Tuesday, May 20, 2014

Grosscup on Anti-Trust Laws, VI: National Commission on Corporation Reform


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.

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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