Overcapitalization

“ Overwork kills man and beast, and ruins even our locomotives and machinery. Too much rain, too much wind, and too much sunshine spoil our crops; too much confidence or too much caution prevents a business man from achieving success. There is a happy medium in all things which produces good results and promotes success. Under our modern system of financing our railroads and industrial corporations overcapitalization has in many instances run riot and produced an overplus of undigested securities. ”

“ Even if the business is able to pay good dividends on watered stock, the crime of overcapitalization is not lessened, though the harm done is now not to the investor but to the public. Stocks should represent only the actual value of the property, so that dividends may be only a fair return for capital really invested in the business. Where there is sharp competition, the possibility of overcharging the public to make returns on watered stock is cut out, and the loss falls upon the investor. ”

“ To-day most of our railroads are comparatively free of overcapitalization, both because much of the water has been eliminated by reorganizations, and because the increased value of terminals and other properties, as well as the large improvements that were paid for out of earnings, have increased the intrinsic value of shares which at one time may have been practically valueless. This process of accretion has been going on for many years, so that now there is comparatively little difference between intrinsic and market values. ”

“ Overcapitalization in all its shapes is one of the prime evils; for it is one of the most fruitful methods by which unscrupulous men get improper profits, and when the holdings come into innocent hands we are forced into the uncomfortable position of being obliged to reduce the dividends of innocent investors, or of permitting the public and the wage-workers, either or both, to suffer. Such really effective control over great inter-State business can come only from the National Government. The American people demands the 78new Nationalism needful to deal with the new problems ”

“ A crisis may take its rise from credit extension in other than properly industrial business. Such, e.g., was in great measure the American crisis in l837, when the most obvious and disastrous inflation was in speculative land values and the credits based on them. But it is no stretch of the concept to say that in that case the situation out of which the crisis arose was an overcapitalization of the land values in question. Capitalized land is, of course, "capital" for business purposes as truly as any other body of values that are capitalized and drawn into the money market. ”

“ The enormous overcapitalization of companies and the appropriation of $100,000,000 in stock to promotion expenses were represented in the stock issues of the new organizations thus formed, and were the basis upon which large dividends have been declared from the profits of the business. ”

“ Notwithstanding the quite unexampled prosperity of the last decade, the tempo of overcapitalization has been relatively less rapid and the process of readjustment throughout the world of enterprise has therefore been less extreme. Industry has slackened rather than collapsed, and the disturbance itself has been comparatively [Pg 644] short-lived, with the prospects of an early rebound. The influence of trusts in moderating crises and in minimizing depressions will doubtless become more apparent with each ensuing decade in the history of modern industry. ”

“ Again, the national government must in some form exercise supervision over corporations engaged in interstate business-and all large corporations engaged in interstate business-whether by license or otherwise, so as to permit us to deal with the far reaching evils of overcapitalization. ”

“ In some method, whether by a national license law or in other fashion, we must exercise, and that at an early date, a far more complete control than at present over these great corporations—a control that will among other things prevent the evils of excessive overcapitalization, and that will compel the disclosure by each big corporation of its stockholders and of its properties and business, whether owned directly or thru subsidiary or affiliated corporations. ”

“ With this greater moderation is apt to be associated a more accurate prevision, which succeeds in a more correct adjustment of present investment to future needs. The drift of business enterprise in its newer form is thus toward a relative checking of the discrepancy between estimated and actual earnings, or, in other words, toward a retardation in the process of overcapitalization. The history of trusts is still too recent, and in not all of them are we yet able to discern the working out of what ultimately will come to be recognized as the real laws of their evolution. ”

“ It is true that over-capitalization may conceal from the public the real extent of monopoly profits, and is for this purpose, if for no other, often resorted to. But this of itself ought to constitute no valid reason for drastic legislation. Investors ought to be left free to take their own risks, and speculative ventures ought to be left free to fix their own capitalization, for otherwise perfectly legitimate, if largely speculative, business interests may be made to suffer injuriously to the interests of the community. ”

“ The new enterprises are financed by the banks on the basis of this mistaken over-capitalization, their organizers engage to pay rates of interest which they cannot earn, and the crash inevitably follows. This is often called the over-capitalization theory, and is essentially psychological in its character. ”

“ This retardation (aided as it is by the reluctance of business men to lower their capitalization) is of sufficient effect to hinder recapitalization, on the whole, from overtaking the progressive need of it, with the result that a fair or "ordinary" rate of profits on industrial investments is not permanently attainable in the field of open competition. ”

“ The real purpose of such legislation is the protection of the consumer. In other words, there is no reason for an arbitrary limitation of capitalization unless it can be used as a means of creating a monopoly which will influence the price of commodities. In the opinion of the committee, the question of capitalization is not a contributing factor in the fight for a monopoly. The United States Steel Company would have no greater and no less a monopoly of the steel business if it were organized with one-half of its present capitalization. ”

“ See here; there are a thousand cotton-mills in this country, half of them in the South, one-fourth in New England, and one-fourth in the Middle States. They are capitalized at six hundred million dollars. Now let me tell you: we control three hundred and fifty millions of that capitalization. The trust is going through capitalization at a billion. The only thing that threatens it is child-labor legislation in the South, the tariff, and the control of the supply of cotton. ”

“ They have learned, through hard experience, that excess profits necessarily result from under-capitalization, in a given industry; and that they are not only God's cure, but the only available remedy, aided by economy and thrift, for the disease itself; that they are but another of the evils that have been imposed by accepting the absurd argument that unwisdom is ever "necessary." ”

“ You know perfectly well that a trust business staggering under a capitalization many times too big is not a business that can afford to admit competitors into the field; because the minute an economical business, a business with its capital down to hard pan, with every ounce of its capital working, comes into the field against such an overloaded corporation, it will inevitably beat it and undersell it; therefore it is to the interest of these gentlemen that monopoly be maintained. ”

“ The "good-will" of Mr Carnegie and his lieutenants, as well as of many other large business men connected with the steel industry, has also no doubt gone to swell the capitalization of the great corporation. But good-will on this higher level of business enterprise has a certain character of inexhaustibility, so that its use and capitalization in one corporation need not, and indeed does not, hinder or diminish the extent to which it may be used and capitalized in any other corporation. ”

“ It frequently misrepresents the sources of income and the probable dividends, conceals essential facts, and makes misleading statements. The capitalization often is absurdly high, compared with the value of the different establishments. In one case eight million dollars of stock were issued to represent factories whose combined value had been five hundred thousand dollars. So far as the capitalization is based on the increased profits due to the monopoly power, the profits of reorganization are taken out of the pockets of the public. ”

“ The consequences of inaccuracy are reduced by confining the capitalization to excess income, but of course it is a question of fact whether future excess income can be predicted with certainty sufficient to persuade a purchaser of the business o pay for its capitalized value. ”

“ But Socialists know that, through indirect taxes or the automatic fall in wages or rise in prices, the same object of charging the bill to the workers may be reached. The capitalization refers to the investment and management of the large fund required by a capitalist government, thereby increasing its power. The last point has to do with the tendency to restrict the workers' liberty in return for the benefits granted—a tendency more visible with the pensions of the railway employees which were almost avowedly granted to sweeten the bitter pill of a law directed against their organizations. ”

“ In the first place, the whole mass of profits which are obtained by the adroit capitalization of a new business, or the reconstruction of one which already exists, have hardly any connection with production at all. When, for instance, a Lancashire cotton mill capitalized at £100,000 is bought by a London syndicate which re-floats it with a capital of £500,000—not at all an extravagant case—what exactly has happened? ”

“ If the ratio of saving which the capitalists (taken together) choose to make exceeds the rate of accumulation dictated by technical progress, the excess savings can only be ‘capitalised’ if there is an outlet for investment outside the system. ”

“ It is too powerful a weapon in the hands of those alive to its possibilities, enabling a small group of men with a relatively insignificant investment of capital to control a country-wide industry. Take the simplest possible illustration: The industry of manufacturing a particular commodity is carried on by a number of corporations scattered throughout the country with an aggregate capitalization of, say, $10,000,000. A, B, and C form a holding company to acquire a bare majority of the stock of each corporation, say $5,100,000 in the aggregate. ”

“ Artificial methods of establishing our railroad corporations have naturally led to artificial methods of regulating their operations. Over-capitalization incapacitates the roads for competition; for it necessarily holds out a temptation to parallel existing roads by others at a lower capitalization. As roads running between the same points were multiplied, competition for “through” business became more active, until not only were dividends threatened on some of the best lines, but some roads were driven into default on their mortgages. ”

“ Though foreign loans are indispensable for the emancipation of the rising capitalist states, they are yet the surest ties by which the old capitalist states maintain their influence, exercise financial control and exert pressure on the customs, foreign and commercial policy of the young capitalist states. Pre-eminently channels for the investment in new spheres of capital accumulated in the old countries, such loans widen the scope for the accumulation of capital; but at the same time they restrict it by creating new competition for the investing countries. ”

“ The commercial men could succeed in having it managed for their purposes and profit, and the politicians could often extract plunder from the successive contracts, but there was no opportunity or possibility for the exercise of the usual capitalist methods of fraudulent diversion of land, or of over-capitalization and exorbitant rates with which to pay dividends on fictitious stock. ”

“ This surplus is divided among the stockholders, not as dividends on their paid-up stock, but is capitalized and stock issued to subscribers. The road is made to pay the interest, and eventually the principal, of the capital borrowed to build it, and also to earn money enough to show a paid-up capital to the amount of the actual cost of the road. This species of financiering on the part of the company is robbing the people, and abusing the privileges conferred by the charter. ”

“ If a railroad corporation has bonded its property for an amount that exceeds its fair value, or if its capitalization is largely fictitious, it may not impose upon the public the burden of such increased rates as may be required for the purpose of realizing profits upon such excessive valuation or fictitious capitalization ”

“ In the case of a corporation which has undistributed earnings, the creation of new corporate obligations which are transferred to stockholders in relation to their former holdings, so as to produce, for all practical purposes, the same result as a distribution of cash earnings of equivalent value, cannot obtain tax immunity because cast in the form of a recapitalization-reorganization. ”