CHAPTER XLIII.
RAILROAD INVESTMENTS.
VASTNESS OF OUR RAILROAD SYSTEM.—ITS COST.—FALL IN THE RATE OF
INTEREST.—TENDENCY TO A FOUR PER CENT. RATE ON RAILROAD
BONDS.—EFFECT OF THE CHANGE ON STOCKS.—PROSPECTIVE SPECULATION.—SOME
SOCIAL INEQUITIES TO BE ADJUSTED THROUGH CHEAPER TRANSPORTATION.
There are, perhaps, few who distinctly realize the magnitude of the
amount of capital invested in the railroads of the United States. The
immense area over which our population is distributed necessitates a
much greater length of railroad, as compared with inhabitants, than
exists in any other nation. In 1884 we had, according to “Poor’s Manual
of Railroads,” no less than 125,380 miles of road within the United
States, which exceeds the entire mileage of Europe. This was required to
provide for the travel and transportation of about 54,000,000 of
population, while Great Britain, France, and Germany, with their
combined population of 120,000,000, had in the same year about 60,000
miles, and Russia, with some 85,000,000 of people, had only about 19,000
miles.
It can hardly be a matter for boasting that we have found it necessary
to provide such a disproportionate length of road to accommodate the
wants of trade and travel; for the more capital we have to invest in the
facilities for carriage the less we have for investment in the means for
production, and the more we have to pay for transportation service the
worse is our position for competing with other nations. This,
undoubtedly, is a much more important factor than is generally allowed
in the question of our ability to command a share in the world’s
international commerce proportioned to the extent of our population.
The cost of our railroads, as indicated by the capitalization statements
of the Companies in 1884, is represented by $3,669,116,000 in bonds and
$3,762,016,000 of stock. As shown in another chapter on “Railroad
Methods,” the actual cash outlay in construction and equipments is very
much less than these figures; but the roads aim to earn an investment
return on these enormously inflated amounts, and do so as far as they
may be able.
Elsewhere in this volume I have shown how the effort to earn dividends
upon hundreds of millions of fictitious railroad capital is imposing an
unjust tax on the people, retarding the growth of national commerce and
creating a distinct millionaire class not without danger to our
political future; and I wish here to refer to one fact from which we may
hope for some mitigation of this pernicious tendency.
Within recent years it has become very clear that a large permanent
reduction has been effected in the rate of interest on fixed capital.
Perhaps, the principal causes of this change has been (1) the high
credit of the Government, represented by a 3 per cent. rate of interest
on its loans; (2) diminution of the element of risk in our corporate
enterprises; (3) the more developed and consolidated condition of our
industry; and (4) the growth of the national earnings in a ratio
disproportionate to the new undertakings inviting capital. To such an
extent has the loanable resources of the country increased that, whereas
ten to fifteen years ago we found it necessary to borrow in other
countries a large portion of the money needed to build our railroads, we
are now almost entirely independent of European lenders, and are
beginning to invest in the construction of roads in Canada and Mexico.
Thus comes about the fact that, while the bulk of the new outstanding
railroad bonds bear interest at 6 to 7 per cent., with exceptions at 5
and 8 per cent., there is no difficulty in now negotiating the mortgages
of sound railroads at 4 per cent., and that may be safely regarded as
the future rate for all meritorious loans. It is not difficult to see to
what course of things this fact points. If new roads can be built on a 4
per cent. ratio of interest charges, then the new constructions on that
basis and the gradual replacing of maturing loans at the same rate will
very quickly establish a competition between roads thus situated and the
large mass of companies burdened with the old high rate of interest that
will bear very seriously on the latter. To a company with, say,
$40,000,000 of bonded debt, it is a matter of a difference of $800,000
per year in fixed charges whether it pays 6 per cent. interest or 4 per
cent. This difference will be so vital in cases of competition between
high rate roads and low-rate ones, that it will leave no choice, with a
very important proportion of our railroads, between facing financial
embarrassment and taking immediate steps for readjusting their debts to
the new and lower rate of interest. As an important proportion of the
original bonds issued 25 to 30 years ago at 6, 7, and 8 per cent. rate
by the older roads are now beginning to mature very rapidly, a large
extent of high-rate debt will from this time forward be transmuted into
4 per cent. bonds, which will add force to the tendency here indicated.
Some important results must follow from this new drift in railroad
investments. One of the effects would naturally be a diminution of the
current high rate of premium on the old bonds, which has become, so
adjusted as to yield, in most cases, a return of 4 to 4½ per cent. on
the market value. Holders of this class of bonds will perceive that the
companies cannot long sustain the burden of their present high rate of
fixed charges, and will soon come to discount in advance the inevitable
“scaling” of their bonds. When the railroads begin to feel the effects
of competition with the low-rate companies, they will not be slow to
adjust their finances to the new situation; neither will they be nice
about their methods of effecting such adjustments; and the rights of
creditors will be ruthlessly dealt with under the compulsion of
foreclosure; and when this compulsory stage is reached, it will not be
very long before a large proportion of the high-rate bonds is transmuted
into long 4 per cent. obligations.
This very important transition, upon a such large mass of investments,
is to be anticipated as one of the most conspicuous financial events of
the comparatively near future. One of its first effects may be expected
to appear in a certain tone of depression among investors, who will feel
themselves impoverished through the fall in the market value of their
bonds, and by the impending reduction of one-third in their income from
this class of securities. The bondholders—and, indeed, investors
generally—will be likely to reason that the reduction in the fixed
charges of the roads will leave so much more available for the
stockholders; and there would be this extent of warrant for such a
conclusion, that, as the stock of a company usually about equals the
amount of its bonds issues, any reduction in the rate of interest on the
latter would be just so much per cent. saved towards the dividend on
share capital. Under such circumstances, there would naturally be a
marked increase in the demand for railroad stocks, and a large advance
in their market value would in all probability result. To those who
contemplate investing in railroad shares, this is a consideration which,
it appears to me, should claim their consideration.
It would seem probable that, in the process of conversion here
foreshadowed, there are the elements of an era of unusual speculative
activity at a period not very remote. That speculative movement may be
expected to consummate and finally adjust the change. Naturally, such an
excitement would tend to produce a great inflation in the price of
stocks (as distinguished from bonds); the final stroke of adjustment,
however, would come ultimately through the construction of new competing
roads, which would take out of the net earnings of the roads as much as
had been saved by the reduction of interest on their debts, thus leaving
the dividend resources where they stood before the change. The final
issue of this transition, therefore, would be to give the public at
large about the entire benefit of what the railroads saved by the
amelioration of their debt charges.
The tendency I have here aimed to foreshadow is one that must largely
tend to the public advantage. In other words, the railroads, having
reduced by 30 to 40 per cent. their interest charges, will be in a
position to perform their services for correspondingly lower charges.
This will be an invaluable advantage to all our industries, and
especially to such as have to deal with bulky products, a considerable
portion of the costs of which consists of charges for transportation,
and the working class, who constitute the bulk of our consumers, will be
especially benefited.
In another chapter I have shown how the overcapitalization of our
railroads has caused a false and unjust distribution of wealth, and
burdened our industries with transportation charges which are a serious
obstacle to our national progress. The tendency above delineated shows
how seriously the natural laws governing the distribution of wealth
provide an ultimate remedy for such violations of these laws. The
railroad capitalists who have made their millions by providing railroads
at such an inflated cost are now faced with the certain prospect of a
loss of one-third of their income from their investments; and that
deduction will have to be distributed among the community at large in
the form of cheaper carriage.
This is but a repetition of what we find so many times in the history of
nations, that when any important class exacts, by some artificial
process, a vast amount of wealth that does not naturally and justly
belong to it, it ultimately finds the earning capacity of its
accumulations declining. This is one among the many reasons why a low
rate of interest is apt to prevail in countries where privileged or
aristocratic classes have absorbed an undue proportion of the national
wealth.
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