 |
| Cohan as Wallingford |
We continue with publishing Judge Grosscup’s “long lost”
talk on anti-trust laws from October, 1907.
Today we look at some of the abuses that the Progressive movement (the
real one, not the pseudo-socialism that progressivism has become today) tried
to address,
e.g., “false
capitalization.”
Take
that, J. Rufus “Get-Rich-Quick”
Wallingford!
(The first collection of
stories about Wallingford, an “American Business Buccaneer,” appeared in 1907;
Grosscup may even have had this fictional character in mind.)
As Grosscup continued,
National Commission
on Corporation Reform Needed
The detailed form that the work of corporate reconstruction
should take would be best performed, perhaps, by a national commission, and
such a commission would have for precedent the work done by Germany thirty
years ago — a corporate reform that has almost disarmed German Socialism,
except as an agitation, against the unjust land laws of that country. I shall
not go into details now, but will confine myself to those fundamental
principles that in their nature must be at the foundation of the new corporate
structure.
In this country the corporation is a creature of the
executive department of the several states, and issues out of such department
almost as a matter of course. Neither the object for which the corporation is
formed, nor the amount of its capitalization, nor the character of the
securities issued commands any preliminary attention other than such as is
merely perfunctory. Put your nickel in the slot and take out a charter, is the
invitation that the states extend; and in line before the slot machine,
entitled, too, to an equal place in the line, are the corporate projects
conceived to defraud, as well as those that have an honest purpose. Neither is
detained by so much as an inquiry. For indifference such as that I would
substitute at the very threshold of the corporation’s application for existence
an honest, careful inquiry by some tribunal of government — a tribunal that
will act only after it has heard; a hearing in which the public is represented
by a District Attorney on whom is thus devolved the duty not merely of pursuing
the horse after it is stolen, but of seeing to it that the door is locked
before the horse is stolen. And what honest project, I ask, can object to such
an inquiry?
Origin of False
Capitalization
 |
| A fraudulent security: counterfeit money |
The corporation as at present organized by the states has
license to issue all the securities it chooses, and all the kinds of securities
it chooses — securities whose place in the corporate geologic stratification no
ordinary mind can locate; and out of this have come the many instances of
capitalizations that serve no purpose other than to exploit with one hand the
consuming public, while baiting with the other that portion of the public that,
with hard-earned savings, is looking for some opportunity to help itself along
in the race of life. No honest project needs license like that. Let the initial
securities issued be related in a fair business way to the actual values put
in.
Incorporated enterprise, just as private enterprise, should
be given room to grow. A dollar turned into two, ten, twenty, if turned
honestly, wrongs no one. Go forth, increase and multiply, is a command without
which economic progress would not be. But in all this there is no need that the
corporation should initially capitalize a projected success that, if it exists
at all, exists only in the future. Let the securities issued on account of
success be issued only when success is established; and let them be fairly
related, as the enterprise grows, to the increased value of the actual earning
power developed. And I can see no reason why in any honest enterprise the
question whether additional securities shall be issued should not be made the
subject of judicial inquiry.
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| Chicago Elevated Train, "The L" |
But the restriction of capitalization to figures that are
fair will accomplish little if the declaring and paying of unearned dividends
be left to those who are in control of the corporations; for it is not on the
par value of securities, but upon the size and regularity of dividend payments,
that the public makes up its judgment as to values; and it is not on mere
capitalization that the schemer in corporate securities counts, but upon his
ability to make the public believe that the capitalization has an earning
power. Take the well-known case of some of the Chicago traction companies.
Without dividends the securities issued would have remained near zero, and
that, too, irrespective of how small the issue was; but with high dividends,
paid year after year until they were no longer questioned, the securities rose
in the stock markets to par, to double par, and beyond that, irrespective of how
large the issue was. It was not the capitalization, but the high dividends
regularly paid for a long period that did the trick; not real dividends in any
honest application of that word to earnings, but trick dividends — dividends
that stripped the enterprise of its power to keep up with its public duty; that
let the enterprise gradually but surely run down, and that borrowed millions
for dividends on the top of the depletion. Indeed, the whole transaction was a
moral crime — a crime that robbed honest men and women of the accumulations of
a lifetime— a crime that is not fully expiated, either, by arraigning before
the bar of public opinion the men who got away with the plunder. I arraign as
accessory before the fact the people of the great state who, scrupulously
honest in their individual dealings, issued to the projectors of this crime the
ready-made corporate weapon without which the crime could not have been
committed.
(Tomorrow: “Workers Should Be Owners”)
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