Stock-Watering
the issuance and sale of additional stock without making a corresponding increase in the investment. If the owner of a mine finds that a total investment of $10,000 is bringing him in a profit of forty per cent, or $4,000 a year, it is probable that he can sell a half interest for more than the whole cost. If we concede that individuals should be allowed to own mines, we must concede again that the sale is a legitimate private transaction in which the public has no concern. If, as we may suppose, the mine be in a galena district, it plays so small a part in fixing the price of lead that the public is not interested in the question of who bought the half interest nor how much was paid for it. There are many enterprises of a semi-public concern for the plain reason that these enterprises serve the public and charge the public. Public gas companies, electric light companies, water supply companies, rail-roads, express companies, and street car companies are of this character. There is no question that public service should be paid for by the public. In the case, let us say, of a lighting plant, fairness demands that the price paid for gas should include:
1. Interest on the actual and necessary cost of the plant. 2. The cost of material consumed, coal, etc. 3. The cost of operation, including wages and salaries. 4. Proper charges for superintendence--expert supervision is expensive. 5. The cost of repairs. 6. The annual wear and tear and deterioration. Not infrequently it is found best to throw away antiquated machinery. 7. A reasonable additional profit to induce investors to put in their money.
In case a plant, the shares of which are listed at a total of $20,000, is able to show a large profit of say $5,000 a year over and above all proper costs, the public is likely to demand a reduction in the price of light. A favorite method of forestalling such a demand is the issuance of additional stock. If, for instance, the stock be increased to a par value of $100,000, each of the original owners is entitled to receive four shares in addition to each original share he may hold. This stock he may sell or hold, it matters not which, but the public is told that a $5,000 yearly profit on $100,000 worth of stock is not excessive. The shrewd observer cannot fail to see that the public is called upon to pay profits on watered stock. Put into modern language, a price below the cost of service is confiscation; a price or rate providing profits on watered stock is plunder.
The watering of railroad stocks in particular has been carried to an outrageous extent. Manipulators have gained control of railroads and have put watered stocks into their pockets. In 1905 263,000,000 shares of stock and over $100,000,000,000 of bonds, face value, were sold on the New York stock exchange. On one day, April 30, 1901, at the climax of a period of excitement and speculation, 3,200,000 shares of stock changed hands. It is improbable that anybody can determine the amount of water in the stock of the country. Whenever it is proposed to force companies to base rates and prices on the present value of plants instead of on the inordinate face value of the stock outstanding, the cry is raised that the stock has passed into the hands of thousands of innocent purchasers whose income would be confiscated. In the case of many successful enterprises, the original promoters have sold watered stock to the public, have taken their own money out, and are yet large stockholders. The public pays the bill.
The way in which stock is watered may be illustrated by an announcement made early in 1910 that the Wells-Fargo Express Company had decided to increase its capital stock from $8,000,000 to $24,000,000. The new issue of $16,000,000 was offered to stockholders to whom stock dividends of $300 a share were declared. This action was taken by the directors subject to the stockholders' approval at a meeting held December 22, 1909. The dividend plan gave each stockholder funds for the purchase of two shares of stock at par and $100 in cash for each share he owned.