the company. Corporations, 
 with their vast capital stock, their great income, 
 their rapidly changing personal property and their 
 large purchases and sales, have proved to be a source 
 of temptation which corporate officers are too often 
 unable to withstand. These companies have been 
 found to be efficient instruments of fraud, specula- 
 tion, plunder, and illegal gain. In these latter days 
 the spoliation of corporations and stockholders by 
 the corporate directors and managers have been sys- 
 tematized into well-known methods of proceeding, 
 and the carrj'ing out of such plans has become a pro- 
 fession and an accomplishment. Skill, audacity, 
 experience, and administrative talent of the highest 
 order have reduced to a certainty the methods of 
 diverting the profits, capital, and even the existence 
 of the corporation itself, to the enrichment of the cor- 
 porate managers and their co-conspirators. Corpo- 
 rations become insolvent and stockholders lose their 
 investment, while individuals become millionaires. 
 Illegitimate gains are secured and enorrnous fortunes 
 >.re amassed by the few, at the expense of the de- 
 frauded but generally helpless stockholders. 
 
 The expense, difficulty, and delays of litigation ; 
 the power, w'ealth, and unscrupulousness of the 
 guilty parties : the secrecy, skill, and evasive nature 
 of their methods; and the fact that the results of 
 even a successful suit belong to the corporation, and 
 not to the stockholders who sue, all combine to 
 
 baffle investigation and exposure, to discourage the 
 6
 
 82 THE CORPORATION PROBLEM. 
 
 stockholders, and to encourage and protect the 
 parties guilty of the wrong. 
 
 In England, ever since the time of the South Sea 
 Bubble, there has been a constant recurrence of 
 " bubble companies " and dishonest promoters. The 
 English reports are filled with cases of frauds of cor- 
 porate directors, corporate agents, and corporate 
 organizers. A system of jurisprudence has grown up 
 from these cases. This system, however, is as yet in 
 a formative state ; and there is no branch of the law 
 more complicated, difficult, and uncertain than that 
 growing out of the frauds of corporate directors. 
 
 In America the cases involving a breach of trust 
 by the directors arise generally out of the manage- 
 ment of corporations and not in their formation. 
 These cases often involve vast transactions, and ex- 
 hibit a remarkable talent for railway management 
 and manipulation. They have commanded the 
 stockholder's admiration as well as aroused his in- 
 dignation. Mr. Acworth, the English writer, says 
 that " hatred itself can deny to American railway 
 management no title to glory except virtue." * 
 
 The American faculty for organization, executive 
 management, and the invention and adoption of 
 means to ends has been very largely engaged in the 
 development and management of the American rail- 
 roads. But this management has not always been 
 honest. The ingenuity and fruitful cunning of 
 adroit, experienced, and unscrupulous men have 
 plundered and robbed the corporations and the 
 stockholders, and have brought reproach on the 
 
 ' " The Railways and the Traders," p. 9.
 
 CONTROVERSIES. 83 
 
 management of the American railway. Great for- 
 tunes have been accumulated by wrecking great 
 corporations. Railroads which were capable of 
 earning a fair return upon the capital invested have 
 been rendered insolvent by the fraudulent manage- 
 ment and illegal gains of the corporate officers. The 
 methods of accomplishing this result have been sys- 
 tematized and elaborated to a remarkable degree. 
 The wrecking of a corporation is done in number- 
 less ways. 
 
 Professor E. J. James says in regard to this sub- 
 ject : 
 
 " It was found again that the directors of the railroads, even where 
 they have been constructed with some reference to honesty and 
 economy, had interests which were not necessarily the same as those 
 of the rest of the corporation or of the public. For example, the 
 directors were often interested in manufacturing or trading enter- 
 prises where it was necessary to resort to the railroads in the course of 
 their business. By giving to themselves, as directors, special rates 
 and privileges, it was possible to build up their own business at the 
 expense of rivals, thereby practically depriving the public of free 
 competition in the particular branches of industry on the one hand, 
 and cheating their fellow-stockholders on the other hand, by lessen- 
 ing by so much the possibilities of income, and consequently the fre- 
 quency or size of dividends. 
 
 '* It was, moreover, possible for the directors to form companies of 
 all kinds for the purpose of supplying the parent company with sup- 
 plies, or of doing certain kinds of business for it, and, in their ca- 
 pacity as directors of the parent companies, awarding to themselves 
 as directors of the barnacle companies fat contracts of all sorts, which 
 increased the expenses of the road, raised the charges of service, thus 
 cheating the public on the one hand and the stockholders on the other. 
 
 " It was also found that directors could grant special rates to men 
 who brought business to the railroad on condition that the latter 
 would pay them handsomely as individuals for using their power as 
 directors or officials for their benefit.
 
 84 THE CORPORATION PROBLEM. 
 
 "As examples of the deals within the railway itself, none were 
 more common than for some of the directors of a railroad to 
 build a branch railroad, and then, after stocking and bonding it 
 heavily, sell it out to the parent road at a high valuation. Among 
 the minor though most common forms of this kind of illegitimate 
 manipulating, should be mentioned that by which the directors of a 
 road buy up real estate in a certain locality and then place a station 
 there so as to enhance the value of their property ; or where they 
 charge more in the neighborhood of a large city for a fare to a near 
 station where they do not own land than to a more distant one where 
 they do own real estate which they are eager to sell." ^ 
 
 And Professor Warner says : 
 
 " Probably real-estate speculators are more often responsible for 
 the building of superfluous roads than any other one class. The Lin- 
 coln Land Company has operated along the line of nearly all the ex- 
 tensions of the Burlington & Missouri River Railroad. It is made 
 up largely of resident railroad officials, who are high enough up in the 
 councils of the company to secure prompt information as to proposed 
 extensions, and to have considerable weight in shaping the course of 
 lines actually building. Members of such a company derive profit 
 from all extensions whether called for or not ; and while their inter- 
 ests as railroad managers may usually outweigh their interests as land 
 speculators, yet this is not always true. The influence of such men 
 upon the companies is seconded by the influence of local real-estate 
 dealers in the districts through which a proposed road is to pass. 
 \Miatever may be the results of building a new line to the commu- 
 nity as a whole, the owners of real estate along its route are sure to 
 profit by its construction." ' 
 
 In all cases, however, the object sought is to trans- 
 fer the corporate assets from the corporation to the 
 parties who are in control. The most common 
 methods of accomplishing this result are by selling 
 the corporate property at a low price ; or purchasing 
 property for it at a high price ; or entering into con- 
 
 ^ James on "The Railway Problem." 
 
 ^ Political Science Quarterly, vol. vi., No. I.
 
 CONTROVERSIES. 85 
 
 tracts on ruinous terms ; or mortgaging the property 
 so as to cut off stockholders and unsecured creditors ; 
 or depriving the corporation of its business, profits, 
 and assets, and precipitating a foreclosure and re- 
 ceivership which leaves little property even for the 
 first mortgage bondholders themselves. In all these 
 various schemes, the parties controlling the corpora- 
 tion are interested openly or secretly with those 
 who are contracting with the corporation. The 
 profits and property, which are lost to the corpora- 
 tion, its minority stockholders, and its creditors, 
 are gained by those who control the corporation 
 itself. 
 
 The law condemns these practices, but is inade- 
 quate to prevent them. Remedies have been pro- 
 posed, more or less effective and severe. Some of 
 them aim to reach the whole difficulty, but most 
 of them attack only some specific wrong. It is well 
 to consider these remedies separately. 
 
 A restriction on the borrowing and mortgaging 
 power of corporations has been advocated, and with 
 reason. By the common law, the directors borrow 
 money arid mortgage the corporate property. If 
 they are dishonest, improvident, or have sold the 
 stock " short," the stockholders are powerless and 
 the corporation may be wrecked before another 
 election takes place. It is with good cause that 
 it has been proposed that the legislature should 
 place the borrowing and mortgaging power in the 
 hands of the stockholders and take it away from 
 the directors. 
 
 Mr. Henry Hitchcock, of St. Louis, in the annual
 
 ^6 THE CORPORATION PROBLEM. 
 
 address before the American Bar Association in 
 1887, said as to this question : 
 
 " No private corporation should be permitted to create any bonded 
 or mortgage indebtedness, as distinguished from current liabilities or 
 floating debt, until the entire capital stock is paid up, — nor then 
 without the consent of the stockholders specially given at a meeting 
 called for that purpose (as now provided by the constitutions of 
 several States), nor without proper restrictions both as to the total 
 amount of such indebtedness, which the New York Business Corpo- 
 ration Act limits to one half the value of the corporation property, 
 and as to the uses to which money so borrowed may be applied. 
 
 " No private corporation should be allowed, under any circum- 
 stances, to incur current liabilities or floating debt beyond a fixed 
 proportion — not exceeding two thirds — of the actual cash market 
 value of its unencumbered assets ; directors permitting any violation 
 of such requirement to be personably liable for the corporate 
 debts." 1 
 
 ' Professor Warner says in regard to this : ' ' Abuse of the borrow- 
 ing power is certainly a very common sin among artificial persons, 
 and especially among American railways. When the holders of 
 a small amount of stock, only partially paid in, build a road with 
 borrowed money, the limitation of their liability shields them from 
 personal loss ; while their power of voting themselves salaries, and of 
 concluding profitable contracts either with themselves or friends, 
 gives them great opportunities for personal profit irrespective of the 
 success of the road. The last report of the statistician of the Inter- 
 state Commerce Commission shows that many of the minor and 
 branch lines of the country have been built wholly with borrowed 
 money — that is, they are bonded to their full cost value. Many of 
 the longer and independent roads are bonded at half to three fourths 
 of their entire capitalization. The total bonded debt of the rail- 
 roads of the United States is actually greater than the total of their 
 share capital ; and this, although the amount of water in the stocks 
 is much larger than in the bonds. As the possession of the majority 
 of the stock gives control over all the capital invested in the roads, 
 it follows, from the figures given in the statistician's report, that 
 the ownership of $1,932,234,128, or 23.77 per cent, of the total rail- 
 way capital, insures complete direction over $8,129,787,731 of rail-
 
 CONTROVERSIES. 87 
 
 Cumulative voting should be allowed. By cumu- 
 lative voting a man with one hundred shares of stock 
 may cast five hundred votes for one director instead 
 of one hundred votes for each of five directors, as 
 under the old system. Cumulative voting gives the 
 minority of stockholders a representative in the 
 board of directors. Their representative, as a di- 
 rector, will know the innermost secrets of the corpo- 
 ration, and will be able to expose and prevent many 
 of the frauds that are perpetrated by a board which 
 represents the majority interest alone. Nine of the 
 States have provided for cumulative voting in their 
 fundamental law — the constitutions themselves. 
 The system is just, fair, and satisfactory in its re- 
 sults. It should be and will be the law in all of 
 the States. 
 
 Stockholders should be allowed to remove a direc- 
 tor whenever they see fit. As the law now stands, 
 a director, once in, remains in his office for a year 
 and cannot be removed. Even though he may sell 
 his stock, become interested in a competing concern, 
 be reckless in administration, or utterly neglectful of 
 his duties, nevertheless neither the courts nor the 
 stockholders can remove him. He may even rob 
 the corporation, and yet, though the courts may 
 attack and stop the robbery, they cannot remove 
 him. He is a fixture for a year. Such a rule of law 
 is unjust, and has led to changes by statute. In 
 
 way capital, t)r 136.8S3.53 miles of line. Massachusetts law forbids 
 the bonding of a ruad to an amount exceeding the total of paid-up 
 share caj)ital, and this regulation is being intr'xluced by other 
 States."
 
 88 THE CORPORATION PROBLEM. 
 
 national banks the acts of Congress provide that 
 the stockholders may remove a director at any time, 
 and some of the States are following this example. 
 It is a reform that is to be commended. It will 
 render the directors more responsible to stock- 
 holders, more in harmony with their wishes and 
 interests, and will make directors more cautious, 
 conservative, and honest. 
 
 Stockholders should be given greater rights to 
 examine the books of the corporation. At common 
 law this right exists theoretically, but practically the 
 courts have taken it away. When it is considered that 
 a corporation is only a highly developed partnership, 
 and that a partner always has a right to examine the 
 partnership books, the natural rights of a stock- 
 holder become more clear. He should be allowed 
 to know the condition, contracts, and plans of his 
 corporation. Most of the States have provided by 
 statute that the stockholder shall have this right. 
 In England another plan is adopted, and it is pro- 
 vided by act of Parliament that a minority of the 
 stockholders, representing a twentieth or a tenth of 
 the stock, may demand a judicial investigation of the 
 affairs of the corporation at any time when they 
 have reason to suspect fraud or mismanagement. 
 
 Closely connected with this reform is the question 
 of requiring frequent and detailed reports from 
 directors. The common law does not require any 
 report at all to be made. Statutes, however, gen- 
 erally provide for an annual report. But the ten- 
 dency of the times is to go farther than this and 
 to require directors and officers to make reports at
 
 CONTROVERSIES. 89 
 
 frequent intervals, and whenever demanded by a 
 stockholder or a certain proportion of the stock- 
 holders.* 
 
 'Mr. Hitchcock, speaking of this subject has said: "Every 
 private corporation should be required to file, not only vtith the 
 Secretary of State, but in some convenient public office at its place 
 of business, at least once in three months, a particular account, 
 on oath, of its assets and liabilities, such as will enable creditors 
 and others interested, without application to its officers, to learn 
 its true position. Railroad and other corporations affecting public 
 interest should also be compelled to publish, monthly, such state- 
 ments so that the public should at least have the opportunity of 
 forming their own judgment as to the value of the stocks, which, in 
 the absence of such information, are the playthings of speculators, 
 and too often the ruin of bona fide investors." 
 
 Professor Warner says: "The advantages of business secrecy to 
 the individual business man who practises it are abundantly manifest ; 
 but its advantages to the public at large, while also manifest, are 
 countervailed by very serious disadvantages. Experience seems to 
 have demonstrated, quite conclusively, that a being at once so vulner- 
 able and so powerful as a corporation cannot afford to keep its affairs 
 entirely to itself ; and if it could afford to do so, the public cannot 
 afford to let it. There is said to be a strong tendency toward 
 ' socialism ' in this wresting of business secrets from the great 
 managers of the world's industries, and bringing the most private of 
 business transactions to the bar of public opinion. Many will no 
 doubt answer that ' the charge is true, and we glory in its truth.' 
 Many more will be inclined to say, with the present writer, that, 
 while this objection should be given its due force, it has not nearly 
 force enough to overrule the strong necessities of the case. The 
 chief danger that legitimate enterprises have to fear from complete 
 publicity is that of over-taxation. The wealth of the corporations 
 lying fully exposed to public view, it is so easy for the politician to 
 fill the public coffers from that source, that we already find certain 
 classes of corporations driven out of certain States by excessive taxa- 
 tion. But it may be doubted whether taxation is as likely to be 
 excessive when the state of a company's accounts is definitely known, 
 as when the politician and his constituents are free to draw upon their
 
 90 THE CORPORATION PROBLEM. 
 
 The incorporators of a company should be allowed 
 to insert certain provisions, restrictions, and regula- 
 tions in their articles of association — their charter. 
 In New Jersey, and under the National Banking 
 Act, such special provisions may thus be made part 
 of the charter of the company. Under the General 
 Incorporating Act of New Jersey, the certificate of 
 incorporation " may contain any limitation upon the 
 powers of the corporation, the directors, and the 
 stockholders, that the parties signing the same desire ; 
 provided such limitation does not attempt to exempt 
 the corporation, the directors, or the stockholders 
 from the performance of any duty imposed by law." ' 
 So also the National Banking Act provides that the 
 articles of association may contain any *' provisions, 
 not inconsistent with law, which the association 
 may see fit to adopt for the regulation of its business 
 and the conduct of its affairs." " 
 
 Again, as the general law exists to-day, the direc- 
 tors exercise all of the essential powers of a corpora- 
 tion, and the stockholders none. The stockholders 
 elect the directors, enact by-laws, and perform a few 
 other minor functions, but they cannot order a con- 
 tract to be made, nor can they give orders to the 
 directors. The tendency of the times is to enlarge 
 the powers of the stockholders and to restrict those 
 of the directors. Statutes for that purpose are 
 
 imaginations for the amount of wealth in the corporate coffers. In 
 other words, it seems probable that in this country, as yet, we have 
 less to fear from wilful injustice than from mutual misunderstandings, 
 begotten of secrecy on the one hand, and suspicion on the other." 
 
 ^ N. J. Revision, p. i8o. 
 
 ''R. S.,§5i33.
 
 CONTROVERSIES. 9 1 
 
 being enacted by the legislatures of the various 
 States. These changes, however, might better be 
 left to the discretion of the stockholders themselves, 
 and permission be given to them to insert such 
 restrictions as they desire in their charter. Under 
 such a freedom, corporation law would be given an 
 elasticity which it does not now possess. By the in- 
 serting of special provisions, the minority may be pro- 
 tected, the powers of the directors limited, corporate 
 debts restricted, officers made subject to removal, 
 the giving of mortgages regulated, reports required, 
 the right of inspecting the books conferred and 
 enforced, cumulative voting provided for, and the 
 important lines of policy peculiar to each corpora- 
 tion may be laid out and secured from variation and 
 diversion. Incorporators would thus be allowed to 
 legislate for themselves without the intervention of 
 State legislatures. With a definite knowledge of 
 what their interests require, the incorporators and 
 investors would protect themselves more fully than 
 they could be protected by others. They could 
 frame their charter as they wished, and their judg- 
 ment and ingenuity would do much towards pre- 
 venting frauds on stockholders, creditors, and the 
 general public. 
 
 Fraudulent prospectuses and fraudulent contracts 
 between corporations and their promoters have 
 become another of the great corporation abuses. 
 In England, this evil became so great that in 1867 
 a statute was passed requiring a public registry of 
 all contracts whereby stock was issued by a corpora- 
 tion in payment for property. In these latter days,
 
 92 THE CORPORATION PROBLEM. 
 
 corporate promoters do not hesitate to send out 
 prospectuses and statements that the capital stock 
 is all paid up and that the enterprise is fully afloat, 
 when, in fact, the capital stock has been paid in, or 
 is to be paid in, only by worthless patents or prop- 
 erty purchased at a gross over-valuation. The 
 money invested by the simple and the unwary is 
 irretrievably lost. This evil is great and increasing, 
 and the number of '' bubbles " which are floated 
 every year, and which are insolvent from the very 
 start, is something appalling.^ 
 
 Professor Warner says on this subject: 
 
 " Men organize companies, at times, for the sole purpose of un- 
 loading upon them an unprofitable business. Let the experience of 
 Eastern capitalists with Western mining stocks be put in evidence, 
 and no one will question this statement. Mining companies with a 
 
 ^ The New York Record and Guide, November 23, i88g, says : 
 Parliament "has distrusted the limited liability principle ever 
 since the Bubble craze in 1720, when companies were formed for all 
 possible and impossible purposes, from the invention of perpetual 
 motion to the melting down of sawdust and the manufacture of 
 knotless boards from the product. No general law for the incor- 
 poration of limited liability companies was passed in England till 
 1855, though a similar law had been passed by the State of New 
 York as early as 181 1, 
 
 "From 1,500 to 2,000 joint stock companies are registered each 
 year in England, of which about 50 per cent, die at birth — a singu- 
 lar commentary on the legal doctrine that corporations are immortal. 
 Out of 1,440 companies registered in London, with a nominal 
 capital of ;^ 143,000,000, no less than 430 died at birth, while 360 
 were wound up within two years. Out of 26,000 companies regis- 
 tered during twenty-nine years the proportion of unsuccessful ones 
 was about 64 per cent. . . . The same expounder of statistics 
 concluded that ;i^ 3 2 8, 000, 000 of capital had been wiped out so far as 
 the bona fide investing public was concerned."
 
 CONTROVERSIES. 93 
 
 nominal capital of $50,000,000 that have never declared a dividend 
 are not uncommon, and very frequently the stock of mammoth com- 
 panies sells at one cent on the dollar for some time before it becomes 
 worthless. But the experience in mining is only an extreme case of 
 what takes place in many departments of industry. 
 
 "In England, turning thither solely because the facts have there 
 been made accessible and have not in this country, it is found tliat 
 certain men make a business of acting as ' promoters.' They are 
 skilled in the writing of prospectuses of companies, and know all tlie 
 arts by which stock can be sold. They devote their energies espe- 
 cially to small companies and small investors. For a time their 
 activity was turned largely to organizing ' single ship companies,' 
 the shares of which could be placed among country parsons, serving- 
 women, and other classes of small investors likely to know very 
 little about commerce, and therefore likely to believe anything a 
 well-printed 'prospectus' might tell them. Many of these small 
 companies never went so far as to build even a single ship, but 
 enough ships were built by them to materially increase the number of 
 * ocean tramps,' and to call for much adverse criticism from the com- 
 mittee appointed * to investigate the loss of life at sea.' The ' com- 
 mission appointed to inquire into the depression of trade ' also had 
 much to say of the influence of the creation of such great numbers 
 of limited liability companies, of the direct loss to investors, and of 
 the general demoralization of trade resulting from it. In fact, many 
 English investigators have laid great emphasis on the idea that over- 
 speculation is due largely to the formation of joint-stock companies 
 that have no real excuse for existence, except the furtherance of the 
 personal aims of the ' promoters.' It is a little curious that, among 
 the three hundred real or alleged causes of ' hard times,' brought to 
 the attention of our National Bureau of Labor, the reckless creation 
 of limited liability concerns was not mentioned. In 18S6 a writer 
 estimated that there were afloat in the English stock market fully 
 two billion pounds of speculative securities, of which at least a fourth 
 were mere gambling counters. It is to such a state of things that a 
 recent law review attributes the fact that real investors now shun the 
 stock exchange, and speculative operators are compelled to live on 
 the plan of ' dog-eat -dog.' . . . None of the leading commer- 
 cial countries .seem to be quite satisfied with the attempts they have 
 made to remedy such evils as these. Germany allows definite pay- 
 ment from the corporation funds for the trouble and expense properly
 
 94 THE CORPORATION PROBLEM. 
 
 incurred by the men who organize a joint-stock company, but guards 
 very carefully against the illicit gains too often made by ' promoters.' 
 The provisions for registering new companies are especially stringent 
 in all cases where a private business or factory is to be sold to a cor- 
 poration organized to buy and manage it. The fullest possible pub- 
 licity is sought regarding all the initial acts of a new company, and 
 some matters where the first decision must be final are reserved for a 
 second meeting of the stockholders. Shares may run either to 
 ' bearer ' or to a particular name. The latter cannot be issued for a 
 less amount than fifty thaler per share, and the former for less than 
 one hundred thaler per share. By forbidding the issue of shares of 
 less amount, it is hoped to make investors consider more carefully 
 the subject of investing, and to prevent the floating of small shares 
 in worthless companies, among the class of very small investors who 
 are most likely to be swindled." 
 
 The tendency of the times is to impose heavy 
 penalties on such acts, and the penalty should be 
 that, if the statements of prospectus or contract 
 whereby the stock is issued be false, then the di- 
 rectors shall be liable for all debts. 
 
 In England Parliament has recently enacted a 
 law creating such a liability oh the part of cor- 
 porate officers, organizers, and promoters.^ This 
 bill met with great opposition in that country. Its 
 enactment was due to a widespread conviction that 
 the existing law was vague and too difficult of 
 enforcement, as regards the liability of directors and 
 promoters for fraudulent prospectuses. Both in 
 England and America this evil and the remedy 
 therefor constitute one of the questions of the day.'* 
 
 ' See Chapter 64, Laws of 1890. 
 
 ^ Professor Richard T, Ely, in Harper s Magazine, J^^ly, i887) P- 
 265, says : 
 
 " Men who wish to form a corporation should be compelled to 
 issue a prospectus, signed with their names, giving a full and com-
 
 CONTROVERSIES. 95 
 
 Another abuse that often comes to light is the 
 consoUdation, lease, or »ale of railroads without any 
 protection of the rights of minority stockholders. 
 Generally these consolidations, leases, and sales are 
 allowed upon a majority or two-thirds vote of the 
 stockholders, and this majority or two thirds are 
 interested on both sides of the contract. The mi- 
 nority are compelled to acquiesce. Great frauds are 
 perpetrated under this system. In one case in Con- 
 necticut where a charter allowed a lease upon a three- 
 fourths vote of the stockholders, the lease was upheld, 
 although the rental from the lease was only enough 
 to pay dividends on the preferred stock, leaving 
 nothing whatever for the common stockholders. It 
 may be remarked that when such acts are upheld by 
 the law it is time for the legislature to interfere. 
 Several of the States now compel the parties in con- 
 trol to buy out the dissenting minority in such cases 
 at an appraised valuation of the stock. This is the 
 law in Pennsylvania and New Jersey and under the 
 National Banking Act. It enables great consolida- 
 tions and reorganizations to be carried out, and at 
 the same time protects the property of dissenting 
 stockholders. 
 
 Finally, boards of directors should, by statute, be 
 required to meet more frequently, and they should 
 
 plete statement about the business to be pursued, the capital to be 
 invested, any existing property to be taken in lieu of money, any 
 property to be acquired of promoters, with its histor)' for the preced- 
 ing two or three years. This prospectus should be made a matter of 
 public record, and any dishonest statement should be regarded as 
 fraud."
 
 96 THE CORPORATION PROBLEM. 
 
 be well paid for their services, instead of serving 
 without pay as they usually do now. They should 
 be required to scrutinize and audit more closely, and 
 a greater responsibility for results should be placed 
 upon them, and less upon the active agents of the 
 company. Such is the practice in England and with 
 many of the larger companies in America. The rule 
 has worked well with some of the great insurance 
 companies, and with others of marked success. It 
 should be made the rule of all great corporations. 
 
 There are other changes in the law which are 
 coming — and coming soon. Guaranties of the stock 
 or bonds of one railroad by another railroad should 
 be allowed only after a vote by the stockholders, in- 
 stead of by the directors alone. Stockholders should 
 have some voice in determining dividends, instead 
 of the decision being entirely in the hands of the 
 directors, as at present is the law. Branch railroads 
 and extensions should not be built except upon con- 
 sent of a majority of the stockholders, and, in gen- 
 eral, a remodelling of the law so far as the protection 
 of stockholders and creditors is concerned, is imper- 
 atively demanded. The ideal code of corporation 
 law is yet to be written. 
 
 MUNICIPAL AID TO RAILROADS. 
 
 The American people are beginning to realize that 
 municipal aid to railroad corporations is a mistake. 
 It is a mistake because the municipal debt is a griev- 
 ous mortgage on present and future generations, 
 and because railroads will be built without it. There 
 was a time when railroads were built very largely
 
 CONTROVERSIES. 97 
 
 from the proceeds of municipal bonds, but those days 
 are past. The protest and warning of some of the 
 leading thinkers and jurists of America have con- 
 vinced the people of the injustice, improvidence, 
 and needlessness of this municipal aid, and the 
 strong tendency of the times is against allowing 
 cities, counties, and towns to bond themselves in 
 order to make rich gifts to projected railroads. 
 
 The lament of Judge Dillon on this subject re- 
 minds one of the thoughts of Macaulay's New Zea- 
 lander overlooking the ruins of London from the 
 London Bridge. In his great work on '* Municipal 
 Corporations," the author says : 
 
 " If it be allowable to judge of a legal principle by its fruits, the 
 dissenting and minority judges on this question will find much to 
 confirm the conviction that their views were sound. But it is useless 
 to fight that battle over again ; it has been fought and lost. All that 
 is left is the contemplation and contrast of what might have been 
 and what is." ^ 
 
 'Dillon on "Municipal Corporations," 3d ed., p. 50S, n. See 
 also Cooley's " Constitutional Lim.," 5th ed., 265, etc. 
 
 '* The cities, towns, and States, have not been alone in granting aid 
 to railroads. The federal government some twenty-five years ago 
 commenced making grants of land to trunk lines of railroad to be 
 constructed to the Pacific Coast. The total grant made to the Union 
 Pacific Railway was 13,000,100 acres ; to the Kansas Pacific, 6,000- 
 000; to the Central Pacific, 12,100,100; to the Northern Pacific, 
 47,000.000 : to the Atlantic and Pacific, 42,000,000 ; to the Southern 
 Pacific, 9,520,000. Great subsidies of money exceeding $60,000,000 
 were also granted by Congress to the first transcontinental lines. 
 The land-grants usually consisted of alternate sections ; in the earlier 
 cases, of five to the mile along the line." 
 
 See Brj'ce's ".American Commonwealth," vol. ii., p. 507, n. 
 
 I'he "Encyclopaedia Britannica," p. 254, states that 200,000,000 
 acres of land and $13,060,000 were given at one time and another by 
 7
 
 98 THE CORPORATION PROBLEM. 
 
 The Supreme Court of the United States, in order 
 to preserve the good name and financial credit of 
 municipal bonds and American securities generally, 
 held, and properly held, that the bonds issued by 
 municipalities to aid railroads should not be re- 
 pudiated, but must be paid. Under the protection 
 of these decisions railroad promoters continued to 
 build railroads by the aid of municipal bonds, and if 
 the bonds were not forthcoming from one town, the 
 railroad avoided that town and built to another and 
 rival town. 
 
 ' ' A railroad company approaches a small town as a highwayman 
 approaches his victim. The threat ' If you do not accede to our 
 terms we will leave your town two or three miles to one side,' is as 
 efficacious as the ' Stand and deliver ' when backed by a cocked 
 pistol. For the threat of the railroad company is not merely to 
 deprive the town of the benefits which the railroad might give : it is 
 to put it in a far worse position than if no railroad had been built. 
 Or if, where there is water communication, an opposition boat is put 
 on : rates are reduced until she is forced off, and then the public are 
 compelled to pay the cost of the operation." ^ 
 
 The burden of municipal debt and the exactions 
 of the railroads at length became unbearable. Some 
 remedy was imperative. Moreover, it had become 
 clear that the remedy must prevent the issue of the 
 bonds, rather than the repudiation of the bonds after 
 they had passed into the hands of bona fide in- 
 vestors. 
 
 Congress to the railroads between the Missouri River and the Pacific 
 Ocean. 
 
 Adams on "Public Debts," p. 356, note, says that previous to 
 1880 Congress had granted 215,000,000 acres of land to railroads and 
 canals, of which titles were secured to 150,000,000 acres. 
 
 ' George on " Progress and Poverty," bk. iii., ch. iv.
 
 CONTROVERSIES. 99 
 
 It was found that only a constitutional prohibition 
 could cure the evil. The legislature could not be 
 relied upon. Accordingly, in most of the States, 
 these constitutional prohibitions have been enacted. 
 And in this instance the provisions of a constitution 
 have accomplished their purpose. The ingenuity 
 even of railroads and corporation lawyers have been 
 unable to circumvent this remedy. Municipal aid 
 to railroads in States where these constitutional pro- 
 hibitions exist is no longer attempted. Voluntary 
 contributions may be obtained from the citizens, 
 but municipal bonds — bonds that must be paid by 
 the city or county — can no longer be issued in those 
 States. The problem has been solved conclusively 
 and satisfactorily. 
 
 LIMITED LIABILITY OF STOCKHOLDERS. 
 
 The stockholders' exemption from liability for the 
 corporate debts is the essential feature of modern 
 corporations. If this limited liability were taken 
 away, corporations would fall away with it. It is 
 the limitation of possible loss that renders the 
 corporation a favorite mode of doing business. 
 
 It is a question, however, whether or not this 
 liability should be limited to the extent that it is at 
 present. Under the general law a stockholder is no 
 longer liable for the debts of the corporation after 
 his stock has once been fully paid up. In some 
 classes of corporations this limited liability has been 
 found dangerous and unjust. It is now generally 
 conceded that stockholders in banks should be liable 
 doubly on their stock, once on the subscription, and
 
 lOO THE CORPORATION PROBLEM. 
 
 aeain in case the bank becomes insolvent. Such is 
 the liabihty of stockholders in national banks and 
 in the banks of most of the States. It has seemed 
 reasonable that the unprotected depositors, most of 
 whom receive no interest on their deposits, should 
 not bear the losses of an insolvent bank, but that 
 the stockholders, who have had the benefit of those 
 deposits, should take the risks of the business. 
 
 A desire also to protect those who most need 
 protection against insolvent corporations has caused 
 many of the States to provide that stockholders 
 shall be hable absolutely for all debts due from the 
 corporation to its laborers. Such is the constitu- 
 tional enactment in Michigan as regards all corpora-- 
 tions, and such is the statutory law of New York for 
 the railroads within its borders. 
 
 But with these exceptions the attempts to make 
 stockholders liable for the debts of the corporation 
 have been failures. The State of Ohio, by consti- 
 tutional provision, renders all stockholders in all 
 corporations liable doubly on their stock, but the 
 liability is one that is rarely enforced. In Cali- 
 fornia stockholders are liable for all debts as in a 
 partnership. In New York stockholders in manu- 
 facturing and business corporations are liable doubly 
 until a certain certificate is filed. 
 
 Companies and investors avoid the States where 
 stockholders are liable for debts, and betake them- 
 selves for incorporation to those States whose laws 
 are more liberal. It is probable that adverse and 
 restrictive incorporation laws drive out more capital 
 in a year than the amount of money collected under
 
 CONTROVERSIES. lOI 
 
 the restrictions amounts to in five generations. 
 Liberality in corporation laws is necessary, if corpo- 
 rations are to be kept at home, and if a State is harsh 
 and restrictive in its statutes, it pays the penalty in 
 seeing its citizens apply to more favorable States for 
 the charters of their corporations. The past twenty 
 year.s have demonstrated that an additional liability 
 t)f stockholders drives capital from the State, is en- 
 forced with difficulty and generally not at all, is fatal 
 to the extension and growth of corporations as a 
 mode of doing business, and is dreaded by investors 
 far beyond its value to the public. 
 
 And the same may be said of penalties and liabili- 
 ties imposed upon directors. Such statutes as these 
 are filled with pitfalls, and lead to great hardships. 
 They rarely result in justice being done, but are pro- 
 lific of lawsuits and losses by reason of mistakes 
 and accidental ov^ersights. The corporation of the 
 future will be without them, except in cases of wil- 
 ful neglect, fraud, or violation of plain duty. ' 
 
 ' Professor Warner advocates a greater liability of directors. He 
 says : 
 
 "In this countr)' the principle of limited liability is almost in- 
 variably the same for the director as for an ordinary stockholder, 
 though the director is personally liable for all illegal or unauthorized 
 acts. There has been a great deal of agitation of late for the intro- 
 duction of the French plan of protecting ordinary stockholders by 
 the grant of limited liability, but leaving the directors liable for the 
 corporate debts to the full amount of their respective fortunes. The 
 experience of France with these societies en commandite has proved 
 that responsible men can be found to manage any legitimate enter- 
 prise under this j)lan. A recent English act permits the formation of 
 sueh companies in England, but the companies decline to adopt this 
 principle under mere permissive legislation. To make this form of
 
 I02 THE CORPORATION PROBLEM. 
 
 TAXATION AND EXEMPTION FROM TAXATION. 
 
 How to tax corporations, and how to tax them 
 fully, yet fairly, is one of the most perplexing 
 problems of the times. For fifty years experiments 
 have been going on, and no satisfactory conclusion 
 has yet been reached. Each State still has its pe- 
 culiar mode of taxing corporations, yet none seems 
 content with the system which it has. 
 
 The popular idea is that corporations cannot be 
 taxed too heavily, nor too often, nor in too many 
 ways. It has been truly said that a sort of Donny- 
 brook habit of taxing every corporation that shows 
 itself seems to pervade all State legislatures. The 
 result is that corporations dodge around among the 
 States, and obtain their charters in those States 
 where taxes are lightest. New York State in 1886 
 enacted what is called the " Vedder Act," requiring 
 every company to pay into the State Treasury a sum 
 of money equal to one eighth of one per cent, of 
 its capital stock before it could become incorporated 
 in that State. The result has been that comparatively 
 few manufacturing and business companies incorpo- 
 rate in New York. This tax has driven them into 
 other States. They go to New Jersey, West Vir- 
 ginia, Kentucky, Connecticut, or Maine. Pennsyl- 
 vania and Ohio have taxation laws similar to those 
 of New York. And the present tendencies of all the 
 States are in the same direction, regardless of the 
 
 organization mandatory upon certain selected classes of our corpora- 
 tions is an experiment that ought to be tried, and is much better than 
 going back to the old plan of unlimited liability for stockholders, as 
 California has done."
 
 CONTROVERSIES. IO3 
 
 fact that excessive taxation of corporations is unjust, 
 drives away capital, is no preventive of stock water- 
 ing, is not based on protection to property, and is 
 an incubus and partial veto upon the only mode of 
 doing business on a scale equal to the requirements 
 of modern times. An incorporation tax is worse 
 than an income tax, because it taxes the corporation 
 before its income has commenced.' 
 
 Moreover, unjust taxes on corporations do not 
 end with the incorporation fee. In many States a 
 heavy tax is levied annually both on the capital 
 stock and on the personal property of corporations. 
 The same property is taxed twice. Indeed, there 
 are instances worse than this. In Connecticut in 
 1868 there was a method of taxing corporations by 
 which the same property was taxed five separate 
 times, and the courts upheld the taxation. Corpo- 
 
 ' Vet during the past fiscal year (1890) New York received from 
 incorporation fees $220,719.94, an increase of $21,737.60 over the 
 previous year. 
 
 On April 6, i8gi, President Michael Coleman of the Tax Depart- 
 ment of New Vork City, one of the most accomplished and ex- 
 perienced Tax Commissioners that New Vork ever had, testified, 
 before the Senate Committee, that from Januar\', 1890. to January, 
 1S91, companies with $320,000,000 of capital had been incorporated 
 in two counties alone in New Jersey, although doing their business 
 and having their offices in New Vork City ; that of these from fifteen 
 to twenty per cent, had previously been incorporated under the laws 
 of New Vork ; and that of personal property to the amount of 
 $1,727,318,188 assessed in New Vork City, $1,400,000 had been 
 stricken off as not subject to taxation because it was incorporated 
 out of the State. Mr. Coleman recommended that foreign corpora- 
 tions be taxed on their gross receipts, that the tax on New Vork 
 corporations be largely reduced, and that the Philadelphia system of 
 taxing corporations be adopted.
 
 104 THE CORPORATION PROBLEM. 
 
 rations were clearly not popular in Connecticut at 
 that early day, except for taxation purposes. The 
 fact is that there is no justification for a double tax 
 on a manufacturing or business corporation. This 
 class of corporations differs very little from partner- 
 ships and should be treated with equal favor. 
 
 The effort to devise a proper and fair method of 
 taxing corporations has been prolific of litigation 
 and experimental legislation. It is still far from a 
 clear conclusion. Taxes may be levied on the fran- 
 chise, or capital stock, or tangible property, or shares 
 of stock of a corporation. A tax on the shares of 
 stock is invariably unjust. It amounts to double 
 taxation, inasmuch as either the franchise, or the 
 capital stock, or the tangible property of the corpo- 
 ration has already been taxed once. The New 
 York mode of taxing corporations seems to be 
 that which is being adopted by many of the States. 
 The tax is levied on the par value of the cap- 
 ital stock and the percentage of the tax varies 
 according to the percentage of dividends that have 
 been declared. If the dividends have been less than 
 a certain amount then a fixed tax is levied on the 
 market value of the whole capital stock. Even this 
 mode of taxation, however, has been found difficult 
 of application. 
 
 There are corporations, however, which should be 
 taxed in divers ways and heavily. The railroad, 
 gas, telegraph, telephone, electric light and water- 
 works corporations — the corporations which are nat- 
 ural monopolies and which have been given peculiar 
 franchises, — these are fit subjects for the heaviest
 
 CONTROVERSIES. IO5 
 
 taxation.^ And generally they are taxed more or 
 less completely. They contend against the tax, in- 
 fluence the legislature and delay the enactment of 
 the law. But sooner or later they are obliged to 
 yield. There are few States more subject to rail- 
 road influence than the State of New Jersey, and 
 yet New Jersey, after a long and bitter contest, has 
 compelled its railroads to pay their full quota of the 
 taxes of the State.' 
 
 As regards exemptions from taxation there is no 
 longer any difference of opinion. These exemptions 
 were granted with a lavish hand in the early days of 
 railroads. The exemption was made a part of the 
 charters themselves. The result was that the States 
 soon found a vast property enjoying the protection 
 of government without contributing to its support. 
 Then the legislatures attempted to repeal the ex- 
 emptions. But here the decisions of the Supreme 
 Court of the United States blocked the way. The 
 Dartmouth College case had decided that a corpo- 
 rate charter was a contract and could not be amended 
 or repealed, except with the consent of the corpora- 
 tion itself. Behind the bulwark of this decision the 
 corporations intrenched themselves and contended 
 that their exemptions from taxation were not re- 
 pealable. And the Dartmouth College case pro- 
 tected them. 
 
 Even so calm and judicial a writer as Judge 
 Cooley says of this decision : 
 
 ' See Chapter IV. on Natural Monopolies. 
 
 ' See Chapter IV. concerning this subject further.
 
 Io6 THE CORPORATION PROBLEM. 
 
 " It is under the protection of the decision in the Dartmouth Col- 
 lege Case that the most enormous and threatening powers in our 
 country have been created : some of the great and wealthy corpora- 
 tions actually having greater influence in the country at large, and 
 upon the legislation of the country, than the States to which they 
 owe their corporate existence. Every privilege granted or right con- 
 ferred — no matter by what means or on what pretence — being made 
 inviolable by the Constitution, the government is frequently found 
 stripped of its authority in very important particulars, by unwise, 
 careless, or corrupt legislation ; and a clause of the Federal Constitu- 
 tion, whose purpose was to preclude the repudiation of debts and just 
 contracts, protects and perpetrates the evil,"^ 
 
 On the other hand, Mr. Justice Miller, in an ad- 
 dress at the University of Michigan, said, regarding 
 this case : 
 
 " The main feature of the case, namely, that a State can make a 
 contract by legislation as vrell as in any other way, and that in no 
 such case shall a subsequent act of the legislature interpose any 
 effectual barrier to its enforcement where it is enforceable in the 
 ordinary courts of justice, has remained. 
 
 " The result of this principle has been to make void innumerable 
 acts of State legislatures, intended in times of disastrous financial 
 depression and suffering to protect the people from the hardships of 
 a rigid and prompt enforcement of the law in regard to their con- 
 tracts, and to prevent the States from repealing, abrogating, or 
 avoiding by legislation contracts fairly entered into with the other 
 parties. 
 
 ' ' This decision has stood, from the day it was rendered to the present 
 hour, as a great bulwark against popular effort through State legisla- 
 tion to evade the payment of just debts, the performance of obligatory 
 contracts, and the general repudiation of the rights of creditors." 
 
 Exemptions, consequently, became very valuable. 
 Legislatures were bribed to grant them and a great 
 injustice was done to tax-payers by reason of them. 
 It was long before a remedy was found. But when 
 
 ^ Cooley's " Constitutional Limitations," 5th ed., 33S, n.
 
 CONTROVERSIES. lO/ 
 
 the remedy came it was effectual. The Dartmouth 
 College case and the exemptions were circumvented 
 by constitutional and statutory provisions in the 
 various States to the effect that all charters there- 
 after granted should be subject to alteration, amend- 
 ment, or repeal at the will of the legislature. The 
 exemptions have largely disappeared and are now 
 becoming a thing of the past. The constitutions 
 of most of the States of the Union prohibit the grant- 
 ing of special privileges, and under these prohibitions 
 any future exemption from taxation would be null 
 and void. 
 
 INCORPORATING IX ONE STATE AND DOING ALL BUSINESS 
 IN ANOTHER STATE. 
 
 One of the innermost business secrets of a corpora- 
 tion lawyer is the incorporation of companies in one 
 State, although all of the business of those companies 
 is to be done in another State. This is a common 
 practice by reason of the fact that some States are 
 Hberal and favorable towards corporations, while 
 others are harsh, restrictive, and hostile. The law 
 says that it is legal to incorporate in one State with 
 the intention of doing all the business in another 
 State. Hence it is that those who are about to em- 
 bark in a corporate enterprise compare the laws of the 
 various States on the questions of what liability is at- 
 tached to stock ; for what kinds of business incorpora- 
 tion may be had ; what the liabilities of the directors 
 are; what incorporation fee is required ; what taxes 
 are levied ; where corporate meetings must be held ; 
 what is the method of voting at elections ; who may
 
 I08 THE CORPORATION PROBLEM. 
 
 be directors ; what capital stock is allowed ; how 
 much land may be owned by the corporation ; what 
 powers are conferred ; and all the miscellaneous 
 rights, duties, and liabilities which are created by 
 constitutional and statutory provisions. He avoids 
 New York, Pennsylvania, and Ohio on account of 
 the incorporation tax and dangerous liabilities at- 
 tached to the stock. He thinks twice before he 
 concludes to incur the large annual tax levied by 
 New Jersey. He has no fondness for the full liabil- 
 ity of stockholders in California. And he finally 
 incorporates in West Virginia, Kentucky,' Florida, 
 Connecticut, Maine, Illinois, or New Jersey. 
 
 These roaming and piratical corporations are gen- 
 erally the manufacturing or business concerns. A 
 railroad, gas, or other corporation, which exercises 
 the right of eminent domain, or uses the streets, 
 cannot safely operate under a foreign charter. But 
 the fact that numberless corporations may go into 
 other States for their charters is having an influence 
 on the old and conservative States. It is convincing 
 them that their laws relative to corporations must be 
 less restrictive, burdensome, and hostile. The law 
 moves slowly, but ultimately it must follow the trend 
 of trade, and especially is this so of the law of 
 corporations. 
 
 Limitations on the amount of the capital stock 
 have proved futile. The object generally is to pre- 
 vent the issue of watered stock, but the limitation 
 has lamentably failed to accomplish this object. 
 The amount of capital stock should be left to the 
 discretion of the incorporators.
 
 CONTROVERSIES. IO9 
 
 So also as to the qualifications for directors. The 
 statute often requires them to be stockholders, 
 sometimes to be citizens, and sometimes to be resi- 
 dents of the State. Such restrictions as these serve 
 no useful purpose. The stockholders are much 
 better qualified than the State to know who will 
 best serve them as directors. 
 
 The decided tendency of all the States is to allow 
 incorporation for any lawful business whatsoever. 
 There may be good reason for prohibiting the incor- 
 poration of construction companies for the con- 
 struction of railroads, inasmuch as the construction 
 company in case of failure causes hardship and loss 
 to laborers. And there may be objections to the 
 formation of large land corporations. But aside 
 from these, the free incorporating act is destined to 
 prevail. Individuals should be allowed to do any 
 and all classes of business through the medium of 
 corporations. It is the coming mode of doing busi- 
 ness on a large scale. The progressive States are 
 seeing this, and are allowing incorporation for any 
 business that is lawful in itself. New York has done 
 so within the past year. 
 
 The place of stockholders' meetings should be left 
 optional with the stockholders themselves. The 
 law at present is that these meetings must be within 
 the State that granted the charter, unless the statutes 
 allow them to be held out of that State. The enter- 
 prising little State of West Virginia saw the advan- 
 tage of changing the old rule, and did so. Indeed, 
 its corporation statutes are marvels of alluring 
 attractiveness for the incorporation of enterprises
 
 no THE CORPORATION PROBLEM. 
 
 located In other States. It allows incorporation for 
 any legal business, except buying and selling real 
 estate ; the capital stock may be five million dollars 
 or less ; there is no personal liability of stockholders; 
 any person may be allowed to act as director; the 
 cost of incorporation and the annual tax are low ; - 
 cumulative voting is provided for; the right of the 
 stockholders to remove directors is given ; and stock- 
 holders' meetings may be held anywhere the stock- 
 holders wish. 
 
 It is easy to see why men incorporate in one State 
 although they intend to transact all the business of 
 the company in another State. 
 
 SPECIAL CHARTERS. 
 
 At the beginning of this century corporations were 
 formed, not by filing a certificate under a general 
 incorporating law, as at present, but by obtaining a 
 special charter from the legislature. But soon it 
 was found that this business occupied most of the 
 time of the legislatures. They were being turned 
 into mills to grind out special charters. It was found 
 also that gross bribery of the legislators was being 
 resorted to for the purpose of obtaining these char- 
 ters. Corruption ran rampant, and the system be- 
 came intolerable. Something had to be done to 
 stem the tide of legislative demoralizatfon. 
 
 A remedy has been found and adopted in most of 
 the States. Constitutional prohibitions against the 
 granting of any special charters by the legislature 
 have been enacted. These prohibitions, followed by
 
 CONTROVERSIES. 1 1 1 
 
 the general incorporating laws, which allow incor- 
 poration without any application whatsoev^cr to the 
 legislature, have cured the evil in those States that 
 have adopted this remedy. 
 
 ])ut many of the States still permit their legisla- 
 tures to grant special charters. This is notably so in 
 the South. But the most flagrant instance of this 
 evil that still survives is found in the small but wide- 
 awake State of Connecticut. The granting of special 
 charters still continues in Connecticut and is the 
 chief part of the legislature's business. As a result, 
 Connecticut is the tramping-ground for the projectors 
 of all sorts of speculative and financial schemes. 
 The grants from imperial magnates three centuries ago 
 were a mere bagatelle as compared with the fabulous 
 prerogatives to which a Chief Executive of Connecti- 
 cut is now able to attach his signature in the way of 
 special charters. 
 
 The following article, which appeared in 1889, 
 throws light on the situation in Connecticut : 
 
 " Ten years ago the abuse of the joint-stock laws of the State had 
 reached such a stage that heroic measures became necessary. In iSSo 
 the legislature, in a spasm of reform, annulled the corporate existence 
 of 1,246 joint-stock companies in the State which had failed to comply 
 with the statutes in one way or another. Eighty-nine of these com- 
 panies were in Bridgeport, 24 in Norwalk, and 17 each in Stamford 
 and Danbury. In Hartford the number abolished was 149. New 
 Haven led in the list with iSg. At Middletown 3S companies were 
 annulled, while the town of Derby furnished 52. Meriden ran one 
 ahead of Middletown, while Waterbury scored a total of 63, and Nor- 
 wich 57. Tlie old whaling port of New London furnished only 16 
 companies for legislative decapitation. After the axe had fallen in 
 18S0 there were less than 1,175 joint-stock companies left in the State. 
 The legislature of i88i was expected to prove conservative in the
 
 112 THE CORPORATION PROBLEM. 
 
 matter of legislating for corporations. A number of joint-stock com- 
 panies, however, appeared asking for additional franchises. The 
 speculative interests in the Republic of Mexico also furnished a 
 tempting field, and before the session was through with, 29 companies 
 were incorporated, with a capital of $5,382,000 at the start. In the 
 aggregate these companies were authorized to increase their capital to 
 $28,365,000. The International Construction Company was one of 
 the organizations incorporated. Its capital was $1,000,000, with 
 authority to increase the amount to $10,000,000. The Rapid Con- 
 struction Company was also incorporated in 188 1. Its capital stock 
 was $1,000,000, with power to increase to $6,000,000. 
 
 " The legislature of 1887 was besieged with persons clamoring for 
 corporate privileges. During the session 117 acts of incorporation 
 were passed. Of this number, 54 were for companies engaging in 
 business and speculative enterprises. The aggregate capital at the 
 start was $10,475,000. The authorized increase was fixed at $55,- 
 060,000. . . . The International Company of Mexico, which was 
 authorized by the legislature of 1885, received power to increase its 
 capital stock to $20,000,000 in 1887. 
 
 " These facts will show how deeply rooted the custom has become 
 in the Connecticut legislature of granting acts of incorporation. Since 
 1880 it has developed into an agency of tremendous power. The 
 current season is not likely to be less marked than the session of 1887 
 by corporate legislation. Within two weeks Gov. Bulkeley, by 
 attaching his name to the Thomson-Houston Bill, extended to that 
 company the right to increase its capital stock to $10,000,000. 
 Military and Grand-Army organizations throughout the State, secret 
 societies of all kinds, and even the churches are also applicants for 
 incorporation. The special privileges secured by charter seem to be 
 the controlling motive in most cases. It is evidently the era of special 
 legislation and the advancement of private interests. The evil effects, 
 as in the abuses of the joint-stock laws, Mdll be felt sooner or later. 
 Prior to the war, the granting of a charter to a corporation was a 
 matter for long and serious consideration. The interests of the public 
 were not overlooked. The result was that the corporations receiving 
 these exceptional prerogatives are among the strongest institutions 
 financially in the State. Under the present wholesale system acts of 
 incorporation exceed one a day during the session. Much of the 
 legislation in this direction has been vicious. But little of it has 
 received the searching supervision of the legislators."
 
 CONTROVERSIES. 1 1 3 
 
 Even Connecticut, however, and the Southern 
 States will tire of this abuse, and sooner or later all 
 the States will, by constitutional enactment, pro- 
 hibit their legislatures from granting special charters. 
 The leading men of Connecticut are even now labor- 
 ing to bring about a reformation in this regard. 
 Such a prohibition has done much to purify legis- 
 lative halls, and it has prevented the grants of ex- 
 clusive and unjust franchises to the detriment of the 
 people at large. It has dispensed with a corrupt 
 lobby, and has rendered necessary a cheap, simple, 
 and quick mode of incorporation, and it has remedied 
 a great evil with certainty and directness.' 
 
 ' In Wells &c. Co. z's. Northern Pac. Ry. Co., 23 Fed, Rep., 469 
 
 (1S84), the court said: " Ever)'body \vho is familiar at all ^vitll the 
 history of the growth and organization of corporations in the United 
 States knows that this rule, requiring corporations to be organized 
 under a general law, is the growth of some years, and has grown 
 out of the confusion, corruption, the partial and inequitable legisla- 
 tion that was the result of allowing parties to go before the legis- 
 lature, and ask for a special charter. The time of the legislature 
 was unnecessarily consumed by it ; the integrity of the members of 
 the legislature was unduly exposed ; or, through the ignorance or 
 carelessness of the legislature, and the astuteness and diligence of 
 designing and overreaching men, there were constantly coming to 
 light obscure clauses in these acts of the legislature, giving powers 
 and granting privileges which were unjust, inequitable, and which 
 would never have been done with the knowledge of the legislature." 
 
 In Nelson vs. McArthur, 38 Mich., 207, the court said in regard 
 to the constitutional provision for general incorporating acts : " The 
 great purpose of this provision was to introduce a system of legislation 
 in regard to the institution of corporations, which would exclude the 
 corruption and party favoritism which had too often accompanied the 
 method previously in vogue, and to secure as far as practicable for 
 all the people of the State an equality of opportunity, and a guard 
 against sectional discrimination." 
 8
 
 114 THE CORPORATION PROBLEM, 
 
 EXCLUSIVE PRIVILEGES AND MONOPOLIES. 
 
 An exclusive privilege is a monopoly granted by 
 a legislature to a corporation. It generally is given 
 to a railroad, gas company or water-works company. 
 It forbids the building of any competing concern 
 for a given number of years, and sometimes it is an 
 exclusive privilege that is to last forever. It has 
 been a prolific source of legislative corruption, and 
 has been one of the worst abuses that has come 
 upon a free people. 
 
 The history of the English-speaking people has 
 been that of a long and arduous struggle against 
 governmental usurpation and monopoly. The word 
 " monopoly " formerly had a restricted meaning. 
 The kings of England, from an early date down to 
 James II., were accustomed to grant a monopoly or 
 exclusive privilege to particular persons to manu- 
 facture or sell articles of commerce specified in a 
 grant. The English people and parliament con- 
 tended that the king had no power to grant such a 
 monopoly, and that Parliament alone could legally 
 give these exclusive privileges. The courts sus- 
 tained the position of Parliament, and the ancient 
 grants of monopoly by the king were declared to be 
 illegal and void. 
 
 In recent times, however, the word '' monopoly " 
 has been given a broader meaning. It is applied to 
 the exclusive privileges of railroad, gas, electric-light, 
 water-works, and bridge corporations, whereby the 
 construction of competing works is forbidden. Dur- 
 ing the first half of this century the granting of these 
 exclusive privileges was of constant occurrence. But
 
 CONTROVERSIES. 1 1 5 
 
 in the course of time they became a grievous burden 
 which could not be done away with. Having a 
 monopoly they charged extravagant prices, gave 
 poor service and misused the public. The courts 
 were hostile to them, and yet were obliged by law 
 to uphold their exclusive privileges. The legis- 
 lature could not repeal them because the Dartmouth 
 College case blocked the way. 
 
 Hence it was, as already stated, that two consti- 
 tutional provisions were devised and enacted by 
 most of the States. The one ordained that all 
 charters should be subject to alteration, amendment, 
 and repeal at the will of the legislature. The other 
 provided that no exclusive provisions should be 
 granted at all. The latter provision goes to the root 
 of the difficulty, but the former is a safeguard where 
 the latter provision does not exist. Under these 
 provisions the monopolies of exclusive privileges are 
 passing away. They no longer constitute an issue 
 of the day. 
 
 Monopoly, however, is a hydra-headed monster 
 that reappears in new forms. One of the great 
 problems of the times is how to deal with the 
 natural monopoly which every railroad, street rail- 
 road, gas, telegraph, telephone, electric-light, and 
 water-works corporation is the owner of to-day. 
 This class of monopolies, however, is considered 
 elsewhere.' 
 
 Another of the great problems before the people 
 is the monopolies which are being created by the 
 " Trusts," — the industrial combinations and con- 
 
 ' See Chapter IV.
 
 Il6 THE CORPORATION PROBLEM. 
 
 solidations which are springing up day by day. This 
 subject also is considered elsewhere.' 
 
 POLITICAL CORRUPTION. 
 
 The amount of deserved and also undeserved 
 abuse that has been heaped upon corporations for 
 the political corruption ascribed to them would fill 
 many books. That such corruption exists, and exists 
 to a frightful extent, there is not a particle of 
 doubt, and that a very large part of it is due to cor- 
 porations is also unquestionably true. That it 
 should exist is no surprise, when one considers the 
 controversies which have already been referred to. 
 The reason why corporations resort to political cor- 
 ruption is because those controversies exist. Cor- 
 porations, in order to protect themselves and to 
 succeed in their schemes of aggrandizement, have 
 resorted to money, bribery, political corruption, 
 and unmitigated rascality. Their corrupt control 
 of legislatures and municipalities have in large part 
 been the means of their safety, their power, and 
 their success. And there is nothing strange in the 
 fact that the corporations interfere with and seek to 
 control government. Property protects itself and 
 works for itself always. If politics can injure or aid 
 property, then property interferes with and strives 
 to control politics. Especially is this the case with 
 railroad property or manufacturing property, both 
 of which are affected by the favorable or unfavorable 
 action of government. Government may make or 
 unmake the manufacturing corporation by increasing 
 
 ^ See Chapter V.
 
 CONTROVERSIES. II7 
 
 or decreasing a protective tariff. Government may 
 make or unmake a railroad by granting or refusing 
 new franchises, or by allowing or reducing high 
 charges for traffic. For many years Congress has 
 held in its hands the future of the Union Pacific 
 Railroad by reason of the power of Congress to fore- 
 close or continue the mortgages which the national 
 government holds upon the railroad itself. It has a 
 similar power over other roads as regards the for- 
 feiture of land grants. Who can wonder that cor- 
 porations have interfered with government, and have 
 interfered so much, that the very word " corporation " 
 has become with many people a synonym for cor- 
 ruption ? The extent of that corruption — its rami- 
 fications into legislatures, municipalities, the halls of 
 Congress, and the judiciary — is a subject too vast, 
 too vague, and too much a matter of abuse and of 
 charges, undoubtedly true but largely without proof, 
 to tempt one to enter upon it. The corruption 
 exists. The problem is how is it to be cured. 
 
 " That already the legislative bodies of the States of the Union are 
 as wax in the hands of the modeler, under the manipulations of these 
 great corporations, is a truth which in all the more densely populated 
 .States, in the North and the East, the people have been made to feel. 
 How to get back their control, and yet not change it into a control of 
 a \ery dangerous character, by adding the supervision of the expen- 
 ditures of the enormous revenues of the railways to the supervision of 
 the enormous revenues of the United States, and of State and local 
 administrations, administered as they are in the main by politicians 
 not much, if any, above the status of the railway magnates, is proba- 
 bly the most serious problem which, since the abolition of slaver)', 
 has confronted the people of the United States." • 
 
 ' " Cyclopaedia of Political Science," vol. iii. 
 
 Jeans, on " Railway Problems," says, p. 46 : " The amounts that
 
 Il8 THE CORPORATION PROBLEM. 
 
 THE REMEDY. 
 
 Sometimes blindly, sometimes intelligibly, but 
 always persistently, a solution of all the questions 
 to which corporations have given rise is being sought. 
 Many of the evils have been cured by a specific 
 remedy. But this is not enough. " The Corporation 
 Problem " in its entirety has become one of the 
 great social questions of the age. It is a problem 
 which the present generation meets face to face. 
 
 have been expended in the United Kingdom in promoting and 
 opposing [Railway] bills in Parliament have been enormous. Ac- 
 cording to a return presented to the House of Commons in 1883, a 
 total expenditure of ;^3,924,7i2 had been incurred on this account 
 between 1872 and 1882. As the increase of railway capital in the 
 United Kingdom during the same period was 198 millions, 
 it follows that the amount spent over Parliamentary battles 
 was two per cent, of the total addition to capital expenditure 
 in these ten years. If it were correct to assume that the same per- 
 centage of the total capital expenditure had been wasted in Parlia- 
 mentary contests over the whole of our railway history, the aggregate 
 sum so spent would amount to about sixteen millions sterling. It is 
 probable, however, that the actual expenditure has been greater even 
 than this, since the fights were much fiercer, and more costly in pro- 
 portion to the capital involved, in the earlier history of the system 
 than in its later stages of development." And on pp. 429, 430: 
 "The Parliamentary expenses incurred in obtaining the Act for the 
 Great Western Railway, as originally constructed, amounted to 
 /^Sj,ig7, or about jCuS P^r mile. For the London and Birmingham 
 line Parliamentary expenses amounted to j(^j2,S68, or ;i^662 per mile. 
 In many other cases, the cost of fighting for the Acts under which 
 the lines were constructed involved a correspondingly lavish scale of 
 expenditure. . . . There is not much published information 
 respecting the prices that have actually been paid for the land 
 acquired by railway companies." And on p. 32 : " That very large 
 sums were expended in conciliating opposition over and above the 
 amounts actually spent in consideration of the supposed or adjudi-
 
 CONTROVERSIES. I IQ 
 
 There have been theories, experiments, and world- 
 wide movements, having for their purpose the dis- 
 position of these questions. And, yet, all the efforts 
 of thinkers, philosophers, and statesmen seem to 
 come to naught. A solution of " The Corporation 
 Problem " seems to be coming, from the natural 
 march of events, even in spite of legislative enact- 
 ments and hostile interests. As will be seen here- 
 after, the solution is to be by consolidations on a 
 colossal scale. 
 
 cated value of the land, is one of the best known facts in English 
 railway histor>'." And on p. 430, Mr, Jeans quotes to the effect that 
 " The first Eastern Counties line was said to have paid ;^i2,ooo per 
 mile for land through an agricultural country, being about ten times 
 its real value. This habit of exaction has been perpetuated to our 
 own day. As an every-day instance, I may mention that only a few 
 months ago a gentlemen of great wealth was selling to a railway 
 company, which he had supported in Parliament, thirty acres of grass 
 land, of which the admitted agricultural value was;^ioo an acre, and 
 three acres of limestone, of which the proved value to a quarryman 
 "^vas /"soo an acre. There was no residential damage, and the rail- 
 way skirted the outside of the estate. The price of the whole in an 
 auction-room would have been about ;^4.ooo. The proprietor's 
 accents, supported by a troop of eminent valuers, demanded ;^2 5, OCX)." 
 Mr. Jeans figures "that in respect of the land acquired for the 
 present railway mileage of the United Kingdom — which at the end 
 of 1885 was approximately about 19,000 miles, — the expenditure 
 incurred would be about one tenth of the total capital cost of British 
 railways to the same date, or, in more exact figures, 76 mil- 
 lions sterling." In America the cost of the land for railroads, includ- 
 ing the buildings erected upon the land, is an average of £22,^ per 
 mile, while in England it has been ;^4,ooo per mile. On p. 35, Mr. 
 Jeans says that the railroads owned part of all the land in the United 
 Kingdom, but that this part has cost the railroads "about one twelfth 
 of the estimated current agricultural value of the whole land of the 
 country."
 
 CHAPTER III. 
 
 REMEDIES FOR THE RAILROAD PROBLEM. 
 
 Co-operative or profit-sharing associations and railroad in- 
 surance as remedies — State socialism as a remedy — 
 State ownership of railroads as a remedy — Periodical 
 leasing of franchises by the State as a remedy — State 
 regulation of railroads as a remedy — Railroad consoli- 
 dation as a remedy. 
 
 The various abuses and problems, growing out of 
 railroads and other corporations, have been discussed 
 in the preceding chapter. The specific remedy for 
 those abuses has also been pointed out in cases where 
 such a remedy exists. But in addition to these there 
 have been proposed and tried a few more general 
 and more comprehensive modes of solving *' The 
 Corporation Problem." Most of them apply to rail- 
 roads particularly, inasmuch as the railroad problem 
 is the chief part of the corporation problem. These 
 sweeping remedies have from time to time excited 
 wide discussion. They have been tried or are being 
 tried in Europe and America. They are the most 
 important subjects connected with social science, and 
 are among the greatest living questions of the day. 
 
 In addition to the remedies set forth in this chap- 
 
 I20
 
 REMEUIKS irUR THE RAILROAD PROBLEM. 121 
 
 ter, Still others have been proposed. Hudson, in his 
 work on " Railways and the Republic," advocates 
 the phm uf separating railway ownership from the 
 business of transportation — that is, giving the rail- 
 roads the station-houses, freight-houses, terminals, 
 and tracks ; allowing an)- persons to own cars, and 
 run those cars over any tracks ; and permitting the 
 railroads to charge for the use of the tracks. This 
 plan is very old, and has been found impracticable. 
 It was adopted in the first days of the railway. 
 From 1825 to 1S35 the mistake was made that, like 
 the canal, the railway would be built by one class of 
 capitalists and the transportation part of the busi- 
 ness would be carried on by another class of capital- 
 ists or by the public generally. In New York the 
 early charter of the Ithaca and Owego Railroad 
 contained the following provision : 
 
 "Sec. 12. All i)ersons paying the toll aforesaid may, with suita- 
 ble and proper carriages, use and travel upon the said railroad, sub- 
 ject to such rules and regulations as the said corporators are authorized 
 to make by the 9th section of this act." 
 
 But the plan did not prove feasible, and if adopted 
 now it would leave the railway problem still un- 
 solved. It would create two monopolies where but 
 one now exists. There would be a corporation to 
 own the tracks and appurtenances, and a corporation 
 to own and run the cars. Mr. Hudson's plan has 
 been dead for fifty years.' 
 
 ' Professor Henry C. .\dams would take a long step backwards in 
 order to remedy the evils arising from corporations. In a paper read 
 before the American Economic Association, in Washington, Decem- 
 ber, 1S90. he took the position that when industries are small and
 
 122 THE CORPORATION PROBLEM. 
 
 CO-OPERATIVE OR PROFIT-SHARING ASSOCIATIONS AND 
 RAILROAD INSURANCE AS REMEDIES. 
 
 John Stuart Mill once said : 
 
 " I must repeat my conviction that the industrial economy which 
 divides society absohitely into two portions, the payers of wages and 
 the receivers of them, the first counted by thousands and the last by 
 millions, is neither fit for nor capable of indefinite duration, " 
 
 dealings are with personal friends, indifference to the public good 
 results in personal loss, but in corporations with world-wide business, 
 claiming privileges and rights intended for the individual, methods 
 and practices immoral and injurious to the public weal go unpun- 
 ished. Accordingly he advocated the following propositions: I. 
 The granting of corporate privileges should be limited to those in 
 which the necessity of the public overbalances the necessity of the 
 individual. 2. In the case of the latter, incorporation should be 
 made obligatory. 3. Such corporations should be forced to make 
 reports sufficient to give opportunity for public regulation and control 
 by government, which is the great corporation out of which all others 
 arise. 4. Other business not suffered and compelled to incorporate 
 should be subject to inquiry, but not control. Unless these principles 
 are accepted. Professor Adams thought we might be forced into a 
 complete State socialism, wherein we would lose the incalculable 
 advantages of individual initiative and enterprise. 
 
 This remedy has also been recently advocated by Judge N. M. 
 Hubbard, of Cedar Rapids, Iowa, as follows : " All private corpora- 
 tions for pecuniary profit should be abolished, except only those of a 
 quasi-public character, such as railroad, telegraph, telephone, insur- 
 ance, banking corporations, and the like ; and these should be under 
 the control of public law, or else owned and managed by the Govern- 
 ment. Railroads are already under the control of public law. The 
 short reason is that corporations destroy individual competition in the 
 acquisition of wealth." 
 
 And in support of the same idea it has been said : 
 "The corporation was invented to do something that the public 
 needed to have done, and that private effort could not well do — to 
 secure limited liability in undertakings so vast that men could not
 
 REMEDIES FOR THE RAILROAD PROBLEM. 1 23 
 
 And he also added : 
 
 "The possibilities of changing this system for one of combina- 
 tion without dependence, and unity of interest instead of organized 
 hostility, depend altogether upon the future developments of the 
 partnership principle. 
 
 Suffice it to say as a corollary to this that the 
 partnership principle has developed into the corpo- 
 
 afford to invest in them without some protection against the unlimited 
 liability of a partnership. 
 
 " From this simple object the device has been perverted to purposes 
 of oppression, corruption, and monopoly. It is used as a means of 
 escaping from moral as well as financial liability. It excuses stock- 
 holders in a factory, for example, from all the responsibility they 
 once felt, as owners, for the condition and treatment of their 
 empltjyees. 
 
 " It is the instrument of monopoly, injustice, political corruption, 
 and all forms of conspiracy to put up prices and levy tribute upon the 
 necessities of the people. 
 
 " The power which created the monster is bound to restrain its 
 evil tendencies, and it is a very serious question whether this can be 
 done otherwise than by limiting the use of the corporate device to 
 those quasi-public undertakings for which it was originally intended." 
 
 It is folly to talk about abolishing the corporation merely because 
 it can be used in a few instances as an instrument of wrong. Of the 
 vast number of corporations in the land, manufacturing, mercantile, 
 banking, insurance, mining, commercial, and business, there are very 
 few which are guilty of the wrongs complained of. The quasi-cor- 
 porations are the very ones which have led to abuses and the destruc- 
 tion of "individual competition in the acquisition of wealth." The 
 small corporations — the honest ones — are to be abolished, while the 
 large ones — the guilty ones — are to remain. It is not true that the 
 " simple object " of the corporations originally was " limited liabil- 
 ity." That was by no means the only object. The advantages, ob- 
 iects, and necessity of the corporation as a mode of doing business 
 are set forth in Chapter I. of this book. The remedy of abolishing 
 the corporation would be a long step backward instead of forward. 
 It will not be taken.
 
 124 'i^HE CORPORATION PROBLEM. 
 
 ration, and that the corporation is to-day being used 
 for co-operative enterprises and profit-sharing. 
 Professor Richard T. Ely says : 
 
 " Corporations and co-operative enterprises will become more and 
 more nearly assimilated until they can scarcely be distinguished. 
 . . . The captains of industry will yet be found at the head of 
 co-operative enterprises. . . . When corporations become more 
 truly co-operative with respect to the labor element, the captains of 
 industry will not disappear. " ^ 
 
 And the corporation is well fitted for carrying out 
 the plan of co-operation. The business is done by a 
 board of directors ; these directors are elected by the 
 shares of stock ; and profits remaining after wages 
 and interest are paid belong to these shares of stock. 
 The machinery for co-operation is perfect, and if the 
 employees own the shares of stock, and if they elect 
 men of ability and honesty for directors, and if 
 money can be borrowed by the company to carry on 
 the business, then the success of co-operation and 
 profit-sharing is assured. But each of these steps has 
 its difficulties. The employees have not the money 
 to own the stock ; they cannot obtain or are unwill- 
 ing to employ the best talent to manage their enter- 
 prise ; and they cannot induce capitalists to loan 
 money to the enterprise on the mere security of the 
 enterprise itself. Nevertheless there have been 
 many attempts at such a co-operation, and in some 
 instances these attempts have been successful. 
 
 The recent transformation of the great dry-goods 
 house of H. B. Claflin & Co., into a corporation, and 
 the sale of a majority of that stock to the employees 
 
 ' Harper s Magazine, July, 1887, p. 266.
 
 REMEDIES rOR THE RAILROAD PROBLEM. 1 25 
 
 of the house, and the sale of the remainder of the 
 stock, first to the patrons of the house and then to 
 the pubUc, is a remarkable instance of co-operation 
 through a corporation. The stock was subscribed 
 for many times over, and the general public re- 
 ceived only five or ten per cent, of the amount it 
 applied for. How the enterprise will succeed can- 
 not yet be told, but it is to be noted that the stock 
 already commands a premium. 
 
 Another recent and attractive instanceof this kind 
 is that of the -Illinois Central Railroad Company. 
 This railroad is one of the oldest in the country, its 
 charter dating back into the fifties. Its stock is 
 dividend-paying and always has been. The company 
 has had no stock for sale, but it proposes to assist 
 any of its officers or employees to buy one share at 
 a time, at a fair market price, to be fixed when the 
 purchase is made, the purchaser to pay for his share 
 in sums of five dollars or multiples thereof. On the 
 sums so paid interest is to be credited at the rate of 
 four per cent., and when the sum at the credit of any 
 purchaser amounts to the sum at which the stock was 
 bought, he will receive a certificate for his share of 
 stock, and can then, if he wishes, begin the purchase 
 of another share. The purchaser may, however, at 
 any time, have his contract cancelled and his money 
 returned to him with interest. Thus the company 
 assumes the entire risk of a fall in the price (^f the 
 shares and the expense of doing the work. The 
 only possibility of loss will be in the event that the 
 Company becomes insolvent. This proposition of 
 the Illinois Central is but another indication that the
 
 126 THE CORPORATION PROBLEM. 
 
 railroad corporations are striving to do away with 
 strikes and labor troubles, and that co-operation 
 is being resorted to in order to end the hostility now 
 existing between employer and employee. 
 
 Mr. Abram S. Hewitt in an address delivered 
 October i, 1890, said on this subject: 
 
 " It should be a matter of congratulation that the formation of 
 trades unions contemporaneously with the rapid growth of large cor- 
 porations, whose stock is divided into such small shares as to admit 
 of easy distribution, clears the way for the new era when every self- 
 respecting workman will insist upon being an owner, and every well- 
 managed corporation will see that its workmen are directly interested 
 in the results of the business. To effect this desirable end, no com- 
 pulsory legislation and no addition to the powers of corporations are 
 needed. 
 
 " It is, however, by no means necessary that all workmen should 
 thus become shareholders. There will always be a considerable ele- 
 ment of an unstable and unintelligent character whose participation 
 in the ownership is neither desirable nor possible ; but I think the 
 time is near when it will be discreditable to a workman not to be also 
 an owner in the establishment in which he works, and that all work- 
 men of the better class will have such an interest. It is quite con- 
 ceivable that the workmen may ultimately acquire the preponderating 
 interest, in which case the best possible solution will have been 
 reached, in which labor hires capital at the lowest possible rate and 
 thus becomes the main factor in the conduct of industry. " ^ 
 
 But in many other instances the enterprises were 
 unfortunate and ruinous, and co-operation was not a 
 success. 
 
 ' ' Certain employees of the Philadelphia & Reading, who a few 
 years ago accepted shares of the company's stock in part payment of 
 wages, came out at the little end of the horn. In Massachusetts 
 there is a special law permitting corporations to contribute to funds 
 of this kind and protecting all moneys thus paid in. Such a law is 
 
 * See also a work on " Profit-Sharing " by N. P. Oilman, 1889.
 
 REMEDIES FOR THE RAILROAD PROBLEM. 12/ 
 
 eminently reasonable and should be provided m cvc-iv State. No 
 Massachusetts company has as yet taken advantage of it, however."' 
 
 The Manchester Textile Recorder speaks of the 
 system of profit-sharing as merely the offering of a 
 bribe for good behavior. And this undoubtedly is 
 true of those enterprises wherein the capitalist gives a 
 small proportion of his profits to his employees. But 
 it can hardly be said to be true of those enterprises 
 in which all of the profits go to the employees ; in 
 other words, the completely co-operative enterprises. 
 
 Herbert Spencer has no faith in co-operation, and 
 in his article on " The Coming Slavery," says : 
 
 *• No form of co-operation, small or great, can be carried on with- 
 out regulation, and an implied submission to the regulating agencies. 
 Even one of their own organizations for effecting social changes 
 yields them proof. It is compelled to have its councils, its local and 
 general officers, its authoritative leaders, who must be obeyed under 
 penalty of confusion and failure. And the experience of those who 
 are loudest in their advocacy of a new social order under the paternal 
 control of a government, shows that even in private voluntarily- 
 formed societies the power of the regulative organization becomes 
 great, if not irresistible ; often, indeed, causing grumbling and 
 restiveness among those controlled. Trades Unions which carry on 
 a kind of industrial war in defence of workers* interests versus 
 employers' interests find that subordination almost military in its 
 strictness is needful to secure efficient action ; for divided councils 
 prove fatal to success. And even in bodies of co-operators formed for 
 carrying on manufacturing or distributing business, and not needing 
 that obedience to leaders which is required where the aims are offen- 
 sive or defensive, it is still found that the administrative agency gains 
 such supremacy that there arise complaints about 'the tyranny of 
 organization.' Judge then what must happen when, instead of 
 relatively small combinations, to which men may belong or not as 
 they please we have a national combination, in which each citizen 
 finds himself incorporated, and from which he cannot separate him- 
 
 ' Railroad Gazette March 22, 1889.
 
 128 THE CORPORATION PROBLEM. 
 
 self without leaving the country. Judge what must under such con- 
 ditions become the despotism of a graduated and centralized official- 
 ism, holding in its hands the resources of the community, and having 
 behind it whatever amount of force it finds requisite to carry out 
 its decrees and maintain what it calls order. Well may Prince 
 Bismarck display leanings toward State-socialism. . . . The 
 final result would be a revival of despotism. A disciplined army 
 of civil officials, like an army of military officials, gives supreme 
 power to its head — a power which has often led to usurpation, as 
 in medieval Europe and still more in Japan — nay, has thus so led 
 among our neighbors, within our own times. . . . That those 
 who rose to power in a socialistic organization would not scruple to 
 carry out their aims at all costs, we have good reason for concluding. 
 . . . It would need but a war with an adjacent society, or some 
 internal discontent demanding forcible suppression, to at once trans- 
 form a socialistic administration into a grinding tyranny like that of 
 ancient Peru : under which the mass of the people, controlled by 
 grades of officials, and leading lives that were inspected out-of-doors 
 and in-doors, labored for the support of the organization which regu- 
 lated them, and were left with but a bare subsistence for themselves." 
 
 The fact seems to be that when an employee has 
 developed to a point where he is capable of carry- 
 ing on a co-operative enterprise, he is capable of 
 rising above the position of employee and of be- 
 coming an employer himself. The result seems to 
 indicate that co-operation and profit-sharing may 
 ameliorate the condition of the weak, but that they 
 will not to any great extent take charge of the in- 
 dustries and railroads of America. 
 
 There is another and very recent phase of this 
 question which is important. The railroads of the 
 country have come to fear the discontent and the 
 strikes of their employees. The bonds of sym- 
 pathy and unity of interest between the railroad 
 owners and the employees are few and weak.
 
 REMEDIES FOR THK RAILROAD PROBLEM. 1 29 
 
 Strikes occur ; traffic is stopped ; wages are lost ; 
 interest and dividends are not paid ; violence and 
 even crimes are perpetrated. The necessity of a 
 remedy became evident long ago, and in the course of 
 time the talent and ingenuity of the railroads devised 
 a remedy. It was inaugurated by the Baltimore & 
 Ohio Railroad Company immediately after the Pitts- 
 burgh strikes and riots of 1877. Later still, the 
 Pennsylvania road adopted the Baltimore & Ohio 
 plan and improved upon it. Later still, after the 
 great strike on the Chicago, Burlington, & Quincy 
 Railroad in 1888, the latter company adopted the 
 Pennsylvania plan. It is substantially a plan of co- 
 operative insurance — the railroad company being 
 the collector and disburser of the fund, and the 
 employees being the persons paying assessments 
 and receiving fixed sums in case of injurj^ or death. 
 The membership is entirely voluntary, and any 
 member can withdraw at any time. The company 
 defrays all operating expenses, and takes charge of 
 the funds, allowing four per cent, interest. For the 
 first six months employees were to be admitted 
 without regard to age or physical condition, except 
 that they were to be in sufficiently good health to 
 perform their duties. After that, none over 45 years 
 old were to be admitted. The dues vary from 75 
 cents to $3.50 a month, and the benefits from 50 cents 
 to $2.50 per day. The death benefits vary from $250 
 to $1,200. An employee injured in the service does 
 not lose his right to sue the company, but if he sues 
 he is not to enforce his claims against the association. 
 
 The railroad has seven out of the thirteen directors : 
 9
 
 130 THE CORPORATION PROBLEM. 
 
 the employees the other six. The employer performs 
 a distinctly generous act toward its employees, and 
 binds itself to keep it up continually. It takes the 
 risks of the first few years — the most difficult obstacle 
 of mutual-benefit associations, — and it renders pay- 
 ment certain. It insures careful and talented manage- 
 ment, and provides faithful and efficient officers. 
 
 " The whole scheme constitutes a constant and tangible evidence 
 to the men that they are not working for a wholly soulless and im- 
 personal organization or machine, and thus it secures a sort of fidelity 
 that is universally regarded as more valuable than that given for mere 
 money." ' 
 
 This plan has succeeded under the management of 
 the Pennsylvania Railroad Company, and probably 
 will be adopted by all of the great railroad systems 
 of the country. And it is a curious fact that while 
 Bismarck in Germany has been causing the state to 
 insure the laboring classes against accident and death, 
 the railroads have been doing a similar service in 
 America. The effect probably will be to make the 
 employee more steady and more content with his 
 lot. It will also tend to increase the power of the 
 railroads themselves. Further than this it will not 
 go. It will not solve the railroad and corporation 
 problem.^ 
 
 STATE SOCIALISM AS A REMEDY. 
 
 There is a large and growing class of thinkers who 
 believe that the important industries of a people 
 
 ^ Railroad Gazette, March 22, 18S9. 
 
 ^ Concerning this question of insurance funds and the relation of 
 corporations and their employees, see also the third annual report of 
 the Interstate Commerce Commission, pp. 102-104.
 
 REMEDIES FOR THE RAILROAD I'RoBr.KM. I3I 
 
 should be managed and carried on by the govern- 
 ment. They beheve that the railroad, banking, in- 
 surance, and in large part the manufacturing business 
 should be carried on not by private corporations, but 
 by the State. They advocate state socialism, and 
 believe that the evils and dangers which no.w arise 
 from corporations and wealth will disappear, if state 
 socialism prevails. They say that of all the forces 
 which civilize a people, the most potent one and 
 the only one capable of solving present difficulties 
 is the power of government. 
 
 The opposite school of thinkers do not believe in 
 this. They say that a nation is civilized and de- 
 veloped, not by its government, but by entirely dif- 
 ferent influences and forces, — influences such as the 
 printing-press, with its books, pamphlets and publica- 
 tions ; commerce with its interchange of merchandise, 
 food, comforts, and luxuries ; travel, introducing new 
 ideas and disclosing the relative importance of men 
 and things ; machinery and inventions, decreasing 
 hours of labor, increasing comforts, cheapening the 
 cost of living, and enlarging the thoughts of men ; 
 gunpowder, rendering war short, costly, and rare; 
 education, science, literature, art, philosophy, and 
 religion, — these are the civilizing forces of the 
 world. This class of thinkers say that govern- 
 ment is not a proper organizer and leader, but is 
 merely the protector of the nation ; that at all times 
 it is merely a reflection of the character of the peo- 
 ple ; that it lags behind their growth, instead of 
 creating it ; that its use is only in protecting life, 
 liberty, and property, — a negative duty; and that
 
 132 THE CORPORATION PROBLEM. 
 
 when government goes outside of this sphere and 
 assumes the task of directing and hastening the 
 development of a people, then government not only 
 becomes oppressive and corrupt, but checks the 
 growth and deadens the vitality of the nation. 
 
 Why is it that whenever a social difficulty arises 
 or is imagined men seek a remedy through govern- 
 ment ? Government has been formed to protect 
 rights, not to create them. And government has 
 proved to be the most incapable leader that civiliza- 
 tion has known. Its whole history has been one long 
 record of war, rapine, interference, mistake, incom- 
 petency, and usurpation. It is the most dangerous 
 force that enters into civilization. It has clogged 
 and misdirected progress in numberless instances, 
 and has rarely aided that progress. It is one of 
 the forces which makes a nation a highly civilized 
 people, but the part that it plays is subsidiary and 
 small. Government is not the power that can solve 
 the problems of the times. 
 
 One of the greatest thinkers of the age, in a 
 searching examination of this question, has demon- 
 strated that the State is incompetent to do more 
 than protect life, liberty, and property. Herbert 
 Spencer, on " The Man versus The State," says : 
 
 "The Westminster Review for April, i860, contained an article 
 entitled ' Parliamentary Reform ; the Dangers and the Safeguards. ' 
 In that article I ventured to predict some results of political changes 
 then proposed. 
 
 "Reduced to its simplest expression, the thesis maintained was 
 that, unless due precautions were taken, increase of freedom in form 
 would be followed by decrease of freedom in fact. Nothing has oc- 
 curred to alter the belief I then expressed. The drift of legislation
 
 REMEDIES FOR THE RAILROAD PROBLEM. 1 33 
 
 since that time has been of the kind anticipated. Dictatorial meas- 
 ures, rapidly multiplied, have tended continually to narrow the liber- 
 ties of individuals ; and have done this in a double way. Regula- 
 tions have been made in yearly-growing numbers, restraining the 
 citizen in directions where his actions were previously unchecked, 
 and compelling actions which previously he might perform or not as 
 he liked ; and at the same time heavier public burdens, chiefly local, 
 have further restricted his freedom, by lessening that portion of his 
 earnings wliich he can spend as he pleases, and augmenting the 
 portion taken from him to be spent as public agents please." 
 
 The same author, in his article on " The Sins of 
 Legislators, " says : 
 
 '* Government, begotten of aggression and by aggression, ever 
 continues to betray its original nature by its aggressiveness ; and 
 that which on its nearer face seems beneficence only, shows, on its 
 remoter face, not a little maleficence — kindness at the cost of cruelty. 
 For is it not cruel to increase the sufferings of the better that the suf- 
 ferings of the worse may be decreased ? It is. indeed, marvellous 
 how readily we let ourselves be deceived by words and phrases which 
 suggest one aspect of the facts while leaving the opposite aspect 
 unsuggested. " 
 
 And also 
 
 " Perpetually governments have thv/arted and deranged the growth 
 [of trade] but have in no way furthered it, save by partially dischar- 
 ging their proper function and maintaining social order. So, too, 
 with those advances of knowledge and those improvements of ap- 
 pliances, by which these structural changes and these increasing 
 acti\'ities have been made possible. It is not to the State that we owe 
 the multitudinous useful inventions from the spade to the telephone ; 
 it was not the State which made possible extended navigation by a 
 developed astronomy ; it was not the State which made the discoveries 
 in physics, chemistr)', and the rest, which guide modern manufactures ; 
 it is not the State which devised the machinery for producing fabrics 
 of every kind, for transferring men and things from place to place, 
 and for ministering in a thousand ways to our comforts. The world- 
 wide transactions conducted in merchants' offices, the rush of traffic 
 filling our streets, the retail distributing system which brings every-
 
 134 THE CORPORATION PROBLEM. 
 
 thing within easy reach and delivers the necessaries of life daily at our 
 doors, are not of governmental origin. All these are results of the 
 spontaneous activities of citizens, separate or grouped. Nay, to 
 these spontaneous activities governments owe the very means of 
 performing their duties. Divest the political machinery of all those 
 aids which Science and Art have yielded it — leave it with those only 
 which State officials have invented, and its functions would cease. " 
 
 Buckle, the most profound historian that ever 
 analyzed the elements of national greatness, sum- 
 marized his belief concerning government, as follows : 
 
 " Well may it be said of Adam Smith, and said too without fear of 
 contradiction, that this solitary Scotchman has, by the publication of 
 one single work, contributed more towards the happiness of man, 
 than has been effected by the united abilities of all the statesmen and 
 legislators of whom history has preserved an authentic account. . . . 
 
 "The accusation which the historian is bound to bring against 
 every government which has hitherto existed is, that it has over- 
 stepped its proper functions, and, at each step, has done incalculable 
 harm. . . . To maintain order, to prevent the strong from oppress- 
 ing the weak, and to adopt certain precautions respecting the public 
 health, are the only services which any government can render to the 
 interests of civilization. That these are services of immense value, 
 no one will deny ; but it cannot be said that by them civilization is 
 advanced, or the progress of man accelerated. All that is done is, to 
 afford the opportunity of progress ; the progress itself must depend 
 upon other motives. 
 
 " In France, as in every other country where the protective prin- 
 ciple is active, the government has established a monopoly of the 
 worst kind ; a monopoly which comes home to the business and 
 bosoms of men, follows them in their daily avocations, troubles them 
 with its petty, meddling spirit, and, what is worse than all, diminishes 
 their responsibility to themselves ; thus depriving them of what is the 
 only real education that most minds receive — the constant necessity 
 of providing for future contingencies, and the habit of grappling with 
 the difficulties of life. 
 
 " The consequence of all this has been, that the French, though a 
 great and splendid people, a people full of me: tie, high-spirited, 
 abounding in knowledge, and perhaps less oppressed by superstition
 
 REMEDIES For THF. KAIIKoaD rRrtp.T.FXf. I ;^5 
 
 than any other in Europe — have always been founci unfit to exercise 
 political power. . . . Men can never be free unless they are edu- 
 cated to freedom. And this is not the eilucation which is to be found 
 in schools, or gained from books ; but it is that w hich consists in 
 self-tliscipline, in self-reliance, and in self-government. . . . The 
 old associations of the French all jioint in another direction. At the 
 slightest difficulty they call on the government for support. What 
 with us is competition, with them is monopoly. That which we 
 effect by private companies they effect by public boards. They 
 cannot cut a canal, or lay down a railroad, without appealing to the 
 government for aid. \Vith them the people look to the rulers ; with 
 us the rulers look to the people. With them the executive is the 
 centre from which society radiates. With us society is the instigator, 
 and the executive the organ. The difference in the result has corre- 
 sponded with the difference in the process. We have been made fit 
 for political power by the long exercise of civil rights. They, 
 neglecting the exercise, think they can at once begin with the power. 
 We have always shown a determination to uphold our liberties, and, 
 when the times are fitting, to increase them ; and this we have done 
 with a decency and a gravity natural to men to whom such subjects 
 have long been familiar. But the French, always treated as children, 
 are, in political matters, children still. And as they have handled 
 the most weighty concerns in that gay and volatile spirit which adorns 
 their lighter literature, it is no wonder that they have failed in mat- 
 ters where the first condition of success is, that men should have been 
 long accustomed to rely upon their own energies, and that before 
 they try their skill in a political struggle, their resources should have 
 been sharpened by that preliminary discipline, which a contest with 
 the difficulties of a civil life can never fail to impart." ' 
 
 At the present time Germany represents the ten- 
 dency towards state sociaHsm. In Germany the 
 Reichstag has recently passed the third of a series 
 of measures which lead up to state socialism in a 
 comprehensive and radical way. By these measures 
 the state insures all employees in the kingdom 
 
 'Buckle's "History of Civilization in England," pp. 155, 203, 
 453. 454.
 
 136 THE CORPORATION PROBLEM. 
 
 against accident, sickness, disablement, old age, and 
 death ; the insurance is compulsory, and the cost is 
 collected from the employers and employees. 
 
 " It may be as well to recall the chief stages in the social legisla- 
 tion of the last eight years. The first installment, a measure of 
 insurance against sickness, became law in 1883. In return for a pay- 
 ment of not more than ij^ to 2 per cent, of the normal local wage, 
 as ascertained by the civil authority in consultation with the officers 
 of the commune, medical attendance, medicine, and medical appli- 
 ances are supplied for the insured in case of sickness. The patient 
 receives during the period of sickness (not more than thirteen weeks) 
 one half of the normal local wage. If it be necessary to remove him 
 to a hospital," his immediate dependents (if any) receive one half of 
 his allowance. Insurance is compulsory, but is not yet extended to 
 agriculture, forestry, commercial employees, or to domestic servants. 
 Contributions are made through the employers, who themselves pay 
 one third of the amount. Self-government in independent local 
 unions (averaging about six hundred members) is the rule. Workmen 
 and employers are represented on the boards in the proportion of two 
 to one. 
 
 " After several fruitless attempts, the first installment of the law 
 for forced insurance against accidents passed the Reichstag on June 
 27, 1884. It began with trades exposed to especial risk, and has 
 since been extended to the building trades, to agriculture, and to 
 sailors of the inland and maritime traffic. The measure still awaits 
 its extension to those engaged in smaller industries and to domestic 
 servants in the towns. The whole body of industries and trades is 
 divided into trade associations. With a view to equitable mutual in- 
 surance those trades are combined which offer an equal degree of 
 risk. In 1886 there were sixty-four such, comprising between 3,000,- 
 000 and 4,000,000 workers. Payments are made by the masters in 
 proportion to the number and average wage of their men and to the 
 risks of their industry. In 1888, independently of the contributions 
 to the reserve fund, the payments in compensation reached four per 
 mille of the total wage, while the expenses of administration 
 amounted to one per mille. The total annual expenditure will ulti- 
 mately reach a much higher figure. 
 
 " But the advantages are considerable. For complete disablement,
 
 REMEDIES FOR THE RAILR(^AD PROBLEM. 1 37 
 
 two thirds of the actual wage (if exceeding four marks, a diminishing 
 fraction) ; for partial disablement, an equitable proportion of the 
 same is granted as pension. In case of death by accident, twenty 
 days' wage is given as burial money, and an allowance to the widow 
 of 20 per cent, of the wages of the deceased, with 15 per cent, 
 to each child under fifteen years — the whole not to exceed 60 per cent. 
 Dependent ascendants have also a secondary claim. If the injured 
 man is removed to a hospital, the wife draws her allowance as in the 
 case of death. The masters who supply the funds also conduct the 
 administration, but representatives of the workers sit on the Board of 
 Central Control and act as assessors to the arbitration courts. Elimi- 
 nation of risk is directly encouraged by self-interest and mutual 
 supervision, and necessary' measures of prevention can be defrayed 
 from the common purse. 
 
 " Such are the chief provisions of these two complicated acts. The 
 former is considered successful ; the latter can hardly yet be finally 
 judged, though it is expensive in working, and its growing burden is 
 regarded with some anxiety. But the measure now sanctioned is of 
 quite a different character. In its scope are included almost without 
 exception all persons above the age of sixteen, male and female, 
 working in a dependent position for regular hire. The line between 
 dependent and independent workers is not always clearly marked ; 
 so a certain discretion is allowed to the Federal Council to admit, in 
 particular trades, by special order, sub-contractors for large firms, 
 and even independent workers not themselves employing workmen. 
 Existing state and communal arrangements for similar purposes are 
 respected, stipulation being made that equal advantages shall be 
 granted. The contribution offered by the State is secured for such 
 establishments when they have obtained the approval of the Federal 
 Council. Eleven millions of persons will at once come under the 
 compulsion of the act when its operation begins (probably in 1891). 
 The capital value of the obligations incurred directly by the State by 
 this connection is reckoned at 77.8 million pounds ; the total obliga- 
 tions will hardly be less than three times as much." ' 
 
 This sweeping and far-reaching poHcy of the Ger- 
 man Empire is an outgrowth of the German tendency 
 toward the paternal system of government. It is 
 
 * London Times' Berlin Correspondence.
 
 138 THE CORPORATION PROBLEM. 
 
 intended as a check to nihilism. It seeks to bind 
 the masses to the support of the government, and it 
 is a long stride toward a state socialism which will 
 not only embrace the railroads, but will include most 
 of those enterprises which in other countries are 
 carried on by private corporations. 
 
 " Every one is familiar to a greater or less degree with the extent to 
 which the European nations have ventured in the direction of pater- 
 nalism. It is known that they are common carriers, stationers, and 
 printers, that they run theatres, public markets, and slaughter-houses, 
 edit and print newspapers, transmit messages, keep lodging-houses, 
 own warehouses and race-tracks, are pawn-brokers, manage express 
 companies, and so on ; but perhaps it is not so well known that in 
 addition they teach stammerers, work coal mines, peat-bogs, smelting 
 houses, and iron mines, hire out hearses and horses, have lime quar- 
 ries, run apothecary shops, vineyards, and wine cellars, and manufac- 
 ture china, tapestry, tobacco, and matches. Many of these industries 
 they are obliged to carry on as a direct consequence of the mere fact 
 of administration ; and others, the more important class, are prompted 
 in their conception evidently by the belief that it will not do to 
 intrust to interested private action the management of an industry 
 which entails important public responsibilities."^ 
 
 Mr. Bellamy in his novel, '' Looking Backward," 
 draws an ideal picture of state socialism. Indeed, 
 ever since Sir Thomas More's '' Utopia," written in 
 the sixteenth century, these ideal communities have 
 been the subject of many books. Mr. Bellamy, 
 however, brings forward the idea that the modern 
 corporation is to be the highway along which 
 America is to travel into state socialism. But when 
 it is considered that ever since Sir Thomas More's 
 time the functions of government have been steadily 
 decreasing, it hardly seems probable that government 
 
 ^ N. Y. Record and Guide, July 13, 1889.
 
 RFMKDIKS FOR THE RAILROAD PROBLEM. 1 39 
 
 is to be the agent that will remedy the social woes 
 of modern times. Indeed, German state socialism 
 has not yet affected other nations. It will, even at 
 the present rate of progress, be ages before the so- 
 cialists can in Germany or any other country set up 
 a legislature strong enough to put the state in pos- 
 session of the industries of the country. The 
 socialists will win many \'ictories so long as the 
 owners of property are not seriously alarmed. But 
 the rights of property are deeply rooted in human 
 nature and human society, and the socialists will 
 be astonished to find what a resistance property is 
 capable of when these attacks are made upon it. 
 
 The traditions and settled policy of the Anglo- 
 Saxon nations are opposed to this theory of govern- 
 ment. England and America have relaxed somewhat 
 from the principle of no interference by the state 
 with business, but England and America still believe 
 that such interference is disastrous, unwise, and de- 
 moralizing both to the government and to the 
 governed. They believe that self-reliance and inde- 
 pendence — the safeguards and guaranties of liberty 
 and progress — are undermined by state socialism. 
 They are aware that government may temporarily 
 bring about splendid and imposing results, but those 
 results are artificial in their origin, ephemeral in their 
 nature, and deadening in their effects upon the 
 growth of a people. The evolution of a higher, a 
 different and more durable civilization will never 
 come through the instrumentality of government. 
 Government creates nothing new. It burnishes up 
 the armor of the past. Great thoughts, great solu-
 
 I40 THE CORPORATION PROBLEM. 
 
 tions of social problems, and great development of 
 the nations of the earth are evolved, not by govern- 
 ment, but by the creative and spontaneous genius of 
 the people — the people untrammelled and free to 
 follow the course designated by nature. 
 
 STATE OWNERSHIP OF RAILROADS AS A REMEDY. 
 
 The State must rule the railroads or the railroads 
 will rule the state. This is the conclusion to which 
 a certain school of thinkers in Europe and America 
 has come. 
 
 In Continental Europe this belief has led to a 
 greater or less state ownership of railroads. In 
 England and America the same belief has led to 
 a governmental regulation of railroads. 
 
 All civilized nations have felt the necessity of 
 dealing radically with this newly risen power — the 
 railroad. For nearly fifty years remedy after remedy 
 has been tried. Each nation has fluctuated in its 
 policy, but has worked towards some end which 
 accords best with its institutions and people. For 
 the most part there has been a blind groping in the 
 dark. Even yet the policy of some of the nations 
 is vacillating and full of doubt. But experiments 
 have been tried on a gigantic scale, and the endeav- 
 ors of Europe to solve the railway problem are full 
 of instruction for all the world. 
 
 In France in 1842, railroads were built at the joint 
 expense of the government and private persons. 
 They were then turned over to the corporations 
 to be operated, but to be returned to the state as 
 the property of the state, at the end of a period
 
 REMEDIES FOR TlIK KA1LR(»AI) PROBLEM. I4I 
 
 of time, averaging thirty-six years. The revolution 
 of 1848, and the advent of Napoleon in 1851 changed 
 the policy of the government, and the reversion of 
 the railroads to the state was extended to ninety- 
 nine years. In 1859 the state assumed greater 
 control. It furnished the greater part of the funds, 
 and guarantied the bonds. The state assumed the 
 regulation of rates, but allowed the corporations to 
 earn interest, declare reasonable dividends, and ac- 
 cumulate a sinking fund to pay stockholders when 
 the time came for the railroads to revert to the state. 
 In 1865 the state began constructing new lines at its 
 own expense, owing to the impossibility of inducing 
 capitalists to undertake the work on the terms 
 offered. The six great lines radiating from Paris, 
 which then operated the railroads of France, had 
 refused to construct the desired new lines. In 1883 
 the financial embarrassments of the government 
 forced it to surrender to the old railroads ; the new 
 lines were turned over to them ; the government 
 agreed not to construct more lines, but to aid the 
 old companies in such construction ; the state gave 
 up its right to all the railroads at the end of ninety- 
 nine years, and the railroads agreed to repay gradu- 
 ally the moneys advanced by the state. The state 
 retained the right to regulate railroad rates. Such 
 is the situation to-day. 
 
 In Prussia in 1837 the railroad policy was inaugu- 
 rated of chartering private corporations to build rail- 
 roads, but le\'ying a state tax of a moderate amount 
 on the profits, and this tax was to be used by the 
 state to purchase the stock of the railroads. The
 
 142 THE CORPORATION PROBLEM. 
 
 state reserved the right to purchase the railroads at 
 any time after thirty years from the time of con- 
 struction, at a price twenty-five times greater than 
 the average dividend for five years prior to the 
 purchase, the state assuming the corporate debts. 
 Under these terms few railroads were built, until the 
 state guarantied the capital required. Many lines 
 however were constructed by the state itself. Bis- 
 marck, after the war of 1870, inaugurated the policy 
 of complete state ownership of railroads, and to-day 
 Prussia owns practically all of the railroads within 
 its boundaries. The paternal system of government 
 and the perpetual preparation for war in Prussia 
 have determined its policy towards the railroads. 
 
 In Italy, up to 1875, the railroads were built and 
 owned by private corporations, aided by state grants 
 and guaranties. In 1875 the state purchased the 
 lines. In 1879 i^ began the construction of addi- 
 tional roads. But in 1885 the difficulties of state 
 ownership and the desire for money on the part 
 of the state brought about a change of policy. 
 The railroads were leased to private corporations 
 for sixty years, with the privilege to the state to 
 terminate the leases at the end of twenty or forty 
 years. The rolling stock was sold to the companies 
 for cash, but the state agreed to pay interest on 
 this cash, and the state is to do certain repairing 
 and improving. 
 
 In Austria the state owns part of the railroads, 
 and is constantly building new ones. Part of the 
 railroads are owned by private corporations, which, 
 however, are subject to governmental control.
 
 REMEDIES FOR THE RAILROAD PROBLEM. I43 
 
 In Bcknum the state owns about three fourths of 
 the railroads, and is constantly acquiring' the lines 
 owned by priv^ate companies. 
 
 In Holland the state built the railroads and leased 
 them to private corporations. 
 
 In Hungary in 1867, out of 1,418 miles of railroad, 
 only /S belonged to the state. In 1887, out of 
 6,293 miles of railroad, 2,746 miles were owned by 
 the state, and 925 miles were guarantied by it. 1 he 
 government within twenty years has expended 
 $95,000,000 on the railroads, and the state roads 
 earn about 3.93 per cent, on their cost. 
 
 In Australia the railroads were built and are still 
 owned and operated by the state.' 
 
 It will be seen that the tendency of Continental 
 Europe is towards state ownership of railroads. 
 The incentives which have led to this result have 
 been not only to do away with the abuses which are 
 incident to private ownership, but also to centralize 
 and increase the power of the government, and to 
 build roads which private enterprise would not build. 
 
 In England, on the other hand, for fifty years there 
 have been investigations, discussions, and legislation 
 in the attempt to solve the railroad problem. The 
 first policy adopted was to allow corporations to 
 construct and own the track, but to allow all persons 
 to own and run cars over the track for a compensa- 
 
 ' See the report (January, 1887), of Simon Sterne as Commissioner 
 of the Federal Government, to investigate the relations of the gov- 
 ernments of Western Europe to the railway systems within their 
 jurisdiction. See also on this subject, Hadley r.n " Railroad Trans- 
 portation," chapters viii., ix., x. , xi., xii.
 
 144 THE CORPORATION PROBLEM. 
 
 tion, the maximum amount of which was specified in 
 the charter. A few years, however, demonstrated 
 that it was impracticable to allow any and all persons 
 to run their own cars over the line, and it was found 
 also that the maximum rates of charges were crude, 
 unmanageable, and excessive. 
 
 In 1845-46 came the financial panic and crash, 
 due to the craze for railroad building. In 1854 an 
 act was passed prohibiting all unjust discriminations. 
 In 1863 trafific agreements and consolidations be- 
 tween railways were prohibited, except such as were 
 approved by the Board of Trade, an official body. 
 In 1867 the railroads were required to publish their 
 rates, and statutes were enacted regulating the keep- 
 ing of their accounts. In 1873 ^^e act still further 
 regulating railroads and creating a Railroad Com- 
 mission was passed. And in 1888 the Railway and 
 Canal Traffic act was enacted, whereby the policy 
 of state regulation of railroads was completely car- 
 ried out. The English policy has become a settled 
 and distinct one. It is neither the policy of state 
 ownership on the one hand, nor of total separation 
 of railroad and state on the other. It is the policy 
 of governmental regulation of railroad abuses. 
 
 In America the question whether the States should 
 own the railroads arose early in the history of the 
 railroads. A very few years, however, demonstrated 
 that state ownership of railroads was not desirable, 
 and there are now very few a-dvocates of the idea that 
 each State should own the railroads within its juris- 
 diction. The experiment has proven to be a failure. 
 
 Professor Adams says :
 
 REMEDIES FOR THE RAILROAD PROBLEM. I45 
 
 " Michigan was admitted into the Union in January, 1837, and it 
 might be imagined, from the proceedings of her early legislatures, 
 that the purpose for which she sought the privileges of a State was 
 to build canals, railroads, and turnpikes, and to improve rivers and 
 harbors. The legislature, in its first session, appointed a Board of 
 Commissioners on Internal Improvements, and directed them to take 
 the necessary measures for executing the following i)ublic works : 
 They were to survey three lines of railroads across the State — called, 
 respectively, the Southern, the Middle, and the Northern routes, and 
 one shorter road, called the Havre Branch Railroad. They were also 
 to undertake three important canals — the Clinton and Kalamazoo, 
 the Saginaw or Northern, and a canal about the St. Mary's River. 
 In addition to this the Grand, the Kalamazoo, and the St. Joseph 
 rivers were to be improved. The total extent of these works, entered 
 upon by the first legislature, amounted to 1,100 miles of highway, of 
 which 557 miles were to be railroads, 231 canals, and 321 improve- 
 ments of rivers. The population of the newly admitted State was at 
 this time 175,000. from which it appears that the legislature projected 
 one mile of improvement for every 150 of the inhabitants." ' 
 
 But during the past ten years a vigorous advocacy 
 of federal ownership of railroads has sprung up. The 
 United States Government is being called upon to 
 purchase and operate all the railroads of the country. 
 The advocates of such ownership are not the masses 
 
 ■ See Adams on " Public Debts," pp. 325, 326. 
 
 Between 1830 and 1840 several States undertook to construct rail- 
 ways on their own account, but most of these attempts ended in dis- 
 aster, and the railways were completed by companies, if completed 
 at all. There remain, however, two State railways, one 138 miles 
 long, owned by Georgia, which it leases to a corporation for working, 
 and the other by Massachusetts, the latter railroad being mostly in 
 the long Hoosac tunnel. The Massachusetts railroads are run under 
 charters, which give to the legislature the right to purchase the roads 
 for the State, by paying therefor the full cost with such sum as, with 
 the profits which shall have been received, will be equal to ten per 
 cent, per annum on the said cost. There is little or no inclination, 
 however, to exercise this right of purchase. 
 10
 
 146 TPIE CORPORATION PROBLEM. 
 
 of the people, nor the poHtical parties, but are some 
 of the leading thinkers of the times. And their 
 cause seems to be growing. The railroads themselves 
 seem not to be averse to a profitable sale to the gov- 
 ernment. America is yet far distant from federal 
 ownership of railroads, but all the arguments for 
 such ownership are now being brought into promi- 
 nence. The arguments for and against State owner- 
 ship of railroads have been stated and restated many 
 times over. They are presented in the following 
 pages at some length. 
 
 The most remarkable advocacy of federal owner- 
 ship of railroads has been that of the president of 
 the Chicago & Alton Railroad in his report of Feb- 
 ruary, 1890. 
 
 The report reads : 
 
 " It is said that we should not complain unless prepared to suggest 
 a remedy. We will therefore suggest the ownership of railroads by 
 the National Government and the organization of a corps of railroad 
 operators, who shall remain in the service during good behavior, and 
 be in no greater degree under the influence of politicians or political 
 parties than the army militant." 
 
 Briefly stated. President Blackstone's suggestions 
 are that the National Government should acquire 
 the ownership of all the railroads in the United 
 States now used for interstate traffic, by the exercise 
 of its right of eminent domain or by purchase, pay- 
 ment being made by an issue of government bonds, 
 bearing interest at a rate not exceeding three per 
 cent, per annum; the bonds to be redeemed by 
 the annual application of a sinking fund equal in 
 amount to one per cent, of the whole amount of
 
 REMEDIES FOR THE RAILROAD PROBLEM. 147 
 
 such bonds issued ; the annual interest and sinking 
 fund to be paid from the net earnings of the rail- 
 roads, and the rates for transportation from year to 
 year to be reduced so as to provide no more money 
 than shall be needed for such payments. It is need- 
 less to say that this plan has not been favorably 
 received. 
 
 Professor Hadley thus sums up the arguments /r^? 
 and con in regard to state ownership of railroads. 
 
 ** The arguments advanced by the advocates of government owner- 
 ship start from the idea that government means of transportation will 
 be managed, not with a view to high profits, but for the good of the 
 community. They will thus, it is said, offer low rates, based upon 
 cost of service, and equal facilities without discrimination. The 
 evils of speculation will be avoided. There will be no waste of 
 capital, no construction of two lines where but one is needed. Capi- 
 tal will be put where it will do the most good for the development of 
 the country. Finally, we shall no longer be at the mercy of combi- 
 nations of capitalists who manipulate and tax us for their own inter- 
 ests. It is further urged that the post-office shows how government 
 ccured to all men low rates, equal facilities, and security against ex- 
 lurtion ; and it is claimed that the same result might be secured with 
 a government telegraph, or perhaps with government railroads. 
 
 " On the other hand, the Italian Commission sums up the arguments 
 on the other side by saying, first, that it is a mistake to expect lower 
 rates or better facilities from government than from private com- 
 panies. The actual results are just the reverse. The state is more 
 apt to tax industry than to foster it ; and when it attempts to tax in- 
 dustr}-, it is even less responsible than a private company. Second, 
 state management is more costly than private management, and a 
 great deal of capital is thus wasted. Third, political considerations 
 are brought into a system of state management in a way which is 
 disastrous to legitimate business and demoralizing to politics." ' 
 
 ' Hadley on *' Railroad Transportation," pp. 252, 253. 
 For a still further argument against state ownership of railroads by 
 Professor Hadley, see Atlantic Monthly, March, 1891, p. 388.
 
 148 THE CORPORATION PROBLEM. 
 
 Sir. R. Hill, in the report of the English Royal 
 Commission on Railways, 1867, gave the following 
 among other reasons why railways should belong to 
 the government. 
 
 (i) That the formation of competing lines, while 
 not producing, but rather preventing, permanent re- 
 duction of rates, has grievously injured the interests 
 of existing companies, and tended to check the use- 
 ful extension of lines and other improvements. 
 
 (2) That railways, being shown by experience to 
 be essentially monopolies, cannot be advantageously 
 left to independent companies, but should be in the 
 hands of those who are charged with the interests of 
 the country at large, viz.: the government. 
 
 (3) That, nevertheless, government should not it- 
 self attempt the immediate management of the lines, 
 but should lease them to companies or individuals, 
 though retaining the power to enforce the observance 
 of all regulations necessary for public safety and con- 
 venience. 
 
 (4) That the state should, therefore, gradually pur- 
 chase the whole railway system, with the exception, 
 perhaps, of a few lines, on terms to be agreed upon 
 with the several companies. 
 
 (5) That such purchase does not necessarily in- 
 volve any outlay on the part of government, seeing 
 that the transfer maybe made on such arrangements 
 as are generally adopted when a line is transferred 
 from one company to another, so that no increase of 
 the national debt is implied. 
 
 (6) That, while the rent demanded for a line must 
 be sufificient to cover the payments by government
 
 REMEDIES FOR THE RAILROAD PROBLEM. I49 
 
 in dividends, interest, etc., to the previous owners, 
 preference amongst competent applicants should be 
 given to the one who offers to adopt the lowest 
 traffic charges. 
 
 (7) That government purchase of railways may be 
 expected to secure the following advantages, viz.: 
 
 (a) A pecuniary gain to the state. 
 
 {b) Again to shareholders and others in steadiness 
 and security of income. 
 
 ic) Security against parliamentary contests, now 
 so costly. 
 
 {d) A reduction (eventually large) in fares, freights, 
 etc. 
 
 {e) Greater efficiency of management. 
 
 (/) Increase of postal facilities.' 
 
 The Royal Commission of 1867, however, denied 
 the soundness of most of these claims, and reported 
 that it would be difficult to find lessees who would 
 run the railroads on the terms that would be offered; 
 that the low interest at which the government could 
 borrow money would be more than offset by the 
 large price which it must pay in order to buy out 
 the railroads ; and that the huge government loan 
 could not be floated at low rates. 
 
 Charles Francis Adams has said : 
 
 " Because in the countries of Continental Europe the state can and 
 does hold close relations, amounting even to ownership, with the rail- 
 roads, it does not follow that the same course could be successfully 
 pursued in England or in America. The former nations are by 
 political habit administrative, the latter are parliamentary ; in other 
 words, France and Germany are essentially executive in their gov- 
 
 ' Jeans on " Railway Problems," p. 458.
 
 150 THE CORPORATION PROBLEM. 
 
 ernmental systems, while England and America are legislative. Now 
 the executive may design, construct, or operate a railroad ; the legis- 
 lative never can." ^ 
 
 And Edward Everett Hale has said : 
 
 ' ' A railway stoppage for a fortnight would almost mean famine in 
 most Massachusetts towns, so steady is the daily river of food by which 
 God now answers our prayers for daily bread. Now, as soon as the 
 tendency which has brought out this state of things comes so far 
 that the railroad sers-ice is needed by one man about as much as by 
 another, so soon will the government take the railroads. In my judg- 
 ment it ought to. But whatever be the judgment of any individuals, 
 what is certain is, that it will. 
 
 " ' It will make a very bad mess of it,' says some grumpy cynic, 
 who has no faith in the people, curses trial by jury, and hates uni- 
 versal suffrage. ' A mere put-up job it will be — all along.' " 
 
 " I do not see that, and I do not believe it. 
 
 "On the other hand, certain facts must be noted. 
 
 "Thus, I. The administration of the post-office, by the United 
 States Government, is the wonder and despair of the rest of the world. 
 Read any study on ' Administration ' by a French expert, and see 
 what he will say. 
 
 "2. The experiment of the success and the honesty of the ' Receiv- 
 ers ' who are now doing this very thing, under infinite difficulties, 
 speak a gi-eat deal as to the power of government to employ the 
 right men. 
 
 " 3. There is not a town in America which has tried water-supply 
 by the public where any man would dare to propose the sale of the 
 works to a corporation. In my own home, Boston, the engines used 
 by the city are the finest pieces of machiner}'. They are among the 
 lions of the town. The water service is so good and cheap that a few 
 years ago the city had to lower the rates and pay us back rates which 
 it had overcharged by accident. 
 
 "4. There is, on the whole, an immense advantage in publicity. 
 State ownership means the printing, from day to day, of every ac- 
 count and transaction where any light is needed. 
 
 "5. As for jobs, there are jobs everywhere. I have heard of the 
 nephew of a large stockholder being placed in a position which he 
 
 ^ Adams on " Railroads," p. 115.
 
 REMEDIES FOR THE RAILROAD PROBLEM. 151 
 
 ought not to have fille.l. I have heard of such a man runnin-j away 
 with money which did not belong him. There can be little doubt 
 that the loss of Massachusetts or of the United States by dishonesty 
 is as slii^ht as is that of any large corporation. 
 
 " 6. The uniform civility of officers of the state is a point of great 
 value. Think how civil post-office officials are always, and how rude 
 the majority of telegraph operators are. This is simply because you 
 are one of the post-office clerk's employers, while the telegraph opera- 
 tor hates you because you make her work when she is tired. She 
 does not look to you for her salary as tlie post-office man does. 
 
 " 7. And it is certainly a great advantage that the state at the out- 
 side needs earn but three per cent, to pay interests on its investments, 
 while the corporation has the privilege of earning ten." ^ 
 
 Professor Richard T. Ely presents his views as 
 follows : 
 
 "Our present policy is one which inevitably leads to political 
 degradation. To maintain pure government in a country like the 
 United States with railways private property, but controlled by courts 
 and legislatures, would require a population of angelic character, or 
 of superhuman wisdom, if not of both. There inevitably arises a 
 strugo-le between two vast and not altogether unequally matched 
 powers, and this struggle must continue as long as our policy con- 
 tinues. The general public and railway owners and managers are the 
 two parties, and they struggle for supremacy in government, some- 
 times openly, often secretly. The railways must seek political 
 power for private ends. They must have their agents in courts and 
 legislatures to protect themselves ; but they do not stop with self- 
 protection. They are aggressive and seek complete control for the 
 promotion of their private interests, and they corrupt legislators with 
 free passes, offices for themselves or friends, retaining-fees, sometimes 
 direct gifts of money, and in every city hall and State capitol they 
 maintain a disreputable lobby." - 
 
 ' T/ie Independent, Aug. 20, 1 890. 
 
 ' Idem. Professor Ely's argument has been summed up as follows : 
 " The evil influence of corrupt capitalists is especially dangerous 
 because it is underhand and approaches unawares. State manage- 
 ment would bring the conflicts into the light. \Vhere one person has
 
 152 THE CORPORATION PROBLEM. 
 
 Herbert Spencer, in his article on " The Coming 
 Slavery," takes an entirely different view of this 
 subject and says : 
 
 "Then, again, comes state ownership of railways. Already this 
 exists to a large extent on the Continent. Already we have had here 
 a few years ago loud advocacy of it. And now the cry, which was 
 raised by sundry politicians and publicists is taken up afresh by the 
 Democratic Federation which proposes ' State appropriation of rail- 
 ways, with or without compensation.' Evidently, pressure from 
 above joined by pressure from below is likely to effect this change 
 dictated by the policy everywhere spreading ; and with it must come 
 many attendant changes. For railway proprietors, at first owners and 
 workers of railways only, have become masters of numerous businesses 
 directly or indirectly connected with railways ; and these will have to 
 be purchased by government when railways are purchased. Already 
 exclusive letter-carrier, exclusive transmitter of telegrams, and on the 
 way to become exclusive carrier of parcels, the State will not only be 
 exclusive carrier of passengers, goods, and minerals, but will add to its 
 present various trades many other trades. Even now, besides erect- 
 ing its naval and military establishments and building harbors, docks, 
 
 suffered from dishonest or inefficient government management of 
 finances, one hundred have suffered from dishonest or inefficient 
 management of railroads. Improvements in the details, politeness of 
 employees, etc., would surely follow, and small places would be 
 accommodated more on a par with large cities, as was the case when 
 the government of (ireat Britain took the telegraph lines in that 
 country. No more parallel lines would be constructed. The inhu- 
 manity of railroad managers who adopt safety appliances to save 
 money, but not to save the men's lives, is enlarged upon. Grade cross- 
 ings in cities would be abolished. In Prussia the financial success of 
 government ownership has surpassed anticipations. Public owner- 
 ship would be the death of the spoils system in politics, for it could 
 not live when its real significance became so plain. It has been the 
 peculiar misfortune of political economy rarely to advocate any 
 reform until it has been accomplished, but the number of political 
 economists who favor government ownership is increasing."
 
 REMEDIKS l-Ol; IHi: KAIL1«>A1) I'ROHLEM. 1 53 
 
 break-waters, etc., it does the work of shipbuilder, cannon-founder, 
 small-arms n.aker, manufacturer of ammunition, army-clothier and 
 boot-maker ; and when the railways have been appropriated ' with or 
 without compensation,' as the Democratic Fcderationists say, it will 
 have to become locomotive-engine builder, carriage-maker, tarpaulin 
 and grease manufacturer, passenger-vessel owner, coal-miner, stone- 
 quarricr, omnibus juoprietor, etc. Meanwhile its local lieutenants, 
 the municipal governments, already, in many places, suppliersof water, 
 gas-makers, owners and workers of tramways, proprietors of baths, 
 will dt)ubtless have undertaken varioits other businesses. And when 
 the State, directly or by proxy, has thus come into possession of, or 
 has established, numerous concerns for wholesale production and for 
 wholesale distribution, there will be gotxl precedents for extending its 
 function to retail distribution : following such an example, say, as is 
 offered by the French Government, which has long been a retail 
 tobacconist." 
 
 The view taken of this subject by Mr. Ashby, the 
 lecturer of the National Farmers' Alliance, an or- 
 ganization that is practically in control of several of 
 the Western States, is as follows : 
 
 '* Rome had her great highways built at public expense. These 
 roads were the arteries for her commerce, and the nerves which kept 
 up the communication between Rome, as the head, and her members, 
 the jirovinces. Those highways were public ; they belonged to the 
 state. What the great ' ways ' as they vere called, were to Rome and 
 the Romans, the railways are to the United States and its citizens. 
 They have superseded the State road and the turnpike. Our rail- 
 ways have been built at public expense as ]-)ublic highways. But our 
 highways, the railroads, have been surrendered to private corpora- 
 tions. 
 
 " We have our great * ways * but they are controlled by the lust of 
 private greed ; our Roman ' ways ' are not of the public, but of the 
 corporation. ^^^loever controlled the great ' ways ' of Rome was 
 master of Rome and the Romans. Such must be our fate as well. 
 Tlie railways are our veins and arteries of commerce. Whoever con- 
 trols the commerce of a country as the railroads control ours, w ill be 
 the masters of the country. This is the inevitable. Shall it be the peo-
 
 154 THE CORPORATION PROBLEM. 
 
 pie, through their government ? Shall it be the lords of the rail, 
 through the government they will set up ? Shall it be the people, or 
 plutocracy?" ^ 
 
 It may truly be said, however, that there is an in- 
 stinctive feeling on the part of Americans that state 
 ownership and management of railroads are hostile 
 to sound principles of government. Ever since the 
 year 1215, when the barons at Runnymede forced 
 Magna Charta from King John, the English speak- 
 ing people have been jealous of any increase of 
 government functions. The tyranny of the state 
 is prevented by restricting the work of the state. 
 It is true that the federal government has gone far 
 in the Interstate-Commerce Act, but this act was 
 merely a prohibition against railroad abuses. An 
 enlargement of the functions of the United States 
 Government by giving it the ownership and opera- 
 tion of 160,000 miles of railroad is not within the 
 range of probabilities. The state is kept pure 
 by the simplicity of its duties. State ownership 
 of railroads means a transfer of inordinate railroad 
 wealth and power to the state. Railroad tyranny 
 would pass to state tyranny and would be in- 
 creased a thousandfold. A republic which en- 
 dures with difficulty the tension and strain caused 
 by the exercise of its present governmental func- 
 tions could not and would not long survive federal 
 ownership and management of railroads. Such 
 ownership of railroads might temporarily leave 
 to the people the nominal control of the govern- 
 
 1 " The Riddle of the Sphinx," p. 282.
 
 KKMK1)11> 1"R iiii. K.\ll.l<< )A1) PROBLEM. 1 55 
 
 ment, but the real control of that government would 
 be with the corporation classes. ' 
 
 PERIODICAL LKASINc; OF FRANCHISES UY THE STATE AS 
 
 A REMEDY. 
 
 Closely related to the question of whether the 
 state shall own and operate the railroads, is the 
 question of whether the state shall own and lease 
 those railroads. As will be shown hereafter, the 
 American cities have wasted their birthright in giv- 
 ing away the franchises of street railways, gas-works, 
 electric-light plant, water-works, electric lights, tele- 
 phones, telegraphs, ferries, wharves, and other natu- 
 ral monopolies.' 
 
 If these natural monopolies had not been granted 
 at all, or had been granted for a few years only, with 
 the right to the city to retake them, or had been 
 sold or leased to the party that offered the highest 
 percentage of gross receipts, or had been operated by 
 the municipalities themselves, the financial gain to 
 the municipalities would have been almost incredible. 
 
 ' Senator Carlisle of Kentucky stated these objections forcibly in 
 May, 1 891, when after showing that the railroads of America would 
 cost the government about fourteen millions of dollars, he proceeded 
 to say : 
 
 "Are you ready to tax yourselves to raise this money? Then, 
 after you have got the property, are you ready to tax yourselves to 
 operate it, for the Government never yet succeeded in doing business 
 at a profit ? Consider another effect ; such a plan would add perhaps 
 1,200,000 men and women to the roll of Government employees. 
 Howr would you ever succeed in turning out of power an administra- 
 tion with such resources at its command ? The more corrupt it was 
 the more difficult it would be to displace it." 
 
 •See Chapter IV.
 
 156 THE CORPORATION PROBLEM. 
 
 It is a serious question, however, whether the 
 same poHcy would have been possible with the rail- 
 roads. There are the same objections to a state 
 ownership and leasing of railroads, and to a state 
 ownership and frequent reselling of the franchises 
 without state ownership of the property, that there 
 are against state ownership and operation of rail- 
 roads. Indeed, state leasing of roads is worse in 
 some respects than state ownership of roads. The 
 former plan means a constant corruption and disturb- 
 ance of the government by the corporations which 
 are operating or seeking to obtain the franchises. 
 When France possessed the right of reversion of all 
 its railroads, the railroads waited until the govern- 
 ment became impecunious, and then forced it to give 
 up its reversionary interest. Illinois, Michigan, and 
 Georgia, and possibly some other States have tried 
 the plan of State ownership, and in some instances 
 leases have been made of the roads to private cor- 
 porations. It is true that when these leases entitled 
 the State to a proportion of the gross receipts, the 
 State derived a large revenue from this source. But 
 in all such instances there has been a constant clash- 
 ing of corporate interests with State government. 
 Sooner or later, by corruption, bribery, and manipu- 
 lation of conventions, the corporations will manage to 
 control the State, and then the rental is reduced or is 
 abandoned altogether, or the franchises and interests 
 of the State are made over to the corporations.* 
 
 ' The Railroad Gazette points out still another objection as follows : 
 " Mr. Baker's plans are not absurdly wild, like those of Mr. Hud- 
 son : but, as far as they go, they would tend to have somewhat the
 
 REMEDIES FOR THE RAILROAD PROBLEM. 157 
 STATE REGULATION OF RAILROADS AS A REMEDY. 
 
 England and America have instinctively refrained 
 from state ownership of railroads. The policy and 
 tendency of Continental Europe in this respect have 
 not been followed. Nevertheless, in both England 
 and America the abuses and dangers of corporate 
 ownership of railroads have been felt as fully as they 
 ever were felt in Continental Europe. These abuses 
 and dangers have already been pointed out. They 
 include discriminations, extortionate charges, wa- 
 tered stock and bonds, free passes, pools, frauds 
 
 same effect. He would have the government acquire the title to the 
 franchise, permanent way, and real estate of all the railroads of the 
 countr)', the money for this purpose being raised by issue of bonds ; 
 and he would then lease these roads in perpetuity to a few large cor- 
 porations, each having a monopoly within its district. The rates 
 should be under direct government control, and should be fixed in 
 such a way as to allow the operating companies from four to eight per 
 cent, dividend, according to circumstances. This is substantially the 
 French plan, though the details are a little different. The combina- 
 tion of government payment for roadbed, district monopoly of opera- 
 ting companies, and government control of construction and rates, 
 has been consistently tried on a large scale and with all the conditions 
 in its favor. The results have been so bad that if Mr. Baker had 
 been familiar with them he would not have recommended us to 
 follow the French example. While every other country has made 
 great reductions in rates, France remains substantially where she was 
 twenty years ago. With a large and rich population her volume of 
 railroad business has not developed. The normal trade incentives 
 have been taken away ; the hope of government control to take their 
 place has proved illusory. Great as may be the evils of the American 
 system, exemption from them would be dearly purchased if it 
 involved the loss of efficiency for the present and progress in the 
 future." 
 
 See still further im this subject Chapter IV.
 
 158 THE CORPORATION PROBLEM. 
 
 on stockholders and creditors, municipal aid, special 
 privileges, exemption from taxation, and the dire 
 evils of railroad bankruptcies, foreclosures, receiver- 
 ships, and reorganizations. They include also the 
 constant corruption of the state by railroad corpora- 
 tions seeking to obtain new franchises, or to modify 
 or protect old ones. England and America have 
 both felt the full weight of these troubles. 
 
 Nevertheless, for the most part, America has been 
 constant to the Anglo-Saxon idea that the true func- 
 tion of government is to protect life, liberty, and 
 property, and that when government attempts to do 
 more than this, it does more harm than good. For 
 the most part, the English-speaking nations have 
 ceased prescribing by statute how many coats a man 
 shall own, what food he shall eat, what he shall 
 drink, how many servants he shall employ, what 
 speculation in merchandise he shall enter into, what 
 business methods he shall adopt, and what opinions 
 he shall hold. State regulation of such matters is 
 hostile to personal liberty. 
 
 It has been largely on account of this feeling that 
 the railroads have not been more seriously interfered 
 with. From 1830 to 1870 there was a separation of 
 railroad and state, as wide as the separation of 
 Church and state. And the railroads, particularly 
 in the West, made the best of their opportunities. 
 They levied extortionate rates, defied municipalities 
 and legislatures, paid no attention to the complaints 
 of the people, and conducted themselves generally 
 as the owners of the country and the fulness thereof. 
 The railroads as well as the people assumed that the
 
 KKMFDTFS KoU TIIK UAlLRoAD PROBLEM. 1 59 
 
 State should bear the same relations towards rail- 
 roads that it bears towards other business — namely 
 the duty to protect life, liberty, and j^roperty, and 
 to do nothing more. 
 
 But this theory failed. Railroad practices, railroad 
 wealth, and railroad power became insolent, usurping, 
 and corrupt. The railroads were not only discrimi- 
 nating and levying oppressive charges for traffic, but 
 they were controlling legislatures, influencing judges, 
 corrupting public officers, and absorbing the press. All 
 the avenues of expression and the bulwarks of the 
 people's supremacy were falling into the hands of 
 the railroads. The time had come for a change. The 
 old theory that State interference with business was 
 wrong and that consequently the State should not 
 interfere with the railroads was found to be too nar- 
 row. It had become clear that either the State must 
 rule the railroads or the railroads would rule the 
 State. 
 
 Hence it was, as already stated,' that in 1870 vari- 
 ous Western States enacted statutes which greatly 
 reduced the charges which the railroads had been 
 collecting. The railroads refused to obey the statutes 
 and claimed that such statutes were contrary to 
 that provision of the Federal Constitution which 
 declares void any statute of a State which impairs 
 the oblifjation of a contract. The railroads con- 
 tended that their charters, being contracts between 
 them and the State, were violated by the statutes, 
 which reduced railroad charges. A series of cases, 
 
 ' See Chapter II.
 
 l6o . THE CORPORATION PROBLEM. 
 
 called the " Granger Cases," were commenced to test 
 the constitutionality of these statutes. The Supreme 
 Court of the United States sustained the statutes 
 and since that time the railroads have necessarily- 
 complied with them. But other abuses arose and 
 soon became unbearable. The railroads gave re- 
 bates, secret reductions, and all kinds of discrimina- 
 tions to favored shippers. The report of the 
 Hepburn Investigating Committee to the New York 
 Legislature in 1879 uncovered an appalling mass of 
 illegal and dishonest practices. New statutes were 
 passed and State Commissioners were appointed and 
 authorized to rectify the abuses. Most of the States 
 of the Union now have these railroad commissions. 
 The powers granted to the commissioners vary in 
 each State. In Massachusetts their power is simply 
 that of investigating and recommending. In New 
 York it is about the same. But in Iowa, Kansas, 
 Missouri, Florida, and several other States the com- 
 missioners are given power to order the railroads to 
 reduce their rates. In nearly all the States the com- 
 missioners have power to prescribe and enforce 
 regulations concerning speed of trains, obstructions 
 at crossings, precautions against collisions and other 
 accidents, adequate depot accommodations and fa- 
 cilities for shipment, the construction and mainte- 
 nance of cattle guards, road- and farm-crossings, 
 side-tracks to mines and manufacturing establish- 
 ments, improved switch and signal systems, and 
 the prevention of fraud or unjust discrimination in 
 the weighing, billing, and transportation of freight ; 
 severe penalties being often prescribed or authorized
 
 REMEDIES FOR THE RAILROAD PROBLEM. l6l 
 
 for their enforcement. But in regard' to all this 
 legislation an unexpected difficulty arose. The 
 Supreme Court of the United States decided that a 
 State statute which affected freight passing from 
 State to State was void because it interfered with 
 the exclusive right of the federal government to 
 regulate interstate commerce. After this decision 
 there remained but one remedy. Congress was called 
 upon to enact a law prohibiting interstate railroads 
 from continuing the abuses which then existed. In 
 1887 such a law was enacted by Congress. It pro- 
 hibited interstate railroads from giving discrimina- 
 tions ; from issuing free passes ; from charging more 
 for a short haul than for a long haul, excepting in a 
 few cases ; and it created a commission of five judges 
 to expound and administer this law. Such is the 
 present situation of the railroad problem in America. 
 
 In England also the regulation of railroads by 
 means of a commission is the policy that now pre- 
 vails. 
 
 But England and America are still ver>' far from 
 having settled the railroad and corporation problem. 
 These commissions may possibly prevent discrimina- 
 
 ' So far ds State railroad commissions are concerned, however, 
 the farmers are already becoming dissatisfied with them. The lec- 
 turer of the National Farmers' Alliance says: "The question was 
 complex, the corporations ever alert, and the granger was soon over- 
 reached. Instead of law he accepted a compromise in the form of 
 railway commissioners to act as a sort of board of arbitration. The 
 salaries of this board were paid by the railway companies, — their 
 appointment, more often than otherwise, dictated by them. These 
 commissioners practically became figure-heads, either through false 
 sympathies, or because powerless to execute their own orders." — " The 
 
 Riddle of the Sphinx," p. 132. 
 II
 
 1 62 THE CORPORATION PROBLEM. 
 
 tions and excessive rates. Congress may even pro- 
 ceed to reduce and regulate the rates charged on 
 interstate commerce. But State or national regula- 
 tion does not touch the deeper questions and 
 difficulties that exist between the railroads and the 
 people. Indeed, these commissions will tend to 
 increase rather than decrease the corruption of the 
 government by the railroads ; increase the induce- 
 ment of the corporations to control and dominate 
 the State and nation ; and increase the tendency of 
 wealth and corporations to use that control, not for 
 the protection of the people and of republican insti- 
 tutions, but for grasping more wealth, wielding more 
 power, and protecting and enlarging the franchises, 
 and privileges which they already possess. 
 
 Adams on " Railroads " says in regard to these 
 unsatisfactory results : 
 
 " The final result is probably yet quite remote, and will be reached 
 only by degrees. When it comes, it will assuredly work itself out ; 
 probably in a very commonplace way. The development will then 
 unquestionably be found to have been correspondent, — that is, con- 
 sciously or unconsciously, the government on one side and the railroad 
 system on the other will have worked towards each other." ^ 
 
 At present, it is very doubtful whether even the 
 Interstate Commerce Commission is capable of 
 solving any of the difficulties of the railroad prob- 
 lem. The effects of the Interstate Commerce Act 
 have given rise to wide discussion and great differ- 
 ence of opinion. The railroad advocates claim that 
 the anti-pooling provision and the prohibition against 
 charging more for a short haul than a long haul are 
 
 ^ Page 146.
 
 REM ED IKS 1(»K THE RAILROAD PROBLEM. 163 
 
 disastrous ; that these provisions arc ruining the 
 small railroads, and leading to the absorption of 
 small lines by great lines ; that the prohibition 
 against free passes and the secret sales of tickets at a 
 discount are not observed and cannot be enforced ; 
 that the prohibition of pools promotes railroad 
 wars and secret discriminations, rate-cutting, re- 
 bates, and under-billing ;— in short, that the act has 
 demoralized the railroad world, and made things 
 worse than they were before.' 
 
 Answers, however, have been given to all of these 
 objections, and these answers are of vital importance 
 because the movement to repeal the Interstate Com- 
 merce Act is a strong one. They are as follows: 
 The prohibition of the pool may promote railroad 
 wars, yet railroad wars existed before pools, and 
 would arise if the Interstate Commerce Act 
 were repealed. Railroad wars will always exist 
 in this country until consolidation takes place. 
 When only great trunk lines remain to compete for 
 business, they will divide the business, parcel out the 
 country, and railroad wars will be heard of no 
 more. Until then railroad wars will occur. Even 
 though the Interstate Commerce Act accelerates the 
 process of the absorption of the small lines by the 
 irreat lines, nevertheless the act should remain. 
 Pools delay the natural course of events, and since 
 the pools retard the manifest solution of the 
 railroad problem, pools should cease. Nor should 
 the long- and short-haul provision be repealed. The 
 
 ' See the Railroad Gazette, Nov. 23, 1889 ; Dec. 14, 1889 ; Feb. I, 
 18S9 ; Feb, 22, 1889 ; and Dec. 7, 188S.
 
 164 THE CORPORATION PROBLEM. 
 
 effect of the enactment has been to cause the rates 
 between the great commercial centres to be main- 
 tained at a higher point, and the local rates to be 
 reduced. It has prevented small lines from cutting 
 through rates because a low through rate necessitates 
 equally low local rates. It has caused the railroads 
 to give better accommodations to local business. It 
 has decreased the attention which railroad officers 
 have given to through business, — a prolific source of 
 the whole list of railway abuses. It has caused 
 small towns, cities, and villages to obtain equally 
 good rates with the larger places, and has prevented 
 the growth of the latter at the cost of the former. 
 It is true that the act has aided the greatest com- 
 mercial centres, while injuring the smaller commer- 
 cial centres. New York thrives under it. Smaller 
 cities, such as Omaha and Detroit, are injured. The 
 cities that have been serving as middlemen between 
 the great metropolis and the small towns have 
 suffered. The middlemen are no longer needed. 
 The rate from the great commercial centre to the 
 small town is lower, or as low, as the rate from that 
 centre to another city added to the rate from the 
 latter city to the small town. 
 
 America will not abandon its policy of State and 
 national regulation of railroads. It will not repeal 
 the Interstate Commerce Act. A few of the cities 
 and all of the railroads may favor that repeal ; but 
 the great mass of the people, particularly in the 
 West, will not allow it. The act is here to stay. ' 
 
 ^ George B. Roberts, President of the Pennsylvania Railroad, re- 
 cently testified before a committee of the Senate, substantially as
 
 REMEDIES FOR THE RAILROAD PROBLEM. 165 
 
 Charles Francis Adams, in December, 1888, said 
 of the Interstate Commerce Act: 
 
 " Under the operation of the act, the smaller local railroads 
 throughout the country are being ground out of existence. It is the 
 long haul which brings in the profit. The smaller independent rail- 
 roads cannot have the long haul, and can only be operated profitably 
 in connection with the larger railroads. They are thus, one by one, 
 becoming unremunerative, and being forced, whether they like it or 
 not, into the maws of the few great systems into which the rail- 
 roads of the country are rapidly crystallizing. . . . Just as the 
 small local railroads are crushed out of existence by the anti-pooling 
 clause, so the local points of distribution and second-class business 
 centres throughout the country find themselves, because of the long 
 and short haul, unable to compete with the great commercial centres. 
 Traffic, under the provisions of the act, must inevitably seek the 
 railroad having the long haul to the most distant and largest centres. 
 The operation of the law in this respect is now beginning to make 
 itself felt upon the smaller distributing points. They are deprived of 
 their markets ; for those who formerly bought of them can get the 
 same goods on better terms from the larger and more distant centres. 
 
 follows : The condition of railroad matters has been bettered since 
 the passage of the Interstate Commerce law. Evasion of the law is 
 still practised ; but this should be expected, as the government sud- 
 denly thrust a great change upon the conditions of doing business. 
 Some law should have been enacted long ago. The time was 
 certainly ripe for some sort of government control. The old pools 
 cost a great deal of money, and did not fully serve their purpose. 
 They tended to increase the construction of competitive lines. If 
 the United States Government took a more paternal interest in the 
 roads, if the State governments should act in a more friendly manner 
 toward them, and if capital might be diverted from building unneces- 
 sary roads, the railroads of the United States would prosper more. 
 He was not prepared to admit that legalized pooling was advisable. 
 Pools tended to prevent the natural development of railroads. He 
 preferred well-regulated competition, under proper laws, to any form 
 of combination. The Pennsylvania Railroad had for years been 
 subject to the long- and short-haul law in the State of Pennsylvania. 
 See report in Railroad Gazette, May 17, 1S89.
 
 l66 THE CORPORATION PROBLEM. 
 
 The old local system of distribution is broken up in favor of the 
 centralized system. This fact is now making itself apparent to the 
 manufacturers and jobbers of the smaller cities and towns as against 
 Chicago, St. Louis, or Cincinnati ; but, as sure as the law of gravita- 
 tion applies to all places and works under all circumstances, this 
 same long- and short-haul clause will next make itself felt against 
 Chicago, St. Louis, and Cincinnati, and in favor of New York. In 
 other words, contrary to every design of those who framed the act, its 
 provisions have lent a new impetus to just those forces Avhich it was 
 intended to hold in check. Instead of building up the local road and 
 the small distributing centre, it is working the sure destruction of 
 both. ... If that act were totally repealed to-morrow, it 
 would produce but a temporary and stock-jobbing relief. For a few 
 days things might be apparently better ; but they would be sure to 
 drop heavily back again into their present bad state, unless the knife 
 of reform went deeper and cut at the root of the evils I have referred 
 to. The railroad system must heal itself ; no act of Congress, or 
 repeal of any act of Congress, will greatly help it." ^ 
 
 RAILROAD CONSOLIDATIONS AS A REMEDY. 
 
 '' Where combination is possible, competition is 
 impossible." The truth of this terse statement of an 
 
 ^ The question of what effect the Interstate Commerce Act has had 
 upon various classes of cities and towns is considered to some extent 
 in the second annual report of the Interstate Commerce Commission, 
 
 pp. 50-34. 
 
 For the opinion of the Interstate Commerce Commission concern- 
 ing this demand of the railroads for the repeal of the anti-pool 
 provision, and concerning the conduct of the railroads generally when 
 asked for information, see fourth annual report, pp. 21-27. 
 
 For a review of the effects of the long- and short-haul clause, and 
 a reference to many statutes by the States in reference to that subject, 
 see the fourth annual report of the Interstate Commerce Commission, 
 pp. 37. &c. 
 
 Mr. A. B. Stickney, Chairman of the Board of Directors of the 
 Chicago, St. Paul, & Kansas City Railroad Company, in a work on 
 "The Railway Problem," p. 211, advocates the following remedy: 
 that whenever the chief executive officer of the federal government
 
 REMEDIES FOR THE RAILROAD PROBLEM. 1 67 
 
 economic principle has been demonstrated by the 
 raihvay histor>' of the past twenty years. Not only 
 this, but very probably the most striking feature of 
 the railroad situation to-day is the swift and uncon- 
 trollable tendency towards consolidation. Trunk 
 lines are being united, while short and disconnected 
 roads are being absorbed. Scarcely a month elapses 
 without some great consolidation being announced. 
 A few great transcontinental systems of railroads are 
 beginning to assume enormous proportions, and when 
 their work has been accomplished it will be found 
 that all other roads have been absorbed. It is being 
 done by leases, sales, consolidations, mergers, absorp- 
 tions, and amalgamations, aided by railway wars, 
 railway wrecking, and railway bankruptcies, fore- 
 closures, receiverships, and reorganizations. The 
 country' is being parcelled out among a few great 
 trunk lines, which ultimately will reach from ocean 
 
 having charge of the enforcement of the interstate commerce laws 
 becomes satisfied that any railroad company is persistently disobeying 
 the laws, he shall have power to take possession of the property and 
 manage it through the intervention of a receiver or otherwise until he 
 can have satisfactory assurances that the law will thereafter be 
 obeyed. The trouble with this remedy is : (i) that if enforced it 
 would ver)' soon place all the great railroads in the country in the 
 hands of the governmental receiver, Mr. Stickney's road included ; 
 (2^ the question of fact as to whether a railroad was or was not per- 
 sistently violating the law would be even more difficult than it is now, 
 and litigation resulting therefrom would destroy the eflfectiveness of 
 the remedy ; (3) after the receiver's administration was finished there 
 would be little property to turn back to the company ; (4) this is 
 another plan of interference by government with all the incompetency, 
 dishonesty, vacillation, superficial treatment, and temporary relief 
 that governmental nostrums involve ; (5) the remedy is not a perma- 
 nent cure ; it is onlv an emetic.
 
 l68 THE CORPORATION PROBLEM. 
 
 to ocean. Each system will have exclusive posses- 
 sion and control of the traffic in its district, and each 
 will respect the territory of the other. In England, 
 out of two hundred and sixty-two companies only 
 eleven remain. For thirty years Parliament tried to 
 stem the tide of consolidation, and then abandoned 
 the effort. In France six companies remain out of 
 forty-eight. In America it takes twenty-seven pages 
 of Poor's ^' Manual of Railroads " for 1889, ^^^ 
 thirty-one pages in 1890, to give merely a list of 
 railroad companies which have become merged into 
 others. The 167,000 miles of American railroad are 
 owned by 1,705 companies, but the operations of all 
 these are controlled by 436 organizations that are 
 independent of each other. Thirty-three systems 
 control more than a thousand miles of road each, 
 and these same systems control forty-nine per cent, 
 of the total railroad mileage of the country. 
 
 Railroad consolidations are inevitable. Constitu- 
 tional and statutory prohibitions cannot prevent 
 them. They are due to the certainty of increased 
 profits and to the impossibility of maintaining com- 
 petition among natural monopolies. They are the 
 product of the laws of trade, and the laws of trade 
 are stronger than the laws of men. 
 
 The consolidations here referred to are where one 
 road becomes permanently united with another by 
 union, purchase, merger, or long-time lease. Re- 
 cently another method of consolidation has been 
 advocated, — the railroad " trust." No such trust 
 on a large scale has yet been attempted, and prob- 
 ably none ever will be. A railroad trust would
 
 REMEDIES FOR THE RAILROAD PROBLEM. 1 69 
 
 encounter the hostility and adverse legislation of 
 every State in the Union. Its legality would be 
 doubtful, especially in the light of the recent decision 
 against all forms of trusts. Moreover, such a trust 
 would be difficult to bring about, owing to the 
 caution and large interests of the stockholders. It 
 would be subject to that objection to all trusts, 
 namely, the unrestrained, secret, and unlimited 
 power of the trustees. It would be liable to fall to 
 pieces and be dissolved by consent, dissensions, dis- 
 asters, or judicial interference. A consolidation, on 
 the other hand, is permanent, reliable, and effective. 
 The railroad trust would seem to be unworthy of 
 serious consideration. It may be formed. It can- 
 not endure.' 
 
 The Railroad Gazette has well said : 
 
 ** A consolidation which actually stands is worth ten times as much 
 as a trust which totters from the beginning and takes the first oppor- 
 tunity to fall to pieces." 
 
 And the Interstate Commerce Commission has 
 said concerning this subject : 
 
 'Anything equivalent to consolidation of all the roads of the 
 country under a single head, or even those of a considerable section, 
 whether by merger or by the formation of a confederation which 
 should have powers of legal control, or by the creation of what is 
 now technically denominated a trust, could hardly be supposed possible 
 even if the parties were at liberty to form it at pleasure. If the par- 
 ties could come into harmony on the subject an arrangement of the 
 sort would be so overshadowing, so powerful in its control over the 
 business interests of the country, and so susceptible of being used for 
 
 ' As regards the form of organization of the Wisconsin Central 
 Company and the Richmond and West Point Terminal, s^e Chap. V., 
 under the heading " Definition of Trusts," notes.
 
 I/O THE CORPORATION PROBLEM. 
 
 mischievous purposes in many ways that public policy could not for a 
 moment sanction it, at least unless by statute it were held in close 
 legal restraints and under effectual public supervision and control.^ 
 
 Again, competition as a remedy for railroad abuses 
 has proved a failure. Mr. Stickney clearly describes 
 the results of competition between railroads when 
 he says : 
 
 " Competition may for a short period illegitimately reduce rates, 
 but its great province is to produce unjust discrimination, taking by 
 stealth what rightfully belonged to one and giving it to another. It 
 takes from the poor and gives to the rich ; from the many and gives 
 to the few. It does not permit men in the ordinary walks of. life 
 fairly to compete with one another. At the command of the favorite 
 it drives multitudes of men from their chosen vocations and indepen- 
 dent business pursuits, thereafter to occupy positions as clerks and 
 employees. ^Vhile the favorite becomes rich, they become poor. It 
 affects the value of real estate, making that of farms and village 
 property in non-competitive districts less, and in increasing that of 
 competitive districts. It afifects the value of personal property, 
 making it greater in the hands of large shippers, who are granted cut 
 rates, than in the hands of small shippers who are not thus favored. 
 It forces population along with manufactories and commerce to the 
 large cities. Instead of allowing the artisan to live in the smaller 
 town, where it might be possible for him to own his home, and with 
 moderate expenses rear his family in the quiet and amid the virtues 
 of the country, it compels him to live in the vicious tenement-house 
 of the crowded city. His children have reeking pavements instead of 
 green fields for a playground, and their ears are greeted with coarse 
 profanity and vulgar language instead of the songs of birds. The 
 air is laden with the disgusting odors of the ginshop instead of 
 the perfume of clover blossoms, and instead of the peaceful scenes 
 of nature they are made familiar with vulgarity, brutality, and 
 crime. By congesting population it indirectly promotes disease, 
 ignorance, and crime. It destroys independent occupations and 
 forces the wdiole people into classes ; employers and employees, 
 
 ' Second annual report, p. 26.
 
 REMEDIES FOR TllK KAl l.lo »A1 » rkol'.l.EM. 171 
 
 masters and servants, autocrats and menials akin to slaves, A\Tiy 
 should the people longer worship the monstrosity of discrimination 
 l)ecause perchance it b i< 1'ten called competitii)n, t)r mourn over 
 its destruction ?" ' 
 
 And Mr. Acworth summarizes the results of rail- 
 road competition in America as follows : 
 
 " Wholesale bankruptcy of companies, with enormous loss to 
 innocent shareholders ; reckless discrimination between local rates 
 and competing rates ; flagrant dishonesty in preferences given to big 
 traders over smaller rivals ; secret rebates and discounts which have 
 sapped the very foundations of commercial morality ; and uncertainty 
 which has made what should have been legitimate trading often little 
 better than mere Stock Exchange gambling. This is strong language, 
 so it is perhaps as well to produce some evidence to justify it. As 
 for the bankruptcy of companies, let this one fact suffice : Between 
 Chicago and Cairo, a distance of 367 miles, there are twenty-two 
 railway companies whose lines cross that of the Illinois Central. 
 Eighteen out of the twenty-two have passed into the hands of a 
 receiver since the year 1874.""^ 
 
 There have been various attempts to promote com- 
 petition and to stop the combination and consolidation 
 of railroads. In Pennsylvania a constitutional pro- 
 vision prohibits the consolidation of competing rail- 
 roads. When the South Pennsylvania railroad was 
 being constructed in 1884, the great Pennsylvania 
 Railroad arranged to purchase it and thus dispose of 
 a dangerous competitor. But the State interfered 
 and enjoined the purchase. Nevertheless the South 
 Pennsylvania railroad has not been completed, and 
 the failure to complete it is due to the Pennsylvania 
 
 ' " The Railway Problem," pp. 224-226. This book is fdled with 
 original ideas and vigorous thought. It is remarkable, in that its 
 author, one of the brainiest railroad men in the country, justifie£ 
 the reduction of rates by the legislatures. 
 
 ' " The Railways and tlxe Traders," pp. 152, 133.
 
 1/2 THE CORPORATION TROBLEM. 
 
 Railroad. The State prevented a consolidation, but 
 it prevented also the completion of the competitor. 
 Various other States have this same prohibition 
 against the consolidation of competing lines, but 
 the march of events has not been, and cannot be, 
 stopped by them. 
 
 In England as well as America the conclusion is 
 being reached that consolidation is inevitable and 
 cannot be stayed. 
 
 Charles Francis Adams speaks of this as follows : 
 
 " Nowhere is the present tendency towards the concentration of 
 railroad interests in a few hands more apparent than in England. 
 The mill of competition has there about fulfilled its allotted work. 
 The whole English railway system has now passed into the hands of 
 a few great companies, by whom the country is practically divided 
 into separate districts. These are literally in the hands of monopolies. " * 
 
 ' England for sixty years has been trying theory after theory for 
 the solution of the railroad problem. In 1872 a Parliamentary 
 Committee made an elaborate and exhaustive report on the subject. 
 The substance of this report is well stated in Adams on " Railroads," 
 pp. 88-94, as follows : 
 
 "The committee examined in detail the various parliamentary 
 theories which had, at different stages, marked the development 
 of the railroad system. The highway analogy was dismissed in 
 silence ; but of the ' enlightened view of self-interest * theory, it 
 was remarked that experience had shown that as a regulating force 
 this was to be relied upon * only to a limited extent.' The principle 
 of competition was next discussed, and the conclusion of the com- 
 mittee was ' that competition between railroads exists only to a 
 limiied extent, and cannot be maintained by legislation.' Of the 
 great Gladstone Act of 1845, looking to the ultimate purchase of the 
 railroads by the government, it was remarked that ' the terms of that 
 act do not appear to be suited to the present condition of railway 
 property, or to be likely to be adopted by Parliament in case of any 
 intention of Parliament at any future time to purchase the railways.' 
 , . . The committee reported that amalgamation ' had not brought
 
 REMEDIES FOR 11 IK RAILROAD PROBLEM. 1 73 
 
 There is no doubt that the objections to these con- 
 soHdations are grave and of great might. Neverthe- 
 less the law of industrial development is stronger 
 than human statutes and constitutions. It is time 
 to admit this fact, and to ask what good and what 
 injury will come from the few great railway systems 
 which are destined to own the railroads of America. 
 
 That there will be some benefits is undeniable. 
 First and foremost there will be greater honesty on 
 the part of the railroads. It is beginning to become 
 clear that honesty in the management of competing 
 railroads is impossible.' 
 
 Traffic goes to him who cuts the rates, under- 
 weighs the shipment, or bribes the shipper in some 
 one of the numerous methods practised by railroad 
 
 with it the evils that were anticipated, but that in any event long 
 and varied experience had fully demonstrated tlie fact that while 
 Parliament might hinder and thwart, it could not prevent it, but it 
 was equally powerless to lay down any general rules determining its 
 limits or character.' . . . Finally the committee examined all the 
 various panaceas for railroad abuses which are so regularly each year 
 brought forward as novelties in the legislatures of this countrj'. 
 These they passed in merciless review. Equal mileage rates they 
 found inexpedient as well as impossible ; the favorite idea of revision 
 of rates and fares with a view to establishing a legal tariff sufficient to 
 affcjrd a return and no more on the actual cost of the railroads, 
 they pronounced entirely impracticable ; tariff of maxima charges 
 incorporated into laws, they truly said had been repeatedly enacted 
 and as often had failed ; periodical revisions of all rates and fares 
 by goN-ernment agents they found to be practically impossible, 
 unless some standard of revision which had not yet been suggested 
 could be devised." 
 
 'Judge Co<;ley, speaking before the annual convention of State 
 Railroad Commissioners, in March, 1891, summarized his conclusions 
 as follows : 
 
 "The railroad problem is certainly not to be found in the legis-
 
 1/4 THE CORPORATION PROBLEM. 
 
 men. The manager who deals fairly with the public 
 and all shippers, who gives equal rates to all, and 
 secret favors to none, soon sees his business depart- 
 ing and soon loses his own position. He is replaced 
 by a " live man.' 
 
 Railroad consolidation will do away with all this. 
 It is true that by these consolidations railroad rates 
 will not be reduced, nor will issues of watered stock 
 
 lation authorizing the building of railroads, or in that which pre- 
 scribes the terms and conditions under which the building shall be 
 carried on and completed. The railroad problem is also not to 
 be found in the conditions in M'hich the roads may be put by their 
 projectors or managers, or the manner in which they are equipped for 
 the purpose of operation, 
 
 "The relations between the railroad corporations and their em- 
 ployees do not present the railroad problem that is troubling the 
 country. The railroad problem is not to be found, exclusively at 
 least, in the diversities which exist between the legislation of the 
 several States when compared with each other, or between the same 
 legislation when compared with that of the Federal Government. 
 
 " The railroad problem is not to be found altogether in the fact that 
 railroad rates are supposed by the public to be in a great many cases 
 much too high, or that there is unlawful discrimination in the trans- 
 portation of freights and of passengers, and that many persons are 
 carried free who are not entitled to it by law, or that in the cases in 
 which exceptions are made by the law to the general rules which are 
 prescribed, the railroad corporations contrive to increase these excep- 
 tions, in inadmissible or unwise ways, to the detriment of their own 
 revenues, or to the increase of the charges that are made against the 
 community in general. The problem, without question, is present 
 here, but not in its entirety. 
 
 " This is the 'railroad problem,' There are mischiefs in railroad 
 service that are outside of it, but we distinctly indicate the main 
 source of difficulty when we place our finger upon the power, as 
 it exists now, to make and unmake the rates for passenger and 
 freight transportation. So long as 500 bodies of men in the country 
 are at liberty to make rate sheets at pleasure, and to unmake, or cut
 
 REMEDIES FOR THE RAILROAD TLOBLEM. 1 75 
 
 and bonds be prevented, nor will the conveniences 
 of trade be studied, nor will the bribery of public 
 ofificials cease. But the cutting of rates and the dis- 
 criminations which now exist will sto^). There will 
 no longer be any occasion for them. 
 
 The railroads themselves will be the chief gainers 
 from consolidations. And in these days when 
 "gentlemen's agreements" and "presidents* confer- 
 
 anJ recut them in every direction at their own unlimited discretion, 
 or want of discretion, and with little restraint on the part of the 
 law, except as it imposes a few days' delay in putting changes in 
 force, the problem will remain to trouble us ; the mere existence of 
 the power making losses, disorder, and confusion constantly immi- 
 nent. The authority to reduce rates when they are found to be 
 excessive, is but a slight corrective, and reaches the evils only on the 
 i>ublic side ; and I need hardly remind you who understand it so well 
 :hat, in this matter of rates, the power on the part of the public 
 authorities to compel the railroads to do what is just to each other 
 in respect to obser\ing rates which they have once made, and to 
 adhering to rate sheets until there is reasonable ground for changing 
 them, is so very slight that it may really be regarded as too insignificant 
 to be spoken of as possessing substantial value." 
 
 Isaac II. Bromley says: "It has not been possible, since the 
 first application of the law of eminent domain in the grant of a rail- 
 road franchise, to manage a railroad with absolute honesty without 
 driving it into bankruptcy, and then, through a receivership, into 
 more practical and less scrupulous hands. The differences in railroad 
 management are in degrees of crookedness only. Straight and level 
 lines are possible, no doubt, in building railroads ; equally possible 
 in managing them. That they are not so built or so managed is due 
 to an unevenness and irregularity on the outside of the globe and the 
 inside of man. It might be both possible and practicable for a man 
 to build a short railroad on his own estate and manage it w ith abso- 
 lute honesty. It is a different thing when he goes to a legislature for 
 a franchise. Sinuosity begins there, and never ends. This sounds 
 like cynicism ; it is not. Things are growing better all the time. 
 But the discussion of the railroad problem needs fresh air."
 
 1/6 THE CORPORATION PROBLEM. 
 
 ences" are endeavoring to bind competing railroads 
 together/ it is well to remember that pools, traffic 
 contracts, and associations to regulate rates are 
 transient and worthless. Consolidation absolute and 
 complete is the only solution. It may be that in 
 
 ' The latest plan of uniting by a loose and unenforceable agreement 
 a large number of competing railroads is the proposed agreement of 
 December, i8go, between the trunk lines west of Chicago to the fol- 
 lowing effect : 
 
 ' ' Resolved^ That the Presidents here assembled agree to recom- 
 mend to their respective Boards of Directors the passage of the 
 following resolution ; 
 
 " Whereas, It is to the benefit of the public and of the railway 
 companies whose lines are situated west of Chicago and St. Louis that 
 they should co-operate closely with each other in the management of 
 their properties for the purpose of securing uniform, reasonable, and 
 stable rates for transportation, and such economies in the operation 
 of their properties for the better accommodation of the public as will 
 insure equitable returns from the capital invested ; therefore be it 
 
 ' ' Resolved, I . That a new association shall be formed between 
 the several companies whose lines are situated west of Chicago and 
 St. Louis, or such of them as may now become or may hereafter be 
 admitted as members thereof. 
 
 " 2. That the affairs of this association shall be under the manage- 
 ment and direction of an advisory board, to consist of the President 
 and one member of the Board of Directors of each company. 
 
 " 3. That the advisory board so constituted shall have power to 
 establish and maintain uniform rates between competitive points, and 
 to decide all questions of common interest between the members of 
 the association. It shall also have entire charge, through properly 
 constituted representatives, of all outside agencies for the securing of 
 traffic at competitive points. If any officer or representative of any 
 company shall authorize or promise, directly or indirectly, any varia- 
 tion from established tariffs, he shall be discharged from the service, 
 with the reasons stated. 
 
 ' ' 4. The rates established and the policy adopted by the Advisory 
 Board at any time shall continue in force and be binding upon all
 
 REMEDIES FOR THE RAILROAD PROBLEM. 1/7 
 
 order to bring about such consolidation, there must 
 be raihoad wars, loss (^f dividends, cutting of 
 rates, and a demoralization of business. It may be 
 that the weaker roads must be crushed until they are 
 absorbed by tbe greater. All this will involve fright- 
 companies comprising the association until altered by subsequent 
 action of the board. 
 
 "5. A vote of at least four fifths of the members of the association 
 shall be required to make its action binding upon all. 
 
 "C. That the Advisory Board shall appoint proper arbitrators, 
 commissions, and other representatives, and adopt ])y-la\vs to carry out 
 the purposes of the association. 
 
 " 7. That no company shall withdraw from the association except 
 after ninety days' written notice by resolution of the Board of 
 Directors to every other member of the association, with the proviso, 
 however, that the association shall continue for at least six months 
 from Jan. i. iSgi. 
 
 " S. That under existing conditions it is expedient for this'company 
 to set in operation the policy and plan indicated in the foregoing as 
 early as practicable. 
 
 " 9. That the President and Mr. . one of the Directors of this 
 
 company, be and they are hereby appointed to be the representatives 
 of this company in such advisory board, with full power to act for 
 this company in carryinij tlie foregoing preamble and resolution into 
 full effect." 
 
 This agreement is an outgrowth of an existing agreement be- 
 tween the New York Central and Pennsylvania railroads, to the 
 following effect ; 
 
 " IVIwreas, It is for the best interest of this company, as well as 
 for the public benefit, that general harmony shall be maintained by 
 and between the New York Central and Hudson River Railroad 
 Company, the Pennsylvania Railroad Company, the Pennsylvania 
 Company, the Lake Shore and Michigan Southern Railway Company, 
 the Michigan Central Railroad Company, and the Cleveland, Cincin- 
 nati, Chicago & St. Louis Railway Company, for which object it is 
 proposed to create an Advisory Council, consisting of the President 
 and one Director of each of said companies, with power to decide all 
 12
 
 1/8 THE CORPORATION PROBLEM. 
 
 ful .loss and hardship. Possibly it may be avoided 
 by gradual purchase, absorption, and consolidations. 
 
 questions of common interest, to avoid wasteful rivalry, and to estab- 
 lish uniformity of rates between competing points. 
 
 "Such decision of such Advisory Council, when made by the 
 affirmative vote of the representatives of five of said companies, and 
 the rates and policy thereby established, to continue until altered by 
 a similar vote at a meeting of such council, unless thirty days shall 
 have elapsed without a meeting, after a request therefor shall have 
 been made in writing by any one of such companies ; now, therefore, 
 
 be it 
 
 '■'•Resolvea, That under existing conditions, it is expedient for this 
 company to set in operation the policy and plan indicated in the fore- 
 going preamble. 
 
 ''Resolved, That the President and one of the Directors of this com- 
 pany be, and they are hereby appointed to be, the representatives of 
 this Company in such Advisory Council, with full power to act for 
 this company in carrying the foregoing preamble and resolution into 
 full effect, this company reserving the right to withdraw from this 
 arrangement upon resolution of its Board of Directors and after 
 ninety days' notice in writing shall have been given to every other 
 company." 
 
 Mr. Walker, in a letter of November 20, 1890, to the railroad 
 presidents in advocacy of the above-mentioned general agreement, 
 said : 
 
 ' ' Competition as it now exists among carriers is simply war, and 
 the situation pleases the unreflecting public. ... In fighting 
 each other the various lines are rapidly destroying themselves. There 
 is no occasion for aggressive action by those who represent an 
 agrarian policy. All they need to do is to watch the progress of the 
 strife among the roads, and drop in an occasional peg as the cards are 
 played. The corner has already been turned, and the pegs are 
 coming toward home. During the past fifteen years about one third 
 of the railway mileage in the United vStates has been reorganized or 
 passed through foreclosure proceedings. One line after another steps 
 one side, and a portion of its capitalization disappears. Is this suicidal 
 process beyond control? I do not believe it. But radical changes 
 are required for the purpose."
 
 REMEDIES FOR THE RAILRoAD I'ROBLEM. 179 
 
 But certain it is that the feeble hand of the proposed 
 railroad associations merely delays the fierce process 
 of consolidation by means of railroad wars and fore- 
 closures. The necessity of that process cannot be 
 obviated by such makeshifts and hollow truces.' 
 Consolidations and consolidations alone will accom- 
 plish the result which is sought. Discriminations will 
 decrease ; rates will be more uniform ; disastrous rail- 
 road wars will cease ; legislative lobbying and free 
 pass bribery will diminish ; the construction of useless 
 roads will be prevented ; foreclosures, receiverships, 
 reorganizations, losses, and financial wrecks of rail- 
 roads will be averted, and the material wealth and 
 financial stability of the country will be enhanced.' 
 
 ' Mr. C. P. Huntington, President of the Southern Pacific Rail- 
 road, said concerning the presidents' agreement of December, 1890 : 
 
 " I repeat that I think this plan a very good thing. It does not go 
 far enough, but it is in the right direction." 
 
 " How far would you have it go ? " 
 
 " To the point of joint ownership. I would like to have a single 
 company operate all of the railroads ; then, instead of a lot of warring, 
 self-destroying elements, we would have a homogeneous and prosperous 
 body. I don't mean a trust or anything like that, but a concentration 
 of ownership of railroad properties. For instance, there are thirty 
 different railroads in the Southern Pacific system. The stock of each 
 one is owned by the Southern Pacific Company. Now suppose we go 
 a step higher and put all of the big roads into the hands of one great 
 corporation. We would then put a stop to rate-cutting, ruinous com- 
 petition, and many useless expenditures. The money that now goes 
 for special commissions, drawbacks, or rebates, and for salaries for 
 unnecessary agents, would be saved to the shareholders. Joint 
 ownership of all the railroads is the only thing that will make uni- 
 formity of rates absolutely certain." 
 
 "^ Atkinson on " The Distribution of Products," p. 38, has said : 
 
 ** The late Cornelius Vanderbilt may be taken as an example of a
 
 l8o THE CORPORATION PROBLEM. 
 
 Consolidation is the only available solution of the 
 railroad problem. State ownership is hostile to 
 Anglo-Saxon instincts and settled ideas of govern- 
 ment. State socialism, such as Germany is fast 
 drifting into, is out of the question in America. 
 Federal or State regulation of rates and abuses does 
 not cure the evils or remove the danger that the 
 railroads will dominate the State. Co-operation or 
 profit-sharing is impracticable. The present tenden- 
 cies are toward a further regulation of railroads on the 
 part of the federal government, and more rapid con- 
 solidation on the part of the railroads themselves. 
 When these two tendencies shall have reached their 
 natural conclusion, and when a concentrated railroad 
 power is subject to regulation by the federal govern- 
 ment, then the question will arise which is the greater, 
 the railroads or the State. The question then will 
 be — shall the State rule the railroads, or will the 
 railroads rule the State ? 
 
 At present the work of consolidation is going on. 
 These are the days of railroad crystallization. A new 
 power is arising and is overshadowing all others. 
 The only great objection to it is the danger which it 
 brings to a republican form of government. The 
 future relations of the State towards the railroads 
 
 communist in the true sense. He consolidated and perfected the railroad 
 service in such a way that a year's supply of meat and bread can be 
 moved one thousand miles from the Western prairies to the Eastern 
 workshops at the measure of cost of a single day's wages of a me- 
 chanic or artisan in Massachusetts." 
 
 Alexander on " Railway Practice," p. 59, says that consolidations 
 promote economy and efficiency, and that this political power is 
 limited by jealousy of the press and popular prejudice.
 
 REMEDIES FOR THE RAILROAD PROBLEM. l8l 
 
 cannot be foreseen nor foretold, and yet those rela- 
 tions are being formed to-day and are entering into 
 the very warp and woof of American institutions. 
 The problem whether the people or the corpora- 
 tions shall rule the republic is one of the greatest 
 problems of the age. It is the subject of a subse- 
 quent chapter of this work.' 
 
 > See Chapter VI. Professor Adams on " Public Debts," pp. 392, 
 393, says : 
 
 *' The present standing of private corporations before the law con- 
 tradicts the rule that all concentrated power should be exercised under 
 strict accountability. The American people deceive themselves in 
 assuming to think their liberties endangered only by the encroach- 
 ments of government. The centre from which power may be exer- 
 cised is of slight importance ; it is the fact of its irresponsible exercise 
 which may justly occasion apprehension. The growth of private 
 corporations is a step in the development of our social constitution. 
 They arose upon the ruins of the States as centres of industrial 
 administration, and it is because the States have failed to retain a 
 proper control over them that they now menace the permanency of 
 popular government. It is true that about 1873 the right of legal 
 control was judicially affirmed, but, so far as railroads are concerned, 
 the measures adopted by the various legislatures served only to dis- 
 close the impotency of the States. These corporations are practically 
 irresponsible to the people by whose favor they exist, and whom they 
 pretend to serve. Popular liberty could be menaced by no greater 
 danger."
 
 CHAPTER IV. 
 
 CORPORATIONS AS THE OWNERS OF NATURAL 
 MONOPOLIES. 
 
 What is a natural monopoly ? — Natural monopolies as 
 the sotirce of great fortunes — Remedies of the public. 
 
 WHAT IS A NATURAL MONOPOLY ? 
 
 A MONOPOLY that is necessarily such from the 
 nature of the case is called a natural monopoly. Its 
 monopolistic character results from the limited 
 number of possible competitors, the limited space 
 that is available for the business, or the limited 
 number of franchises within the gift of the people. 
 
 A natural monopoly is found in a railroad, street 
 railroad, telegraph system, telephone system, water- 
 works, gas-works, electric lights, irrigation reservoirs, 
 wharves, and ferries. It differs from other business 
 in the following respects: the people give to it the 
 right to take private land and the public streets for 
 its use ; it charges a toll instead of a profit ; it is 
 free from permanent competition ; it rapidly in- 
 creases in value, and this increase is due not to its 
 owners, but to its monopolistic character ; its value 
 does not decrease with the decease of its owners, as 
 
 182
 
 OWNERS OF NATURAL MONOPOLIES. 183 
 
 is the case w ith a large manufacturing business or 
 professional pursuit ; and an increase of population 
 increases its income, but does not bring new com- 
 petitors. 
 
 These are important distinctions. 
 
 A natural monopoly originates generally in a grant 
 from the people. A railroad can be built only by 
 the people authorizing it to take private land under 
 the power of eminent domain. A street railway, gas- 
 plant, electric lights, telegraph, telephone, and water- 
 works are granted the right to use the public streets. 
 Wharves are built on the seashore which belonged 
 to the state, and ferries are authorized by munici- 
 palities or by the state. These privileges granted 
 b\' the public to natural monopolies are called fran- 
 chises. This kind of franchise, however, is to be 
 clearly distinguished from a franchise to act as a 
 corporation. As regards corporations there are two 
 kinds of franchises ; one consisting of the power 
 and privilege to exist as a corporation ; the other 
 consisting of the additional peculiar privileges men- 
 tioned above. All corporations have the former 
 — the franchise to act as a corporation. This last- 
 mentioned franchise enables the corporation to sue 
 and be sued in its ow^n name instead of in the name 
 of its members ; to buy, sell, and hold property in 
 that name ; to have directors to do the business ; to 
 make by-laws and contracts; to limit the liability of 
 its members as regards creditors of the corporation ; 
 to allow its members to transfer their interests to 
 another ; and to use a corporate seal in its deeds 
 and contracts. All these constitute one kind of
 
 1 84 THE CORPORATION PROBLEM. 
 
 franchise — a franchise to exist and act as a corpora- 
 tion. But many corporations have two kinds of 
 franchises : the franchise to act as a corporation ; and 
 additional franchises not essential to their corporate 
 existence, such as franchises to use the public streets, 
 to take private land for their purposes, and to collect 
 tolls from the public. A manufacturing or business 
 corporation has the former of these franchises. Rail- 
 road corporations and all other natural monopolies 
 have both. 
 
 There is reason for using this term, natural monop- 
 oly. 
 
 It is well to examine the histoiy and various uses 
 of this word monopoly. In olden times under the 
 English kings a monopoly meant an exclusive privi- 
 lege granted by the king. It was a grant by the 
 king and not by Parliament. In the formative In- 
 dustrial period of England, the government Avished to 
 secure the establishment in that country of certain 
 trades and industries that were then successfully car- 
 ried on in foreign countries, especially in Flanders. 
 Foreign artificers, tradesmen, and manufacturers were 
 invited to come over and establish their industries 
 In England, and as an inducement the king gave them 
 special privileges, such as the exclusive right to carry 
 on a particular industry, or the exclusive right to 
 certain markets, or to trade exclusively with certain 
 countries or colonies. But these monopolies soon 
 restricted progress, shut out competition, and became 
 odious to the people. Moreover, the crown abused 
 its power to create monopolies. They were given 
 as gifts to royal favorites, and were sold for money,
 
 OWNERS OF NATURAL MONOPOLIES. 1 85 
 
 which the crown then employed to subvert the 
 constitutional liberties of the people. Consequently 
 there arose a great contest. The right and preroga- 
 tive of the king to create monopolies were denied. 
 The Parliament, the courts, and the people carried 
 on the contest against the crown, and Lord Coke, in 
 the great Case of the Monopolies, declared these 
 crown monopolies to be void. Nevertheless the 
 king continued to create them and to sell them. One 
 of the charges against Charles the First was his un- 
 lawful creation of monopolies. But finally the 
 crown abandoned its claim, and at the present time 
 no one but Parliament has power to create such a 
 monopoly, and even if such a thing were attempted 
 by Parliament, the unwritten constitution of Eng- 
 land and the settled principles of the English people 
 would soon cause the act to be repealed. 
 
 In modern times the word monopoly has, by 
 usage, been given a wider meaning. It means the 
 power of a corporation or person or combination to 
 control prices. It is a monopoly in a particular 
 business. It is a monopoly for the present, even 
 though in_ the future there may arise competition. 
 The monopoly may be in the manufacture or sale of 
 a commodity, or in the control of the rate for the 
 transportation of persons or merchandise, or it may 
 consist of exclusive privileges granted b\' a legisla- 
 ture — privileges conferred by statute. 
 
 The past fifty years have been prolific in the pro- 
 duction of monopolies. They exist to-day in three 
 different forms: monopolies in which the govern- 
 ment has prohibited competition ; monopolies by
 
 l86 THE CORPORATION PROBLEM. 
 
 the combination of competitors, as In the case of 
 trusts ; and third, natural monopoHes. They will 
 be considered in the order named. 
 
 Monopolies in which the government prohibited 
 competition were freely granted fifty years ago. 
 They were generally granted to bridges, ferries, rail- 
 roads, water-works, gas-plant, and turnpikes. A bridge 
 company would be given exclusive privileges, and 
 no other bridge for a certain number of miles above 
 it or below it was to be erected. So also with ferries 
 and railroads. A railroad would be given a charter, 
 and that charter v/ould prohibit the building of any 
 other railroad for a certain number of miles on either 
 side of It. Water-works in a city would be given the 
 exclusive privilege of supplying that city with water. 
 Gas-works would be accorded a similar monopoly as 
 to gas. And even turnpikes were given exclusive 
 privileges. As will be shown hereafter, these various 
 enterprises are natural monopolies in themselves. 
 But the point to which attention Is now called is 
 that the legislatures have added to their monopolistic 
 character by making them statutory monopolies also. 
 
 All these monopolies were legal and constitutional. 
 They could not be granted by municipalities unless 
 the latter had express power to grant them.. But 
 they could be granted by the State legislatures, and 
 were upheld by the Supreme Court of the United 
 States, when the States afterwards attempted to 
 repudiate their reckless gifts. A State, however, 
 could not grant a monopoly as to water transporta- 
 tion, because Congress had exclusive power over 
 interstate commerce. The monopoly granted by
 
 OWNERS DK NATURAL MONOPOLIES. iS/ 
 
 New York State to certain persons relative to boats 
 propelled by steam was declared void. 
 
 But the injustice, improvidence, and bad results of 
 these statutory monopolies granted to bridges, fer- 
 ries, railroads, turnpikes, gas-plant, and water-works 
 soon became apparent. It became clear that a little 
 delay would have brought all these improvements 
 without the statutory monopolistic grants. The 
 monopolies themselves became unbearable. They 
 gave poor service, neglected repairs, refused improve- 
 ments, disregarded protests, acquired bad manners, 
 and became a nuisance. Attempts were made to 
 break the monopoly by starting a competitor. But 
 the courts sustained the monopoly on the ground 
 that it was a contract. The new competitor was 
 enjoined. The courts, however, went a long way in 
 construing away the special privileges. Unless the 
 monopoly was clearly granted it was overthrown. It 
 was limited by construction as much as possible. 
 Moreover, new kinds of competition were fav^ored. 
 The courts held that a gas monopoly did not exclude 
 an electric-light competitor, nor did a bridge mo- 
 nopoly exclude a railroad bridge. But this remedy 
 was not enough. The people were hostile to monop- 
 olies, and this hostility took form in constitutional 
 prohibitions against monopolies. Massachusetts led 
 tlie way, and now all of the advanced constitutions 
 (jf the various States contain a provision that no 
 special or exclusive privilege or immunity shall be 
 granted to any corporation.' 
 
 The second class of monopolies, those created by 
 
 ' See Chapter IL
 
 1 88 THE CORPORATION PROBLEM. 
 
 the combination of competitors, have come to be 
 called trusts. They are considered elsewhere.' 
 
 The third class is the natural monopoly. This is 
 a monopoly originating in a statute, and afterwards 
 becoming a monopoly by the very nature of things. 
 It is a right given by statute, and yet the statute 
 does not make it an exclusive right. It becomes 
 exclusive and a monopoly by reason of the charac- 
 ter of the business itself. It includes all franchises 
 to collect toll — railroads, canals, street railroads, gas- 
 works, electric lights, telegraphs, telephones, wharves, 
 ferries, turnpikes, bridges. It is true that there is 
 nothing in the law to prevent competition, but 
 such franchises as these are monopoHes neverthe- 
 less. They are so because competition is restricted 
 by the great cost, great risk, and great danger of 
 loss, or because from the circumstances of the case 
 competition is impossible. They are monopolies or 
 soon become such from the very nature of the 
 business. 
 
 NATURAL MONOPOLIES AS THE SOURCE OF GREAT 
 
 FORTUNES. 
 
 It is curious to note how the different kinds of 
 property have a different relative importance in the 
 course of time. Five hundred years ago real estate 
 was the only property that brought wealth and 
 standing to its owner. Personal property was of 
 little consequence, and not much of it was in exist- 
 ence. But during the past two hundred years per- 
 
 ' See Chapter V.
 
 OWNERS OF NATURAL MOPOLOLIES. 1 89 
 
 sonal property has risen to the ascendenc}'. The 
 banker, merchant, manufacturer, and capitaHst, have 
 become wealthier than the landowner. The moneyed 
 classes have supplanted the landed classes in import- 
 ance. The banker millionaire is greater and more 
 powerful than the ducal landlord. 
 
 During the past thirty years, however, a still differ- 
 ent source of wealth has sprung into existence. It 
 has risen to the first importance, and has created 
 moneyed kings greater, stronger, richer even than 
 the banker himself. A new financial era has been 
 entered upon. Land, the old source of centralized 
 wealth, inordinate power, caste privileges, and here- 
 ditary rights, no longer maintains its pre-eminent 
 importance. In its place has come the natural 
 monopoly and a new order of men are in control. 
 Crassus and Croesus were poor men compared with 
 the modern Vanderbilts.' A consolidated railroad 
 has become greater than a dukedom. 
 
 ' Professor Adams on " Public Debts," pp. 339, 340, says : 
 " The withdrawal of the States from the domain of internal im- 
 provements marks the rise of corporate power in the United States. 
 As in 1S30, the Federal government abandoned the thought of direct 
 control over remunerative public works, giving up the field in favor 
 of local governments ; so, during the years from 1842 to 1S46, a 
 re\'ulsion of sentiment turned all this business over to individuals. 
 So far from realizing the programme of Jacksonian democracy, 
 according to which the States were to recover their administrative 
 importance, this experiment resulted in the establishment of a new 
 power, unknown to the founders of our government, yet intrusted with 
 truly sovereign functions. The rise of the corporation marks an 
 epoch in the history of inland commerce. The material advancement 
 of the United States since 1S50, no one can nor does one care to deny ; 
 yet the industrial, the political, and the social influences that have been
 
 190 THE CORPORATION PROBLEM. 
 
 Professor Bryce speaks of the railway magnates as 
 follows : 
 
 ' ' These railway kings are among the greatest men ; perhaps I may 
 say are the greatest men in America. They have wealth, else they 
 could not hold the position. They have fame, for every one has 
 heard of their achievements, every newspaper chronicles their move- 
 ments. They have power, more power — that is, more opportunity of 
 making their personal will prevail — than perhaps any one in political 
 life, except the President and the Speaker, who after all hold theirs 
 only for four years and two years, while the railroad monarch may 
 keep his for life. When the master of one of the greatest western 
 lines travels towards the Pacific on his palace car, his journey is like 
 a royal progress. Governors of States and Territories bow before 
 him, legislatures receive him in solemn session, cities and towns seek 
 to propitiate him ; for has he not the means of making or marring a 
 city's fortunes. . . . Probably no career draws to it, or unfolds 
 and develops, so much of the characteristic ability of the nation ; and 
 I doubt whether any congressional legislation will greatly reduce the 
 commanding positions which these potentates hold as the masters of 
 enterprises whose wealth, geographical extension, and influence upon 
 the growth of the country and the fortunes of individuals, find no 
 parallel in the old world." ^ 
 
 It is easy to understand why natural monopolies 
 are valuable. They increase in value with the in- 
 crease of population, while the profits of other busi- 
 
 introduced into national life by the unprecedented growth of cor- 
 porate power, are the occasion for grave apprehension. Cities have 
 been unnecessarily crowded, real-estate values have been arbitrarily 
 distributed, a social dependence is being introduced not surpassed in 
 its evil tendencies by any previous form of servitude, politics are 
 being run in the interests of profit to those already gorged with 
 profit ; while, from the political point of view, it is to the encroach- 
 ment of private corporations as much as to the centralizing tendencies 
 of the Federal government that the present impotency of the State 
 ffovernment is due." 
 
 ' Bryce's "American Commonwealth," vol. ii., p. 515.
 
 OWNERS OF NATURAL MONOPOLIES. I9I 
 
 ness have an opposite tendency. The price of mer- 
 chandise goes down as population increases. This is 
 because the cost of producing the merchandise is 
 decreased. But with a natural monojjoly, a railroad, 
 street railroad, telegraph, telephone, water-works, 
 gas-plant, electric lights, irrigation reservoir, wharf, or 
 ferr}', there is no such reduction of price. Reductions 
 are sometimes made in the charges, but these reduc- 
 tions are insignificant compared with the increase of 
 business. The cost of operating the monopoly does 
 not materially increase with the increase of popula- 
 tion, but that increase of population brings a rich 
 and ever swelling volume of money into the coffers 
 of its owner. The profits become so large that even 
 the owner dare not declare the rate per cent, which 
 he receives on his investment. In order to conceal 
 his real profit, he pretends that he has invested far 
 more than he has, and by watered stock and 
 bonds, he covers up his profits. Into his coffers 
 come sooner or later the surplus earnings of the toil- 
 ing millions. His wealth grows with the population. 
 The large risk and capital involved in starting a 
 competing concern leave him without a competitor. 
 This fact, together with the fact that the streets of a 
 city are not wide enough to admit many competi- 
 tors, and that these competitors inevitably combine, 
 soon renders the natural monopoly complete. The 
 merchant, the lawyer, the doctor, the manufacturer, 
 the laborer — all are subject to competition. But the 
 street railway, the railroad, the ferry, the wharf, the 
 gas-plant, the electric light, the telephone, the tele- 
 graph, the water-works — all are natural monopolies.
 
 192 THE CORPORATION PROBLEM. 
 
 There is a limit to the competitors — a Hmit fixed 
 not by the abiUty to do the work, as in other busi- 
 ness, but a limit fixed by the limited space or the 
 certain absorption of competitors. All other kinds 
 of business have a rise and fall. If the energies of 
 the participants are relaxed, the business droops. 
 When A. T. Stewart died, his immense business fell 
 away. But a natural monopoly does not depend on 
 the talent of men. It never dies, but it grows with 
 the growth of population. It is free from perma- 
 nent competition, and it is handed on from one 
 generation to another. 
 
 It is well to examine with some care the growth 
 and value of these different natural monopolies. 
 
 There is the railroad. It rarely pays in the begin- 
 ning. As a rule, the builders of a railroad lose all 
 they put into it. The bondholders take it, and 
 even they generally lose a part of their investment. 
 This is so generally true that comparatively few 
 railroads are now built except by the old lines. They 
 can afford to hold the enterprise and wait until it 
 becomes a paying investment. But sooner or later 
 the railroad begins to pay and its income increases 
 with the population. In the course of time it pays 
 interest and dividends on many times its actual cost. 
 And it increases without any particular additional 
 outlay or exertion on the part of the railroad. The 
 increase is due to the inherent value of the franchise 
 — the franchise that was granted by the people, and 
 which derives its increased value from the increase 
 of the people. A man with a few thousand dollars 
 may begin the manufacture of matches, and possibly
 
 DWXEKS <>1" NATURAL MONOPOLIES. I93 
 
 may compete \\ ith the Diamond Match Company's 
 monopoly. A man with a few luindred thousand 
 dollars may construct a su^ar refinery and compete 
 with the SuLjar Trust monopoly. A man with a few 
 million dollars and a talent for a certain method of 
 doing business ma\' construct an oil refinery and 
 compete with the Standard Oil Trust monopoly. 
 But such is not the case with railroads. A new road 
 })aralleling an old road is certain to lose money. 
 The truth is that a railroad is a natural monopoly. 
 To construct a parallel competitor involves great 
 capital and great loss. The day of paralleling 
 railroads has gone by. The disastrous results of the 
 West Shore and the South Pennsylvania railroads 
 have been a costly warning. That the railroad is a 
 practical nionopoly is due to the fact that a parallel 
 and competing line is soon absorbed or else is driven 
 into bankruptcy and then bought up. The greatest 
 fortunes that the world has ever seen have arisen 
 from the wealth-producing power of the railroad 
 monopoly. 
 
 The Duke of Marlborough, in the Fortnightly 
 Reviezv, says : 
 
 " It is not a flattering thing, perhaps, to our national pride, but if 
 the truth is t<jld our English railways are toy systems and our rolling 
 stock are toy freight carriers compared to the trains that are run all 
 over America. The immense haulage of American lines done on 
 single pairs of rails is marvellous, and these systems must continue to 
 grow to meet the wants of increasing population and the large cen- 
 tres of permanent industry and manufacture that exist ever^'^\'here. 
 It must be noted, however, that the great main arteries of these 
 sj-stems are now permanently marked out. It will be practically 
 impossible to make new main routes, except at fabulous cost, with 
 approaches to the coast. The strategical positions are seized and 
 13
 
 194 'i'HE CORPORATION PROBLEM. 
 
 occupied, and whoever can possess himself to-day of a controlling 
 interest in a main through route and allied feeders across the great 
 central basin of the Northern States, cannot be deprived of a gigantic 
 monopoly in the present and in the future," 
 
 So also with the street railways. When first con- 
 structed the street railway pays little or nothing. 
 But soon it begins to be valuable. The people be- 
 come educated up to using it. The town grows to 
 be a city, and the city becomes a commercial centre. 
 The street-railway franchise — the right to collect 
 tolls — the natural monopoly given by the people to 
 a corporation — becomes more and more valuable. 
 Sooner or later its income pays an extraordinary 
 interest on the original capital invested. The corpo- 
 ration has not materially increased its outlay. But 
 the income has grown with the growth of the town. 
 
 So also with gas-works, telegraphs, telephones, 
 electric lights, ferries, wharves, water-works, and 
 irrigation reservoirs. * 
 
 ^ Still another illustration of a natural monopoly that will give 
 trouble in the future is the underground system of conduits in the 
 streets of New York for containing the telegraph, telephone, and 
 other wires which formerly were strung on poles overhead. A 
 private corporation has constructed these conduits and now owns' 
 them. A toll is levied by this corporation on all persons or corpora- 
 tions who run M-ires through the conduits, and of course all wires are 
 now obliged to go underground by statute. This conduit corpora- 
 tion has passed under the control of one of the great telephone and 
 telegraph monopolies of the country by the ownership of sixteen 
 thousand out of thirty thousand shares of stock. This great monopoly, 
 
 -by methods well known to the corporation lawyer, can easily make 
 the capital stock and bonded debt of the conduit company so large 
 
 • that- in order -to -pay interest and reasonable dividends on the same, 
 very high tolls must be charged by the conduit company. This, in
 
 OWNERS OF NATURAL MONOPOLIES. I95 
 
 The histor}' of water-works is another instance of 
 what a natural monopoly is capable of becoming. 
 It is impossible to ascertain the amount of water 
 there is in the stock and bonds of water-works com- 
 panies, but certain it is tliat where the works are 
 owned by a corporation, the practice is to construct 
 the works by the sale of the bonds at less than par, 
 and to have the stock free of cost : in other words, 
 all water. Even then it is rare indeed that a water- 
 works company goes into insolvency. It is said that 
 only three foreclosures of mortgages on water-works 
 have taken place in this countr}\ 
 
 itself alone, will sufRce to keep new competitors in the tele<;rai»h, 
 telephone, etc., business out of the city of New York. 
 
 Since the above was written the trouble with this underground 
 monopoly has commenced. The various corporations using the system 
 in September, 1890, complained to the City Board of Electrical 
 Control that exorbitant charges were demanded and that the Edison 
 Company, being owner of six thousand shares of stock, had the iiiside 
 favors and would probably exclude all other electric light companies 
 by reason thereof. 
 
 The scale of prices asked were : For 4-inch ducts, ^1,250 per mile 
 per annum ; for 3-inch ducts, |i,ooo per mile per annum ; for 
 2j-inch ducts, $850 per mile per annum : for 2-inch ducts, ^700 per 
 mile per annum ; for ij-inch ducts. $550 per mile per annum; for 
 l|-inch ducts, $500 j^er annum : for distribution ducts, I to 4 inches, 
 $1,000 per annum. 
 
 The subway company filed a statement to the effect that up to 
 January I, 1890, 501 miles of telegraph and telephone ducts and 
 515 miles of electric-light and power ducts had been constructed, 
 making a total of 1.016 miles of ducts, the cost of maintaining and 
 constructing which was $4,827,647.97 from 1SS6 to 1890. Only 404 
 miles of subways were occupied, producing at present rates an annual 
 rental of $388,771. The yearly expenses of the subway company 
 were placed at $826,332, and an annual deficit of $437,611 waa 
 figured out.
 
 196 THE CORPORATION I'ROBLEM. 
 
 In England one of the seventy-two shares in the 
 New River Company, which supphes London with 
 one quarter of its water, recently sold for $614,000, 
 although the par value of that share was only $500. 
 This enterprise was commenced in 1609, and the 
 company was organized a few years later. It built 
 on dry land the New River to conduct water for 
 twenty miles by a route of about forty miles to the 
 city of London. King James I. originally owned 
 one half the shares, but in 161 3 sold them for an 
 annual income of ^500. This sum is still paid 
 yearly. The net return on the whole capital stock 
 for the year 1888 was ;^ 187,920. The dividend on a 
 single share in 1 888 was £2,610. The shares are 
 now generally divided into many parts. It is three 
 centuries since a full undivided share has been sold. 
 For nineteen years after the company was formed 
 the annual income was barely 12s. a share. In 1634 
 one might have been had for a very moderate price, 
 since its income did not amount to more than £^ 
 4s. 2d., while its profits w-ere practically nothing. 
 By 1636, after a bad year or two, each moiety 
 brought only ^^115 lo^-. of profit, and toward the 
 close of the last century the return was no more than 
 £42,'^ S-y* 8^/. As late as the second decade of this 
 century a share was thought to have attained an 
 extravagant figure when it sold for ;^ 1 1,500 at auc- 
 tion. But now its value is unquestioned. In the 
 rounded sentences of its owners, it may well be 
 said that it ^' comprises all the elements desired in 
 the employment of capital — security, regularity, and 
 realizability. It combines the simplicity of a govern-
 
 OWNERS OF XATT:RAI. ^^ONOPOLTES. I97 
 
 mcnt annuity, the profits of a trading corporation, 
 and the prestige of landed proprietorship. Inasmuch 
 as it includes the corporate ownership of farms in 
 Hertfordshire and estates in London, and conveys 
 the right to vote both in the city and the countr}^, 
 with the possibility of a seat at the board, and the 
 qualification for a place on the bench, the fraction of 
 the Adventurer's moiety may be said to 'embody 
 the potentiality of growing rich beyond the dreams 
 ot avarice. 
 
 Another remarkable instance of private water- 
 works is found in New Jersey. For ten years Jersey 
 City, Newark, Passaic, and adjacent towns have 
 been complaining that their water supply was pol- 
 luted and unfit for use. The source of supply was 
 the Passaic River, below the great falls at Paterson. 
 The cities had many plans for reaching the upper 
 waters of the Passaic River, but nothing was done. 
 About the year 1885 3. group of New York capital- 
 ists took the matter in hand, obtained the right to 
 the entire flow of the Passaic watershed at the falls, 
 and to the control of every lake and stream in a 
 watershed of Zyj square miles, including Lake Hopat- 
 cong and Greenwood Lake : consolidated all private 
 interest, giving a storage capacity of billions of gal- 
 lons, and arranged to bring from the mountains about 
 450,000,000 gallons of pure water daily. They then 
 offered to pipe and furnish water to the various cities 
 at a fixed rate per million gallons, or to sell to any 
 city such part of the plant and pipe as would give 
 to that city an adequate supply. Popular hostility 
 ran very high, and statutes were passed enabling the
 
 198 THE CORPORATION PROBLEM. 
 
 cities to circumvent this private corporation. But it 
 was of no avail. One by one the cities of Montclair, 
 Passaic, Paterson, Newark, Bayonne, and Jersey 
 City have capitulated to the corporation. Most of 
 these cities have agreed to pay a fixed price per 
 million gallons ; Bayonne, for instance, paying $80 
 per million gallons. Jersey City has been offered 
 the rate of $40 per million gallons. Newark adopted 
 the other plan and paid $6,000,000 for a complete 
 plant and pipe line and a supply of 275,000,000 
 gallons daily, for ten years. As regards the corpora- 
 tion it is said that over $20,000,000 have been 
 invested in this colossal private water-works project, 
 and that it has proved a profitable venture. 
 
 In America the water-works are just starting on 
 their career of money-making. And there is so much 
 water in their stock and bonds it is impossible to 
 tell what rate of profit they are actually paying. 
 But the facts which are at hand prove the value of 
 the monopoly even at this early stage of its growth.' 
 
 There is still another natural monopoly and one 
 which is just beginning to attract the attention of 
 the country. It is the storage and distribution of 
 water for irrigation in the West. Whole rivers are 
 being diverted for this purpose. States lying along 
 
 ^ From the " Manual of American Water-Works for 1888," pub- 
 lished by the Engineering News, it appears that up to that date there 
 had been constructed in the United States 1,642 water-works at a cost 
 equal to something more than a tenth of the bonded debt of all the 
 railroads in the country up to the same time, and supplying 14,854,- 
 612 of the population, or an average of 8, goo per works. Of the 
 total works 715 are owned by the city, town, or village, as the case 
 may be, and 927 by companies or individuals.
 
 OWXERJ^ OF XATURAl. MONOPOLIES. I99 
 
 the lower courses of rivers are comphiining of the 
 disappearance of all the water before it reaches their 
 borders. \"ast rescrv'oirs for storage of water are 
 being built, and Congress is being asked to take 
 charge of the irrigating business. English com- 
 panies own a large part of these reservoirs. The 
 spirit of speculation is becoming interested in the 
 tolls which hereafter can be levied on the farming 
 and land-owning communities of the West. Im- 
 mense tracts of land are sterile without this artificial 
 water irrigation, while with it they are as fertile and 
 productive as the banks of the Nile. The value of 
 such a natural monopoly as this is almost incalculable, 
 and it is a monopoly that will grow with the years. 
 
 " The laws of the Western States and Territories everywhere 
 recognize and protect the rights of the first or ' prior appropriator * 
 of water. If the first settler on the banks of a stream draws off, in 
 his ditch, one half or the whole of the customar}' flow to irrigate his 
 farm, he has the right to take this one half or the whole flow forever, 
 to the entire exclusion of any subsequent settler. But the same rule 
 applies to rivers of large size. As the quick-witted Westerner stands 
 by the side of one of the great rivers and looks over thousands of acres 
 of desert land along its banks, he sees a fortune in the situation. 
 Only get capital enough together, organize a great company, dig an 
 immense canal which will ' appropriate ' all the water in the river, 
 and you command the whole valley. It is the position of the 
 Western railroads repeated. Instead of waiting for settlers to 
 come and dig little ditches as they need them, an immense capital 
 digs one huge canal, watering thousands of farms, and then draws 
 settlers by advertisement and boom. So all over the West, through- 
 out Colorado, in Central and Southern California, in Montana and 
 Idaho, on the Salt and Gila Rivers, in Southern Arizona, there are 
 great companies, with capitals running into the millions, putting this 
 idea into effect. The canals they dig are twenty, thirty, or even fifty 
 miles long. The largest are a hundred feet wide and ten feet deep,
 
 200 THE CORPORATION PROBLE^r. 
 
 very rivers in themselves. They follow the contour of the country, 
 running back farther and farther from the river as the latter falls 
 away. The main canal gives off lateral branches at frequent intervals, 
 and by an ingenious system of gates, crossings, and ditches sends 
 water to every foot of arable ground between it and the river. The 
 land belongs to the Government, and is taken up by individual settlers 
 at merely nominal prices under the ' Desert Land Act.* But the 
 water belongs to the Canal Company, and it is this water that the 
 settler really pays for." ^ 
 
 REMEDIES OF THE PUBLIC. 
 
 For the most part the natural monopohes of 
 America have passed Into the hands of corporations. 
 The State legislatures and the municipalities have 
 wasted and given away that which might have been 
 of almost incalculable value to the public if properly- 
 preserved. Privileges and franchises which belonged 
 to the people and which grow in value year by year 
 have been given away to become the instruments of 
 corporate greed and gain. And all this has been 
 done, not from settled views of public policy, but 
 quietly, without discussion and often by corruption 
 of public officials. 
 
 During the past few years the fact has become 
 clear to the public that natural monopolies are be- 
 coming ekceedingly valuable. That which was 
 granted to aid the growth of a city is now found to 
 be an instrument of extortion and restriction. The 
 wealth derived from the natural monopoly is used 
 to prevent any competition whatsoever. The com- 
 fort, accommodation, and rights of the public are 
 disregarded. Hence it is that public opinion is at 
 work demanding some relief. It Is somewhat late 
 
 ^ From " Water Storage in the West," by Walter Gillette Bates, 
 in Scribner.
 
 OWXEK.s (-1 XATrRAI. MONOPOLIES. 20I 
 
 to apply a remedy to the mistakes that have been 
 made, but nevertheless several remedies have been 
 proposed. 
 
 Taxation has been tried, but has not been a suc- 
 cess. The most conspicuous failure t>f this method 
 of preserving to the public some part of the money 
 value of the natural monopolies has been in the 
 effort to collect license fees from street-car lines. 
 Generally these license fees were fairly respectable 
 as originally fixed, but invariably by methods well 
 known to corporate officials, these licenses have been 
 reduced by the city authorities and usually have 
 disappeared altogether. 
 
 In Cleveland, Ohio, the street-car companies* 
 charters paid originally a license fee of seventy-five 
 dollars a car and one cent a passenger, but this has 
 been reduced to five dollars a car. In Baltimore the 
 companies originally paid twenty per cent, of their 
 gross income to the city, but tliis has been reduced 
 to nine per cent. At that rate they paid to the 
 city in 1885 the sum of one hundred and fourteen 
 thousand dollars. In Chicago the companies which 
 have been chartered since 1865 are obliged to pay an 
 annual tax of fifty dollars a car. In Boston very 
 little is realized to the city from the franchise tax. 
 In San Francisco there is a license fee of fifteen 
 dollars a car, and an annual tax on the franchises. 
 In Philadelphia there is an annual license tax of 
 fifty dollars a car and a tax on the franchises. 
 
 Moreover, it has been found generally that it is 
 wellnigh impossible to collect the tax. The com- 
 panies evade it, and pay only at the end of long and 
 strenuous litigation. To such an extent is this
 
 202 THE CORPORATION PROBLEM. 
 
 evasion carried in New York that in some cases the 
 tax has been abandoned, and a statute has been 
 passed requiring the company to pay to the city a 
 certain percentage of its gross receipts.' 
 
 The plan of compeUing the companies to pay to 
 the city a certain percentage of its gross receipts is 
 an improvement on the license fee for each car. It 
 is levied on the gross receipts, because, if levied on 
 the net profits, the company might manage to 
 defraud the city by paying high salaries and figuring 
 out little or no net profit. The tax on gross receipts 
 may be levied not only on the gross receipts of street 
 railways, bat also on those of water-works, gas com- 
 panies, and other monoplies. Many of the States 
 have statutes compelling railroads, street railroads, 
 express companies, telephone and telegraph com- 
 panies, and other quasi public corporations, to pay to 
 the State a certain percentage of their gross receipts.'' 
 
 ^See the case, Mayor, etc., v. Twenty-third St. Ry. Co., 113 N. Y., 
 311 (1889) sustaining the constitutionality of a statute which ordered 
 a company to pay to the city one per cent, of its gross receipts instead 
 of an annual license fee of fifty dollars a car. 
 
 2 The State of Illinois turned over the Illinois Central Railroad to a 
 corporation, but it reserved an interest in the profits. 
 
 The following is an extract from the message of the Governor of 
 Illinois to the legislature in 1 891 : 
 
 " Under the wise provision which retained to the State an interest 
 to the extent of 7 per cent, of the gross earnings of the road, to be 
 paid annually into the State treasury, there has been paid to the State, 
 all told, for the years from 1855 to 1890, inclusive, the sum of 
 $12,365,618. Upon the $40,000,000 of capital stock of the company 
 paid in there was paid as dividends in the same period the sum of 
 $64,782,357, showing that an amount slightly exceeding 19 per cent, 
 of the total paid as dividends has been turned into the State treasury ; 
 or a sum equal to 16.03 per cent, of the whole sum i)aid both to the 
 State and upon stock. The last year the State's 7 per cent, of gross
 
 OWNERS OF NATrRAI. MONOPOLIES. 203 
 
 But there are fundamental defects in all uf these 
 statutes. They are difficult to enforce because the 
 companies conceal the full amount of their receipts. 
 Not even the ri^ht of the State or city to investigate 
 the amount of receipts is sufficient to prevent these 
 frauds. Moreover, the amount received in taxes is 
 infinitesimal compared with the value of the natural 
 monopoly itself. 
 
 And yet taxation is one method of redeeming for 
 the people a small part of the value of the franchises 
 which they have given away. But in order to accom- 
 plish this, the present rate of taxation on corpora- 
 tions owning a natural monopoly will have to be 
 greatly increased. A small tax may bring large 
 returns, but it is trivial compared with the value of 
 the franchise which produces it. Theoretically, the 
 tax should take all of the annual income, except 
 such as will pay the reasonable expenses of the cor- 
 poration and a fair return on the cost of the plant. 
 It is impossible now to levy such taxes on present 
 
 earnings paid amounted to §486,281, and on said $40,cxx>,ooo of 
 stock were distributed as dividends $2,400,000, the State's portion 
 being nearly 17 per cent, of tlie whole amount so paid. The showing 
 for the last six months ending October 31, 1S90, gives the State as its 
 7 per cent, of earnin^'s $257,219, or at a rate which would make the 
 income of the State from this source over half a million jier year, 
 exceeding in amount any other half year in the history of the road. 
 On the whole, I think the rapid increase in the State's revenues from 
 this source, in late years, rising as they have from $3^7.799. '" ^ ^^5. to 
 ^86,281, in 1S90, presents an encouraging prospect, and speaks well 
 for the eflficiency of the present management of the company. The 
 further building of new competing lines of railroad having entirely 
 ceased, there seems cause to hoj^e for a gradual and healthy growth in 
 the revenue of the lines in which the State will share with the owners 
 of the stock."
 
 204 
 
 THE CORPORATION PROBLEM. 
 
 monoplies, but it is possible to provide for the future 
 ones. The present tendency of legislatures is to 
 place all taxes on corporations. And so far as taxes 
 are placed on corporations which own these natural 
 monoplies, such a rule is right. The law allows the 
 tax to be levied on the capital stock, on the divi- 
 dends, on the franchise, on the gross receipts, on the 
 net receipts, on the cars, on the shares of stock, on 
 the market value of the stock, or on the estimated 
 value of the corporate property. Each of these 
 methods of taxation has been tried with varying 
 success. Most of them have had, and all of them 
 should have, for their object the levying of a tax on 
 the natural monopolies owned by the corporations. 
 So far as these taxation statutes have applied to cor- 
 porations doing a manufacturing, mercantile, or 
 similar business, they are unjust, disastrous, and 
 indefensible, but so far as they form a part of the 
 charters of the corporations operating a natural 
 monopoly they are right and are to be commended.' 
 
 ' The following table relative to railroads is taken from the United 
 States Census Report of 1880. 
 
 
 ! 
 
 .Gross Earnings. 
 
 1 
 
 State and Local 
 Tax. 
 
 Per Cent, of Tax 
 
 on 
 Gross Income. 
 
 New Eng. States..' $ 46,942,000 
 Middle " ..j 283,173,000 
 Southern " ..! 49,172,000 
 Western " ..1 130,608,000 
 Pacific " .. 70,554,000 
 Total 580,450,000 
 
 $ 1,601,000 
 
 5,945,000 
 
 616,000 
 
 3,267,000 
 
 1,855,000 
 
 13,284,000 
 
 3.4 
 2.1 
 
 1.3 
 2.5 
 2.6 
 
 2.3 
 
 In Prussia, the General Railway Code of 1838, S. 39, levies a tax 
 on railways in proportion to the profits on the total capital subscribed, 
 after deducting all the expenses of repair, the cost of carr}'ing on the 
 business, and the yearly sum to be appropriated to the reserved fund.
 
 OWNERS OF NATURAL MONOPOLIES. 205 
 
 The day is not far distant when State and munici- 
 pal taxes will be largely if not entirely defrayed by 
 the taxes levied upon corporations owning natural 
 monopolies. In Vermont for many years the rail- 
 roads have paid all State taxes. In Wisconsin and 
 Mississippi a similar plan is being adopted. The 
 State of New Jersey also has recently modified her 
 taxation statutes so that the corporations now pay 
 practically all of the State taxes. Such also is the 
 law in New Hampshire.' 
 
 There is also a tax levied upon the net profit after deducting manage- 
 ment, maintenance, working expenses, reserve funds, and interest 
 and sinking funds U) pay off loans. The rate is : 
 
 If net profit is 4 per cent. — j^^ thereof, 
 
 " " " " 4 to 5 per cent. — -^j^ thereof. 
 
 ' 5 to6 " •• -^V " 
 
 ' 6 per cent. — j'^j thereof. 
 
 The tax is used by the state to buy the stock of the road, and thus by 
 degrees the state becomes its owner. — Jeans on " Railway Problems," 
 p. 174. 
 
 ' See Ely on " Taxation," pp. 435, 436. 
 
 At an early period the State of Maryland required the Baltimore 
 and Ohio Railroad to agree to give to the State twenty per cent, of the 
 gross income from passenger traffic over the line from Baltimore to 
 Washington, as compensation for the franchise to build the road. 
 See R. R. Co., vs. Maryland, 21 Wall, 456 (1S74). 
 
 In the city of New York, in 1888, the local tax on the corporations 
 was at the rate of 1.9483 per cent, on $57,623,060 making a tax of 
 $1,120,365.80. The whole amount of tax collected was $34, 329,860- 
 12. The city is entitled to 5 per cent, of the net income from one 
 of the elevated railroad companies. In i8Sg the city received from 
 all the surface and elevated railroads $225,990, in addition to the 
 regular taxes. Of this over $80,000 was for unpaid license fees for 
 previous years. 
 
 The total State taxes levied by all the .States and Territories in 1889 
 were $109,543,870. Ely on " Taxation," p. 453. The total gross 
 income of all the railroads of the country was about $1,000,000,000.
 
 2o6 THE CORPORATION PROBLEM. 
 
 But taxation has failed to restore to the people a 
 fair part of the annual income from natural monopo- 
 lies. Hence another remedy has been tried. In 
 New York, in 1885, the bribery of the board of alder- 
 men, whereby the Broadway street-railway franchise 
 worth a mxillion dollars, was obtained, led to a popu- 
 lar demand for a change in the laws. Accordingly 
 the legislature enacted that thereafter all street 
 railway franchises should be sold at public auction 
 to the one who offered the highest percentage of 
 the gross receipts/ This statute, has checked the 
 building of lines, yet it has led to some surprising 
 results. At one sale the successful bidder was 
 obliged to give 26^ per cent, of the gross annual 
 receipts to the city in order to get the franchise, and 
 in another sale 35 per cent, was the price at which 
 the franchise was sold. It is safe to say that if this 
 statute had been passed fifty years ago and had 
 applied to all franchises which involve a natural mo- 
 nopoly, the city of New York would be free from 
 debt to-day and the greater part of the expense of 
 governing the city, which is now upwards of thirty 
 millions of dollars annually, would be met by the 
 income from these natural monopolies. The present 
 enormous tax of about two per cent, on all taxable 
 property in that city would not be levied.^ 
 
 1 See Ch. 642 L. 1886, as amended by Ch. 622 L. 1887. The price 
 must be at least 3 per cent, for the first five years, and 5 per cent, 
 thereafter. 
 
 ^ Comptroller ISIyers, of the city of New York, said, in October, 
 1890, that " it would pay any man to take a contract to run the 
 city government without levying any taxes, provided he could get 
 possession of all the franchises which the city had in former times
 
 OWNERS OF XATURAI. M()N( )!'( )LIKS. 20/ 
 
 But there is an improvement which should be 
 added even to this plan of a public sale of the 
 franchises. The sale should be for a specified num- 
 ber of years only — ten, fifteen, twenty, or twenty- 
 five. At the end of that length of time it should be 
 provided that the city be allowed to purchase the 
 property at the actual cost of replacing the plant, or 
 the franchise should be again sold at public auction, 
 the purchaser to purchase the old property at the 
 actual cost of reproduction. Such is practically the 
 plan adopted in Louisiana, England, and Canada.* 
 
 given away, together with those franchises which it controls to-day. 
 I stated that all those franchises are now so valuable that if their 
 present incumbents were reasonably taxed, a sufficient revenue would 
 be obtained to meet the expenses of city government, thus permitting 
 of the abolition of taxes on property." 
 
 ' In Louisiana, where after twenty years the street railways revert to 
 the city, the estimated value of the plant being paid to the company, 
 the city at the expiration of the twenty years may sell the franchise. 
 — Canal, etc., R.R, rs. New Orleans, 2 South Rep., 388 (1887). 
 
 In New Orleans alone have the rights of the public been carefully 
 protected. In that city the policy of granting short charters, and, at 
 the expiration of these charters, reselling the franchises for large 
 amounts, has been carefully pursued. The New Orleans companies 
 make large incomes for the city, are run cheaply, have little wa- 
 tered stock, and yet pay good dividends. In 1S86 the sale of a 
 single franchise met nearly one eighth of the total municipal expendi- 
 tures for the year. 
 
 In Chicago charters granted prior to 1865 run for one hundred 
 years. In Cleveland the charters are perpetual, and practically so 
 in Boston. In Philadelphia and Baltimore the charters are unlimited, 
 but the city may buy out the corjioration at the end of the first or any 
 subsequent fifteen years. 
 
 I'rofessor Richard T. Ely, in Harper s Magazine, July, 1887, says : 
 ** All charters for i)erforming the functions of a natural monopoly 
 should lie limited to a brief period, with the reversion of the entire 
 property to municipality, stale, or federal government, either without
 
 208 THE CORPORATION PROBLEM. 
 
 But the most effectual remedy is that each city 
 shall own all of the street railways, water-works, gas- 
 works, electric lights, telegraph and telephone lines, 
 wharves and ferries within its limits. This plan is 
 that each city shall own them, not necessarily for the 
 purpose of operating them, but for leasing them on 
 short periods of time. In Europe such a mode of 
 owning natural monopolies has gone much farther 
 
 compensation or with compensation at an appraised valuation for 
 actual outlays. '' 
 
 In Berlin "the street-car lines pay a portion of their revenue to 
 the city, keep the streets through which they run well paved from 
 curb to curb, and in igii they become the property of the city with- 
 out compensation. Had New York City — a municipality of about 
 the same size — followed this example, taxation would in a no distant 
 future be reduced very considerably, and fares lowered from five to 
 three or even two cents. ... An act of Parliament allows no 
 municipality to grant a charter to a street-car company or an electric- 
 light company for more than twenty-one years, and it must always be 
 granted with the reserved right of purchase before the expiration of 
 the charter, and at expiration, with compensation for land, buildings, 
 and plant, but none whatever for good-will, expectation of future 
 profits, or for compulsory purchase." 
 
 A striking illustration of the dangers of this plan, however, is 
 found in New York City. The City every few years gives a new 
 lease of its ferries, the last lease being in 1S87, by which the city was 
 to receive 12^ per cent, of the gross revenues from the operation of 
 the ferries. The lease provided that upon its termination in 1891 , if the 
 old lessees did not take a new lease at the next letting in i8gi, the new 
 lessees should buy the plant of the old lessees at an appraised valua- 
 tion, each party appointing one appraiser. The appraisers were ap- 
 pointed and valued the plant at $3,803,000. This figure was so high 
 that no one except the old lessees could afford to bid at the letting in 
 i8gi. Accordingly, before the new letting was made, certain parties 
 who wished to bid caused suit to be instituted to set aside the $3,803,- 
 000 appraisement, alleging that }j^i, 520^000 was all that the old plant 
 is worth. This suit is still pending.
 
 OWNERS OF NATURAL MONOPOLIES. 209 
 
 than in America. There are comparatively few of 
 the American cities which own their gas-works, and 
 none at all which own their street-car lines. New 
 York City owns its water-works and most of the 
 ferry privileges, and is acquiring the wharves.' It 
 leases a part of the ferry privileges. But for the 
 most part the natural monopolies of that city are 
 owned absolutely by corporations. And, indeed, in 
 all American cities this private ownership has gone to 
 such an extent that the most advanced and vigorous 
 thinkers and political economists of the times are 
 steadfastly advocating city ownership of all natural 
 monopolies within city limits. 
 
 In regard to this movement Professor Warner 
 says : 
 
 " \Mien, in 1S73, Adolph Wagner read before the German Verein 
 fiir Socialpolitik an elaborate paper on joint-stock companies, he 
 made many suggestions as to the reform of cor])oration law. But 
 he concluded by defending the thesis that, while the reform of 
 corporation law was indispensable, this alone, however perfectly 
 accomplished, could not suffice to eliminate the evils of corporate 
 management of property ; he contended that corporations must con- 
 tinue to be mischievous until they are restricted to a narrower field of 
 activity than that now occupied by them ; that the State, in its vari- 
 ous branches, must assume control of those enterprises that are of 
 necessity monopolies." 
 
 The New York Record and Guide presents the fol- 
 lowing facts and figures : 
 
 ' ' A careful estimate has been made which seems to show that the 
 people of this country are paying ten per cent, annual dividends on 
 $150,000,000 of fictitious gas stock, and yet our cities go on without 
 
 * In 1889 New York City received fi, 521,602 from dock and ship 
 rents. 
 14
 
 2IO THE CORPORATION PROBLEM. 
 
 a change of policy, apparently continuing to think that competition 
 will regulate prices in business where competition is demonstrably 
 nothing but an expense and a nuisance. Only five cities in the whole 
 country are known to own their gas-works — Philadelphia ; Richmond, 
 Danville, Wheeling, and Alexandria, Virginia. Yet of these five, 
 the one that has managed least wisely has succeeded in obtaining gas 
 at a lower rate than almost any of the cities supplied by private com- 
 panies and considerably below the average for such cities. There is 
 no example of sustained and healthy competition between gas com- 
 panies in the United States. Even a ' gas war ' that lasts for a 
 considerable time is merely 'a fight to the finish,' and duplicate gas- 
 plants must eventually be paid for by double dividends. . . . 
 
 " AYe published some time ago a list of eighteen cities owning and 
 very successfully operating their own electric-light works, Chicago 
 beino- one of the number. All but one of these are west of the 
 Alleghanies. 
 
 • ' If we desire to find a contrast to this state of things we must look 
 outside our countr}', but need not look farther than England. Of 
 the 155 tramways in the United Kingdom twenty-seven belong to 
 the local authorities, yielding an annual revenue of ;^8i,98o. In the 
 financial year of 1S83-4, which is the last for which the figures are at 
 hand, the amount of money received from water-works by municipal 
 boroughs was ^1,628,585 ; by urban sanitary districts, ;^267,8io ; by 
 rural sanitary districts, £i(^, 166. From gas-works the municipal bor- 
 oughs received ;^3,056,559 ; the urban sanitary districts, ;,^307,489." ' 
 
 '^Prof. E. W. Bemis, in a paper read before the American 
 Economic Association recently, stated that nine cities now own and 
 operate gas-works in this country : Philadelphia ; Wheeling, West 
 Virginia ; Bellefontaine and Hamilton, Ohio ; Henderson, Ken- 
 tucky ; and four cities in Virginia, Richmond, Danville, Charlottes- 
 ville, and Alexandria. Philadelphia now manufactures gas at a cost 
 of 74 cents per thousand feet, or if five per cent, interest and two 
 per cent, as taxes, which a private company would have to pay, is 
 included, $1.02 per thousand feet. The cost of manufacturing gas in 
 Richmond is, allowing six per cent, interest and two per cent, for 
 taxes, $1.04 per thousand feet. 
 
 It seems that all of the ferry privileges between New York and 
 Brooklyn are owned by New York, and that Brooklyn has no interest 
 therein. This ownership runs back as far as I730- The right to
 
 OWNERS OK NATURAL MONOPOLIES. 2ll 
 
 Professor VAv said in l^osloii in Janu.iiy, I SS9 : 
 
 *' I oppose private monopolies. What I favor is the management 
 of certain monopolies by public authorities and in the interests of the 
 public. Monopolies are the field for j)ublic activity. Competitive 
 pursuits are the field for private activity. It is thus that I draw the 
 line, and it is, as I hold, clearly and sharply drawn. ... I will 
 simply enumerate the more important natural monopolies : gas 
 supply, water supply, and electric lighting, street railroads of all 
 kinds, steam railroads, telegraphs, telephones, all public roads, the 
 e.xpress business. These businesses never can be conducted except as 
 monopolies, and any phenomena which appear like competition are 
 temporar>' and illusor)-. The gas business ser^'es well as illustration. 
 I suppose competition has been tried over a thousand times, and it 
 never has yet been permanent, and it can be demonstrated almost 
 mathematically that it never can be permanent. . . . Certain 
 monopolies are local in their nature — t'.^., street cars, electric lights, 
 gas supply, water supply, and for these I favor the principle of 
 municipal self-help, as opposed to the perpetual interference with 
 private corporations which render these ser\'ices. There are two 
 principles, one of which must be violated in these matters. One is 
 the ' keep-out ' principle — the other is the ' let-alone ' principle. 
 The keep-out principle means that government should not perform 
 industrial functions. The let-alone principle means that government 
 should let private parties manage their own business in their own 
 way. Now, I believe in this let-alone principle. Its violation 
 brings about an intermingling of private and public interests which is 
 most demoralizing, and which is to-day the chief cause of corruption 
 in public life. The keep-out principle can be violated with greater 
 safety. I say then that cities should pursue a policy looking to the 
 ultimate ov.nership and management of all local monopolies. This is 
 most intimately connected with local taxation. One of two methods 
 may be pursued, i. These monopolies may be worked for a profit, 
 and by profits taxes may be reduced ; or, 2, charges may be reduced, 
 
 operate the ferries is sold every ten years by the city of New York to 
 the highest bidder. The present operators of five of the lines pay 
 12 3.^ per cent, of the gross receipts to New York. In the year i88q 
 these five ferries earned $815,404. New York received from ferry 
 rents in 1889, $326,559.
 
 212 THE CORPORATION PROBLEM. 
 
 and increased general prosperity will furnish a more plentiful source 
 of taxes, and thus allow a reduction of the tax rate. Enormous waste 
 is thereby obviated. . . . Natural monopolies owned and con- 
 trolled by cities always work well, and you may search the world over 
 for an exception. . . . The worst instance of municipal works 
 has proved better than ordinary private works, and probably less 
 demoralizing politically. . . . Public works will always be in 
 politics. The only question is whether it shall be open and above 
 board or concealed. ... By the application of correct principles 
 in the treatment of natural monopolies we could have reduced taxes in 
 Baltimore one third, I suppose in New York two thirds, probably in 
 Boston at least one half." 
 
 The example set by Birmingham, England, in the 
 way of city ownership and operation of natural 
 monopolies, is a remarkable instance of what a city is 
 capable of. That city has recently acquired nearly 
 all of the natural monopolies within its limits. The 
 two gas monopolies, which had supplied the citizens 
 with an inferior and costly article, were bought out 
 of existence and consolidated into a department of 
 the city council. The profits to the city are about 
 $100,000 a year, although the price charged is sixty- 
 two and fifty-eight cents per thousand. The water- 
 works are owned by the city. The street railways are 
 leased by the city to corporations. The city lays 
 down the tracks, keeps them in repair, and the cor- 
 porations pay a mileage rent. Overcrowding is 
 illegal and fines are imposed for violations. 
 
 And yet there are grave objections to all this. It 
 may be true that if these natural monopolies were 
 owned by the cities, the people would get the income 
 therefrom ; that the service would be better ; that it 
 would be cheaper ; that more improvements would 
 be made; and that less controversies between the
 
 OWNERS OF NATURAL MONOPOLIES. 21 3 
 
 corporations and the i3eople would exist. It may be 
 true that the income from tht? natural monopolies 
 would pay municipal debts, pay the annual expenses 
 of local government, build great public improve- 
 ments, and reduce the rates charged for service to 
 the public. 
 
 Notwithstanding this the thoughtful citizen has 
 doubts about the expediency of such a course. The 
 making or saving of money is not the chief aim or 
 end for which government is given power by the 
 governed. The argument against the centralization 
 of power in government is not applicable here, 
 because the power here considered is that of the 
 municipalities, and such government never has and 
 probably never will be too greatly centralized. But 
 the objection is that such a bureaucratic and paternal 
 system of government, even of local government, 
 would teach the American people to look to and 
 depend upon government for the transaction and 
 regulation of business. Worse than this, the mu- 
 nicipal governments, even now, with their limited 
 power and patronage, are spectacles of unmitigated 
 corruption and mismanagement, and it seems impos- 
 sible to wrest them from lawless bands of politicians. 
 If the cities acquired all of the natural rrionopolies, 
 these too would become subjects of plunder. A 
 city government would then become the El Dorado 
 of political freebooters and mountebanks.
 
 CHAPTER V. 
 
 TRUSTS. 
 
 Causes of trusts — Definition and explanation of the various 
 kinds of trusts — The legality of trusts — The tendency 
 of business towards large concerns^ combinations^ and 
 consolidation — Are trusts to be justified as a legitimate 
 mode of doing business on a large scale ? — The monopoly 
 feature of trusts — Transformation^ reorganization, and 
 disappearance of trusts iiito large corporations. 
 
 CAUSES OF TRUSTS. 
 
 During the past fifteen years there has been a 
 rapid growth of manufactories. This growth has 
 extended into all branches of manufacturing business. 
 It has created competition, caused an over-produc- 
 tion, and reduced prices frequently below the cost 
 of the article produced. Several years ago it became 
 evident to manufacturers that they must pursue one 
 of two courses. They must continue the war of 
 prices until the weaker concerns went to the wall 
 and a few great establishments arose on the ruins, or 
 they must combine, limit production, and control 
 prices. The latter plan was adopted. - 
 
 There are other causes at work. America has 
 been and is increasing in population and wealth 
 
 214
 
 TRUSTS. 215 
 
 with wonderful rapidity. The imperial destiii)' of 
 the country is manifest. It is becomin<^ the com- 
 mercial centre as well as the ^^ranary of the world. 
 Its sixty-three millions of people consume an amount 
 of manufactured products which is growing year by 
 year. As a result the manufacturing industries have 
 been developed witli remarkable speed. This fact 
 has put into vigorous operation the law of trade, that, 
 as an industry grows in \olume, it tends to centralize 
 and become focused into great establishments. This 
 is natural, because the great establishments produce 
 in large quantities and thus produce more cheaply ; 
 they buy raw material more cheaply, save in expense 
 of selling, utilize inventions, employ the best talent, 
 and they can sell at prices which ruin and drive out 
 the smaller concerns. The talent, business capacity, 
 carefully invested capital, energy', and reliability of 
 great concerns give them the supremacy. Hard 
 times may intensify and shorten the struggle. 
 Close competition may for a time prevent profits and 
 even cause a loss to all. But sooner or later the 
 weaker concerns drop out, prices are restored to a 
 normal basis, competition between the surviving 
 g^eat houses prevent an undue enhancement of 
 those prices, and trade settles down to a healthy 
 basis — fair to the public, and fair to itself. Such 
 has been the history of European manufacturing 
 industries, and such is the natural development of 
 all productive enterprises. It is so with the mining 
 and mercantile business, with water transportation, 
 banking, and manufacturing. It is the law of nature 
 and of trade.
 
 2l6 THE CORPORATION PROBLEM. 
 
 These two causes — too many concerns and the 
 natural tendency of all large business to concentrate 
 — were enough ultimately to bring about the rise of 
 great concerns in each branch of business and the 
 fall of the small competitors. The fact is, that 
 competition is a benefit not only to the consumer 
 but also to the deserving producer, the manufacturer. 
 To the consumer it gives reasonable prices. To the 
 manufacturer it is a benefit by periodically winding 
 up the decrepit and incapable concerns. A vigorous 
 and growing manufacturing establishment has no 
 need to fear. It may at times have its profits cut 
 down by low prices caused by excessive competition, 
 but after the tottering and worn-out concerns have 
 gone to the wall, trade revives on a new and paying 
 basis. 
 
 But the natural process was not fast enough for 
 the restless American. The law of the survival of 
 the fittest works too slowly for his temperament. 
 Instead of allowing the weak concerns to die, and 
 the strong, talented, energetic ones to survive, he 
 has stopped the workings of the natural laws of 
 trade and has substituted his own makeshift. And 
 his device has been bold and swift. It is the device 
 of trusts. 
 
 The trust has been a creation of very recent times 
 and one of the chief reasons why so many adopted 
 this remarkable mode of combination was that a 
 great monopoly in oil had devised it and had pros- 
 pered. This monopoly in oil had amassed millions 
 of money, and had practically crushed out all com- 
 petition. It had succeeded beyond the dreams even
 
 TRUSTS. 217 
 
 of those who originated it, and had worked out the 
 trust plan and poHcy of organization. The Standard 
 Oil Trust proved a success, and the mode of organi- 
 zation which it adopted set an example for manu- 
 facturers which they were not slow to follow. 
 
 DEFINITION AND EXPLANATION OF THE VARIOUS KINDS 
 
 OF TRUSTS. 
 
 A trust is a combination of many competing con- 
 cerns under one management, which thereby reduces 
 the cost, regulates the amount of production, and 
 increases the price for which an article is sold. It is 
 a monopoly or an endeavor to establish a monopoly. 
 Its purpose is to make larger profits by decreasing 
 cost, limiting production, and increasing the price to 
 the consumer. This it accomplishes by presenting 
 to competitors the alternative of joining the trust 
 or being crushed out. 
 
 The term trust has been popularly applied to 
 all of the modes of effecting combinations. These 
 combinations have varied in their organization, ac- 
 cording to the property involved, the objects to 
 be attained, and the willingness of the parties 
 to place their property in the hands of others. 
 Hence it is that many different plans of combining 
 have been attempted. The first plan was by con- 
 tracts, whereby all the parties were to sell at a fixed 
 price or through a common agent. Five years ago 
 these contracts existed in many branches of business. 
 They corresponded in principle and purpose to the 
 railroad pools, but like them they were a failure. 
 The courts would not enforce or sustain them, and
 
 2l8 THE CORPORATION PROBLEM. 
 
 the members would not live up to them. They were 
 short-lived. The parties would not act in good 
 faith. Secret breaches were made, or the whole 
 agreement was openly repudiated. They fell to 
 pieces. Self-interest was the only cohesive bond, 
 and self-interest sooner or later induced one or more 
 to abandon and compete with the combination pool. 
 
 It became evident that a stronger method of effect- 
 ing a combination must be found. It must be a 
 method which would bind fast all who once entered 
 into it. It must take the management and owner- 
 ship of the business out of the hands of the various 
 discordant elements which constituted the combina- 
 tion. It must be based not on a moral obligation 
 or mere agreement, but on an absolute right of 
 property, possession, and ownership, vested in the 
 combination itself. The old method of combination 
 had failed, because it required the continuous assent 
 of its numerous members. The new combination 
 could succeed only by depriving the parties of the 
 power to withdraw their assent. A scheme that 
 would fulfil these requisites was not easy to discover. 
 But it was found, and exists in the latest form of 
 trusts. 
 
 This latest and perhaps most efficient method of 
 organizing the trust is for each of the parties to 
 incorporate his own establishment. The stock 
 of these various corporations is then turned over 
 to certain persons called trustees. In payment 
 therefor the trustees issue to each party trust cer- 
 tificates, similar to shares of stock in corporations. 
 By these exchanges the trustees hold a majority
 
 TRUSTS. 219 
 
 or all of the stock of each of the separate corpora- 
 tions. The trustees thereby elect the directors, 
 place their agents in charge, prevent all clashing 
 of interests, and so control the market. They then 
 have the power to cause one concern to be closed, 
 limit the production of another, consolidate the 
 different establishments, or centralize production at 
 one point. The various parties are not injured 
 thereby, since their part of the profits comes from 
 the whole trust, and not from their particular estab- 
 lishment. The trustees are annually elected by the 
 certificate holders. The trust certificates themselves 
 are watered up to a point where the vast profits 
 of the trust will make only a reasonable dividend on 
 all the trust certificates which have been issued. 
 These certificates are bought and sold on the market 
 like shares of stock. 
 
 The Standard Oil Trust, the American Cotton-Oil 
 Trust, and the Sugar Trust have been the most 
 [prominent examples of this mode of forming a trust. 
 
 The term trust has also been applied to any great 
 corporation that has been formed to purchase the 
 copcerns of many competitors in a particular line of 
 business. The most celebrated of this class of cor- 
 porations is the Diamond Match Company. It pur- 
 chased and still owns nearly every match manufactory 
 in this country. Such a corporation is a combination, 
 and its purposes are the same as those of the regular 
 trust. It differs essentially, however, from the lat- 
 ter in certain particulars. These particulars will be 
 pointed out hereafter. 
 
 There are still other uses for the word trust. In
 
 220 THE CORPORATION PROBLEM. 
 
 England it is applied to a legitimate investment en- 
 terprise, where the trustees are authorized to invest 
 the funds of the trust in the stocks and bonds of 
 miscellaneous corporations, the amount invested in 
 any one company being generally hmited. That 
 which is lost in one investment is expected to be 
 made up by large profits in another. It is a mode 
 of investment on a large scale, and is conducted on 
 the principle of an average gain or loss. Again, in 
 America the American car trust exists, and this also 
 is unobjectionable in its operations and plans. It 
 is practically an agreement of several owners of cars 
 to place them in the hands of an agent to sell on the 
 instalment plan, the agent having the power to issue 
 certificates representing an interest in the instalments. 
 In America also there has arisen the railroad voting 
 trust. Such a trust is created by transferring a 
 majority of the stock of the railroad company to 
 trustees, who shall vote it and hold it, but shall issue 
 trust certificates therefor to the parties who turn in 
 their stock to form the trust. The objection to such 
 a trust as this is, that it gives power without re- 
 sponsibility. 
 
 The Reading Railroad is controlled and its officers 
 elected by a voting trust of this kind. The Railroad 
 Gazette, speaking of the proposed voting trust for the 
 Atchison, Topeka, & Santa Fe Railroad, has said : 
 
 " A trust, in this sense of the word, is an arrangement by which 
 the stockholders part with their voting power for a term of years, and 
 during that time lose all control over the management. The object 
 of such a scheme is to protect each individual investor from the effect 
 ©f changes of policy which might arise if a majority interest in the
 
 TRUSTS. 221 
 
 stock should change hands. In an ordinary corporation this is an 
 ever present liability. But if the stock, or a majority of such stock, 
 is placed in the hands of trustees, who give in return a set of trust 
 receipts entitling the holder to all dividends on his stock, the invest- 
 ment and the management become separated. If the trust receipts 
 change hands the dividends go to the new holder ; the management 
 remains where it was before, namely, under the control of the trustees. 
 " Such is the recognized character and purpose of voting trusts. 
 Their object is to secure permanence of management without sacrificing 
 transferability of shares. 
 
 " The opposition to a proceeding of this kind is usually based on 
 legal technicalities. But it really has wider and stronger economic 
 ground. If a concern is owned and managed by its stockholders, the 
 power and responsibility belong in the same hands. If some of the 
 existing owners secure permanent tenure of management by means of 
 a trust, and then sell their interest as investors to others, power and 
 responsibility are at once separated. If a man wishes to make him- 
 self trustee in his own behalf, there is often a presumption that he 
 wishes to retain the power and avoid the responsibility, and that his 
 motives in so doing are questionable. Looked at from the standpoint 
 of the community, the gain in stability of management is more than 
 offset by the loss of safeguards against mismanagement. From this 
 point of view a voting trust is wrong in principle." ' 
 
 ' The same article goes on to say, however, that where, as in the 
 case of a railroad like this, the stock is worth only one seventh of the 
 whole value of the property, a different question arises : 
 
 " Under these circumstances the trust seems to afford the best and 
 simplest means of giving the bondholders an assurance that the road 
 will be run in their interest. Instead of offering chances for dishonest 
 manipulation, it goes far to remove them. Instead of separating 
 power and responsibility, it may really tend to unite them. If the 
 result proves good it is not unlikely to furnish a precedent for subse- 
 quent reorganizations. 
 
 '* Had our railroads been built with stock instead of bonds the 
 question would not have come up in its present form. Had the stock- 
 holders furnished three (juarters of the capital, as is the case in Eng- 
 land, it is doubtful whether a railroad trust of this kind could be 
 justified on grounds of public policy. If investment and manage-
 
 222 THE CORPORATION PROBLEM. 
 
 A trust of this kind prevents, the owner of stock 
 from voting the stock, and for this reason it is gener- 
 ally dissolved by the courts upon the application of 
 a trust-certificate holder. 
 
 But the original and simon pure trust is a 
 unique piece of handiwork. It is well fitted to 
 baffle investigation and to work out its schemes 
 secretly, silently, and effectively. Its structure bears 
 witness to the ingenuity displayed in its construc- 
 tion. It is a labyrinth that is a puzzle to the inves- 
 tor and a peril to the public. It controls the wealth 
 and concentrated power of a corporation, but for 
 the most part avoids the publicity and restraints 
 
 ment were actually in the same hands, there would be no good excuse 
 for separating them. But they are not in the same hands. They are 
 already separated by the existence of the large investment in the form 
 of bonds, whose owners have no direct voice in the management." — 
 Railroad Gazette, January 3, 1890. 
 
 A still different and yet peculiar trust is the Wisconsin Central 
 Company. It is a corporation formed for the purpose of purchasing 
 and holding shares of stock in railroad corporations. It controlled 
 about eight hundred miles of railroad, and recently has leased its 
 lines to the Northern Pacific Railroad Company. " It is organized 
 under the several laws of the State of Wisconsin, but operates 
 in the same way that the trusts do, and is in fact a trust. The 
 stocks and bonds of the various companies acquired are vested in 
 the trustees, who issue their non-voting trustee certificate against 
 them. The trustees have power to fill vacancies in their own body 
 upon the joint nomination of the surviving trustees, approved in 
 writing by the holders of a majority of the stock of the company 
 covered by the trustees' certificates, both common and preferred. 
 This approval is the only interference in the affairs of the company 
 allowed from outside the trustees, who are empowered to vote ' for 
 all purposes whatsoever, upon every question raised at each and every 
 meeting of said company, M'hether annual or special.' " 
 
 The Richmond & West Point Terminal Railway & Warehouse
 
 TRUSTS. 223 
 
 which ii wise pubHc poHcy has placed upon corporate 
 acts. It is a skilfully constructed intricate machine, 
 and is the product of the highest order of business 
 talent and executive ability. 
 
 One of the chief objects of organizing a trust 
 instead of a single great corporation is that by the 
 trust the business is subdivided into many parts, 
 and the insolvency or rascality of one of the con- 
 stituent companies does not bring ruin upon the 
 entire enterprise. It is admirably constructed for 
 use as an irresponsible and " dark-lantern " affair. 
 Its proceedings, books, and operations are not open 
 to the public, nor certificate holders, nor creditors. 
 The law has placed certain safeguards around corpo- 
 
 Company is also a corporation owning the stocks of other companies. 
 The Railroad Gazette of January 1 1, 1 889, says in regard to it : 
 
 " The dangers involved in the form of combination of which the 
 Richmond cV West Point is the most prominent type are to be looked 
 for in other directions. This company is, in substance, a financial 
 concern which controls railroads by ownership of a majority of their 
 securities. The Pennsylvania and other roads have done the same 
 thing in times past, but the difference is that the Pennsylvania is a 
 railroad while the Richmond & West Point is not. This gives the 
 operations of the last named company a more distinctively financial 
 character. It also creates a danger that minority rights may be 
 sacrificed for financial purposes. Not that the Richmond & West 
 Point has done so ; its conduct in this respect has been so straightfor- 
 ward as to l)e an important element in its success.' The continuance 
 of Gen. -\lexander in the presidency of the Georgia Central gives 
 added reason to believe that this policy will continue. But there is 
 none the less a possibility of great evil in this direction, and we trust 
 that the courts will see the danger, and the necessity of throwing 
 additional safeguards over the rights of minority stockholders. Apart 
 from such protection, a minority stockholder in a case like this is even 
 more helpless than he is anywhere else."
 
 224 THE CORPORATION PROBLEM. 
 
 rations. But the trust gives practically absolute 
 power to the trustees, and these trustees act secretly 
 and silently, and refuse to give information even to 
 the certificate holders themselves. They are neither 
 corporations nor well-defined common-law trusts ; 
 no charter or statements need be filed for public 
 inspection ; no reports need be made or published ; it 
 may carry on any business it desires ; the principles 
 of ultra vires acts do not check it ; no limit is placed 
 by statute on its capital stock ; no law prevents an 
 increase or decrease of its trust certificates ; no tax 
 is laid on its charter or franchises or capital stock ; 
 no limit is placed by the public on the powers and 
 discretion of its trustees ; no publicity is given to its 
 acts ; and there is no liability for debts. It may 
 move from State to State ; it may evade taxation, 
 and defy the powers of courts ; and yet it may act 
 secretly, silently, and with all the enginery of irre- 
 sponsible power and unlimited wealth. It has been 
 well said that power without responsibility is the 
 darling of the human heart. The trustees of some 
 of the modern trusts possess it. They have practi- 
 cally no limit placed upon their powers in conduc- 
 ting the business ; no necessity of accounting and 
 disclosing the condition of things ; and no lack of 
 opportunity to use their information for the purpose 
 of making a fortune on the stock exchange. 
 
 THE LEGALITY OF TRUSTS. 
 
 There is no longer any doubt that a trust 
 formed by a combination of manufacturers is ille- 
 gal. The decisions are clear and emphatic. There is
 
 TRUSTS. 22$ 
 
 a long line of cases to this effect running back to Lord 
 Coke, who, in the famous Case of the Monopolies, 
 said that there were three inevitable results of mo- 
 no]DoIy : " ( i) That the price of tlie same commodity 
 will be raised ; (2) that the commodity is not so 
 good as before ; (3) that it tends to the impoverish- 
 ment of divers artisans, artificers, and others." 
 
 The recent decisions in Illinois against the Chicago 
 Gas Trust, and in New York against the Sugar Trust 
 are to the same effect. The State will annul the 
 charter of any corporation that unites or is united 
 with another corporation in forming a trust. The 
 law declares that such combinations are against pub- 
 lic policy and are illegal and void. The courts have 
 set a face of adamant against the trusts, and their 
 days are numbered. Men cannot afford to be doing 
 business in an illegal way. Moreover, the express 
 ban of the law is being put upon them. Congress 
 in 1890 enacted a statute against them; fourteen 
 of the States of the Union have passed similar laws 
 during the past two years, and five other States by 
 constitutional enactments have prohibited trusts 
 absolutely and in unmistakable terms. 
 
 THK TENDENCY OF BUSINESS TOWARDS LARGE CONCERNS, 
 COMBINATIONS, AND CONSOLIDATIONS. 
 
 The industries of America are expanding with 
 the growth of the wealth and population of the 
 country itself. A nation that doubles its popula- 
 tion every twenty-five years, and its wealth in still 
 less time, necessarily has a trade that grows to 
 immense proportions. As already remarked, the
 
 226 THE CORPORATION PROBLEM. 
 
 natural development of such a trade causes great 
 establishments to supplant the numberless small 
 ones. It is a law of nature. These great establish- 
 ments arise gradually by the course of trade and the 
 genius of particular individuals, or they are hastened 
 in their formation by the combinations and consoli- 
 dations of competing concerns. If they arise by the 
 former process, they contain no dead limbs, but 
 every part is replete with vigorous, healthful life. 
 If they arise by the latter process, by combination or 
 consolidation of competing concerns, some of those 
 concerns are generally weak and decayed, and to 
 this extent the great establishment is crippled. 
 
 It is best to be candid and fair in considering a 
 subject which has been the occasion of such wide 
 discussion, intense feeling, and bitter litigation. It 
 is an established principle of economics that the dis- 
 placement of numberless small concerns by large 
 ones is not only a natural process but is beneficial in 
 its results. These great concerns arise because by 
 doing business on a large scale they can do it more 
 cheaply ; they not only can manufacture more 
 cheaply but can sell more cheaply ; they use ma- 
 chinery and improved processes ; investigate, experi- 
 ment, and develop inventions which are beyond 
 the reach of individuals or small organizations ; 
 utilize in every w^ay the modern forces of steam, 
 electricity, machinery, and capital ; produce and 
 distribute on a vast scale ; combine capital and 
 engage skilled persons ; add factory to factory ; use 
 every device that cheapens products ; reduce the 
 cost of transportation ; dispense with multitudes of
 
 TRUSTS. 227 
 
 officers, superintendents, ira\elling salesmen, and 
 expensive advertisements; purchase raw materials 
 at low figures; employ the highest order of admin- 
 istrative abilit)' ; prevent over-production ; ensure 
 certain returns on capital ; prevent insolvencies ; and 
 build up large and new enterprises which require 
 great capital, incur great risks, and call for the best 
 administratixe talent. These are the reasons why 
 in the natural course of events, the great establish- 
 ments displace the small ones. America is now 
 going through this process, and her industries are 
 being revolutionized. 
 
 It has become clear that the natural growth and 
 existence of great concerns, doing all or most of the 
 business in a particular line, are a benefit - 
 
 ARE TRUSTS TO BE JUSTIFIED AS A LEGITIMATE MODE OF 
 DOING BUSINESS ON A LARGE SCALE ? 
 
 Nevertheless all this does not lead to the conclu- 
 sion that the artificial formation of those great 
 concerns by the combination or consolidation of 
 man}- competitors is a benefit. There are legitimate 
 and there are illegitimate methods of combining 
 capital. It is true that the wonderful success of 
 modern business is dependent upon combination ; 
 that by combination capital is obtained, enterprises 
 of magnitude conducted, great results accomplished ; 
 and that every partnership and every corporation is 
 a combination. But these arguments do not justify 
 the trust mode of combination any more than 
 arguments in favor of a standing army would 
 justify the existence of a band of bandits. The
 
 228 THE CORPORATION PROBLEM. 
 
 trust is a nefarioiis mode of forming a few great 
 establishments — nefarious because those estabhsh- 
 ments arise, not by outstripping competitors through 
 a reduction of cost and of prices, but by destroying 
 competition and making possible still higher prices. 
 And they are unnatural creations in that they load 
 down the vigorous and prosperous concerns with the 
 weight of the unprofitable and failing ones. The 
 law of the survival of the fittest in manufacturing is 
 one thing ; the trust plan of turning strong establish- 
 ments into a poorhouse for the preservation of 
 weak concerns is quite a different thing. There is 
 less progress under the latter than under the former 
 law. If competition is allowed to do its work, the 
 capable concerns survive ; they are not handicapped 
 by the weak ; they eventually reduce the cost of 
 production to the lowest possible limit ; they are 
 obliged to create, seek, and use new inventions and 
 processes of manufacture ; they can afford to sell 
 cheaper because they can produce cheaper, and they 
 are obliged to sell cheaply in order to prevent the 
 rise of new and strong competing concerns. In 
 short, the trust is not a natural mode of doing 
 business on a large scale. It is not to be justified as 
 a natural development of trade.* 
 
 ' In reply to the argument that the massing of capital in the form of 
 trusts "has made it possible to organize industrial enterprises on a 
 scale so extensive, and to employ labor-saving machinery so largely, 
 ihat the cost of production, including the cost of transportation to 
 markets, has been enormously, almost incredibly, reduced within the 
 last twenty years," a Pittsburg journal says :' " The benefits of the 
 massing of capital in cheapening the cost of production and trans- 
 portation, although it is often cited to defend the trusts, has no
 
 TRUSTS. 229 
 
 THE MONOPOLY FEATURE OF TRUSTS. 
 
 A trust is an organized effort to establish a 
 monopoly. This is its chief object, and if it were 
 not for the prospect of making this monopoly more 
 or less complete, the trust would not be formed. 
 It is idle for its defenders to say that the trust is 
 created in order to cheapen the cost of manufacture 
 and reduce the price to the public. Incidentally, in 
 
 cogency for three reasons : (i) The corporation laws of the country 
 afTi)rd abundant opportunity for the concentration of capital neces- 
 sary to perform any industrial operation, and no one objects to the 
 incorporation of either $25.ooo,cxx) honest and unwatered capital to 
 build a railroad, or $25,000 to build a factory. (2) No trust puts 
 any new capital into an industrial enterprise, but only combines the 
 capital already existing for purpose of preventing competition and 
 exacting arbitrary profits. (3) Except for the illegitimate profits 
 secured by the suspension of competition, the trust organization 
 produces no saving, but, on the contrary, takes away the penalty of 
 waste, negligence, and recklessness, as has already been shown by 
 recent disclosures." 
 
 Chauncey M. Depew, in an address before the International 
 Brotherhood of Engineers, in Pittsburg, Pa., in October, 1890, said: 
 
 "In the United States our pace is so rapid and our development 
 so phenomenal, that without due consideration we rush rapidly to ex- 
 tremes. This is true both of capital and labor. The money required 
 to construct telegraphs, to build railroads, to establish banks, was 
 beyond the power of the individual, and so the State permitted ag- 
 gregated capital, representing the contributions of many, to perform 
 these works. At the same time, through commissions, departments, 
 and State officers, the hand of the government was constantly upon 
 them for the protection of the public against extortion or discrimina- 
 tion. But within a few years everything from pine lands to peanuts, 
 and from steel rails to sardines has been organized into some form of 
 corporation or trust. This universal effort to absorb the individual, 
 to divide the people into employing companies and employees, and 
 to destroy competition Mill inevitably end in disaster. Hostile
 
 230 THE CORPORATION PROBLEM: 
 
 a few rare cases, both of these results occur. But the 
 chief object of a trust is a monopoly of the market. 
 
 A monopoly of the market means a control of 
 prices, and such a control is always unjust and 
 oppressive, whether created by a king or by a 
 combination of men. It raises prices, persecutes 
 those who refuse to come into the combination, 
 crushes out competition, punishes or ruins single 
 independent producers, lowers the price paid for 
 raw material, restricts production, and renders fair 
 competition impossible. 
 
 Sir John Colepepper, in a speech in the Long 
 Parliament, thus spoke of monopolies and " pollers 
 of the people " : " They are a nest of wasps — a 
 
 legislation and the laws of trade will leave only the legitimate enter- 
 prises surviving." 
 
 The New York Times, the great journal which has been first and 
 foremost in the warfare against trusts, makes the following argument 
 on this point : 
 
 "Certain trusts are maintaining in the field of production manu- 
 facturers who have fallen behind in the race for lack of business 
 ability or of the latest improvement in machinery, just as the Copper 
 Syndicate enabled the owners of poor mines and lean ores to con- 
 tinue production when natural laws and free competition M-ould have 
 shut them out. And they are doing this by exacting an artificial 
 ring price for their products. There are trusts that are heavily 
 loaded with old factories and antiquated machinery, capitalized at 
 three or four times their value, and that are trying to make the public 
 support this rubbish and the owners of it. 
 
 "Such schemes retard the natural elimination of unfit machinery 
 and processes that would take place if the action of natural laws 
 were not prevented. Under free competition old machinery gives 
 place to new,' and old processes are discarded when better ones are 
 discovered and utilized. The lazy, the wasteful, and those who are 
 otherwise unfitted for the struggle yield to the energetic, the thrifty, 
 and the skilful. Inventive genius is stimulated and rewarded, and
 
 TRUSTS. 231 
 
 swarm of vermin which have overcrcpt the hind. 
 Like the frogs of Egypt, they have gotten possession 
 of our dwelhngs, and we have scarce a room free from 
 them. They sup in our cup, they dip in our dish, 
 they sit by our fire. We find tliem in the dye fat, 
 washbowl, and powdering tub. They share with 
 the butler in his box. They will not bate us a pin. 
 We may not buy our clothes without their brokage. 
 These are the leeches that have sucked the com- 
 monwealth so hard that it is almost hectical." This 
 was the same Parliament that sent Charles the First 
 to the block. One of the chief grievances against 
 him was his creation of monopolies in wine, coal, 
 salt, starch, the dressing of meats, beavers, belts, 
 
 industries show steady growtli and progress as tlie old is cast off to 
 give place to the new, and processes are improved. 
 
 " The effect of trust methods — the suppression of competition in 
 prices and sales, the over-capitalization of idle and antiquated fac- 
 tories in practical consolidation with those that are active and well 
 equipped, and the discouragement by intimidation, or otherwise of 
 new and independent enterprises — is frequently to retard the natural 
 growth and improvement of an industry, in order that rubbish may 
 be made valuable, while the people are taxed for the support and en- 
 richment of producers who are incompetent and who would be forced, 
 under tlie working of competition, to show new proof of ability and 
 good management or make way for better men. It is true that the 
 results of free competition are not always satisfactory to all the 
 producers concerned. Some will suffer loss, and, when overproduc- 
 tion has been caused by laws that interfere with the natural course of 
 trade, the readjustment may cause serious disturbance. But, while 
 there are hardships for some in the ceaseless contest, competition is 
 far better for the people and the world and the good of the race 
 than al)Solute or qualified monopoly caused by a suppression of it, 
 and whenever the question has come before our courts of last resort, 
 this doctrine has been strongly supported in the interests of sound 
 public policy."
 
 232 THE CORPORATION PROBLEM. 
 
 bone-lace, leather, pins, and other necessaries, and 
 even the gathering of rags. Prior to that time even 
 Queen Elizabeth yielded to the indignant protest of 
 the English House of Commons and repealed the 
 monopolies which she had granted on iron, coal, oil, 
 vinegar, lead, starch, yarn, leather, and glass. 
 
 There are certain natural monopolies which have 
 already been considered. They are the railroads, 
 street railways, telegraph, telephone, gas, electric 
 lights, and others. These are not popular or de- 
 sirable so far as their monopolistic feature is con- 
 cerned. But the hostility against them is mild and 
 trifling compared with that against the trusts, the 
 monopolies in the necessaries of life, in sugar, oil, 
 coal, and the articles of daily consumption. It is 
 asserted, and with reason, that these trust monopolies 
 press hardest on the great masses of the people, 
 those who are least able to bear the exactions ; that 
 they are a burden which is borne, not by the rich 
 and powerful, but by the poor and weak ; that they 
 are monopolies in the necessaries of life of the farmer, 
 the mechanic, and the laboring man, and that the 
 exactions fall upon those who work for their daily 
 sustenance. A monopoly in those things which the 
 plain people consume day by day, those things 
 which they eat and wear and use in their daily life, 
 is a menace to the future of the nation itself, 
 inasmuch as it affects the character of the next 
 generation. 
 
 There is a general principle of business ethics 
 which may be laid down without much fear of con- 
 tradiction. The moment an individual, partnership,
 
 TRUSTS. 233 
 
 corporation, or combination seeks a monopoly, that 
 moment his or its business methods become iniqui- 
 tous. Especially is this the case where the sole 
 object of a combination is to establish a monopoly. 
 It is not surprising, therefore, that the trust has 
 demoralized business ethics. Its chief object is to 
 put up prices and put down competition. These 
 objects are pursued by fair means and foul. Iniqui- 
 tous bargains are forced or made with railroads. 
 Legislatures are tampered with. Resort is had to 
 threats, fear, dishonesty, bribery, discriminations, 
 and even crime. Business morals are corrupted. 
 Dishonesty ceases to be odious. Chicanery, trickery, 
 and fraud are excused, provided the desired results 
 are attained. The great wealth and splendid talents 
 of the trust are coupled with unscrupulous methods 
 and a greed for gain. The end is made to justify 
 the means. Unscrupulous devices and sinuous ways 
 are overlooked or applauded if they are success- 
 ful. The history of the trust has demonstrated 
 that when a body of men seek a monopoly, they 
 begin to abandon honorable business methods. 
 
 Mr. S. C. T. Dodd, the solicitor for the Standard 
 Oil Trust, in defending that organization in a speech 
 made at Boston, January 8, 1889, said that the 
 Standard Oil Trust had used capital which only 
 a large combination could command, in opening 
 markets for petroleum throughout the civilized and 
 uncivilized world ; that it had decreased the price 
 by enlarging the output and making large gains out 
 of small profits ; that it had further decreased the 
 price by cheapening the methods of transportation,
 
 ^34 THE CORPORATION PROBLEM. 
 
 by building cars for carrying oil in bulk, and by 
 erecting pipe lines ; that all the persons in the com- 
 bination have the benefit of combined knowledge 
 and experience, and the best and cheapest methods 
 of manufacture, as well as the use of patents ; and 
 that in consequence thereof the actual cost of manu- 
 facturing refined oil has been reduced 66 per cent, 
 in fourteen years. Mr. Dodd said nothing about 
 the business practices of his organization. Judge 
 Thomas M. Cooley, however, on the same occasion 
 said : 
 
 "A few things can be said of trusts without danger of mistake. 
 They are things to be feared. They antagonize a leading and most 
 valuable principle of industrial life in their attempt not to curb com- 
 petition merely, but to put an end to it. The course of the leading 
 trust of the country has been such as to emphasize the fear of them, 
 and the benefits that have come froivi its cheapening of an article of 
 commerce are insignificant when contrasted with the mischiefs that 
 have followed the exhibitions in many forms of the merciless power 
 of concentrated capital. And when we witness the utterly heartless 
 manner in which trusts sometimes have closed manufactories and 
 turned men willing to be industrious into the streets in order that they 
 may increase profits already reasonably large, we cannot help asking 
 ourselves the question whether the trust as we see it is not a public 
 enemy ; whether it is not teaching the laborer dangerous lessons ; 
 whether it is not helping to breed anarchy." 
 
 The Conte7nporary Revieiv says : 
 
 " No future treatise on political economy will be complete without 
 an exposition of modern trusts, which have attained such alarming 
 proportions in the United States of America. The growth of these 
 combinations is one of the most remarkable economic developments 
 of the time. The great staples of the country are fast falling into 
 their duties, and some of the necessaries of life are already under 
 their con#ol. Trusts are illegal corporations, born of rapacity and 
 maintained by the exercise of tyranny. Their organization is secret.
 
 TRUSTS. 235 
 
 their workinj^s dark, silent, and subtle. They stretch out their tenta- 
 cles — quietly and stealthily — until whole industries are in their grasp. 
 They are contrivances to create a monopoly by throttling all competi- 
 tors. They squeeze the people at both extremes of the commercial 
 scale — grinding down those who furnish the raw niatcrial ami supply 
 the labor to the lowest limit, and exacting the highest possible price- 
 from the consumer. Once established, trusts soon become strong — 
 almost impregnable — cita<lels of capital. The highest business capa- 
 city is employetl in organizing and maintaining them. They laugh at 
 public opinion, ride rough-shod over legislative enactments, and baffle 
 the law courts. They bridle newspapers with subsidies, and send 
 members to Congress, They have their agents in every legislature 
 and bills are passed in their interest. They tamper with judges, they 
 ally themselves with political leaders, and hire professors of political 
 economy to defend them. But the people are at last awakening to 
 the dangers of trusts, and see in them not only an interference with 
 trade, but a menace to political liberty. Tnists stand in the forefront 
 of the protectionist breastwQiks. They are the crux of the tariff 
 question. It is round them flR«t the battle rages most fiercely, and 
 tariff reformers are bent before all things on clearing them away." 
 
 Professor Bryce .says : 
 
 "He who considers the irresponsible nature of the power which 
 three or four men, or perhaps one man, can exercise through a great 
 corporation, such as a railroad or telegraph company, the injury they 
 can inflict on the public, as well as on their competitors, the cynical 
 audacity with which they have often used their wealth to seduce offi- 
 cials and legislators from the path of virtue, will find nothing unreason- 
 able in the desire of the American masses to regulate the management 
 of corporations and narrow the range of their action. The same 
 remark applies, with even more force, to combinations of men not 
 incorporated, but acting together, the so-called trusts — ;'. «•. , commercial 
 rings or syndicates." ' 
 
 THE DANGERS WHICH ARE BESETTING THE TRUSTS. 
 
 The country has just passed through an epoch of 
 
 trusts. The success of the chief combinations 
 
 - - -£ 
 
 ' Bryce's " American Commonwealth," vol. ii., ]>. 705.
 
 236 THE CORPORATION PROBLEM. 
 
 dazzled the minds and set on fire the imagination 
 of men. It is believed that trusts have existed in 
 over thirty of the necessaries of life.' 
 
 And the list is growing day by day. 
 
 But there are powerful forces at work which are 
 bringing disaster to the trust mode of doing business. 
 
 Most of these trusts will fall to pieces of their own 
 inherent weakness. The tie which binds together 
 the members, who formerly were competitors, is not 
 strong enough to endure. Trusts which consist of 
 mere agreements to keep up prices are destined 
 sooner or later to go to pieces. Unless there is a 
 union of property as well as an agreement to act 
 together, the agreement will be broken. Witness 
 the former pools of railroads, often made and 
 always broken. Unity and single ownership of all 
 the property of all the competing concerns is the 
 only assurance of long life to a trust. Hence it is 
 that most of the trusts now existing, being merely 
 contract agreements to act together, will be broken 
 up by the acts of the members themselves, who will 
 secretly or openly violate their contract. 
 
 There is another rock upon which many trusts will 
 
 ' The Shipping List prints the following list of trusts in existence in 
 the United States : 
 
 Match Trust, Steel-Rail Trust, Jute-Bag Trust, Cordage Trust, 
 Kerosene (Standard) Oil Trust, Borax Trust, Cotton-Seed Oil Trust, 
 Linseed-Oil Trust, Paper-Envelope Trust, Nail Trust, Barbed-Fence 
 Trust, Lead Trust, Nickel Trust, Sugar Trust, School Book Trust, 
 Gutta-Percha Trust, Copper Trust, Zinc Trust, Slate-Pencil Trust, 
 Iron Nut and Washer Trust, Oil-Cloth Trust, Ultramarine Trust, 
 Whisky Trust, Gas Trust, Dressed-Beef Trust, Distillers' and Cattle 
 Feeders' Trust, Starch Trust, Cigarette Trust, Straw Braid Trust.
 
 TRUSTS. 237 
 
 go to pieces. It is the discovery that the strong 
 concerns make a fatal mistake in uniting with 
 the weak concerns. The trust is the salvation of 
 the weak competitor. It enables him to become 
 established ; to build up business and reputation ; 
 to weather the first financial storms ; and to avoid 
 that certain bankruptcy which awaits him, if the 
 war of competition goes on. A few years of the 
 trust puts him fairly on his feet. He then is able to 
 stand alone. He is ready to meet the break up of 
 the trust, and the war of competition. Meanwhile 
 the strong concerns have gained little. They have 
 received greater profits, but have caused weak com- 
 petitors to become strong competitors. The inevit- 
 able war of prices and competition has been delayed 
 for a few years, but the delay has raised up new 
 powers against the old and well established concerns. 
 When, finally, the trust goes to pieces, and competi- 
 tion again decrees that only the fittest shall survive, a 
 long and disastrous struggle will occur. Out of this 
 struggle a few great establishments will arise on the 
 ruins of the many competing concerns. But the 
 trust will have proved a delusion and a snare. Such 
 has been the history of the railroad pool, and such 
 will be the histor)' of the majority of the trusts. 
 
 There is another pitfall for the trust. It is the 
 certainty of new competitors. Competing concerns, 
 content with reasonable prices, will supply the 
 market. Even after a trust becomes an absolute 
 monopoly it is never safe. Its vast profits are a 
 tempting prize, to be contended for by the wealth 
 and enterprise of all men. Capital, ever ready to
 
 238 THE CORPORATION PROBLEM. 
 
 make daring ventures in the hope of great returns, 
 is a power that cannot be suppressed by the trust. 
 It will be unceasing in its menace and it cannot be 
 subdued. 
 
 One of the leading journals of London, speaking 
 of American trusts, said, in May, 1890: 
 
 "A more powerful remedy than that of any penal code, however, 
 exists in the practical impossibility of cornering being carried on to 
 any serious lengths without great peril to those who resort to it. It 
 is difficult to conceive of any body of capitalists being sufficiently 
 powerful to monopolize an article in general demand, and to use their 
 monopoly for any length of time to the serious hurt of the public. 
 Directly prices became prohibitive there would be a formidable 
 movement in the opposite direction, and the monopoly would break 
 down. Only in remotely possible cases could a corner enjoy a pro- 
 longed triumph over the needs of the public. . . . Natural laws, 
 after all, are more potent factors than all the contrivances of selfish 
 and unscrupulous men." 
 
 A world-wide trust — a trust embracing all lands 
 and all peoples, is yet to be seen. It was attempted 
 in the French copper trust, but that gigantic concern 
 went down and brought ruin upon its members. Its 
 recent collapse, even after it had been operated with 
 almost unlimited capital, temporary success, and 
 great ability, shows that the markets of the whole 
 world are too great and competitors too numerous 
 to be collected or controlled by a single trust.* 
 
 ' At the time the F'rench copper trust was in the height of its 
 power the French government proposed to attack it through the 
 French law against combinations. The immense profits, however, 
 coming'into France through the operation of the trust caused the gov- 
 ernment to stay its hand. But when the trust collapsed a different 
 view was taken of the situation, and M. Secretan, the most promi- 
 nent man in the trust, was sentenced to six months' imprisonment and
 
 TRUSTS. 230 
 
 The two great things which a trust fears arc : 
 (i) the decisions of the courts forfeiting the cliar- 
 ters of the constituent corporations ; (2) new com- 
 petitors on a large scale, either at home or abroad. 
 Whether it is best by free trade to sacrifice various 
 branches of American manufacturing, in order to 
 destroy the trusts, is a question not yet con- 
 clusively decided. The people differ in opinion as 
 
 a fine of 3,000 francs, as n punishment practically for his failure to 
 make the trust a success. 
 
 Judge Thompson, of St. Louis, thus describes the copper trust : 
 " It was my fortune to have for a ship companion on a trans- 
 atlantic voyage a member of that so-called trust, and he was good 
 enough to explain to me how it was organized and what had been 
 its results. The scheme consiste<l in nothing less than forestall- 
 ing or ' cornering,' to use a modern expression, the market of the 
 whole world in copper for the period of three years. This it at- 
 tempted to accomplish, and did for a time accomplish, by buying up 
 the out-put of all the copper mines in the world for that period, 
 imder contracts by which they agreed to pay the mine owners thirteen 
 cents per pound, and one-half of whatever the so-called ' syndicate ' 
 should be able to get for the copper in excess of thirteen cents per 
 pound. The immediate effect of this gigantic crime against com- 
 merce was to advance the price of copper in the United States from 
 nine to sixteen cents a pound ; so that, where the mine-owners were 
 realizing, before the formation of the trust, nine cents per pound, 
 they soon after found themselves realizing fourteen and one-half cents 
 per pound. But the syndicate did not take the precaution to buy up 
 all the old scrap copper in the world, nor to buy all the metal that 
 could be substituted in the arts in the place of copper, nor to arrange 
 with those who were consuming copper that they should continue to 
 consume it in the same quantities, notwithstanding any increase of 
 price which the syndicate might demand. The result was that the 
 gigantic scheme collapsed, dragging down with it one of the great 
 banking institutions of France, bankrupting an untold number of 
 individuals, and, what was of less consequence, driving to suicide 
 the 'Napoleon of Finance' who had organized the crime."
 
 240 THE CORPORATION PROBLEM. 
 
 to the merits of a protective tariff and free trade. 
 But there is no inclination to protect the trusts. 
 If it is finally concluded that the protective tariff 
 laws create and foster the trusts, then the protective 
 tariff laws will be repealed. 
 
 Hon. John Sherman, in a speech delivered in the 
 United States Senate on September 29, 1890, said, 
 concerning the recently enacted protective tariff 
 act : 
 
 ' ' The great obstacle and menace that stands in the way of the suc- 
 cess of this tariff bill, that which more than all else will determine 
 the length of its life, that which will test its wisdom hereafter, is the 
 question which has been discussed heretofore in the Senate, whether 
 the manufacturers of this country are willing to maintain free and 
 fair competition in their various productions, so that the people may 
 have the benefit of that which they claim as their right — free and full 
 competition in domestic markets of domestic products. | The great 
 danger of this tariff and of all schemes for building up domestic 
 industries by law is that the beneficiaries themselves, capitalists and 
 laborers alike, will not be content to realize the advantages they 
 enjoy, but will combine and confederate in order to cheat the peo- 
 ple of that which they have the right to enjoy. , . . This pro- 
 tective policy must not degenerate into monopoly — into trusts or 
 combinations to raise prices against the spirit of the common law. 
 ... If . . . the notion prevails that it is right and just for peo- 
 ple who engage in the same pursuit to pool their issues, to appoint a 
 trustee to manage their affairs, to deprive themselves of the powers 
 which they enjoy as citizens and as corporations in order to make 
 corners and by various devices to cheat the people, then the protective 
 tariff system will disappear as rapidly as it has sprung into ex- 
 istence." ' 
 
 ' Judge Thompson, of St. Louis, recommends the following treat- 
 ment of the trusts : 
 
 " My idea is that, as a general rule, men should be free to combine 
 for their own interest and profit ; that both the trust and the trades 
 union should be let alone ; but that, if the evils produced by these
 
 TRUSTS. 241 
 
 But the laws of competition and chany;es in the 
 protective-tariff system proceed slowly. The trust 
 has the power to delay all these. Its wealth mounts 
 into the hundreds of millions of dollars. It em- 
 ploys tens of thousands of men. It has destroyed 
 hundreds of competitors. It ignores the press, the 
 legislature, and the law. Its powers are not limited 
 by charter or public opinion. Its policy is directed 
 by the highest order of executive and legal talents. 
 Its movements are secret, silent, unerring, and all 
 powerful, and it extends into all branches of indus- 
 tr}\ It has no fear of Congress or State legislatures. 
 
 The courts, however, are doing more than all else 
 to drive out the trusts. They are forfeiting the 
 
 rombinations become unbearable, tjovernnient should proceed with 
 rigid impartiality against both. 
 
 *' I, As a general rule, we may safely tru^t to the operation of 
 natural laws and to the inherent weakness of every human combina- 
 tion for a sufficient remedy, 
 
 " 2. But if this remedy proves inadequate in any case — if men, by 
 combining, acquire in business struggles undue advantage over those 
 who do not combine, the remedy is first to be sought outside of the 
 law — outside of government — Viy individual action, by counter move- 
 ments of some kind. If capital combines against labor, labor must 
 combine against capital. If manufactures combine against agricul- 
 ture, agriculture must combine against manufactures. If the common 
 carrier combines against the farmer, the manufacturer, the merchant, 
 and the laborer, then all must combine against the common carrier. 
 Meet combination with combination ; strike with strike ; lockout 
 with lockout ; fight the devil with fire. 
 
 " 3. Withdraw all governmental aid, in the form of protective 
 tariffs or otheru-ise, from combinations which threaten to suppress 
 competition in any trade, or to engross the market in any commodity. 
 Apply this principle impartially against combinations of capital and 
 against fomhinations of labor ; repealing on the one hand tariff \a^^^%. 
 not needful f<3r revenue, and, on the Other hand, laws which hamper 
 If
 
 242 THE CORPORATION PROBLEM. 
 
 charters of the constituent corporations which make 
 up the trust, and are appointing receivers of the 
 property. The decisions in Louisiana, Illinois, and 
 New York have settled the law beyond controversy. 
 The trusts have at length realized that they are 
 Illegal and must go. And the question with them 
 now is, What shall they do next ? 
 
 TRANSFORMATION, REORGANIZATION, AND DISAPPEAR- 
 ANCE OF TRUSTS INTO LARGE CORPORATIONS. 
 
 The first great trust in this country was the 
 Standard Oil Trust. The first great combination of 
 manufacturers into a monopoly, however, was the 
 Diam.ond Match Company. The purpose was the 
 
 the importation of foreign labor, not needful for the exclusion of 
 undesirable immigrants. 
 
 ' ' 4. Withdraw corporate franchises from every corporation which 
 attemjDts to suppress competition and engross the market in any com- 
 modity, and leave every adventurer in such an enterprise liable as a 
 partner. No matter how small his holdings in it may be, let it be 
 known that he involves his whole fortune in the crime against society 
 which he and his confederates attempt, and that if their attempt goes 
 down, he goes down. 
 
 "5. If these means fail, level against the individuals — not against 
 the corporations — the machinery of the criminal law." 
 
 Charles Francis Adams, writing in March, 1 891, said concerning 
 trusts : "So far as my judgment, observation, and study go, I 
 have found that business combinations and trusts are mainly dangerous 
 to those who are, so to speak, inside them. If left absolutely alone 
 by the government, they will work nothing but good ; unless they are 
 perverted to some purpose opposed to the laws of trade, in which 
 case they inevitably, soon or late, bring about the ruin of those con- 
 cerned in them. I think there is no exception to this rule. Every 
 trust, so called, exists even, on condition that it supplies that which 
 it controls cheaper than any one els.e- can afford to supply it."
 
 TRUSTS. 243 
 
 same — the creation of a monopoly. The mode of 
 organization was different, tlie former being a genu- 
 ine trust — that is, the placing' of all the shares of 
 stock of many corporations in the hands of trustees 
 who issue certificates therefor; while the Diamond 
 Match Company's mode of organizing the monopoly 
 was to organize one single huge corporation and 
 have it purchase and own all the competing manu- 
 factories, payment therefor being made chiefly in 
 shares of stock. 
 
 The law has decided that the trust mode of organ- 
 izing a monopoly is illegal. Hence it is that the 
 numberless trusts are hastening to adopt the other 
 mode of organization — the corporation, the plan of 
 the Diamond Match monopoly. Already the Sugar 
 Trust and the American Cotton Oil Trust have dis- 
 solved and become New Jersey corporations, and 
 other trusts are following the example.' 
 
 What is to be said about these great corporations ? 
 
 One thing may readily be conceded. It is better 
 to have the large corporation than to have the trust. 
 There is something inherently vicious and dangerous 
 in the powers which are given to the trustees of a 
 trust. The secrecy of their operations and orders, 
 the concealment of the condition of the business, 
 
 ' The Linseed-Oil Trust is now incoq^orated in Illinois with a 
 capital of $iS, 000,000. It owns fifty-two works. The Distilling 
 and Cattle-Feeding Trust is also now incorporated in Illinois with a 
 capital of ^35,000,000. It owns seventy-two works. Tlie American 
 Tobacco Trust is now incorporated in New Jersey with a capital of 
 f25,<X)0,ooo. It owns five works. The American Straw-Board 
 Trust was incorporated in Illinois in 1888. It owns twenty-ona 
 factories, of which eighteen are running.
 
 244 'THE CORPORATION PROBLEM. 
 
 the power to refuse all information, and the unre- 
 stricted irresponsible powers of the trustees ren- 
 ders the trust mode of doing business intolerant 
 and intolerable. 
 
 These particular evils do not exist to such an ex- 
 tent in a corporation. The safeguards, checks, and 
 regulations which have been thrown around corpora- 
 tions for the protection of stockholders and credit- 
 ors are many and valuable. They limit the powers 
 of the directors ; provide for statements of the busi- 
 ness ; allow stockholders to investigate and examine 
 the books, and enable the public as well as stock- 
 holders and creditors to know something of what is 
 going on. 
 
 But is the public satisfied with this new method of 
 combining competing concerns, of organizing a mo- 
 nopoly — the method adopted by the Diamond Match 
 Company, the method of uniting in one great cor- 
 poration, the method that is now being adopted by 
 all the trusts ? 
 
 It will be difificult to annul the charters, because 
 the charters may be obtained in a State which will 
 not interfere with the trusts. It will be dif^ficult to 
 legislate against them because, although a State 
 may legally exclude a foreign corporation from do- 
 ing business within its boundaries, yet it is extremely 
 difificult to enact laws which accomplish that result. 
 
 Nevertheless the courts are refusing to enforce the 
 contracts of such corporations and are annulling their 
 charters. In Michigan, where several persons turned 
 over their match factory to the Diamond Match 
 Company, a corporation formed to obtain a mo-
 
 TRUSTS. 245 
 
 nopoly, and these parties contracted to divide their 
 profits in a certain proportion, the Supreme Court 
 of the State refused to enforce that contract, and 
 refused because the purpose of it was to aid in cre- 
 ating the match monopoly. In Ilh'nois the charter 
 of a corporation formed to own and control the 
 shares of stock of competing gas companies was 
 annulled by the State, the court holding that the 
 charter was invalid. Judging from these cases, the 
 prospects of this latest form of trust are not flattering 
 or reassuring. 
 
 The first campaign of the warfare with the trusts 
 has been fought out. The victory has been with the 
 people. The trusts have been routed and driven 
 to a second line of defence. They are entrenching 
 themselves under the cover of corporate charters. 
 Whether they shall be driven from these remains to 
 be seen. Certain it is that unless they justify their 
 existence they will be annihilated by the courts, 
 legislatures, and new competitors.
 
 CHAPTER VI. 
 
 CORPORATIONS AND THE REPUBLIC. 
 
 There are numberless instances in which corpora- 
 tions have corrupted the government. They have 
 controlled nominating conventions; carried elections; 
 dictated appointments ; tampered with aldermen and 
 municipal authorities ; bribed legislators, judges, and 
 other public officers, and made their influence felt in 
 Congress and every branch of the national govern- 
 ment. These are facts known to all. And it will serve 
 no useful purpose to pass in review the details of 
 the notorious record. The evil has existed and still 
 exists. It cannot be abolished by denunciation nor 
 by statute. There is a cause for its existence, and it 
 will not pass away until the cause is removed. 
 
 Among the problems before the American people 
 there are none more important than these : Why is 
 it that corporations seek to control government ; 
 how is their corruption to be stopped ; what are the 
 real dangers, if any, which the corporations have 
 brought upon government ; and how are those dan- 
 gers to be met ? For many years to come America 
 will be interested in these questions. 
 
 It is not remarkable that corporations seek to con- 
 trol government. The reason why they take part in 
 
 246
 
 CORPORATIONS AND THE REPUBLIC. 247 
 
 politics ; manipulate caucuses and conventions ; use 
 money, power, and votes in elections ; bribe and in- 
 fluence national, State, and municipal officers, judges, 
 and legislators ; and often control States and cities, 
 is plain. Corporations do all tliis to protect and 
 increase their propert}-. Politics and bribery are to 
 them a matter of business. They are not seeking 
 glory, or honor, or even power for the sake of 
 power. They are seeking property. Usually the 
 ambition of those who enter politics is not merce- 
 nar}- ; it is to acquire reputation, or wield power, 
 represent large bodies of men, or gratify an innate 
 fondness for leadership — all for the mere pleasure of 
 so doing, and all leading to money losses rather than 
 to money gains. But these are not the motives 
 which actuate corporations. They are in politics 
 for business only. As already stated, they are there 
 to protect and increase their property. And if gov- 
 ernment could afford to ha\'e nothing to do with 
 their property, they would have nothing to do with 
 government. 
 
 Already in the prior pages of this book the various 
 controversies between the corporations and the gov- 
 ernment have been pointed out. Government is 
 seeking to rule the corporations, and the corporations 
 are seeking to control the government. Indeed, it 
 seems as though every Important property interest of 
 a corporation involves it in a contest with the legisla- 
 tive, executive, or judicial part of the national, State, 
 or municipal government. What wonder is it then 
 that corporations are constantly interfering with 
 government ? Is it anything strange or inexplicable
 
 248 THE CORPORATION PROBLEM. 
 
 that they should do so ? They have vast property 
 Interests at stake. Naturally they are more active 
 and aggressive than men who take part in govern- 
 ment from motives which are merely partisan or 
 theoretical. So long as the business of corporations 
 Is affected by government, just so long will corpora- 
 tions continue to bribe, brow-beat, and dominate 
 public officials. 
 
 This source of political corruption, however, will 
 decrease as time goes on. The points of controversy 
 between the corporations and government will grow 
 less and less. And as these disputes diminish In 
 number and intensity, so also will diminish the 
 motives and reasons of the corporations for inter- 
 fering with government. Thus, when the various 
 States prohibited the granting of special charters to 
 corporations, the corporations at once withdrew very 
 largely from the legislatures. And, hereafter, when 
 the consolidation of the railroads Into a few great 
 systems has taken place, the contest between the 
 railroads and the government over secret discrimina- 
 tions, rebates, free passes, and a w^hole cohort of evils 
 will cease. The consolidated roads, being without 
 competition, will have no occasion to resort to these 
 particular abuses. The existing controversies be- 
 tween the corporations and the government are many 
 In number, and seem to be increasing rather than 
 decreasing. Questions which formerly were between 
 the corporations and Individuals are now between 
 the corporations and the government, the latter 
 having taken u[ the unequal fight which was 
 formerly carried on by individuals. But these con-
 
 CORPORATIONS AND TIIH REPUBLIC. 249 
 
 troversies will gradually be adjusted by statutes, 
 decisions, consolidations, and mutual concessions. 
 And when so adjusted, then the present corruption 
 of government by corporations for the purpose of 
 protecting and increasini^ corporate ])r()perty will 
 come to an end. 
 
 But there is another phase to this problem of the 
 corporations and the republic. The republic has an 
 old antl never-ending danger — plutocracy, — a danger 
 that is common to all advanced forms of government. 
 Plutocracy always has and always will seek to con- 
 trol government. Government gives to it worldly 
 honors, social position, fame, power in the affairs of 
 men, and greater opportunities to amass wealth. 
 Plutocracy undermines a republic by undermining 
 the character of its citizens. It makes money and 
 pleasure the objects of existence and the tests of 
 success. Whatsoever is an aid to plutocracy is a 
 danger to the republic. 
 
 The corporation is the ally, the agent, the repre- 
 sentative of plutocracy. To a small extent corpora- 
 tion bonds and stocks are owned by the many. But 
 the control, the management, and the ownership of 
 the great corporations of the land are to-day in the 
 hands of the wealthy few. Plutocracy has appeared 
 in a new^ guise, a new coat of mail — the corporation. 
 The struggle of democracy against plutocracy — a 
 struggle that is coming to the American people — 
 will be between democracy and the corporation. 
 The people are beginning to recognize their old 
 plutocratic foe in its new corporate form. 
 
 And the corporation is no mean ally. It gives to
 
 250 THE CORPORATION PROBLEM. 
 
 plutocracy a power which it never before possessed. 
 Private fortunes in corporate form, and by legal 
 sanction, have rapidly and enormously increased, 
 until now the American Republic has to deal with 
 aggregations of capital, such as the world has never 
 before beheld. There has resulted a concentration 
 of wealth that past ages never dreamed of, and 
 private fortunes exist which surpass those of Baby- 
 lon and Rome. The corporations have made the 
 plutocrat more wealthy and more powerful than 
 ever before. 
 
 Nor is the corporation tempered by any of the 
 amiable weaknesses of plutocracy. There is a great 
 difference between wealth as used by the owner 
 himself and wealth as used by the corporation. 
 When the capitalist invests and administers his 
 wealth himself, his humanity asserts itself ; his sym- 
 pathy, generosity, gratitude, sense of wrong, sensi- 
 tiveness to public criticism, and aversion to public 
 dislike — all tend to prevent harshness and injustice 
 in the use of his power. But with the advent of 
 the corporations, these restraints are passing away. 
 Fifty years ago wealthy men were identified with 
 their investments. To-day, with a few exceptions, 
 the great enterprises are not connected in the public 
 mind with individual names. Corporations have 
 separated the investor from the investment. The 
 millionaire uses the corporation to invest his prop- 
 erty. He owns the stocks and bonds ; controls 
 the corporation, and makes it do his bidding. But 
 all acts in the management of the property are 
 done not in his name but in the name of the cor-
 
 CORPORATION> AND THK KEPrRI.IC. 2$ I 
 
 poration. If corrupt and unscrupulous, the odium 
 and disgrace rest upon the corporation and not upon 
 the individual. Take it all in all, the corporation is 
 as perfect and heartless a money-making machine as 
 the wit of man has ever devised. 
 
 The corporation iS dangerous to the republic. It 
 has become the tool of plutocracy. It has increased 
 the historical dangers to government from the con- 
 centrated wealth of the few. It has been instru- 
 mental in increasing that concentration of wealth 
 and in shielding its owners from risks and opprobrium 
 arising from its illegal use. It is without moral 
 responsibility or feeling. It can do more harm than 
 individuals, and, in so far as plutocracy is a danger 
 to the republic, the corporation has increased that 
 danger. 
 
 And yet the corporation, as an ally of the pluto- 
 crat, is fickle, unreliable, and vulnerable. 
 
 The plutocrat cannot always be sure of his cor- 
 poration. It rarely represents one capitalist alone. 
 It is controlled by several acting in union. The 
 wealth of each, so far as it is invested in that 
 corporation, cannot be used for his personal pur- 
 poses. It must be used to further the corporate 
 ends — the making of money. It cannot long be 
 used to further the political aspirations of one of its 
 members, however great a plutocrat he may be. 
 The others will not allow it. He is deprived of 
 control. 
 
 The corporation is withdrawing the plutocrat from 
 the field of politics. It is engrossing him in business. 
 The colossal schemes of the age are more attractive
 
 252 THE CORPORATION PROBLEM. 
 
 than the position even of a United States senator. 
 A railroad president is a man more courted, has 
 more power, enjoys more excitement, and has greater 
 opportunities for the display of ability, energy, and 
 ambition than the governor of a State. Corpora- 
 tions are absorbing the wealthy as well as the 
 wealth of the nation. They are furnishing an out- 
 let for the ambition as well as the ostentation of the 
 plutocrat. Moreover, to the extent that they absorb 
 the wealth of the wealthy, to that extent the pluto- 
 crat does not use his money in extravagance, waste, 
 the demoralization of the people, and the corruption 
 of government. The Roman plutocrat bought an 
 empire ; Vanderbilt buys systems of railroads. 
 
 But the most important fact of all remains to be 
 mentioned. The corporation holds its life subject 
 to the will of the people. It is a creature and 
 creation of the state. Its powers may be changed, 
 its duties increased, its charter may be repealed 
 and its existence ended. It is sensitive to the very 
 breath of public opinion. It is vulnerable. Plu- 
 tocracy in the form of the individual is largely 
 beyond the reach of legislatures and the law. But 
 plutocracy in the form of the corporation is open 
 to attack. It can be regulated, restricted, and 
 annihilated. 
 
 Plutocracy acting through corporations is obliged 
 to be cautious and conservative. The vast interests 
 which they represent, the wealth which they manage, 
 and the size to which they have grown, render it 
 dangerous for them to incur the hostility of the 
 people. The plutocrat gives bonds to keep the
 
 CORPORATIONS AND THE REPUBLIC 353 
 
 peace when he acts through the corporation. It is 
 by reason of this that the great corporations of the 
 land are gradually passing into the hands of conserva- 
 tive men — men who realize the risks and responsi- 
 bilities of these creatures of the state. 
 
 Notwithstanding all this, the great majority of the 
 American people look upon corporations and their 
 colossal aggregations of capital as dangerous to the 
 republic. A vague and indescribable dread and 
 suspicion of them pervade the minds of men. There 
 is reason for this distrust. And yet it is to be borne 
 in mind that the history of the republic gives no 
 occasion for gloomy forebodings of ill. Whenever a 
 national crisis has occurred, whenever a political 
 regeneration has become necessary, whenever the 
 national existence has been imperilled, whenever 
 corruption has become dangerous, whenever the 
 leaders have been in despair and have run hither and 
 thither in doubt and confusion, the great masses 
 of the people have been equal to the emergency. 
 
 And so it will be in regard to the corporations. 
 They will continue to vex the minds of men and 
 to appear as ominous spectres and omens of ill. But 
 the American people, clear in their intellectual 
 powers, honest in their purposes, and decisive in 
 their acts, have no need to fear them. " The Cor- 
 ooration Problem " will be solved, and the solution, 
 when it comes, will be satisfactory', thorough, and 
 complete.
 
 INDEX. 
 
 AcwoRTH, on short aiul long haul, 
 41 ; on American railroads, 82 ; 
 on competition between rail- 
 roads, 171 
 
 Adams, Charles Francis, on the 
 Granger laws, 20 ; on strikes, 
 78 ; on state ownership of rail- 
 roads, 149, 150 ; on the railroad 
 problem, 162 ; on the Interstate 
 Commerce Act, 165 ; on consoli- 
 dation of railroads, 172 ; on 
 trusts, 242 
 
 Adams, Henry C, on abolishing 
 corporations, 121, 122 
 
 Adams, Prof., on state ownership 
 of railroads, 144, 145 ; on the 
 dangers to the state from rail- 
 road consolidation, 181 ; on the 
 political power of corporations, 
 i8g, 190 
 
 Agreements to maintain rates, 175- 
 178 
 
 Aid to railroads by municipalities, 
 12-14, 9^-99 
 
 Alexander, E. P., on watered 
 stock, 30 ; on discriminations, 
 39 ; on long and short haul, 43 ; 
 on pools, 53 ; on railroad con- 
 solidation, 180 
 
 incorporation, see 
 
 Articles of 
 Charter 
 
 AsHBY, N, B., on state ownership 
 of railroads, 153 ; on railroad 
 commissions, 161 
 
 Associations to maintain rates, 1 75- 
 178 
 
 Atkinson, Edward, on watered 
 stock, 31 ; on railroad consolida- 
 tion, 179 
 
 Australia, policy of, as to railroads, 
 
 143 
 Austria, policy of, as to railroads, 
 142 
 
 Banks, liability of stockholders in, 
 
 99 
 Bates, W. T., on irrigation, 199, 
 
 200 
 Belgium, policy of, as to railroads, 
 
 143 
 Bellamy, on state socialism, 138 
 Bemis, E. W., on gas-works, 210 
 Blackstone, President, advocacy 
 of state ownership of railroads, 146 
 Blanch ARD, George R., on pools, 
 
 56 
 Bonds, municipal, given to rail- 
 roads, 12-14, 96-99 ; watered, 
 
 255
 
 256 
 
 INDEX. 
 
 14, 24-33 ! of a company should 
 
 be less than its stock, 65, 66 ; 
 
 restrictions on amount, 85 
 Books of company, examination 
 
 of, 88 
 Borrowing power, restrictions on, 
 
 85 
 Bromley, Isaac U., on railroad 
 
 honesty, 175 
 Bryce, on railroad wars, 58 ; on 
 
 railroad presidents, 190 ; on 
 
 trusts, 235 
 Bubble companies, 91-94 
 Bucket shops, gambling in, 67-73 
 Buckle, on paternal government, 
 
 134, 135 
 Business for which incorporation 
 
 may be had, 109 
 
 Capital of corporations, should be 
 represented by stock rather than 
 bonds 65, 66 ; stock, limitations 
 on, 108 
 
 Carlisle, Senator, on state owner- 
 ship of railroads, 155 
 
 Car trust, 220 
 
 Case of the monopolies, 185 
 
 Charters, restrictions on grant to 
 new railroads, 62, 63 ; see also 
 Incorporation ; special provisions 
 in, 90; special, 110-113; also 
 114-116 
 
 Cities, and street railroads, 201 ; 
 as owners of street railroads, etc., 
 208-213 ; government and func- 
 tions of, 212, 113 
 
 Clearing-house of railroa'ds, 58 
 
 Coleman, Tax Commissioner, on 
 taxation of corporations, 103 
 
 Combinations and trusts, ch. V. 
 
 Commissioners, giving power to, 
 to restrict grant of charters, 62, 
 63 ; see Railroads and Interstate 
 Commerce Commission ; rail- 
 road, 160, 161 
 
 Competition, and trusts, ch. V. ; 
 between water and railroad trans- 
 portation, 40-44 ; by paralleling 
 of railroads, 60-63 \ between 
 railroads, 170-172 
 
 Connecticut, special charters in, 
 111-113 
 
 Consolidation, as a preventive of 
 railroad wars, 59 ; to injury of 
 stockholders, 95 ; of railroads as 
 a remedy for the railroad prob- 
 lem, 166-181 
 
 Constitutionality of reduction of 
 rates, 20, 21 
 
 Constitutional law, Dartmouth 
 College case, 105-107 
 
 Conte?7iporary Review, on trusts, 
 
 234 
 CoOLEY, Judge, on municipal aid 
 ^to railroads, 97 ; on Dartmouth 
 College case, 105, 106 ; the rail- 
 road problem, 173-175 ; trusts, 
 
 234 
 Co-operation as a remedy, 122-130 
 Corporations, and the Republic, 
 ch. VI. ; and political corruption, 
 ch. VI. ; as the allies of plu- 
 tocracy, ch. VI. ; as the owners 
 of natural monopolies, ch. IV. ; 
 differ from partnerships, 2, 3 ; 
 advantages over partnerships, 2, 
 3 ; absorption of business by, 4 ; 
 benefits of, 4 ; moral effects of, 
 5 ; international effects of, 7 ; 
 abuses of, 7, 8 ; various contro-
 
 INDEX. 
 
 257 
 
 versies, ch. II. ; gambling in 
 stocks of, 67-73 ; frauds on 
 stockholders and creditors of, 
 80-96 ; restrictions on mortgages 
 and debts, 85 ; voting, cumula- 
 tive, 87 ; removal of officers of, 
 87 ; examination of books of, 88 ; 
 reports of officers, 88 ; bubble, 
 91-94 ; powers of stockholders 
 and officers, 90, 91 ; restrictions 
 in charter, 90 ; liability of stock- 
 holders, 99-101 ; taxation of, 
 102-107 ; incorporating in one 
 State and doing business in 
 another, 107-110; special char- 
 ters, 110-113 ; exclusive privi- 
 leges and monopolies, 114-116; 
 political corruption by, 1 16, 117 ; 
 abolishing, as a remedy, 121, 
 122 ; franchises of character, 183; 
 see also Railroads ; as the owners 
 of natural monopolies, ch. IV. 
 
 Corruption, and the corporation, 
 ch. VI.; political, by corpora- 
 tions, 116, 117 
 
 Creditors of corporations, frauds 
 on, 80-96 
 
 CuMMiNGS, A. B., on Iowa rail- 
 roads, 28 
 
 Cumulative voting, 87 
 
 Dartmouth College case, 105-107 
 Debts, restrictions on amount, 85 
 Oepew, Chauncey M,, on restrict- 
 ing the grant of charters to rail- 
 roads, 62 ; on trusts, 229 
 Dillon, Judge, on municipal aid 
 
 to railroads, 97 
 Directors, frauds by, 80-96 ; 
 power to remove, 87 ; reports 
 17 
 
 by, 88 ; should be paid f«>r ser- 
 vices, 95 ; liability to creditors, 
 loi ; qualitications of, 109 
 
 Discriminations between individu- 
 als — rebates and secret rates, 34- 
 39 ; towns — charging more for 
 a short than for a long haul, 40- 
 44 ; articles — charging what the 
 traffic will bear, 45-48 
 
 Dividends, limitation of, 18 ; stock, 
 New York Central, 19 ; stock, 
 25, 26 
 
 DoDD, S. C. T., on trusts, 233 
 
 Duke of Marlborough on American 
 railroads, 193 
 
 Elections, cumulative voting, 87 
 
 Electric lights are natural monopo- 
 lies, ch. IV. 
 
 Ely, Richard T., on discrimina- 
 tions, 37 ; on bubble companies, 
 94 ; on co-operation, 124 ; on 
 state ownership of railroads, 151 ; 
 on street railroads, 207 ; on 
 natural monof>olies, 211 
 
 " Encyclopaedia of Political Sci- 
 ence" on discriminations, 35 
 
 England, special charters of rail- 
 roads required, 62 ; foreclosures 
 of railroads not allowed, 65 ; 
 frauds in, on stockholders, 82 ; 
 remedies for bubble companies, 
 92 ; cost of land to railways, 117- 
 119; policy of, as to railroads, 
 143, 144 ; its experiments con- 
 cerning railroads, 172, 173 
 
 European policy as to railroads, 
 140-155 
 
 Evening Post on watered stock, 
 32
 
 258 
 
 INDEX. 
 
 Examination of books of company, 
 
 88 
 Exchange, stock, gambling on, 
 
 67-73 
 
 Exclusive privileges, to corpora- 
 tions, 114-116 ; granted by char- 
 ter, 186 
 
 Exemptions from taxation, 102-107 
 
 Ferries are natural monopolies, ch. 
 
 IV. 
 Foreclosures of railroads, 63-67 
 France, policy of, as to railroads, 
 
 140, 141 
 
 Franchise, increase of value with 
 increase of population, 29 ; to 
 use the streets, etc., 173 ; defini- 
 tion of, 183 ; to act as a corpo- 
 ration, 183 
 
 Frauds on stockholders and cor- 
 porate creditors, 80-96 
 
 Free passes, 48-50 
 
 Gambling in stocks, 67-73 
 Gas-works are natural monopolies, 
 
 ch. IV. 
 George, Henry, on municipal aid 
 
 to railroads, 98 
 Germany and state socialism, 135- 
 
 137 ; policy of, as to railroads, 
 
 141, 142 
 
 Government, and the corporations, 
 
 ch. VI. ; paternal, 130-140 ; 
 
 ownership of railroads, 140-155 ; 
 
 as the lessor of railroads, 155, 156 
 Granger laws, 20, 21 ; cases, 159, 
 
 160 
 Grants of land to railroads, 97 
 
 Hadley, a. T., on charging what 
 the traffic will bear, 46 ; on 
 
 pools, 52 ; arguments on state 
 ownership of railroads, 147 
 
 Hale, Edward Everett, on state 
 ownership of railroads, 150 
 
 Haul, long and short, 40-44 
 
 Hepburn Investigating Commit- 
 tee, 35, 39 ; effects of, 160 
 
 Hewitt, Abram S., on co-opera- 
 tion, 126 
 
 Hill, Sir R., arguments on state 
 ownership of railroads, 148, 149 
 
 Hitchcock, Henry, on debts of 
 corporations, 85-86 ; on reports 
 of officers, 89 
 
 Holland, policy of, as to railroads, 
 
 143 
 
 Hubbard, N. M., on abolishing 
 corporations, 121, 122 
 
 Hudson, on discriminations, 39 ; 
 remedy of separating railroad 
 ownership from the transporta- 
 tion thereon, 12 1 
 
 Hungary, policy of, as to railroads, 
 
 143 
 Huntington, C. P., on railroad 
 
 consolidation, 179 
 
 Illinois, Central R. R. Co. plan of 
 co-operation, 125 ; and the state 
 of Illinois, 202 
 
 Incorporation, articles of, see 
 Charter ; place of, by reason of 
 liability of stockholders, lOO, 
 loi ; in one State and doing 
 business in another, 107-110 ; 
 should be allowed for all pur- 
 poses, 109 
 
 Inspection of corporate books, 88 
 
 Insurance, railroad, as a remedy, 
 by the state, 128-130 ; I35-I37
 
 INDEX. 
 
 259 
 
 Interstate Commerce Act, 161, 162 ; 
 should perhaps prohibit railroad 
 wars, 59 ; railroad objections to 
 it, 162, 164 ; effect on towns, 
 166 
 
 Interstate Commerce Commission, 
 reduction of rates, 21-23 ; 
 watered stock, 25 ; competition 
 between rail and water. 43 ; on 
 charging what the traffic will 
 bear, 4S ; free passes, 51 ; on 
 pools, 55 ; railroad wars, 57 ; 
 railroad insurance, 130 ; its 
 cause, 160, i6i ; its difficulties, 
 162-164 ; relative to repeal of 
 anti-pool clause, 166 ; relative to 
 short and long haul. 166 ; on 
 railroad trusts, 168, 169 
 
 Irrigation reservoirs, 198-200 ; are 
 natural monopolies, ch. IV. 
 
 Italy, policy of, as to railroads, 
 142 
 
 James, E. J., on frauds of direc- 
 tors, 83 
 
 Jeans, on discriminations, 40 ; on 
 charging what the traffic will 
 bear, 47 ; on pools, 53 ; on cor- 
 rupt cost of right of way of 
 English railways, 117, 118 
 
 Labor, wages of, 76 
 
 Land, grants to railroads, 97 ; cor- 
 rupt cost of, to English railways, 
 1 1 7-1 19 
 
 Larrabee, Ex-Governor, on dis- 
 criminations, 37 
 
 Lease of street railroads to injury 
 of stockholders, 95 ; by cities, 
 207 
 
 Leasing of railroads by the state, 
 
 155, 156 
 
 Leese, Attorney - General, on 
 watered stock, 33 
 
 Legislature, power to reduce rates, 
 20 
 
 Liability, of stockholders to credi- 
 tors, 99-101 ; of directors to 
 creditors, loi 
 
 Limitation of dividends, 18 ; of 
 capital stock, 108 
 
 Long and short haul, 40-44 
 
 Michigan, State ownership of rail- 
 roads in, 145 
 
 Mill, John Stuart, on co-operation, 
 122; on paternal government, 132 
 
 Miller, Mr. Justice, on Dart- 
 mouth College case, 106 
 
 Monopolies, and trusts, ch. V. ; 
 granted to corporations, 114-116; 
 meaning of the word monopoly, 
 114, 115 
 
 Monopoly, a railroad is a, 17, 18 ; 
 natural, ch. IV. ; definition and 
 nature of, 182-188 
 
 Mortgages, restrictions on amount, 
 
 85 
 
 Municipal, aid to railroads, 96-99 ; 
 bonds, given to railroads, 12-14, 
 96-99 
 
 Municipalities, and street railroads, 
 201 ; as owners of street rail- 
 roads, 208-213 
 
 Myers, Controller, on taxation of 
 natural monopolies, 206 
 
 Natural monopoly, ch. IV. 
 New Jersey water-works com- 
 panies, 197
 
 26o 
 
 INDEX. 
 
 New Orleans street railroads, 207 
 
 New River Water-works Com- 
 pany, 196 
 
 New York Recoi'd and Guide, on 
 strikes, 76, 79 ; on bubble com- 
 panies, 92 ; on paternal govern- 
 ment in Europe, 138 ; on owner- 
 ship of natural monopolies, 209 
 
 New York Times on trusts, 230 
 
 Officers, frauds by, 80-96 ; power 
 
 to remove, 87 ; reports by, 88 ; 
 
 should be paid for services, 95 ; 
 
 liability to creditors, loi 
 Ownership of railroads by the state, 
 
 140-155 
 
 Paralleling^ of railroads, 60-63 
 
 Partnerships have been displaced 
 by corporations, 2, 3 
 
 Passes, free, 48-50 
 
 Paternal government, 130-140 
 
 Philadelphia & Reading R.R. Co. 
 co-operation, 126 
 
 Place, of incorporation, 100, loi, 
 107-110; of stockholders' meet- 
 ing, 109 
 
 Plutocracy and the corporations, 
 ch. VI. 
 
 Political corruption by corpora- 
 tions, 116, 117 
 
 Politics and the corporations, ch . VI . 
 
 Pools, 51-56 ; as preventives of 
 railroad wars, 58 ; in the shape 
 of "gentlemen's agreements" 
 and "presidents' conferences," 
 
 175-179 
 Poor, on watered stock, 25 
 Powers of stockholders and direc- 
 tors, 90, 91 
 
 Privileges, exclusive, granted by 
 charter, 186 ; to corporations, 
 114-116 
 Profit-sharing as a remedy, 122-130 
 Promoters, frauds by, 91-94 
 Property in payment of stock, 91- 
 
 94 ; see also Watered Stock 
 Prospectuses, fraudulent, 91-94 
 Prussia, policy of, as to railroads, 
 
 141, 142 
 Public opinion, its effect on corpo- 
 rations, 9 
 Purposes for which incorporation 
 allowed, 109 
 
 Qualifications of directors, 109 
 
 Railroad Commissioners, 160, 161 
 Railroad Gazette, 19 ; on watered 
 stock, 32 ; on charging what the 
 traffic will bear, 46 ; on free 
 passes, 50 ; on pools, 53 ; on 
 railroad clearing house, 58 ; on 
 desirability of railroad capital 
 being represented by stock rather 
 than bonds, 65 ; on co-operation, 
 127 ; on railroad insurance, 128- 
 130 ; on leasing of railroads by 
 the state, 156, 157 ; on railroad 
 trusts, 169 ; on trusts of stock, 
 220 
 Railroad trust is not feasible or 
 
 desirable, 168, 169 
 Railroad voting trust, 220-222 
 Railroads, are natural monopolies, 
 ch. IV. ; as an intellectual force, 
 5 ; moral effect of, 6 ; abuses of, 
 8; reduction of rates, 11-24; 
 are naturally a monopoly, 17-18 ; 
 watered stock and bonds, 24-33 ;
 
 INDEX. 
 
 261 
 
 discriminations between indi- 
 viduals, f. r-., rebates and secret 
 rates, 34-39 ; discriminations be- 
 tween towns, charj^ing more for 
 a short than for a long haul, 40- 
 44 ; number of stations in 
 United States, 41 ; discrimina- 
 tions between articles — charging 
 what the traffic will bear, 45-48 ; 
 free passes, 4S-50 ; pools, 51- 
 56 ; wars, 56-59 ; clearing house, 
 58 ; consolidation as a preven- 
 tive of wars, 59 ; paralleling of 
 lines, 60-63 ; restrictions on 
 grant of charters to, 62, 63 ; fore- 
 closures and reorganizations, 63- 
 '67 ; bonds should be less than 
 the stock, 65-66 ; consolidations, 
 etc. to injury of stockholders, ' 
 95 ; municipal aid to, 96-99 ; 1 
 land grants to. 97 ; remedies for 
 railroad problems, ch. III. : co- ' 
 operation, 122-128 — insurance, ; 
 1 28- 1 30 — state socialism, 130- 
 140 — state ownership of rail- . 
 roads 140-155 — leasing by the 
 state. 155, 156 — regulation by 
 the state, 157-166 — consolida- 
 tions, 166-18 1 ; effects of com- 
 petition, 170-172; see also Cor- 
 p)orations 
 
 Rates of railroads, reductions. 11- \ 
 24 
 
 Rebates, 34-39 
 
 Receivers, reorganizations, etc., 
 63-67 
 
 Regulation of railroads by the state. 
 157-166 
 
 Remedies for the railroad problem, 
 ch. III. 
 
 Reorganization of railroads, 63-67 
 
 Reports of officers, 88 
 
 Republican institutions ami cor- 
 porations, ch. \'I. 
 
 Reservoirs for irrigation, 198-200 
 
 Restrictions on grant of charters 
 to railroads, 62-63 
 
 Right of way, corrupt cost of, to 
 English railways, 1 1 7-1 19 
 
 Roberts, George H., on watered 
 stock, 27 ; on the Interstate 
 Commerce Act, 164 
 
 Sherman, John, on trusts, 240 
 
 Short and long haul, 40-44 
 
 Socialism as a remedy, 130-140 
 
 South Sea Bubble, 67 
 
 Special charters, 110-113, also 
 114-116 
 
 Spencer, Herbert, on co-opera- 
 tion, 127 ; on state ownership of 
 railroads, 152 
 
 Standard Oil Company, rebates to, 
 
 36 
 
 State, and the corporations, ch. 
 VI. ; socialism as a remedy, 130- 
 140; ownership of railroads, 140- 
 155 ; as the lessor of railroads. 
 155. 156; regulation of rail- 
 roads, 157-166 
 
 Stations, number of, in United 
 States, 41 
 
 Statutes, reducing rates. 20, 21 
 
 Stickney, a. B,. on receiverships 
 for railroads which violate the 
 Interstate Commerce .Act. 166, 
 167 ; on competition among 
 railroads, 170 
 
 Stock, dividends. 25. 26 . watered, 
 14. 24-33 ; New York Central,
 
 262 
 
 INDEX. 
 
 19 ; of railroads, owned by non- 
 residents, 16, 17 ; should exceed 
 bonds of a company, 65, 66 ; 
 gambling, 67-73 ; issued for 
 property, gi-94; see also Watered 
 Stock 
 
 Stockholders, powers of, 80-96 ; 
 frauds on, 80-96 ; powers of, go, 
 gi ; and consolidations, etc., 95 ; 
 liability to creditors, gg-ioi ; 
 meeting-place of, log 
 
 Street railroads, as monopolies, 
 ig4 ; and cities, 201 ; taxation 
 of, 201-206 ; sale of, by city for 
 limited number of years, 207 ; 
 owned by cities, 208-213 ; are 
 natural monopolies, ch. IV.; 
 
 Strikes, 73-80 
 
 SwANN on watered stock, 31 
 
 Tacitus on the gambling of the 
 Germanic races, 67 
 
 Taxation, of corporations, etc. 
 102, 107 ; of natural monopolies, 
 201-206 ; of street railroads, 
 etc., 201-206 
 
 Telephones are natural monopo- 
 lies, ch. IV. 
 
 Telegraphs are natural monopolies, 
 ch. IV. 
 
 Thompson, S. D., on trusts, 23g 
 
 Traffic contracts, 1 75-1 79 
 
 Trusts, ch. v.; causes of, 214-217 ; 
 definition and nature of, 217- 
 224 ; legality, 224-225 ; ten- 
 dency towards, 225-227 ; as a 
 means of doing business, 227- 
 228 ; as monopolies, 22g-235 ; 
 
 transformation into corporations, 
 242 ; railroad, not feasible or 
 desirable, 168, 169 ; voting, 220- 
 222 
 
 Underground conduits for wires 
 are natural monopolies, 194 
 
 Voting, cumulative, 87 ; trust, 220- 
 222 
 
 Wages of labor, 76 
 
 Walker on railroad competition, 
 178 
 
 Warner, Amos G., on ownership 
 of stock by non-residents, 16 ; 
 on strikes, 79 ; on frauds on 
 stockholders, 84 ; on borrowing 
 powers, 86 ; on reports of offi- 
 cers, 89 ; on bubble companies, 
 92 ; on liability of directors. 
 10 1 ; on ownership of natural 
 monopolies, 2og 
 
 Wars of railroads, 56-5g 
 
 Water competition with railroads, 
 40-44 
 
 Watered stock and bonds, 14, 24- 
 33 ; definitions, 24 ; methods of 
 issuing, 25-26 ; injurious effects 
 of, 26-2g ; defences for, 30-31 ; 
 remedies for, 32 
 
 W'ater-works are natural monopo- 
 lies, ch. IV. ; as monopolies, ig5 ; 
 New River Company, ig6 
 
 Western Union Telegraph Com- 
 pany's stock dividend, 26 
 
 Wharves are natural monopolies, 
 ch. IV.
 
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