The Human Side of Immigration

Railway Overcapitalization

WILLIAM L. SNYDER IN THE OUTLOOK March 1 1907
The Human Side of Immigration

Railway Overcapitalization

WILLIAM L. SNYDER IN THE OUTLOOK March 1 1907

Railway Overcapitalization

WILLIAM L. SNYDER IN THE OUTLOOK

The outcome of the action of the Attorney General of Minnesota to prohibit the Great Northern Railroad Company from issuing more stock is looked forward to with the greatest of interest. Mr. Snyder urges immediate action on the part of the State and Federal Government.

THE legal proceedings instituted by the Attorney-General of Minnesota to restrain the Great Northern Railroad Company from issuing new stock aggregating over $60,000,000, in addition to the $150,000,000, the amount of its present issue, presents a question not only as to the power of the State of Minnesota to deal with the matter, but the broader question as to the power of the Federal Government to institute similar proceedings. The enormous overcapitalization of corporations engaged as inter-State carriers operates as a direct tax on inter-State commerce. It is important to inquire whether State control is relaxed ; whether a sovereign State maintains laws which promote and foster such injurious practices. The greater question is, can the country, in such cases, seek relief which will be adequate, through the action of the Federal Government, which is, after all, the only power having jurisdiction to regulate interstate commerce.

The facts, as disclosed by the bill of complaint filed by the AttorneyGeneral of Minnesota in the case of the Great Northern, would seem to present a case requiring the action of the Federal authorities. In such a controversy the Federal courts would have jurisdiction. An amendment to the Constitution of the United States conferring additional power upon Congress, and further diminishing the power of the sovereign States, is not necessary, because the commerce clause of the Constitution is ample to cover all cases of over-capitalization by carriers engaged in inter-State commerce, where such overcapitalization is a direct burden on such commerce. The fact that the carriers are private corporations, created under State laws, is not material. Their charters, and the laws of the State which granted them, will afford no protection for the unlawful acts of the carriers, if it appears that such acts directly affect commerce among the States by imposing unlawful bur-

dens thereon. A brief review of the facts and authorities will demonstrate the correctness of this contention.

The Great Northern Railroad Company wTas authorized by its charter to issue capital stock to the extent of $30,000,000. It is a transportation corporation engaged in interstate commerce, and received its charter from the State of Minnesota. The conduct of this corporation is typical of the conduct of nearly all of the great transportation corporations m the United States in this, that, since the day it was organized, it has habitually ignored the law under which it came into being, and has violated the statutes of Minnesota, apparently without let or hindrance. Primarily it owes allegiance to the Commonwealth of Minnesota. But it exercises its powers in relation to interstate commerce subject to the exclusive supervision and control of the Federal Government. The Minnesota Legislature has seen fit to prohibit carrying corporations organized under its laws to issue capital stock in excess of the amount authorized by their respective charters, without the consent of its Railroad and Warehouse Commission. The law is clear, and provides that such corporations, in case they desire to increase their capital stock, shall make written application to the Commission and procure its written consent to the issue of additional stock.

The law has been entirely ignored by the Great Northern, which, in connection with the Northern Pacific and the Chicago, Burlington and Quincy, operates a system embracing the commerce carried on within the vast territory, north of the Union

Pacific, lying between the Great

Lakes and the Pacific Ocean. As the country grew in wealth and prosperity, as the population of this fertile region increased, as its mineral and agricultural resources have been gradually developed, the earning capacity of the Great Northern has increased five hundred per cent. It formerly earned and paid to its stockholders, over and above all fixed charges and expenses, $2,1/10,000 annually, or seven per cent, on its $30,000,000 of capital stock. Its earnings gradually increased to $4,200,000 annually. Instead of paying fourteen per cent, on the $30,000,000 of original stock, it issued $30,000,000 additional, without legal authority and in direct violation of the laws of Minnesota, and paid seven per cent, on the $60,000,000. Its net earnings increased to $6,300,000 per year and its stock was again increased to $90,000,000. The earnings grew to $8,400,000 annually, and the stock was increased accordingly to $120,000,000. The net earnings soon exceeded $10,500,000 annually, and another increase of $30,000,000 of stock was issued, making the aggregate value of the stock at the present time $150,000,000, on which it pays the handsome sum of $10,500,000 annually, or seven per cent, on this entire issue. But so great gas been the growth and development of the country that this company now seems to be earning net every year $14,700,000, which will . justify an additional increase of $60,000,000 of stock, as the increased earnings will enable it to pay seven per cent, of $210,000,000, instead of on $150,000,000, the amount of its present issue.

The commercial history of the world affords nothing to equal this wonderful exhibition of economic

achievement, which has been duplicateh in like manner by the other great transportation corporations of the United States.

The figures are startling when we consider that these vast sums are not earned in ordinary business transactions, by the employment of private capital in ordinary commercial pursuits, where success among competing rivals is the result of superior skill and business ability. If this money, levied upon and taken from the public by a private corporation engaged in inter-State commerce, were used to build new railways and to increase equipment, trackage, and terminal facilities to an extent which would enable every traveler and every shipper to use the highways with convenience and comfort, so that no such thing as a car famine would ever be heard of, perhaps no complaints would arise and no remedies be invoked.

The enormous increase in the revenues of the carrier has been absorbed by the stockholders who subscribed for the stock and who receive the dividends. But the money paid to the carrier for the stock apparently has not been used to increase carrying facilities. How has it been used ? Increased facilities have been provided from time to time, but such as have been provided are grossly inadequate. The carrier has failed absolutely to increase its facilities so as to provide adequate public service or anything that approaches it. In failing to do so it has failed to perform the duties for which it was chartered, and has failed to fulfil the *mds and purposes for which it was created. And this lamentable failure is not a private matter, but is essentially a matter of public concern.

The carrier has failed to keep abreast with the increase of population and the enormous increase of business, which is now six times greater than when it earned seven per cent, on its original capital. It has failed to furnish sufficient trackage, equipment, or adequate terminal facilities. Statistics show that railway mileage has increased only twenty per cent, in ten years, while the earnings have increased one hundred and ten per cent. Trackage as distinguished from mileage is also miserabty inadequate. As a consequence, the increased traffic has so far outgrown the facilities furnished by the carrier that the inhabitants of the territory who are compelled to rely on this particular railway to carry on their business cannot, with ordinary celerity, move their crops or the products of their mines or their factories. The investigation of the fuel famine and car shortage in the Northwest, held in December last revealed the fact that fifty million bushels of grain, as nearly as could be estimated, remained on the farms or in the country elevators of North Dakota. It was further shown that in some localities no freight trains passed the depots at times for periods ranging from three to four weeks. It is clear that one railway cannot do the business which requires the services of at least three. Consequently, many have been ruined, thousands have been injured pecuniarily, and the growth in population and general business prosperity must also suffer.

The perennial increase of wealth above referred to, which may be said to be the direct result of increased population, should inure to the benefit of the State. It is the unearned increment appropriated by the

carrier to his private use, but which the carrier should have used to increase facilities for traffic and transportation. This unearned increment, doubtless, is what the President refers to in his recent message to Congress, in which he says that the people, while they do not wish confiscation, and desire those who invest in railway securities to receive a fair return upon their investments, “will not tolerate efforts to make the public pay dividends on watered stock. They are justly indignant at manipulations of securities and tricks of organization by which the effort is made to secure a monopolistic grip upon a community, and then capitalize the value of the control as a basis for unreasonable exactions. They are willing to see legitimate business pay legitimate profit, but they insist upon being well served and fairly and impartially served.” In other words, the unearned increment which should be used by the carrier to increase its facilities so as to prevent congested traffic and car famine, and to enable it to perform its duties faithfully, is capitalized “as a basis for unreasonable exactions” and used to pay dividends on wintered stock.

The protest which has arisen has increased in volume and intensity, until, goaded by incessant complaints and the general discontent of the people, the officials of the State of Minnesota have finally been driven by the sheer force of public opinion to take some action to enforce the laws of the State, which have been ignored for years. Whether the enforcement of these laws will furnish an adequate remedy for the evils complained of is not material to the present inquiry, which concerns more efficient and far-reaching action by

the Federal Government in the premises.

It would be impossible for the directorate of a private corporation to create wealth to the extent of $14,7‘00,000 annually unless thej7 were permitted to exercise the power of taxation, which power resides exclusively in the sovereign. In other words, a corporation which operates a public highway exercises the powers of the sovereign. Permission to fix rates and charges for transportation of persons and property is permission to exercise an attribute to sovereignty. The public highways of the country are constructed for public use, to accommodate public travel and secure public convenience. They are absolutely essential to the Government. The sovereign cannot surrender its power over its highways, because the entire community has an interest in preserving the power undiminished. The impairment of the power in the least degree would render the carrier supreme and make the State subordinate. The sovereign cannot surrender it any more than it can surrender the taxing power which is essential to support the Government. Yet private corporations, in operating the public highways of the country, incidentally exercise the power of taxation ; but, unlike the sovereign, they exercise this power, as their business is now conducted, largely for private gain and emolument. The power to tax can be legitimately exercised only for the benefit of all the people. It must be exercised by the sovereign to maintain the integrity of the Government. The people pay the tax into the public treasury for the benefit of the commonwealth, to operate the machinery necessary for its ad-

ministration. The public highways of the country are its avenues of commerce, and are essential to the existence of the State, for without commerce there can be no civilization.

When, therefore, the Government conferred upon a private corporation the privilege of operating a public highway, it permitted it to exercise a high special privilege and to perform the powers of the sovereign. Under our system it was deemed better wisdom to allow the duty of operating these highways, which are also military and post roads, to be performed by private corporations, upon the assumption that they would discharge that duty faithfully and well. When the carrier assumed the duty thus imposed, it entered into an obligation to carry for all, upon equal terms and conditions, and to operate the highways it was permitted to construct, primarily for the benefit, use, and convenience of the public, and to live up to all the duties imposed by law upon common carriers. To this end these corporations were created, and to accomplish this purpose they were permitted to be called into being. They received their charter and franchises as trustees, not for syndicated wealth, but for the people who compose the government which conferred these high special privileges. The President has said in this connection in his recent message to Congress in discussing the delinquencies of public service corporations, “In special privilege they live, and move, and have their being.”

When public transportation corporations fail to fulfil their mission, and fail to achieve the ends and purposes of their creation, they have violated their charters, and the

trusts and obligations imposed upon them. The indictment against them is that they do not carry for all upon equal terms and conditions. They do not move traffic with ordinary celerity. They do not transport persons in comfort, nor at times suited to public convenience. They do not furnish adequate equipment, trackage, or terminal facilities to keep pace with the increasing popuiation and the expanding volume of business. They have failed to confine themselves to their duties as carriers, but have assumed to become miners, shippers and manufacturers.

In so doing they have acquired private interests, the retention of which is repugnant to their public duties. As carriers, exercising special privileges and sovereign power, they have allied themselves with commercial enterprises. They have acquired extensive holdings in corporations engaged in mining coal, producing and refining oil, in the manufacture and sale of iron, steel, sugar, and ice ; as dealers in cattle and live stock, in dressed meats, and in all the necessaries of life. By giving special rates for the car.riage of these articles over the public highways to corporations in which they, as directors of the carrying corporations, are interested—because they own stock of the trusts and participate in their dividends—they practically choose who shall use these highways, to the exclusion of shippers not thus favored, and thereby make them no longer public but private. The result is a gigantic conspiracy against trade and commerce, the conspirators being the public carriers and the great trusts with which they are partners and allies. The carriers and the industrial combines

have practically secured a monopoly of trade and commerce in the necessaries of life.

This result, so far as the carriers are concerned, could never have been accomplished without the exercise of the sovereign power which the carriers exercise exclusively in operating the public highways of the country. In other words, the creature has become, in one sense, a separate branch of the Government, co-ordinate with the creator in the exercise of the sovereignty conferred.

The State of Minnesota has a right to complain, but the law limits its activities to commerce within the

borders of the State. Its courts have the power to enjoin the corporation which it created, and compel its creature to give the State officials a bill of particulars before permitting it to issue more stock. But it is obvious, from the facts above referred to, that the issue of this stock will affect directly commerce extending far beyond the confines of Minnesota. This aspect of the question gives the Federal Government supreme control of the situation, and the jurisdiction of the Federal courts attaches in a controversy which affects inter-State commerce.