In the measure that practice in any individual case departs from the generally recognized principles of first-class practice, the investor should seek further information, and raise the question of efficiency more and more definitely. Wisdom is the product of ex perience. In the administration of industrial enter prises it often happens that wisdom is only forth coming after severe punishment. Mr. Roger W. Babson described this in one of his articles in the Sat urday Evening Post.
Why is it that so many corporations seem destined to be reorganized? Why is it that the majority of stocks and bonds decline in price after the first public offering? Why is it that the man who waits until a concern has been operat ing a few years before investing money therein usually gets better terms than those who go in at the first? Why is it that most industries do not really succeed until they have been thru some sort of a reorganization? I will give an answer to these questions.
New corporations are like newly married couples. They start out as optimists with everyone wishing them success. They know only the pleasant side of life, having had little experience with sickness or other misfortunes. New cor porations are formed usually during prosperous times. They begin business when things are at their height, and cut their cloth accordingly. Hence when trouble and mis fortune come they are unprepared to stand the blow.
A new corporation may be likened to a young married couple with a full linen closet and a wardrobe all paid for. Perhaps father has even given them a home. The expense account of newly married couples and newly formed cor porations is unreal. With so many gifts and no clothes to buy, both young couples and young corporations get a distorted view of what are their real expenses. Hence from the first both are apt to adopt an extravagant policy that fails to provide for a replacing of goods consumed and for a proper maintenance of their property. Sooner or later there is a rude awakening that causes a heartburn for the newly wedded couples and usually a reorganization for un seasoned corporations.
Mr. Babson then proceeds to detail the sorrowful initial experiences of the General Electric Company, the Allis-Chalmers Company, the General Motors Company, the United States Shipbuilding Corpora tion, the Consolidated Steamship Lines Company and the M. Rumely Company.
A good administration usually depends upon a few men, and often upon one man. Since transfers, or ganizations, factional fights and death rapidly change the personnel of most companies, it is obvious that when the personal factor is the chief cause of net earnings, there is not a suitable basis for long-term bonding.
6. Public relation between the state and industrial corporations does not compare in in timacy with that which is characteristic of railways and public service corporations. However, there are two bearings which the investor should observe. One of these is the influence of the tariff, the other is the operation of laws designed to prevent unreason able restraint of trade.
7. The tariff is a perennial source of anxiety to that class of fine industries located upon the Atlantic seaboard, which is not able to solve its industrial problem in the characteristic American fashion, by low-cost raw materials, or mass produc tion. What the influence of the tariff is in any in dividual case, is, of course, a matter for special in quiry. It is not simply a matter of prosperity with high protection and prostration with low tariff rates. When the Underwood tariff of 1913 reduced the rates on manufactured rubber goods, the United States Rubber Company chronicled a great increase of business. When the same tariff decreased the rates on manufactures of leather the effect on the earnings of the American Hide and Leather Com pany was scarcely noticeable. It is true that free sugar expected after May 1, 1916, may have been responsible in 1913 for the great drop in the earn ings of the American Sugar Refining Company. Apparently it was the lowering of the duty on wool which destroyed the profits of the American Woolen Company in 1913. But free sugar did not injure the Corn Products Refining Company, as was predicted; and cheaper woolen and worsted cloths stimulated the business of hundreds of clothing manufacturers. A lowering of rates, with a corresponding reduction of the schedules applying to raw materials, parts, supplies, etc., will not often injure efficiently operated American manufactories; but each industry has its own special problems and safe generalization is im possible. As the amount of our manufactured arti cles exported to foreign countries increases, some manufacturers are even finding the tariff, with its enhancement of costs, a barrier to growth. Many business men completely confuse the operation of the normal trade cycle, which periodically cuts down industrial activity to conform to the resources of the capital market, with the effects of governmental trade policies. When the inevitable trade reaction comes in a trade cycle, the political party which happens to be in power receives the blame.