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 futurerate 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 thecompulsion 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 dividendresources 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.