CHAPTER XXIV.
RAILWAY CORPORATIONS.

[386]

THE operations of exchange are aided by all facilities for free communication and for the transportation of persons and goods between different sections of a country and different parts of the world.  Steamships and ocean telegraphs have changed the methods of foreign commerce. Domestic trade and industry have been yet more affected by the modern system of Railway transportation. The pen of an eminent jurist has set forth with both truth and eloquence the benefits derived from this means of swift passage.  “Railroads,” says Judge Paine, “are the great public highways of the world, along which its gigantic currents of trade and travel continually pour -- highways compared with which the most magnificent highways of antiquity dwindle into insignificance. They are the most marvelous invention of modern times. They have done more to develop the wealth and resources, to stimulate the industry, reward the labor and promote the general comfort and prosperity of the country, than any other or perhaps all other mere physical causes combined. There is probably not a man, woman or child, whose interest and comfort has not in some degree been sub served by them. They bring to our doors the productions of the earth. They enable us to anticipate and protract the seasons. They enable the inhabitants of each clime to enjoy the pleasures and luxuries of all . . . . There is scarcely a want, wish or aspiration of the human heart which they do not in some measure help to gratify.”  [387]

But every power for good may be abused and perverted into a power for evil. Experience reveals a tendency in great railway corporations to acquire and to exercise despotic power, in a way to obstruct trade and to bring a blight upon productive industry -- a power which sometimes aims by base means to control legislation, and sometimes attempts to defy the law. Grave and complicated problems are thus presented which need to be studied in the light of economic principles. Our science has certainly something to contribute towards the practical solution of these problems.

The Nature of a Railway Corporation. There are to be recognized three distinctive features.

1. Such a corporation is a Creature of the State. It originates in a legislative act. This must be so for three reasons. First, because it is peculiarly a function of the State to provide highways of travel and trade for the general benefit of its people. Second, because the making of such highways involves an interference with private property which can be warranted only by the authority of the State in the exercise of its sole right of eminent domain" for a public advantage. And Third, because the construction, equipment and operating of an extended railway is an operation of such magnitude as to require the capital and energies of many to be combined.

2. Such a corporation is an Agent of the State. The considerations just named would justify the government of a State in taking upon itself to provide and manage railways for the public good. Belgium and some other European states do thus entrust this entire interest to the direction of government officials. But the policy of our government is, in accordance with the economic principles heretofore presented, to enlist private enterprise as far se practicable in all undertakings which directly concern industry   [388]   and trade. Accordingly in the legislative act which creates a railway corporation, the government does two things. First, it constitutes of a number of associated individuals an artificial person with a distinctive name, to net by one united will, capable of receiving, holding and conveying property, of entering into contracts and incur ring debts, of suing and being sued. The body corporate thus formed, is in the eye of the law, a civil person possessing certain rights, enjoying certain privileges and exercising certain functions for a specific object. Second, the government transfers to this body corporate certain of its own sovereign  powers, especially that of eminent domain, that is the power to take private property for public use on making due compensation to the owners; and charges it with the fulfillment of its own legitimate functions, namely, providing the public with facilities for the transportation of persons and goods. The powers are granted with reference solely to the function contemplated. A decision of the United States Supreme Court declares that “building a railroad, though it be built by a private corporation, is all act done for it public use,” and again “in their very nature railroads are public highways.”  Chief Justice Shaw, of Massachusetts, says, “the real anti personal property necessary to the establishment and management of a railroad is vested in the corporation, but it is in trust for the public.” It is therefore, as an agent of the State, that a railway corporation takes laud from its citizens and establishes a highway of intercourse and commerce for the public service. Hence in the very nature of the case, its powers and vested rights cannot be held and exercised independently of the State. The government is false to its own sacred trusts, if it does not hold such corporations ever responsible in all respects for their conduct in the discharge of their proper functions.

3. A railway corporation is in some degree a practical  [389]  Monopoly.  The private enterprise which undertakes, as an agent of the State to perform the service named, is entitled to a just compensation. The members of the company invest their capital for expected profits. Their private interests are to be carefully conserved. The corpora. ion gets its compensation by collecting fares and freight charges for the actual transportation of persons and goods. That is, as an offset for the service rendered, the government allows a private company to tax the public who have the benefits of that service. But after a railway is once established, it controls the business of transportation for the section through which it runs. The only competition possible is that of parallel railways or water transportation. Hence the arrangement itself gives to the corporation a practical monopoly with the power of taxing the community. 

This is probably the best way of making remuneration for the service. If the government performed the same service by a bureau of its own appointed officers, it would tax the community in the same way. There is no just ground for complaint of this monopoly as a method of paying for a valuable service; nor of its legitimate exercise to secure generous returns for capital anti labor employed. But it is evidently liable to abuse. The government has need therefore, to subject the business a to reasonable conditions and to retain such power over it as to guard the public against oppression. Mr. Mill very fitly says, "the State should either reserve to itself a reversionary properly in such public works, or should retain and freely exercise the right of fixing a maximum of fares and charges and from time to time varying that maximum."

While railway corporations are creatures of the State, called into being to serve as agents of the State for the accomplishment of certain purposes, they are also to be regarded as parties to contracts with the State, entitled to    [390]   just reward for their services, and having private rights and interests always to be respected and guarded. On the part of the State, the object distinctly contemplated is to develop the material prosperity of the people. On the part of each corporation, the object never lost sight of is to realize a profit for the capital and labor which it employs. These two objects are not necessarily opposed to each other. On the contrary, each is best promoted when qualified by respect for the other. This will appear more clearly as we study next,

The Relations of Railway Corporations to general Industry.

1. By transportation, they give to all products that last addition of value which comes from their being in the places where they are most needed. They directly perform a kind of labor essential to the increase of wealth. The importance of this labor cannot be over-estimated. It links itself with every other kind of labor and is necessary to develop the full results of all industry.

2. They enlarge the market for all products, and so help to maintain the natural equilibrium of supply and demand. They bear away the surplus productions of one section to meet the deficiencies of another, to the relief of both; and the industry of both is thereby stimulated.

3. They quicken exchanges and thus hasten the returns from both capital and labor. Hence they tend to reduce prices, and at the same time to make them more remunerative.

4. The business of the railways depends upon the productiveness of industry. The demand for transportation is proportioned to the amount of products to be carried out of a country. We have seen that the ability of a people to trade depends on the surplus of goods they have to dispose of. That which goes out must pay for what is   [391]   brought in. Hence the bountiful crops which reward the labor of agriculture, large proceeds from the mines, the success of all manufacturing industry, all subserve the profits of the railways. So too, the use of railways for travel depends on the increase of individual wealth. It is for the interest of these corporations that all whom they serve should grow rich. It is better for themselves and for all concerned that their profits should be increased by enlargement of business rather than by increasing the rates of charges. It is both right and politic for railways to favor the prosperity of industry all along their routes, ill all intermediate places, as well as at the extremities.

5. By abuse of their power as monopolies, the railway corporations may diminish the returns of all industry. They may set their rates so high as virtually to deprive producers of the advantage of an enlarged market. Thus  the railway charges for transporting the agricultural products of the West to the sea-board sometimes absorb all the difference in prices. When increased demand abroad has raised the price of wheat in the foreign market, the railways have been known to increase their charges so as to cover all the advance, and rob the Western farmer of his share in the advantage. Such a course must be depressing to industry. It is possible in the relations of the parties, but it is a violation of mutual rights in these relations. Harmony and co-operation characterize the true relation of railways to all other departments of productive industry. It is a foolish short-sighted policy which, for a temporary advantage, disregards this fundamental truth.

The Administration of Railway Corporations.

The construction and operations of railways require great outlays for which large accumulations of capital are necessary. This capital is in part gathered by subscriptions for stock; in part, it is obtained by the use of credit. The   [392]   original corporators pledge themselves for certain shares. Then the public and especially the people along the proposed route are called to add their subscriptions. The call is urged by pleading the benefit to be derived from the road, and by the promise of profits to stockholders. In many cases, farmers and other citizens, unable to advance money, have been induced to give their credit by mortgaging their farms and homesteads. Cities, towns and counties also have been persuaded to tax themselves, or to lend their credit in the form of bonds for the benefit of the road. The stock is then widely distributed to great numbers of persons. The corporation is composed of all stockholders. Such a body is manifestly unfitted for the details of business. The corporation is therefore organized by the election of a Board of Directors which may be continued or changed at each annual meeting of stockholders. To this Board is entrusted the choice of officers and the general administration of the company's affairs.  A mighty power is thus concentrated in the hands of a few managers.

Since at meetings of stockholders, votes on all questions are taken by count of shares, absentees voting by proxy, it is not difficult for the managers, by commanding a majority of the shares, to control action and retain their power. The minority are helpless to resist this power. The directors may be true and faithful to the interests of the corporation and of the public, so that all shall be well administered. They may use their power to subserve a interests of their own, antagonistic to both.

Great abuses proceed from the selfish policy and ruinous administration of railway managers. By lavish expenditure, and the reckless use of credit, the entire property and franchises of many railways have passed under fore. closure of mortgages into the hands of bondholders. In. individual stockholders thus lose all they had invested in the   [393]    enterprise. Worse than that, many an humble citizen or farmer has to give up his homestead or farm, or struggle for years to clear it from the mortgage given for his stock, with nothing to offset his loss.

The interests of minor stockholders are often sacrificed in another way, which can best be explained by an actual instance. The B. & C. railway was doing a prosperous business, which paid handsome dividends and commanded for its stock a premium in the market. The B. & D. railway, ruining out of the same city in another direction, was much embarrassed so that it yielded no profits, and its stock was almost worthless. The managers of the B. & C. in concert with some others, bought up at very low rates, the greater part of the B. & D. stock, and then using, or rather misusing the power of their official position, merged the stock of the good road in that of the other. The consequence was that the B. & D. stock rose at once to seven­fold its former value, the advantage of which inured to the benefit of its shrewd managers and their friends, while hundreds of innocent holders of the B. & C. stock saw their dividends cut off and their property reduced in value one‑half, by the treacherous act which they lead no power to resist and for the wrong of which they had no redress.

Again we have cases like that of the “Credit Mobilier” on the Union Pacific railway, in which some of the managers as individuals were organized into a distinct company to contract for building the road. As managers they let to themselves, in the above capacity, contracts at such rates as made them rich, but tended to impoverish the corporation of which they were the official guardians.

Not infrequently railway directors operate on a large scale, in the speculations of the stock exchange,  and manipulate the affairs of their own corporations so as to raise or depress prices as may best suit their own advantage,   [394]    utterly regardless of the effects on public interests or on those whose capital is entrusted to their care.

The process of “watering stock” so-called, in like man, manager sacrifices public interests to the selfish greed of railway officials. Its effect is to lay on the public extra charges that dividends may be paid on double the amount of stock actually paid in.

Sometimes the officers of a railway engage in the traffic of commerce and change the rates of freights to suit their own advantage. Then by alternate ruinous competitions and grand combinations they throw uncertainty over all the transactions of trade, causing fluctuations by which many are made bankrupt while a few of the inside ring are enriched.

Worst of all, is the abuse of the great money power of these corporations to carry measures of legislation for their own interests to the detriment of the public weal.  The modest expression, "putting money, bonds or stocks where they will do the most good,” means in plain speech, bribing Congressmen of weak consciences and buying up State legislatures.

In speaking of these things, we have no sympathy with the indiscriminate tirade against these corporations, in which some indulge. We do not charge them as sinners above all others in these respects. Express companies, telegraph companies, insurance companies and other great monied corporations indicate more or less the same vicious tendencies. We advocate no blind "granger" movement of open hostility. On the other hand, we hold in highest estimation the benefits conferred on the country by these corporations. We count worthy of all honor many men of highest integrity connected officially with them, who stand manfully for the correction of abuses and the just fulfillment of their trusts.

But a clear apprehension and consideration on the part   [395]   of our intelligent citizens generally, in the light of both economic and moral principles, of the evil as well as the good involved, will work out the surest corrective of the evil and the truest safeguard of the good. Grave questions of legislation are before the country on which the people as well as their law-makers need to have an intelligent gent judgment. How shall the rights of innocent stockholders be guarded against the machinations of unscrupulous managers? How shall these corporations be protected in their just private rights, and yet be held under restrictions and responsibilities which will keep them true and faithful in their legitimate functions as agents of the State for great public interests? Shall all be left to the separate and varying action of the several States, or shall the national Congress exercise its constitutional power to regulate commerce between the States, by enactments which shall be uniform and authoritative over the whole country? The wisest and profoundest statesmanship in the land is needed for the solution of these problems.

But back of all legislation, more effective than all statutes, is the sound public sentiment, formed and guided by a good conscience on the part of the body of our people -- a sentiment which rests on an intelligent regard for the fundamental principles of Political Economy in this as in other applications -- a conscience which holds individual conduct to the ways of justice and honor, and which expresses itself, through all channels of social intercourse and popular influence, in condemnation of treachery, fraud and robbery, however subtle and shrewd the processes however grand the scale of operations, however rich the results of successful wickedness.