2 The Effect Upon Common Stocks of Railroad Corporations
Here the effect of high interest rates is, or in time may be, offset by returns in the form of dividends, undivided profits, improvement of property, or the fact that income is not limited. But there is another trouble, and a serious one, for which the gold supply is responsible.
If the increasing supply of gold is responsible for higher commodity prices it must be at once apparent that the building, equipment and maintenance of railway properties costs more and more as all commodities, including labor, advance in price. This would be all right if the selling commodity, i. e.: transportation, also advanced proportionately in price; but it is so difficult to override popular prejudice and widespread misunderstanding on this point, that we find continued agitation and legislation not only against advancing rates, but with a view to reducing those which already obtain. There must, of course, be a limit to this thing, and if the cost of production continues to increase, the railroads must be permitted to demand higher prices for transportation. Otherwise a point would finally be reached where every railroad in the country would be forced into bankruptcy. The great danger lies in a belated assimilation of this truth by the masses, and too much demagoguery on the part of politicians who do understand, but, being politicians, prefer to reflect the views of a majority of constituents, rather than to enter a campaign of proselyting. That evils have been fostered and wrongs committed by eminent railroad financiers is certain; but there is considerable confusion of ideas on this head. Over-capitalization, illegal combinations, manipulation of funds for private gain, and the swelling of dividends for stock-jobbing purposes, when the funds so distributed should have gone into improvements or surplus, have all played their part in arousing the wrath and indignation of the great majority, and they are, as a class, prone to jump to the conclusion that any and every railroad corporation is charging unduly high rates for its services, and making exorbitant returns on invested capital. This has, no doubt, been more or less true in the past in certain cases where extremely high rates were made, and the apparent returns on money attenuated by over-capitalization; but this evil is gradually decreasing, and the real fight is, or should be, against these abuses. The railroads are suffering for the sins of the past, and may suffer still further; but the time is not far distant when, unless conditions change radically, the railroads must be allowed more latitude in the adjustment of rates.
The prevalent opinion, that needed reforms which strike at the root of the evils mentioned above is a bear argument, is another popular fallacy. Such reforms intelligently conceived, and unswervingly carried out, are all in favor of the small shareholder. If laws can be enacted which will prevent individual interests from plundering or misusing the funds of corporations, and which will compel these corporations to issue reports and statements which are not so involved and complex as to be beyond the ordinary comprehension, the small holder or investor will have a better show. But, having cured these evils, no laws can possibly endure which contemplate curtailing fair returns on money, and fair profits through natural enhancement in values.
But, however fair or cheering this view may appear, the fact remains that it will be slow in its acceptance and slower in its operation. We may therefore summarize the situation thus. Increasing production of gold brings about increasing cost of operation, and so long as cost of operation is advanced with no corresponding advance in selling price of transportation, the ratio of profits will gradually decrease until a vanishing point is reached.
In the last analysis, a probable tardy and reluctant recognition of the true status of the case warrants the belief that for the near future, the railroads have a hard time ahead of them, and that so far as this single important influence is concerned, it is decidedly a bearish factor.