RAILWAY CAPITALIZATION. Much of the finan cial difficulty under which a good many Ameri can railways have labored has been the direct outgrowth of speculation, in which the proper ties have frequently been practically wrecked. merely to effect deals in the stock market, and roads which have been the subject of these operations are generally overcapitalized or mort gaged to such an extent that the earnings which would be sufficient to provide reasonable divi dends on the actual value of the property are frequently too small to pay the interest on its bonds. The amount of railway stock which has been issued without consideration of money or value is unquestionably very large, although no approximation to the real sum is possible of being estimated. Occasionally such stock is is sued pro rata to the stockholders of a very profit able road to make the rate of dividends less prominent, which might otherwise invite restric tive legislation. More frequently the object of issuing watered stock is to keep the control of the railway by means of the apparent invest ment it represents, or to balance some difference in cases of reorganization. The bonds represent very closely the amount of the debt actually paid in. The stockholders, as owners of the road, have the entire control of the property, and the bondholders have no voice in the management so long as their interest is paid. This condition, corresponding to that of the owners and mort gagees of real estate, is entirely reasonable as long as the actual investments in stock and bonds maintain normal proportions, for the reason that the stockholders assume all the risk, while the bondholders are practically secured. In some cases, however, the amount of money supplied by the stockholders is merely nominal, and the road is bonded for all or more than its value. This I can only occur where the stock is most all `water,' and its result is to put the management of the road in hands of parties having but little financial or other interest in it except for the opportunity it affords for speculating with the money of the bondholders. The abuses which have grown out of railway transactions under such circumstances constitute shameful chapters in the history of a number of roads, such as the Erie, Wabash, Union Pacific, and others.
What are known as the Erie wars in 1868 illustrated the worst evils of this class. Two or three operators bought within a few weeks op tions on a large amount of Erie stock for the sum of $72,000, and obtained possession of suffi cient proxies to elect one of their own repre sentatives as president of the road. After thus obtaining control of the property, the railway was charged at once with the $72,000 spent in acquiring it, and the speculators then commenced selling the stock for a fall. This was eagerly purchased by the Erie's rivals, the owners of the New York Central road, and, instead of a fall, the price of Erie stock rose from 6S to about SO. As this threatened to ruin the Erie operators, they issued $5,000,000 worth of fraudulent stock, which was sold at 80, and on its discovery the speculators for a fall realized an enormous profit in addition to the $4,000,000 proceeds from the sale of fraudulent stock. In the legal proceed ings which followed large sums of money were spent in buying up elections, legislatures, and judges, all of which were charged to the Erie road, and at. the end of two or three years, when the ring lost its control, the indebtedness of the Erie had been increased by about $65,000,000, which prevented its stock from paying a dividend for twenty years.
A certain amount of hostile feeling has always existed between the public and the railways, which fortunately is diminishing with the better understanding of the questions in dispute. Prac tically the whole difference hinged on the matter of rates, and both sides have been at fault in treating this subject. The railways have at times made very unjust discriminations between different persons and different localities, and, on the other hand, the public in attempting to cor rect these abuses have passed laws which have been equally unjust to the railways. The prob lem of rates is an exceedingly difficult one to legislate upon, as no fixed rule can be justly applied in every case as to the proportional charges for different distances. A large propor tion of the transportation of this country falls within the jurisdiction of the Interstate Com merce Law, which in respect to rates leaves considerable discretionary power in the hands of the Commission. See INTERSTATE COMMERCE ACT.