CHAPTER XXI

Exercise 302

1. Mr. Henry Carroll of Wausau, Wis., writes to Mr. Randall (Exercise 301, 7), asking him to buy 10 shares of C. & N. W. R. R.preferred stock at 134 or better. When they are bought, he adds, they can be sent through any bank in Wausau.2. Mr. Randall replies by sending the 10 shares of stock to the bank's correspondent in Wausau, the First National Bank, telling the latter to deliver them to Mr. Henry Carroll on payment of the enclosed draft for $1340 with exchange. Write the letter.3. A dressmaker in South Bend, Ind., has applied to Marshall Field & Co., Retail, State and Washington Streets, Chicago, for a charge account. The department store makes inquiries concerning her at her bank, the Commercial and Savings Bank of South Bend. Write the letter.4. The bank replies that she has maintained a small but steady balance, that she has never overdrawn her account, and that in their opinion her credit would be good up to $100 monthly. Write the letter.5. Theodore Buchanan of St. Louis sends Philip Newborg of your city a check for $100 with which he pays a debt to Charles Springer of Minneapolis. Springer endorses it and deposits it in the Security National Bank. The check is returned marked N.S.F., and the Security National Bank notifies Springer of the situation and of the fact that his account has been charged with $104, the amount of the draft plus expenses.6. One of the depositors of the Milwaukee Trust and Savings Bank brings to the Cashier a note which is about due, and asks the bank to collect it. The maker of the note is William T. Adams of Seattle. The Cashier writes to the bank's correspondent in Seattle, the Scandinavian American Bank, asking the latter to collect. Write the letter. (SeeExercise 301, 7.)7. The Scandinavian American bank writes to William T. Adams, telling him that it holds a note signed by him, due ——, and asking him to make prompt payment. Write the letter.8. Mr. Adams pays the note. The Seattle Bank notifies the Milwaukee Bank, enclosing a draft for the amount. Write the letter.9. SeeExercise 301, 10. As John Elsworth's banker send the coupons for the American Telephone and Telegraph bonds to your correspondent in New York, the National City Bank, because the interest is payable in New York. Ask the bank to make the collection. Write the letter.10. The National City Bank makes the collection and informs you by means of a printed form that it has credited you with the amount, $112.50. The form is just like a letter except that it isalready printed with blanks left for the name and the address and for itemizing the coupons collected. Write such a form.11. One of your depositors has overdrawn his account. Notify him of the fact. Do this courteously so that the depositor may have no reason to withdraw his account.12. In your city there is a real estate dealer who often has large sums of money idle for a short time because, when he sells one piece of property, he does not always have another immediately in view. He is not a depositor in your bank. Write to him, inducing him to take out a Certificate of Deposit at such times and telling him that the advantages of such a certificate are that he will get 3% interest on the money deposited and that he may draw out the money at any time.13. One of your depositors has written to you, asking for a loan of $5,000 for nine months. Write to him, saying that it is not your practice to make time loans for definite periods longer than six months, as it is not a good plan thus to tie up your deposits. Explain that as most of a bank's deposits are payable on demand, you would suggest his taking out a demand loan for $5,000, payable on the demand of the bank. Under ordinary business conditions such a loan might easily run for nine months.14. R. F. Marsden, President of the Truesdale Cotton Mill, Birmingham, Ala., has written to you, asking whether he can secure a loan next fall on the cotton in the mill as collateral. Reply that you feel certain that satisfactory arrangements could be made if the cotton were stored in an accredited warehouse, so that you could accept the warehouse receipt as collateral.

2. Mr. Randall replies by sending the 10 shares of stock to the bank's correspondent in Wausau, the First National Bank, telling the latter to deliver them to Mr. Henry Carroll on payment of the enclosed draft for $1340 with exchange. Write the letter.

3. A dressmaker in South Bend, Ind., has applied to Marshall Field & Co., Retail, State and Washington Streets, Chicago, for a charge account. The department store makes inquiries concerning her at her bank, the Commercial and Savings Bank of South Bend. Write the letter.

4. The bank replies that she has maintained a small but steady balance, that she has never overdrawn her account, and that in their opinion her credit would be good up to $100 monthly. Write the letter.

5. Theodore Buchanan of St. Louis sends Philip Newborg of your city a check for $100 with which he pays a debt to Charles Springer of Minneapolis. Springer endorses it and deposits it in the Security National Bank. The check is returned marked N.S.F., and the Security National Bank notifies Springer of the situation and of the fact that his account has been charged with $104, the amount of the draft plus expenses.

6. One of the depositors of the Milwaukee Trust and Savings Bank brings to the Cashier a note which is about due, and asks the bank to collect it. The maker of the note is William T. Adams of Seattle. The Cashier writes to the bank's correspondent in Seattle, the Scandinavian American Bank, asking the latter to collect. Write the letter. (SeeExercise 301, 7.)

7. The Scandinavian American bank writes to William T. Adams, telling him that it holds a note signed by him, due ——, and asking him to make prompt payment. Write the letter.

8. Mr. Adams pays the note. The Seattle Bank notifies the Milwaukee Bank, enclosing a draft for the amount. Write the letter.

9. SeeExercise 301, 10. As John Elsworth's banker send the coupons for the American Telephone and Telegraph bonds to your correspondent in New York, the National City Bank, because the interest is payable in New York. Ask the bank to make the collection. Write the letter.

10. The National City Bank makes the collection and informs you by means of a printed form that it has credited you with the amount, $112.50. The form is just like a letter except that it isalready printed with blanks left for the name and the address and for itemizing the coupons collected. Write such a form.

11. One of your depositors has overdrawn his account. Notify him of the fact. Do this courteously so that the depositor may have no reason to withdraw his account.

12. In your city there is a real estate dealer who often has large sums of money idle for a short time because, when he sells one piece of property, he does not always have another immediately in view. He is not a depositor in your bank. Write to him, inducing him to take out a Certificate of Deposit at such times and telling him that the advantages of such a certificate are that he will get 3% interest on the money deposited and that he may draw out the money at any time.

13. One of your depositors has written to you, asking for a loan of $5,000 for nine months. Write to him, saying that it is not your practice to make time loans for definite periods longer than six months, as it is not a good plan thus to tie up your deposits. Explain that as most of a bank's deposits are payable on demand, you would suggest his taking out a demand loan for $5,000, payable on the demand of the bank. Under ordinary business conditions such a loan might easily run for nine months.

14. R. F. Marsden, President of the Truesdale Cotton Mill, Birmingham, Ala., has written to you, asking whether he can secure a loan next fall on the cotton in the mill as collateral. Reply that you feel certain that satisfactory arrangements could be made if the cotton were stored in an accredited warehouse, so that you could accept the warehouse receipt as collateral.

Exercise 303

Punctuate and paragraph the following letter, which explains one function of a trust company:

Dear sir as you are one of our clients you are familiar with the reputation of this bank for sound banking and conservative investments you may not however be aware that we have a fully equipped trust department prepared to act in any of the numerous capacities in which the services of trust companies have proved of special value at this time we wish to call your particular attention to the service which this department is prepared to render as trustee under agreement it is natural that one who has accumulated property should desire to superintend or direct its disposition formerly this was done by will now however as the complex lawsof the various states frequently necessitate the payment of double or triple inheritance taxes it is becoming a more and more common practice for a man during his lifetime to administer his own estate so to speak this may be accomplished through the establishment of a trust with respect to either a part or all of one's property it can be accomplished not only with absolute safety to the donor but with entire secrecy as well the terms of the trust being regarded as absolutely confidential furthermore the donor has the satisfaction of disposing of his property during his lifetime in accordance with his desires the life of a trust company unlike that of any individual is of perpetual duration death does not interfere with its management of the trust estate its financial responsibility and the safeguards thrown around trust estates by the state laws insure the safety of a trust fund if you are interested in this subject let us discuss it with you either in person or by correspondence when this bank is named in a trust capacity no charge is made for service or advice in connection with the drafting of the trust instruments yours truly

Before writing the following, re-read The Richards' Baby Stocking Fund,page 337.

1. Suppose that you were a newspaper correspondent in Alaska at the time Richards was killed. For your home paper write an account of the finding of the baby stocking. In what ways would this account differ from a magazine article on the same subject?2. As if you were the United States Commissioner of the Territory of Alaska, write to a Portland bank saying that you are sending the $2,500 to them, and asking them to put the funds in the care of a reliable trust company.3. The Portland bank writes to the Kansas City Trust Company, asking if the latter will accept the trust. Write the letter.4. The Kansas City Trust Company replies that it will accept the trust without remuneration. Write the letter.5. The Portland bank informs the United States Commissioner of the Territory of Alaska of the disposition of the funds. Write the letter.

2. As if you were the United States Commissioner of the Territory of Alaska, write to a Portland bank saying that you are sending the $2,500 to them, and asking them to put the funds in the care of a reliable trust company.

3. The Portland bank writes to the Kansas City Trust Company, asking if the latter will accept the trust. Write the letter.

4. The Kansas City Trust Company replies that it will accept the trust without remuneration. Write the letter.

5. The Portland bank informs the United States Commissioner of the Territory of Alaska of the disposition of the funds. Write the letter.

Exercise 304Topics for Investigation and Discussion

1. The panic of 1907 and some of its lessons.2. Future banking reform.3. Government supervision of banks.4. Unscrupulous banking companies.5. Clearing house certificates.6. Postal savings banks.7. The work of the clearing house.8. The need of banks in a community.9. The development of real estate firms into banks.10. The Owen Glass Currency Bill.

Exercise 305Books that will Suggest Topics for Talks

Crocker, U. H., The Cause of Hard Times.Fonda, Arthur J., Honest Money.Gibbs, H. C., A Bimetallic Primer.McAdams, Graham, An Alphabet in Finance.Newcomb, Simon, The A B C of Finance.Norton, S. F., Ten Men of Money Island, or The Primer of Finance.Reeves, John, The Rothschilds: The Financial Rulers of Nations.White, Horace, Money and Banking.

Exercise 306

Write the following from dictation:

1The Daily Routine of the Clearing House

Each bank sends two clerks to the Clearing House: a delivering clerk and a settling clerk. There are three rows of seats running through the clearing room lengthwise, one in the center and one on each side parallel with it. The settling clerks occupy these seats and each one has a sufficient amount of desk room in front of him to do his work on, his space being separated from his neighbors' by a wire screen. The delivery clerks, with their packages of checks in separate envelopes, stand in the open space in front of the settling clerks. At two minutes before 10 o'clock the manager, whose station is an elevated open space at the extreme end of the room, strikes a bell.The movement has all the precision of a military drill. When the second bell sounds, at exactly 10 o'clock, each delivery clerk takes one step forward, hands the proper package to the settling clerk of the bank next to him, drops the accompanying ticket showing the amount into an aperture like a letter box, and placesbefore the settling clerk his schedule, on which the latter places his initials. Thus the procession moves uninterruptedly until each delivery clerk has presented to each settling clerk the proper package and ticket. Usually this part of the operation is completed in ten minutes. Meanwhile the proof clerk, who occupies a desk near the manager, has entered the claims of each bank under the head "Bank Cr." on a broad sheet of paper.Inasmuch as the amount of each bank's claim against the Clearing House (entered under the head "Banks Cr.") is the sum of all the tickets which its delivery clerk has pushed into the letter boxes of the other banks, it follows that all the tickets of all the banks should equal all the entries under that head. The next step in the operation is for each settling clerk to arrange the amounts of all the tickets in his letter box in a column, add it up, and send the amount to the proof clerk, who transcribes and arranges it according to the bank's number under the head "Banks Dr.," so that the debit of Bank A shall be on the same line with its credit.Then the difference between the two will show how much the bank owes the Clearing House or how much the Clearing House owes the bank. The time occupied by the settling clerks in arranging their tickets and adding up the columns is about half an hour. As fast as these footings are completed, they are sent to the proof clerk, who puts them in the debit column opposite the credits of the banks, respectively. When all are completed, if no error has been made, the footings of the credit and debit columns must be exactly equal and the footings of the two other columns, which show the differences, must be exactly equal. Then these differences are read off slowly and in a distinct tone by the manager, so that each settling clerk can write down the sum that his bank has to pay or to receive. As time is money at the Clearing House, a fine is exacted for every error and every delay in making footings, for every disobedience of the orders of the manager, or for every instance of disorderly conduct.—Horace White:Money and Banking.

The movement has all the precision of a military drill. When the second bell sounds, at exactly 10 o'clock, each delivery clerk takes one step forward, hands the proper package to the settling clerk of the bank next to him, drops the accompanying ticket showing the amount into an aperture like a letter box, and placesbefore the settling clerk his schedule, on which the latter places his initials. Thus the procession moves uninterruptedly until each delivery clerk has presented to each settling clerk the proper package and ticket. Usually this part of the operation is completed in ten minutes. Meanwhile the proof clerk, who occupies a desk near the manager, has entered the claims of each bank under the head "Bank Cr." on a broad sheet of paper.

Inasmuch as the amount of each bank's claim against the Clearing House (entered under the head "Banks Cr.") is the sum of all the tickets which its delivery clerk has pushed into the letter boxes of the other banks, it follows that all the tickets of all the banks should equal all the entries under that head. The next step in the operation is for each settling clerk to arrange the amounts of all the tickets in his letter box in a column, add it up, and send the amount to the proof clerk, who transcribes and arranges it according to the bank's number under the head "Banks Dr.," so that the debit of Bank A shall be on the same line with its credit.

Then the difference between the two will show how much the bank owes the Clearing House or how much the Clearing House owes the bank. The time occupied by the settling clerks in arranging their tickets and adding up the columns is about half an hour. As fast as these footings are completed, they are sent to the proof clerk, who puts them in the debit column opposite the credits of the banks, respectively. When all are completed, if no error has been made, the footings of the credit and debit columns must be exactly equal and the footings of the two other columns, which show the differences, must be exactly equal. Then these differences are read off slowly and in a distinct tone by the manager, so that each settling clerk can write down the sum that his bank has to pay or to receive. As time is money at the Clearing House, a fine is exacted for every error and every delay in making footings, for every disobedience of the orders of the manager, or for every instance of disorderly conduct.—Horace White:Money and Banking.

The Treasury, in connection with its money washing, has asked national banks to exercise more care in sending in money for redemption. Banks frequently put into the same bundle, good notes, bad notes, and notes of different denominations. When they are mixed in this way, it requires a good deal of work toseparate the money. The Treasury thinks that the banks could do this work, so that, when the money reaches Washington, it could easily be separated by packages instead of each package having to be separated first. The Assistant Secretary says he believes that, when he gets the subject worked out in detail, new washed money will be returned to the bank in any denomination desired on the same day that it is received; that money unfit for laundering will be destroyed and new money issued. This expeditious handling of money sent in for redemption cannot, however, be attained, he admits, without the co-operation of the banks. In a short time, he believes, all banks will see that it is to their benefit to do this.

THE CORPORATION

Thestudy that we have thus far made of the various kinds of businesses would be incomplete did we not briefly outline the different types of organization by which modern business is conducted. This willnaturallylead us to a discussion of stocks and bonds, which are of great importance in every big business and of interest to individuals as means of investment. However, as the subjects are probably outside the experience of most students, we shall treat them as simply as possible, letting the chapter stand rather for the information it contains than for its application to the study of English expression.

Business to-day is carried on in three different ways; viz., by individuals, by partnerships, and by corporations. The grocer, the butcher, the baker, or any one man who carries on a business is an example of the first. If, however, the grocer and the butcher, or the grocer and the baker, combine their businesses for the good of both, they form a partnership. When the amount of capital necessary for carrying on the business becomes so large that the money of many people is needed, acorporationis formed. The amount of money which any one individual invests in the company is represented by a certain number of shares of thecapital stockof the company, entitling him to his portion of the dividends, or interest on the money he has invested. These shares of the capital stock are transferable and can be bought and sold like an automobile or a house. Since there is no time limit as to how long a corporation may do business, a change in the ownership of part of the stock, orthe death of a stockholder, is not accompanied by the same result as in a partnership, where the death of one of the partners sometimes breaks up the business. Furthermore, in a partnership each one of the partners is personally liable for any debts made by any of the partners in behalf of the business, whereas the personal possessions of a stockholder in a corporation cannot be held as security for any debts incurred by the corporation. These are two of the more important advantages of corporate organization over partnership.

The Finances of a Corporation

It has been estimated that if one were to count money, dollar by dollar, one dollar every second for eight hours six days a week, it would take him six weeks to count one million dollars, and over one hundred years to count a billion dollars. This may help us to appreciate the sums of money spoken of in the following: In 1914 the market value of the Commonwealth Edison Company of Chicago was over $83,000,000. The valuation placed on the properties of the Chicago Railways Company in 1914 exceeded $79,000,000. The Union Pacific Railroad Company had invested in its properties in 1914 approximately $500,000,000. The capital obligations of the United States Steel Corporation in 1914 were over $1,500,000,000. There are hundreds of such organizations in our country, the investments in which run to and beyond $50,000,000 each. It must be plain that, except in a very few cases, these vast amounts of money do not represent the investment of one, or of a few, but of many persons. In uniting their capital, these persons decrease the cost of making or distributing the product and so increase their profits.

Stocks

When a large company of this kind is organized, a certain amount of money is agreed upon to be the capital of thecompany, and it is divided into small portions, ordinarily $100 each, calledshares. The total of the shares is called theauthorized capital stock. These shares are sold, the purchasers of the shares being calledshareholders, orstockholders,of the company. The number of shares a person holds determines what part of the profits he is entitled to. For example, if a company is organized for 1000 shares of $100 each, or a capital stock of $100,000, and you owned 100 shares, you would be entitled to one-tenth of the divided profits of the company. Such profits of the company, divided proportionately among the stockholders, constitute thedividends.

Often the capital stock is of two kinds,preferredandcommon, as in the case of the Union Pacific R. R., which has $200,000,000 of authorized preferred stock and $296,178,700 of authorized common stock. As the names signify, preferred stock is ordinarily better than common stock, the dividends on preferred stock being paid before any dividends are paid on common stock and usually at a stated rate of interest; as, 4, 5, or 6 per cent. In the case of the Union Pacific, this rate is 4 per cent. If the company earns only enough profits to pay the dividends on the preferred stock, the common gets no dividends. On the other hand, if the profits are enormous, the common occasionally gets more than the preferred.

Par and Market Value

Thepar valueof a stock is the face value of one share of stock, indicated on the face of the certificate. This may be $10 or $50 or $100, whatever the amount agreed upon for one share when the company is organized. The amount most commonly used as par is $100. Themarket valueof the stock, however, need not be this amount, but may be greater or less, dependent on how successful the company is and what rate of dividends it pays. If a company's standing is very good and the dividends are high (over 6 per cent),the stock will probably sell on the market above par. If the company's finances are in a doubtful condition and there are evidences that the company will pay small dividends, if any at all, the market price of the stock will fall below par. For example, in January, 1914, Union Pacific R. R. common stock sold for about $158 per share, because the finances of the company were in good condition and the company had paid 10 per cent dividends steadily each year since July 1, 1907. If, however, any occasion should arise to make the public doubt the payment of future dividends at the same rate, the stock would probably decline. To go to the other extreme, in the same month Wabash R. R. common stock sold as low as $8½ per share, although the par is $100. This was because for some years the company had paid no dividends and was then in the hands of receivers. To take a middle case in the same month and year, Erie R. R. first preferred stock sold at about $45 per share, notwithstanding the fact that since 1907 no dividends had been paid. The reason for this seemingly high price was that the company had for some time been reconstructing its property, had gradually increased its business, had earned a $9,000,000 surplus in 1913, and had a good outlook to a dividend in the near future.

These are not the only influences that affect the price of stocks. The old factor of supply and demand has a great influence on price. If, for example, a financier decides to buy a large "block" of some stock, the market will almost immediately be affected, and that stock will go up. One example will suffice. In 1901 E. H. Harriman set out to buy $155,000,000 worth of Northern Pacific stock in the open market to gain control of the Northern Pacific railroad. Of course, the market felt the demand, and the price of the stock rose from a little above par until it touched $1,000 a share before it started back to normal. When Mr. Harriman unloaded that same stock in 1906, because he failedto gain control, the market went down so considerably that he lost $10,000,000 and almost caused a panic.

Often the stocks of a company sell below par because the stock is watered; that is, the company has issued more stock than there is value invested in the property. Many of our railroads, for example, were built on borrowed money—that is, from the proceeds of the sale of bonds—and, to make the bonds sell more readily, stocks were given away with them. This, of course, increased the capitalization greatly without increasing the value. The temptation in forming new companies, especially in mining schemes and wildcat ventures, is to water the stock heavily by voting a large block of stock gratis to the organizers. Before one invests in any of these companies, he should thoroughly investigate them. Sometimes companies water their stocks when their dividends have become very large and they wish to bring the rate down to that commonly paid. The Wells Fargo Express Company did this in 1910, presenting their stockholders with $16,000,000 worth of new stock without any new investment in the property.

Bonds

Suppose that A owns a house with a store in it, and in the store he carries on a grocery business. Suppose that by enlarging his store and putting in a bigger stock of goods he can make more money. The improvements will cost $1,000, but he hasn't the money. He goes to B to ask B to lend him $1,000 for five years, offering B the house as security. B gives A the $1,000 and in return gets a certain amount of interest each year and A's mortgage note against the property. This means that, if at the end of five years A cannot pay the $1,000, B has the right to sell A's house and collect the money due him.

When a corporation borrows money to extend its properties, plants, or rights, the transaction is really the same,although the form is somewhat different. Just as all the capital stock of a corporation is divided into shares owned by a number of people, so, when the corporation borrows money, the amount borrowed is divided into smaller parts of $500 or $1,000 each, calledbonds, which the corporation sells through its bankers to people who have idle money to invest. Twice each year, as stated in the bond, the corporation pays interest on the borrowed money at the rate, probably, of 4, 4½, 5, or 6 per cent. After a definite number of years, as stated in the bond, the corporation is obliged to pay back the amount of money that it borrowed. This is calledredeemingthe bonds. To show that it intends to pay back the amount borrowed at the end of the time stated, or redeem the bonds when they become due, the corporation puts a mortgage on its real estate, buildings, machinery, and equipment. When the bonds become due—ormature, as it is called—if the corporation does not pay back the amount borrowed, the holders of the bonds may take possession of the company's real estate, buildings, machinery, and equipment on which the company has placed the mortgage and may sell them to recover the money they have loaned. Thus, while the stockholders of a corporation have no assurance that they will ever get their money back or will ever get any interest on it, the holders of carefully selected bonds are reasonably sure of getting a certain amount of interest each year and of getting their money back when the bonds mature. Shares of stock represent the investment made by the stockholders who own the company, whereas bonds represent the investment of those who loan money to the company. We can readily see, then, that the stockholders take the greater risk. For this reason it is expected that stocks should yield a higher profit than bonds, and this is usually the case.

The greater portion of the bonds that are issued by corporations run for long periods—twenty, forty, fifty, andeven one hundred years. At times when money rates are high, corporations that need funds are reluctant to pay a high rate for so many years, and so they issueshort time bondsto run from two to five years, in the hope that at the end of the time money rates will be lower and more favorable to their issuing long time bonds. Many companies, especially industrial corporations and railroads, have issued obligations to pay,notesrunning from six months to five years. They are not usually secured by a mortgage on the property but are merely the company's promise to pay, the interest and the principal taking precedence over the dividends on the preferred and the common stocks.

Corporate Organization

Before a corporation can carry on its business, it must obtain a charter from one of the states of the United States, whose laws it must obey. The laws of some states are more lenient than those of others, allowing the corporations more privileges. New Jersey is thus lenient; consequently we find many large corporations—such as the United States Steel Corporation, the American Sugar Refining Company, and others—organized under the laws of New Jersey. After the charter is granted and the stock bought by the stockholders, the latter have a meeting, at which they elect a small number of men to bedirectors, who, as the name signifies, conduct the business of the company for the stockholders. They choose a president, one or more vice-presidents, a treasurer, a secretary, and any other officers necessary to carry on the business under the control of the directors. The term of office of the directors is usually so fixed that the term of a part of them expires each year, so that each year the stockholders have an annual meeting at which they elect new directors or re-elect the old ones whose term has expired.

The Railroad

Corporations divide themselves into three large groups; viz., railroad companies, public utility corporations, and industrial corporations. Of these, the group composed of the largest and most powerful corporations is the railroad group.

Railroads have two general sources of income, the larger being the revenue received from operating trains, both freight and passenger; and the smaller being the return from investments in other companies, from real estate, and from the rental of lines, terminals, stations, and cars to other railroads. To carry on the second or smaller part of its business, the company needs an organization much like any other business, but to conduct the first part it requires a special organization. This divides itself into four departments, usually with a vice-president at the head of each: (1) the traffic department, (2) the operating department, (3) the finance and accounting department, and (4) the legal department.

It is the duty of the traffic department to get the business for the company and adjust all traffic claims. In short, it does everything to increase the business and the earnings. This department naturally divides into the freight traffic and passenger traffic departments, with a superintendent or manager at the head of each.

After the traffic department has solicited the business for the company, it is the duty of the operating department to render the services required by the traffic department. The work is done by four large divisions: (1) the engineering or construction department, whose duty it is to build the roads over which the company may operate; (2) the maintenance-of-way department, whose duty it is to see that the roadbed and rails are kept in good order and repair; (3) the equipment department, whose duty it is to see that thecompany is supplied with proper locomotives and cars and to see that such equipment is kept in repair; and (4) the transportation department, which has to do with the operating of the trains.

The financial policy of a railroad is usually in charge of one of the vice-presidents, who must be a man of experience in financial matters and who acts with the approval of the directors. The accounting department is more important than may appear at first sight. Railroads are now under the supervision and regulation of the government, and one of the rights that the government has is to examine the books of the company at any time and to require all companies to submit a monthly report to the government.

The legal department of a railroad is especially important for two reasons: (1) In performing its services, the company has business dealings with a large number of persons, and in the adjustment of claims against the railroad, expert legal advice is constantly necessary. (2) The railroad, as stated above, is under the regulation and control of the state and the national governments, and the enforcement of this regulation makes the railroad a party to numerous proceedings in the courts and before the Interstate Commerce Commission. The large railroads operate in from ten to twenty states. It can thus easily be seen that the legal department has a great deal more to do than if the railroad operated under but one political power.

Public Utility Corporations

Public utility corporations supply services without which the people of to-day could not very well live. They are those supplying water, light, heat, power, telephones, local transportation, gas, etc. They may properly be called public necessity corporations. The nature of these businessespractically gives them a monopoly in their locality; this is the reason that they have grown so enormously during the last thirty years. The Commonwealth Edison Company, which supplies a large part of Chicago with light and power, began in 1887 with a capital of $500,000 and in 1914 its capital obligations had a market value of over $83,000,000. The American Telephone and Telegraph Company began in 1885 with $12,000,000 of capital stock and in 1914 had practically $340,000,000. The other public service corporations have kept pace, according to the growth of the locality they serve. In the depression of 1907 this class of corporation kept steadily increasing the volume of its business when all others went back a step. Since these corporations are dependent on the local community for their business, if the community grows the company must grow, and usually faster than the community. For this reason the stocks and bonds of these companies are usually a good investment.

It is a common practice for municipalities to demand a share of the profits of the company, by way of a fixed sum, a certain percentage of the gross profits, or a share of the net profits. For example the city of Chicago receives, from the Commonwealth Edison Company each year 3 per cent of its gross receipts from the sale of current and 10 per cent of its gross receipts from the rental of conduit space, amounting in 1913 to more than $300,000, quite a considerable sum. The Chicago Railways Company and the Chicago City Railway Company, the two large street car companies of Chicago, after deductions for expenses and charges and 5 per cent on the amount invested are made from the gross income, pay to the city 55 per cent of the surplus earnings, keeping for themselves 45 per cent. Whenever these companies pay part of their earnings to the municipality, they are really under municipal supervision, and their books and accounts are open to examinationby the city at any time. These companies are called quasi-municipal corporations.

Industrial Corporations

As the name indicates, industrial corporations are those that carry on our industries. They are by far the largest class of corporations and have among their number some very powerful companies, whose assets run up toward the billions. This class of corporations has not had the gradual, steady growth of the public utility corporations, but in the case of the most successful, the growth has been amazing. The Standard Oil Company for many years prior to its dissolution had paid dividends on its capital stock of about $100,000,000 at the rate of 40 per cent a year. The Steel Corporation is said to have produced a thousand millionaires and is still producing them. This class of corporations has not been so closely under the supervision of the federal and municipal authorities as the railroads and public utility corporations, and their financing has been carried on in a looser fashion than that of the other two classes. For this reason the securities of these corporations are not generally regarded as highly as those of the other two. However, the federal government has taken and is taking steps to regulate these corporations, and this will tend to bring them eventually to the standards of the railroad and public utility corporations.

Exercise 307Oral

Explain carefully:

1. What is a corporation?2. What is a share of stock?3. What is a bond? a security?4. Explain the difference between par and market values.5. Why do stocks and bonds vary in value?6. What is the difference between preferred and common stock?7. What are dividends?8. What is meant by watered stock?9. What are the advantages of a corporation over a partnership?10. The following was copied from a morning paper. Explain it."The Canadian Westinghouse Company, Ltd., declared its regular quarterly dividend of 1½% and an extra dividend of 1% on its stock, both payable Jan. 10."11. Explain the following bond quotations:Municipal BondsSecurityMaturityYield per cent aboutAlbany, Ga., 5'sNov. 1, 19414.75King Co., Wash., 4½'sNov. 1, 19314.50Railroad BondsAtchison, Topeka, & Santa Fé,general mortgage, 4'sOct. 1, 19954.20Louisville and Nashville, unifiedmortgage, 4'sFeb. 1, 19464.35Public Service Corporation BondsNew York Telephone Co., 4'sNov. 1, 19394.75Chicago Railways, first mortgage, 5'sFeb. 1, 19274.9912. Why are the bonds of successful public utility corporations a good investment?13. Which company do you think would grow faster, a light and power company or a gas company? What effect would the growth or the failure to grow have on the price of the stocks of each?14. Should a street car company pay part of its earnings to the city?15. If the population of a city doubled, what effect would there be on the price of public utility stocks?

1. What is a corporation?

2. What is a share of stock?

3. What is a bond? a security?

4. Explain the difference between par and market values.

5. Why do stocks and bonds vary in value?

6. What is the difference between preferred and common stock?

7. What are dividends?

8. What is meant by watered stock?

9. What are the advantages of a corporation over a partnership?

10. The following was copied from a morning paper. Explain it.

"The Canadian Westinghouse Company, Ltd., declared its regular quarterly dividend of 1½% and an extra dividend of 1% on its stock, both payable Jan. 10."

11. Explain the following bond quotations:

Municipal BondsSecurityMaturityYield per cent aboutAlbany, Ga., 5'sNov. 1, 19414.75King Co., Wash., 4½'sNov. 1, 19314.50Railroad BondsAtchison, Topeka, & Santa Fé,general mortgage, 4'sOct. 1, 19954.20Louisville and Nashville, unifiedmortgage, 4'sFeb. 1, 19464.35Public Service Corporation BondsNew York Telephone Co., 4'sNov. 1, 19394.75Chicago Railways, first mortgage, 5'sFeb. 1, 19274.99

Atchison, Topeka, & Santa Fé,general mortgage, 4's

Louisville and Nashville, unifiedmortgage, 4's

12. Why are the bonds of successful public utility corporations a good investment?

13. Which company do you think would grow faster, a light and power company or a gas company? What effect would the growth or the failure to grow have on the price of the stocks of each?

14. Should a street car company pay part of its earnings to the city?

15. If the population of a city doubled, what effect would there be on the price of public utility stocks?

Exercise 308Topics for Investigation and Discussion

1. Harnessing our streams to secure electric power.2. The growth of the Interurban.3. In your own town:a.Have gas rates increased or decreased? Can you explain the change?b.Have electric light rates increased or decreased? Can you explain the change?4. Street railway, electric light, and gas company franchises.5. The earnings of the street car company in your city.6. Municipal ownership of public utility corporations.7. The effect of mergers and consolidations of big corporations.8. The effect of a trust on competition.9. Trusts and prices.10. Government suits against trusts.11. The tariff and the steel industry, the wool industry, and the sugar industry.12. Railroad rate increases.

1. Harnessing our streams to secure electric power.

2. The growth of the Interurban.

3. In your own town:

a.Have gas rates increased or decreased? Can you explain the change?b.Have electric light rates increased or decreased? Can you explain the change?

a.Have gas rates increased or decreased? Can you explain the change?

b.Have electric light rates increased or decreased? Can you explain the change?

4. Street railway, electric light, and gas company franchises.

5. The earnings of the street car company in your city.

6. Municipal ownership of public utility corporations.

7. The effect of mergers and consolidations of big corporations.

8. The effect of a trust on competition.

9. Trusts and prices.

10. Government suits against trusts.

11. The tariff and the steel industry, the wool industry, and the sugar industry.

12. Railroad rate increases.

Exercise 309

Write the following from dictation:

In New London, Connecticut, stands the oldest grist mill in the country. It is a picturesque building, having a water wheel like the one that it originally used when New London was first settled. The town was in the center of an agricultural community, and a mill to grind corn was a need that soon manifested itself to the settlers. Accordingly, in 1650 at a town meeting, six men were chosen to build a mill. John Winthrop and his heirs were granted the right to carry on the grist mill as long as they maintained the building placed in their charge. This is one of the first monopolies recorded in New England history.

The same standards by which a farming or a manufacturing investment may be judged are not applicable to a mining investment. A farmer may earn eight per cent on his capital, and with care his investment may increase in value. A manufacturermay earn eight per cent on his investment, and, if he keeps up his machinery, his business may be as valuable ten years, or even twenty years, hence; but a mine, after each dividend is paid, is that much nearer its end. Now, it is well known among mining men that the average life of a gold or silver mine is under, rather than over, ten years. There are exceptions to this rule, of course, but, granting that the life of a certain gold or silver mine is to be ten years, then, in order to pay back both principal and interest, dividends of at least sixteen per cent should be distributed. Copper mining, of which the statistics have been most accurately kept in New York and Boston, offers many inducements to the investor; but too much care cannot be taken in the matter of selection, for copper stocks, in not a few instances, have been boosted out of all reason. As with gold and silver mines, so it is with copper mines. They have so much ore to begin with, and after each dividend are that much nearer to the day when they will close down. For such mines, provided they have a good lease of life, eight per cent or even ten per cent may be regarded as only moderate returns. These are merely samples of some general principles to be followed.—Roger W. Babson.

Dear Sir:At the close of a year which has presented many perplexing problems, not only to investors and dealers in bonds, but also to borrowing municipalities and corporations, there are several factors in the situation which in our opinion offer strong encouragement to every one in any way interested in bond investments.Of special significance is the marked change in sentiment which has recently taken place. There is every indication that this country enters the new year with an unusually substantial feeling of confidence. While a notable increase in the demand for bonds would undoubtedly bring out a large amount of new financing, on the other hand, there has been an accumulation of funds during the period of depressed markets, and it is generally understood that investment dealers are carrying comparatively small amounts of bonds.January has an almost unbroken record of higher average bond prices than the average prices in December. It is not our intention to predict an advance this January, although there are unquestionably many reasons for anticipating at least a moderate improvement; but, viewing the question in its broader aspects, we find many convincing arguments in favor of the purchase ofbonds at this time. It is recognized that the decline in prices has been due to a variety of causes, which, except in a few individual cases, are not the result of any depreciation in real values. Basic conditions are admittedly sound. We, accordingly, not only recommend the judicious purchase of bonds for the investment of surplus funds, but also suggest consideration of the advisability in some cases of converting short time securities into long time bonds.What conditions could be more favorable from the standpoint of the purchaser of bonds than an extremely low level of prices; a wide-spread belief that fundamental conditions are sound; a general feeling of confidence that the problems which have tended to disturb business during the past year have been, or are being, solved; and a conviction that we are entering upon a period of probable ease in money rates?Very truly yours,

At the close of a year which has presented many perplexing problems, not only to investors and dealers in bonds, but also to borrowing municipalities and corporations, there are several factors in the situation which in our opinion offer strong encouragement to every one in any way interested in bond investments.

Of special significance is the marked change in sentiment which has recently taken place. There is every indication that this country enters the new year with an unusually substantial feeling of confidence. While a notable increase in the demand for bonds would undoubtedly bring out a large amount of new financing, on the other hand, there has been an accumulation of funds during the period of depressed markets, and it is generally understood that investment dealers are carrying comparatively small amounts of bonds.

January has an almost unbroken record of higher average bond prices than the average prices in December. It is not our intention to predict an advance this January, although there are unquestionably many reasons for anticipating at least a moderate improvement; but, viewing the question in its broader aspects, we find many convincing arguments in favor of the purchase ofbonds at this time. It is recognized that the decline in prices has been due to a variety of causes, which, except in a few individual cases, are not the result of any depreciation in real values. Basic conditions are admittedly sound. We, accordingly, not only recommend the judicious purchase of bonds for the investment of surplus funds, but also suggest consideration of the advisability in some cases of converting short time securities into long time bonds.

What conditions could be more favorable from the standpoint of the purchaser of bonds than an extremely low level of prices; a wide-spread belief that fundamental conditions are sound; a general feeling of confidence that the problems which have tended to disturb business during the past year have been, or are being, solved; and a conviction that we are entering upon a period of probable ease in money rates?

Very truly yours,

Numbers refer to pages

Back to Index Next