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PAGE FOUR
THE CHEA T of O PITALIZA TION
By Will Payne in Everybody’s Magazine.
Editor’s Note. —Three and one-half
billions of watered securities in elev
en years! On this we pay interest
—you and I, our children, and our chil
dren’s children unto the third and
fourth generation. We carry this
Old Man of the Sea upon our backs,
and bequeath him to posterity. High
Finance has grown so bold that it
raises the ancient cry of “vested
rights,” and demands this tribute as
a sacred privilege. See how the game
is played: Unscrupulous schemers is
sue heavily watered securities; with
the bland cunning of the gold-brick
manipulator they boom and inflate
them; at their highest price they deft
ly exchange them for the nation’s
savings. When exposure comes and
an outraged public threatens to prick
the bubble, they are in a position to
say, “You are cutting your own
throats. The securities are yours.”
These creators and vendors of bogus
wares refuse to obey the laws as
definitely as did the robber barons of
old, who seized the land, subsidized
the church, corrupted the bench, and
left to their descendants the divine
right of ruling their inferiors. Do we
want to come to this? Are we to have
a vested aristocracy supported by im
poverished masses? Mr. Payne’s ar
ticle, which strongly points the ques
tion, is one of two that will disclose
some astounding features of recent
brigandage.)
In the past eleven years there have
been listed on the New York Stock
Exchange new securities —stocks and
bonds —to the amount of twelve and a
half billion dollars, not including gov
ernment and city bonds.
Os this total, twenty-five per cent, or
three and a half billion dollars, in
round figures, is just water —a bogus,
fiat creation representing no legiti
mate investment of capital in the
properties against which the securi
ties are issued.
There is a popular impression that
stock-watering is a monopoly of the
“industrials” or trusts. This is a mis
take. Railroad securities listed since
the last big panic include more than
fifteen hundred million dollars of pure
w r ater. When the railroads argue that
they are entitled to earn a fair return
upon the “investment,” they include
this bogus billion and a half.
Recent listings on the exchange do
not, of course, completely cover the
ground. Much bogus capitalization
was listed before 1896. Much is not
listed at all, but handled “on the
curb.” And in the railroad field, es
pecially, not all inflations of capital
can be traced directly in the listings.
But even three and a half billion coun
terfeit dollars, passed on an easy pub
lic in eleven years, will do for a
test.
William H. Moore, John W. Gates,
Jacob H. Schiff, and other financiers
have recorded the opinion that stock
watering is an essentially harmless
pastime. The current Wall street ar
gument is that a concern should be
capitalized according to its earning
power. If capitalized in excess of
earnings, the market value of the stock
will shrink. If the earnings will pay
more than the going rate of divi
dends on the capitalization, the mar
ket value of the stock will advance.
Thus, market value will always cor
respond to earnings, anywav. and no
body need bother as to whether or not
the stock is watered.
The Typical Case of Tin Plate.
This sounds rather plausible; but it
overlooks a fact of prime importance
—namely, that whenever overcapital
ization succeeds, the element of mo
nopoly is present.
WATSON’S WEEKLY JEFFERSONIAN.
You combine the leading plants in a
certain field, or enough of them to
give you monopolistic control over the
price of the product. You copiously
water the stock of your combination.
You put up the price of the product
sufficiently to pay dividends on the
bogus stock. Then you say, “This
capitalization is legitimate, because 1
can earn good dividends on it.” Thus
do able financiers lift themselves by
their own boot-straps.
It is by no means necessary to have
all the trade in a given line in order
to gain monopolistic control over the
price of the product. Said Mr. Have
meyer of the Sugar Trust: “It goes
without saying that a man who pro
duces eighty per cent of an article
can control the price by not produc
ing.” And in other ways, too. The
Steel Trust hasn’t even eighty per
cent of the trade; but the rail pools,
pig iron pools, and so on, of which
it is a member, have more than eigh
ty per cent.
Take, now, the strictly typical case
of the American Tin Plate Company,
organized by Judge Moore in January,
1899. The tin plate industry in Amer
ica was created by the McKinley tar
iff of 1890 and is often pointed to as
a signal instance of the benefits of
high protection. There is a general
misconception respecting the tariff. A
high protective tariff in itself is not
much good. Indeed it is often inju
rious rather than beneficial, because it
stimulates competition. To get the
benefit of the tariff you must monopo
lize the protected commodity. The tar
iff is merely a lever. A lever without
a fulcrum will boost nothing. Monopoly
is the fulcrum. We shall see more
of this hereafter.
The McKinley tariff raised the duty
on tin plate from one cent a pound to
2.2 cents. The price of tin plate ad
vanced to $5.75 a box. This price
yielded a profit of 100 per cent to the
manufacturer. To build a practicable
tin plant required no great investment.
The unit is a “mill,” plants being of
ten-mill or twenty-mill capacity. An
investment of four hundred thousand
dollars would build a plant, the cost
being $40,000 a “mill.” Naturally, cap
ital flowed into so attractive a field.
Tin plate plants multiplied. Presently
they began to fight for business. The
price of tin plate dropped from $5.75 to
$2.60 a box. Not only 100 per
cent profit, but all profit disappeared
—as it usually does when ruinous
competition is left free to do its work.
Tin plate concerns were pushed to
the verge of bankruptcy. This, of
course, was the trust promoter’s oppor
tunity. Judge Moore took the matter
in hand, and brought thirty-nine plants
into a combination, the combined ca
pacity being 272 mills.
At the accepted average of $40,000
a mill, the investment in these plants,
allowing some leeway would have been
about $12,000,000, which estimate
agrees with other evidence in the case.
The promoters supplied some cash for
working capital. Thus, including “good
will” —in a losing business —there was
nearly enough value in sight to cover
the $18,000,000 of preferred stock that
the American Tin Plate Company is
sued. The company also issued $28,-
000,000 of common stock, all water,
$10,000,000 of it going out of hand to
the promoter for his services, and the
rest as bonuses to the underwriters,
and so on. Now, the American Tin
Plate Company added absolutely noth
ing of a tangible nature to the indus
try. Those 272 mills, the day after
It took them over, were exactly what
thoy had been before. What the Amer
ican Tin Plate Company did add to
the industry was monopoly. The price
of tin plate advanced from $2.60 a
box to $4.65; and the 272 mills, which
could barely support a capitalization
of say, $15,000,000, excluding “good
will,” before the consolidation, now
handsomely supported the new capital
ization of $46,000,000. Judge Moore was
able to argue that the capitalization
was legitimate because the company
could pay good dividends on it.
Carnegie Mixes War Medicine.
In the next year and a half six oth
er trustlets in the steel trade were
organized, watered, and floated on the
same plan by Gates, Morgan, the
Moores, and others. Like the tin piate
concern they added nothing tangible
to the industry, simply buying up and
consolidating existing plants. Expect
ing monopolistic control over the price
of products, they inflated the capital
zation of the plants by $200,000,000.
Judge Moore and his associates then
proposed to buy out Mr. Carnegie on
the basis of his earning power. They
failed to raise the money and the deal
collapsed. This annoyed Mr. Carne
gie. With a hostile eye on the trust
lets, he began to mix war medicine.
If he had fought, the water would
have poured out of trustlet stocks
in a manner resembling a cloudburst.
In order to protect over two hundred
millions of bogus trustlet capitaliza
tion it became necessary to buy out
Carnegie. Mr. Morgan rose to the oc
casion and the United States Steel
Corporation—otherwise known as the
Steel Trust —resulted.
The American Can Company.
The big trust, in taking over the in
flated little trusts, added $75,000,000
of water. That is, in exchange for
their watered stock, it gave its own
stock to an amount greater by $74,373,-
035 than the total of the stocks ac
quired. For example, in exchange for
$46,000,000 of American Tin Plate
stock—about $30,000,0000 water—the
Steel Trust gave $62,000,000 of its own
stock
But. by taking in Carnegie, the big
trust made monopoly even more se
cure, and is able to earn a handsome
return upon its capitalization.
Os course its members object to the
word monopoly. They say that the
prosperity of the Steel Trust is due
solely to good times; that anybody
with a good plant can do about as well.
Let us see. A little while before the
organization of the Steel Trust the
Shelby Steel Tube Company was form
ed. It had fine plants—admittedly,
none were better. It was the most
modestly capitalized of any combina
tion in the iron and steel trade. It
had a rival in the National Tube Com
pany, a Morgan promotion, but the
original Shelby plant had been a good
money-maker. The Shelby Steel Tube
Company, however, owned no supply of
steel billets, and so must buy them
in the market. The Steel Trust took
in the National Tube Company; took
in also the chief sources of supply for
billets, thereby leaving the Shelby in
th© sadly unmonopolistic condition of
having to buy its raw material from
its chief competitor. So the Shelby
sold out to the Trust. But, observe,
there was no inflation of capital here,
in exchange for the Shelby’s $15,000,-
000 of capital the Trust issued its own
dropsical shares to the amount of only
$3,750,000 because the Shelby was not
in a monopolistic position.
About this time Judge Moore made
his last industrial promotion, organ
izing the American Can Company. The
standard recipe was followed. Being
busy with other things he may have
inadvertently ladled in a little more
water than usual. But that is not ma
terial. The company took in all the
good plants. The steel trade was
booming. It ought to have made
enough to support the capitalization.
But it didn’t. The packers are large
users of tin cans. They object to mo
nopoly prices for their own consump
tion —possibly because they know so
well how these prices are made. They
took to manufacturing their own cans;
then cans for others. In a word, the
American Can Company could not sup
press competition. It could not get a
monopoly. Hence, it could not support
its bogus capitalization. Last year its
earnings were equal to barely five
per cent on the preferred stock; noth
ing on the common. The preferred
stock sells at about fifty; common at
about five. Stock-watering cannot
flourish under competition.
Mr. Schwab, in a rather famous
statement, pointed out that there was
no water in the capitalization of the
Steel Trust, because its deposits of
iron ore were worth the whole amount
of common stock issued, or, in round
numbers, $500,000,000. A brief exam
ination of the facts in the case will
prove instructive.
Carnegie’s Misjudgments.
In 1892 Henry W. Oliver, of Pitts
burg, owned a big iron mine on the
Mesaba range in the Lake Superior
region, which was incorporated as the
Oliver Iron Mining Company. For a
long time the steel trade in the north
had drawn its raw material from the
mines of the Lake Superior country, as
it does today. Yet nobody, generally
speaking, thought much of iron ore
property. There were vast deposits of
it in sight. To develop them required
comparatively little capital. In the
best mines, like Oliver’s, the ore was
simply scooped up from the surface
with steam shovels, at a cost for labor
of five cents a ton. The notion of mo
nopolizing iron ore would probably
have struck the average business man
about like the notion of monopolizing
sand.
The Carnegie Steel Company was, of
course, the largest consumer of ore.
Oliver saw the advantage of an alli
ance with this consumer, which would
insure him a big, steady output of ore.
With such an output assured he could
get good contracts with the railroads
and steamships for transportation. He
agreed with Henry Clay Frick, chair
man of the Carnegie Company, to give
that company one-half the stock in the
Oliver Iron Mining Company in con
sideration of a loan of $500,000, to be
secured on the mines, the money to
be spent in development work. And
Mr. Carnegie vetoed this proposition.
He wrote:
“If there is any department of the
business that offers no inducements, it
is ore. It never has been very profit
able, and the Mesaba is not the last
great deposit that Lake Superior is
to reveal.”
Enter the Rockefellers.
You see, he thought a monopoly im
possible, and he preferred to buy his
raw material under competitive condi
tions rather than to take a half-inter
est in Oliver’s venture as a gift. Frick
persisted, however, and the bargain
was closed; so the Carnegie Compa
ny got a half-interest in the Oliver
property without investing a dollar.
Afterward, Mr. Carnegie, in pursuance
of his firmly settled policy of holding
a controlling interest in everything he
touched, got Oliver to sell the Carne
gie Company an additional one-third
interest, making five-sixths in all. The
price is not disclosed; but the total