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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