More Light!--and Power Too

WITH increasing intensity, and particularly during the last two years, there has been a marked tendency toward the growth of great electric light and power systems all over the United States. The number of new small independent plants seems to be keeping pace with the growth of the country; but the overpowering impulse of efficiency and economy is putting an ever-increasing number of the important central power stations, first into closely coördinated tributary systems of their own, and secondly into widespread interconnection one with another. Plainly visible and also down out of sight, a boiling, seething corporate rearrangement is taking place. A quarter, in fact, of the aggregate capitalization of the electric light and power industry was affected one way or the other by this movement during 1925. One reorganization alone involved $200,000,000, three over $125,000,000, and twenty-one were in excess of $25,000,000 of capitalization. So far has the movement progressed at this writing that five of the largest holding companies control 43 per cent of the national central station output.

I

The advantages of holding-company organization have been persistently and elaborately set before the public for a decade. They are substantial and convincing up to a certain point. Mere recapitulation must suffice, particularly to indicate that practically each merit has its attendant defect, by virtue of the abiding motive of self-interest. The distinction between sheer operating functions and those appertaining to finance, as well as the difference between engineering, technical, and business activities, must be continually kept in mind. Types shade into one another. But, by and large, the following are the obviously serviceable attributes: —

Holding companies afford a wide distribution of business risk, although the extraordinary inherent stability of earning power, said to be independent of prosperity or depression, somewhat minimizes the relative importance of this advantage. Secondly, more skillful administration, both on the business and on the technical side, at low cost, through coöperative effort; perhaps best illustrated by the first-class organization of the Electric Bond and Share Company. On the business side, the purchase of supplies at wholesale. Large-scale centralized financing, by volume rather than piecemeal, through this high-powered vehicle of finance — sometimes, as it appears, a bit over-engined. Economies in power production through provision of large central stations, with interconnection for minimizing investment to meet peak load or emergency. Concentrated and more effective public relationships, dealing with regulatory bodies and consumers, publicity flying squadrons, or more competent legal staffs.

Unquestionably, also, as in the formation of the Engineers Public Service Company, there is greater defensive power for resisting the stock-purchasing onslaught of competitors. As the companies stand back to back, perhaps in closed-up, trust formation, like the New England Power Association, there is safety in numbers against attack. And finally it is alleged that subsidiary properties can be rearranged more readily: buying and selling corporations — passing them, that is to say, from hand to hand. A mere statement of these advantages will suffice to call to mind the shadow cast by each. The dean of the industry, Mr. Samuel Insull, defines the holding corporation’s task thus: ‘to strengthen and guide the local companies.’ Guidance raises the question of direction, too — merely another way of stating that every virtue has its attendant vice. And of course one may also register the query in general as to how far many of these advantages are peculiar to the holding corporation, not being attainable through downright merger in single corporate units.

Having viewed the face of the coin, reverse it and give thought to certain defects of the holding corporation, glaringly in evidence at the moment. Herewith are two typical publicutility hierarchies, large and small, illustrative of modernist extension practice in the field of public utilities.

1. Financial interests, Hulswit & Company, Managers, control

2. United Light & Power Company (Md.), owning all stock of

3. United Light & Railways Company (Del.), owning 95 per cent of common stock of

4. Continental Gas & Electric Corporation (Del.), owning majority common and preferred stock of

5. Kansas City Power Securities Corporation (Ill.), owning all (under trust agreement) of

6. Kansas City Power & Light Company (Mo.), owning all common stock of

7. Kansas City Light & Power Company and Edison Electric Light & Power Company (Mo.?)

This group comprises eighteen gas, light, and power companies, and central heating, artificial ice, cold storage, street and interurban railway, and subsidiary merchandising companies, serving a population of 1,725,000 people.

1. North American Light & Power Company (Me.), owning all preferred and common stock of

2. North American Light & Power Corporation (Del.), owning all the common stock of

3. Illinois Traction Company (Me.), owning, directly and indirectly, all common stock of

4. Illinois Power & Light Corporation (Ill.), owning all stock of

5. Kansas Public Service Company (Me.), owning all capital stock of

3. Kansas Power & Light Company (Kas.), controlling

7. Union Power Company (Kas.?), owning stock of the small operating companies about Topeka, Kansas

This is a small company, serving only 300 municipalities, with 285,000 people, for gas and electric light, together with 800 miles of electric railway. There are no gaps in ownership of total capitalization from top to bottom.

In the days before corporate jazz, the Rock Island Railway set-up of 1900, which imposed two holding companies upon the operating property, was regarded as downright scandalous. But that was almost a generation ago. Here we have six piled one on top of another, and the practice is so common as to arouse no gossip whatsoever. It will be noted, furthermore, that these heaped-up concerns are not loosely held by ownership of a bare majority of stock. That feature is a phase of concentration of control. This one, characterized by heaped-up corporations bound together by ownership of all the stock, is distinctively an American development. Nor can the phenomenon be fairly laid upon the doorstep of the industry itself. It is an outcome of our federal form of government, and of the conditions under which these companies, pursuing their ‘tramp and bauble existence,’ — to borrow a phrase from the Supreme Court of Kansas, — are spawned. The keynote is found in the variety of states, indicated in the exhibit, which have a hand in their forth-putting. Thus, as Abraham Lincoln once said, in enumerating the assets of a client of doubtful standing, ‘Last of all, there is in one corner [of the office] a large rat hole which will bear looking into.’ Nonuniformity of state corporation laws, however, is no rat hole. It is as deep as a well and as wide as a church door, and, as experience shows, ‘’t is enough.’

Is n’t it queer how these corporate hierarchies seem to peter out after attainment of a seventh-degree unfolding? What magic is there in that figure seven? We have it in the sevenday week, the ecstasy of the seventh heaven, the healing powers of the seventh son of a seventh son, and the reputed rejuvenation of our bodies every seven years. These even suggest, for the moment, poor mortal man with his existence of threescore years and ten. In the Northeastern Power Company family circle — nor yet by reason of strength, either — is the only case thus far discoverable of an extension of a corporate holding genealogy to fourscore, exceeding the set limit of seven. And thus far this strength gives evidence of being but labor and sorrow. One is inclined to sympathize heartily with Mark Twain on a certain occasion— ‘not a bit superstitious myself, but I always did hate to sleep thirteen in a bed.’

II

Utility managements are less to blame for this overextended situation than are the people of the United States. Corporations are oftentimes compelled by the diversity of state laws to resort to these artificial arrangements — albeit perhaps not without a modicum of quiet satisfaction that our conflicts of laws are so baldly permissive of profitable indirection. Thus many states require that public utilities be conducted by domestic corporations; else they may be denied the enjoyment of such rights as that of eminent domain. Hence the domestic operating concern has to be controlled by a holding corporation chartered elsewhere, in order to couple up these local privileges with others which may alone be attainable by going abroad. A case of Jack Sprat and his wife — ‘and so, betwixt them both, they licked the platter clean!’ The Minneapolis General Electric would forfeit its charter were it to transfer its properties to a foreign corporation. The only thing to do is to keep it alive and hold its stock from elsewhere, catch as catch can. Minnesota also lays a double liability upon stockholders in public utilities. Marketability for Northern States Power stock would be impaired thereby; hence one markets customer stock of a holding corporation, elsewhere chartered without this double liability. Indiana may require a vote of 75 per cent of the stockholders of an Indianapolis public utility in order to validate a mortgage. Utilities Power and Light can perhaps corral only 71.4 per cent of the stock. Off we go to Virginia for a charter, creating an intermediary corporation, which proceeds, not to mortgage the property, but to mortgage its holdings of stock in the corporation which does hold the property.

' Shall we call it whipping the devil round the stump, or is it a case of the House that Jack built, and all that? Still further to build up a record; some domestic corporations have to be kept alive because of bond issues outstanding, perhaps with sinking funds. No accounts save minute books are kept, but they go on like brooks — almost forever. Maine permits resort to steamroller tactics in winding up corporations, allowing condemnation proceedings to compel recalcitrant minorities to fall into line. Under certain conditions a Maine charter might be convenient for a holding company, that it might the more freely traffic in subsidiaries. The New Jersey Board of Utilities, partly as a result of our nonvoting stock campaign in 1926, has recently condemned a voting trust for control of an interstate bus line. Query: Why not, as they do on local buses in Rhode Island, back down a bit over the Massachusetts line, in order to get a good fresh start on a local run to another point in Rhode Island, because, forsooth, a cargo of interstateness is thereby taken on? The similarity of names, where these corporations are driven by pairs, Twenty Mule Team Borax fashion, is still further confusing. Northern States Power Co. of Minn. has another of Wis. close alongside; the Kansas City Power and Light Co. of Mo. is yoked with a corresponding Kansas City Light and Power Co. of Kas. — titles twisted tail-end-to, or perhaps one a Co. and the other a Corp. It is the Middle West Securities Co. one day, and then, presto! it is the Middle West Utilities Co. Only Alice, with adequate legal counsel in Wonderland, could do justice to such a situation. It all seems so witless and tortuous, this conflict of state legislation, over taxes, no-par stock, and every other conceivable issue; and to it there is no end. Rather, we are irresistibly trending to one of two goals: either greater unanimity of state legislation or supersession of state incorporation for interstate business by direct assumption of Federal authority.

The awkward and even deceitful nature of these involved corporate relationships is fully recognized by responsible managements. Several firstclass attempts, in fact, are now under way, aiming at a simplification of such overextension. The outstanding instance, perhaps, is that of Standard Gas and Electric. This attempt at simplification through substitution of direct ownership from a single holding company of the various operating concerns is an outcome of the recent acquisition of the involved public utilities of San Francisco and Pittsburgh. General Gas and Electric has also recently directed its attention toward the acquisition of practically all the securities of a number of subsidiaries, to the end that the top corporation may own the common stock of its operating concerns directly, driving them all abreast, so to speak, without resort to these intermediary holding concerns. And as part of its attempt to unify its financial set-up, Associated Gas and Electric is engaged in a similar praiseworthy endeavor, whatever one may think of the new plan just as a bit of finance.

Holding-company organization is highly provocative of unwarranted concentration of power, well defined by Lyon as ‘controlling not the ownership of the operating concern, but controlling the control of the operating concern.’ First, holding corporation A may control the operating company by ownership of 51 per cent of its capital stock. If, thereupon, corporation B controls corporation A by ownership of a like bare majority of its common shares, the investment necessary to swing the entire enterprise is again practically cut in halves. And so on ad infinitum. This use of the holding corporation differs essentially from the one previously described, wherein the hierarchy is tied together by ownership of practically all of the shares of the subsidiaries all down the line. There is nothing new about the device; but the unprecedented elaboration of it permits the power-magnification process to be run into the ground clear down to bed rock. And then on top of this the differentiation of securities comes into play to accentuate the process. If, as in most utility companies, senior reliance is on either bonds or preferred shares, the bonds never vote and the preferred shares quite often cannot. And a still further development in the last few years — that of the nonvoting classes of stocks — may carry the business well toward infinity. Take the United Light and Railways Company, with three kinds of nonvoting stocks in 1923, an authorized total of $37,500,000. On top of this is a funded debt of $26,000,000. The voting control is vested in $12,500,000 of common stock.

It is probably true in most cases that the controlling common stock of the banking or management firm standing at the head of the utility hierarchies already instanced practically represents no actual investment in first instance. The following table shows the small proportion of capital stock to total system capital obligations for a number of groups.

FISCAL YEAR 1925

Per cent parent com pany capital stcck to total system capital obligations Per cent of gross operating revenue to book value of property
Columbia Gas & Electric 56 22
American Telephone & Telegraph 47 29
Detroit Edison 52 25
Standard Gas & Electric 11.8 14.4
Public Service Co., N. J. 25 22
National Public Service 14 20
General Gas & Electric 21 20
Cities Service Co. 34 24.8
American W ater Works & Electric 12 16

If one were to cut down some of these percentages still further — National Public Service, for instance — by re-

sort to the nonvoting-stock device, an almost unbelievably exaggerated inverted pyramid of control would be disclosed. On top of all this, you may add, if you please, that this infinitesimal fraction of controlling shares at the top may be trusteed as a still further measure of protection against loss of control.

III

A further serious defect of overdeveloped holding-company organization is the temptation afforded to prestidigitation, double-shuffling, hornswoggling, and skullduggery. Sound and defensible management shades off almost imperceptibly under stress of self-interest, given such concentration of control as has just been described, into all sorts of nefarious dealings. Practically all of this lies within the domain of financial activity. It takes its strength from domination through common-stock control of banking houses which may or may not have a sufficient actual investment to hold them to a steady course. Publicutility systems, large and small, are now commonly affiliated with a single banking house. It is rather the thing to do, giving prestige to even the lesser bankers to establish themselves in such positions of responsibility. The open market for competitive financing is, of course, thereby closed, and perhaps in this pioneering stage necessarily so. Even the enjoyment for the nonce of the cash resources of the system might, in a pinch, under nonchalant or irresponsible chaperonage, be right convenient. Such things do happen. Most of this banking service, it goes without saying, is above criticism. Yet a sufficient number of lapses have already occurred to reveal the possibilities of wrongdoing. Probably the most illuminating instance is afforded by the Slaymaker Case, in which $1,136,000 was recovered by shareholders of the Columbus Railway, Power, and Light Company in 1923 from the banking house which had assumed charge of construction work, internal and external financing, management, and allied services. An indication that this is not an issue local to the United States is found in the recent report of the Committee of the British Board of Trade on Amendment of the Companies Acts, in which a glaring defect in the statutes is detected — that there is ‘nothing to prevent a holding company from using the dividends received from profit-making subsidiaries in order to pay a dividend on its own shares without taking into account loss suffered by other subsidiaries. . . . The effect of this may be that the holding company is paying a dividend at a time when the group as a whole is in debit on the year’s working.’

Equally serious, especially in this domain of public utilities, is the disposition of some of these holding companies to adventure far afield in search of profit, even though it carry them well beyond the natural province of utility operations. This is fortunately rare, but it is also sufficiently in evidence to call for reprobation. The Southern Ice and Utilities Company, serving a population of 960,000, may naturally enough slip over from ice into ice cream and creameries; or it may dabble in plain cream, light and heavy. It is less easy to discover the sound basis for an investment of American Water Works and Electric Company in some 26,000 acres of fruit lands in the Sacramento Valley. The transition from artificial to natural gas, and then again from natural gas into petroleum development and refining, is perhaps inevitable. But when the Standard Gas and Electric Company owns a majority of the common stock and some of the preferred shares, and guarantees ‘as to principal, interest, and sinking fund’ $8,300,000 worth of bonds of the Shaffer Oil Company, ‘a complete unit in the oil industry, embracing petroleum production, transportation, refining, distribution, and marketing,’ it becomes a matter of substantial interest, not only to the 110,000 ordinary and customer stockholders, but to a general public scattered over some seventeen states of the Union as well. Yet the Standard Company in its annual report does not give even a résumé of the affairs of this oil concern. Although the statements of all the other subsidiaries are given in full, it merely recites that the oil earnings have increased some 90 per cent during the year. It strikes one as decidedly casual, to say the least. One queries what would be the effect of its inclusion in a consolidated balance sheet, if there were one.

Then there is Cities Service Company. This premier public-utility holding company first dipped into the oil business in 1915. By 1920 from this source flowed 81 per cent of its consolidated gross earnings — less than one fifth of them from public utilities proper. Apparently oil saved the day in that year of trial. Thereafter the oil business dried up relatively; then again it took on new life after 1923; the proportion of consolidated gross earnings thereafter rose until in 1925 it amounted to about 38 per cent of the total for the system, contributing something like the same proportion, apparently, to net income. In this second instance the whole story is set forth frankly in the published reports, so far as gross earnings are concerned; together with plans for further development of ‘large acreage in Louisiana, Texas, Oklahoma, and Montana.’ One stands face to face with a dilemma under such circumstances, which can best be baldly stated in terms of logic. Such a company either is a public utility or is not. If it is, it has no possible right to be engaging on any such scale in one of the most speculative businesses in the United States. If it is not, it has no right to be posing as a public utility, adding 41,000 new stockholders to its list in 1925, most of them customers, to bring the aggregate up to 235,000, one of the very largest for any corporation in the world.

And, oh, the annual reports of these full-flowered interstate super-corporations! Any impression that supermen competent to handle them from the standpoint of intelligibility have thus far been evolved will vanish on slight acquaintance. Try it for yourself — not for the state-limited and state-regulated companies, of course, but for the top holding ones. Many of them pursue a straight course in this regard. Some have recently made encouraging progress — United Gas and Improvement, and Columbia Gas and Electric, for example. But for the bulk of them, the maze at Hampton Court, Einstein’s theory of relativity, current political platforms on Prohibition, are not in it with them for convolution. Tryeven with those holding companies listed on the New York Stock Exchange — to reconcile their statements for exchange consumption with those which are rendered to their public shareholders. Even with the best of intentions the current kaleidoscopic transmogrifications are utterly thwarting to any attempt at comparisons from year to year. Attempting to deal with them reminds one of Lincoln’s characterization of office-seekers: ‘Paton, did you ever try to shovel fleas?’ Reappraisals at cost of reproduction, perhaps on an ever new price footing, still more completely knock the ground from under any such attempt at an historical analysis. Cities Service denies to its 235,000 shareholders in 1925 any information about the earnings of its subsidiaries, confining its consolidated statement of earnings to seven lines of type. Its outline of earnings year by year would be informative, except for the utter absence there and throughout the report of any references to retirement or renewals. They simply do not occur in the document. Some corporations blandly allocate to themselves all earnings of their subsidiaries, figuring results in percentage earned on capital stock, quite irrespective of the minor detail as to whether these earnings have been distributed as dividends or not. Most of these companies afford a consolidated income account and balance sheet, but Northeastern Power, while its securities have been issued in large volume, gives no earnings whatsoever, even in the prospectus — presumably because there were none. Some companies trifle a bit with the shareholders’ patience, as it seems, in respect to the lag between close of the fiscal year and distribution of the statements. And a whole group of companies, in varying proportions combined of investment trusteeship and operating management, — American Super-Power Corporation and Electric Bond and Share, for example, — while vouchsafing a list of their investments, afford no indication whatsoever of the number of shares or of the cost thereof as carried on their books.

Inadequacy and ‘limitless obfuscation ’ — that ’s what a lot of these perpetrations are.

The last serious indictment against the overdeveloped holding corporation in the public-utility field has to do with rate regulation. Under the terrific involution of accounts it may become practically impossible to allocate costs and to determine earnings as related to the investment. The holding company is exposed to the temptation to exploit its subsidiaries, taking its own profit by undue enhancement of the operating expenses of the local concerns. Alpha Company, the operating concern, apparently runs at a loss, while Omega Company, which holds its stock, pays dividends nevertheless. Such things may be accomplished by overloading management expenses. ‘Too many crossed wires’ was the newspaper headline applied to the Massachusetts Public Utilities decision in 1916, when something like $240,000 out of its total expenditures of $318,000 was paid by the North Adams Gas Light Company to the Light, Heat, and Power Corporation of West Virginia for current supplies, construction, and management. How easy for the interstate holding company to dilute earnings in order that they may become digestible in the public view; and how difficult in a massive hierarchy of such holding companies to trace anything like costs in relation to investment back to some solid bench mark. How difficult to pass upon the reasonableness of contracts for use of property or sale of power. This too has recently been brought to the attention of the Massachusetts legislature. Proceedings degenerate under such circumstances into a mere muzz of words.

IV

Public-utility finance under these merger transformations is going through a process of change little comprehended by the general public, to whom appeal must of course be made for the necessary funds attendant upon its growth. The new capital issues by such companies in 1925 alone reached the stupendous total of $1,500,000,000, upward of one third of the total new corporate financing of the country. Of bonds alone, $892,000,000 at par were placed on the market during the twelvemonth. It is peculiarly essential that these changes be clearly understood, because a substantial and ever-increasing part of this new capital is being drawn from the little people, particularly by the sale of customer securities. First one must keep in mind clearly the distinction between the financing of the basic or operating concerns and the issue of securities by the top holding companies. As for the former, the unusual preponderance of funded indebtedness is noteworthy. Among railroads such indebtedness, although it far exceeds that among industrial corporations, finds its equilibrium at about a fifty-fifty figure. For the public utilities the normal minimum of funded indebtedness is about 60 per cent of the total capitalization, with the balance more or less evenly divided between preferred and common shares. The public regulatory commissions are in part responsible for this relatively high proportion of senior issues among the operating companies, assuming perhaps that essential industries, characterized by a fairly stable rate of return independent of cyclical fluctuations, can well support so heavy a burden of fixed charges.

The major reliance of the new holding corporations, on the other hand, is upon the issuance of preferred shares; and it is particularly in reference to these, since they are most widely dispensed in connection with customer-ownership campaigns, that the true situation should be made clear. Such preferred shares ought properly to stand first in their rightful claim to whatever income from investments the holding corporations may be entitled to. If preceded by bonds of the holding company, they ought to be widely distributed only in cases of exceptional soundness of the subsidiary concerns. Such securities are in considerable measure the result of the discovery a dozen years ago of the device of customer ownership for public utilities. These companies, eager to raise funds up to the full measure of the equity in their properties, have since been enabled to dispose of such shares, too often to represent the entire margin between feasible bond issues and the full value of the property. Such financing, through offerings of preferred shares to the general public in small allotments, is made directly, without the intermediation of banking houses. That has the advantage, of course, of eliminating commissions; but it is open to the marked disadvantage that the long-time experience and natural conservatism of the banking fraternity are denied to the consumer. Such preferred shares of holding companies are not comparable as to security with similar shares, either of operating companies or of railroads, for that matter. That, of course, is why they yield so much higher rates of return.

A particular menace lies in the appeal, often under guise of a plea for simplification of an involved corporate structure, for the little holder of bonds of a local operating enterprise to give them up in return for shares of the newly created finance corporation. This danger is contemplated in the preamble to a resolution of the Board of Governors of the Investment Bankers Association of America, May 14, 1925, as follows: ‘It is obvious that, from the standpoint of sound investment, it is inappropriate for many investors to exchange mortgage bonds of operating public-utility properties for the preferred and other stocks of public-utility holding companies.’ For obviously by such exchange the uninitiated investor may have shifted his position from that of a preferred to that of a junior claimant upon earnings. The record of preferred issues of operating companies is on the whole excellent. By and large, however, noncumulative preferred shares in any enterprise are not inaptly described by a leading lawyer as ‘waifs of the stock market.’ They fall between two stools — neither a partner sharing in the increment of future growth nor a true creditor with a prior lien upon earnings and assets. They are exposed to the danger of vanishing returns soon to be set forth in another connection, as well as to the possibility, unless duly safeguarded, of the intrusion of new securities with claims upon earnings prior to their own. Nevertheless, within reasonable limits they have proven themselves a present help in time of trouble — that is to say, a handy means for satisfying the gluttonous appetite of this lusty, growing industry for capital. The upshot of this warning, then, is not that their use should be prohibited; but that their possible precariousness should be safeguarded by some substantial measure of public supervision. This the separate states are incompetent to give. The matter lies entirely beyond the scope of their jurisdiction.

The new holding corporations, topping off these recent consolidations, depend, of course, for their income upon dividends paid by the operating companies. They have little if any real property which can be mortgaged by bond issues directly. What they do, therefore, besides selling preferred shares of stock, is to mortgage the income from their investments in shares of these subsidiaries through the sale of collateral trust bonds, secured by deposit with a trustee of these selfsame shares. Obviously the proportion of bonds, if any, must be less than with their subsidiaries. That is the reason why they depend so much more largely upon raising funds by disposal of their preferred shares, or it may be in part of common shares; although these common shares which spell control are customarily quite closely held. Concerning even the bonds of these top companies, then, few people understand that they are not true bonds in the sense of being mortgages upon property. They are not permissible for investments of savings banks, for example, in a conservative state like Massachusetts, which limits such investments to mortgages upon operating companies with direct liens upon property. Nor is it true — except, as we children used to say, ‘over the left’ — that the bonds of these holding companies constitute the ‘only funded debt of the company,’ if perchance there is an odd hundred million or so of bonds of the subsidiary companies which have a prior claim upon the same income. The legend in capital letters on the prospectus of the Northeastern Power Corporation in 1926, ‘No Funded Debt,’ fails obviously of a statement of the true fact, since every bond outstanding on the subsidiary corporations stands ahead of the holdingcompany issues. The prime test, therefore, of financial stability for these holding corporations, particularly for the preferred shares which come after bond issues, is that such mortgages should not be issued to excess. And yet in some instances the proportion of bonded indebtedness rises as high or higher for such holding companies than it customarily does for operating concerns. It should be said that the present tax policy of the Federal Government puts a premium upon such financing by holding companies, as well as all others, inasmuch as the deduction of interest upon such borrowings before computation of the tax upon net earnings is permissible.

V

These public-utility holding companies thus financed are, as we have already seen, highly provocative of pyramiding of control. In much the same fashion they lend themselves also to magnification of returns in finance. Pyramiding in this second sense consists of ‘making a little capital go a long way.’ It is otherwise defined as ‘ the custom of trading on a thin equity, control resting in the hands of the common stockholders, while the funds are supplied by the sale of preferred stock and bonds.’ By this simple expedient, then, the attenuation of the equity in the property brings about an abnormally accentuated rate of return upon a relatively small part of the total investment. This contingency of magnified earning power operates something like the nozzle on a hose pipe — in speeding up the flow, so to speak. But the financial danger in such a setup, customarily created on the crest of a wave of prosperity, arises from the little appreciated but simple mathematical proposition that declines are accentuated as truly as are increases in revenue. In other words, a minor drop in the income of the operating concern is at once translated into a major one for the holding company.

By way of concrete illustration, assume that a holding corporation owns all the stock of a subsidiary operating company, and that the subsidiary has no preferential securities, bonds or stocks, with a claim to earnings prior to the dividends of the top corporation. A fluctuation of 10 per cent up or down in the earnings of the subsidiary will, in precisely the same degree, affect the income, through dividends, of the holding corporation. But now assume that the subsidiary has already mortgaged 50 per cent of its income, for payment either of interest on bonds or of cumulative dividends upon preferred shares. Then, with a 10-percent fluctuation in earnings of the operating company, the entire change is focused upon only 50 per cent of the capitalization — that is to say, the junior stocks of the subsidiary. In other words, a shrinkage of one tenth in the income of the subsidiary all falls upon its junior dividends, reducing them by one fifth instead of one tenth. And just in proportion as the fixed charges of the subsidiary increase, so in geometric ratio with a drop in income will the income available for dividends to the top company fall. If the prior claim on the subsidiary for bond interest or preferred dividends consumes 80 per cent of its total earnings, a drop of 10 per cent in net will cut the dividends payable to the holding corporation in halves; if the prior claims are 90 per cent, this minor change in operating income will wipe out the income of the top company entirely. And so it goes. In other words, a small normal variation in the rate of return of the operating subsidiary may effect a very large and abnormal change in the rate of return from the junior securities of the holding company. And each corporation piled upon another in series, provided each of them has a certain amount of fixed charges, magnifies its sensitiveness still further. The explanation of resort to this dangerous device is, of course, that fluctuations upward are magnified for the holding corporation in time of prosperity, just as they may move conversely in time of depression. This characteristic of holding-company finance, thussomewhat tediously stated, may readily enough become a root of much evil. It is said from the outset to have been a veritable bogeyman in the estimation of the farsighted founder of the General Electric Company, Mr. Charles A. Coffin.

The application of this principle of sensitive or of vanishing returns, to coin a phrase, for holding corporations is intended to be demonstrated by the table on page 678. It purports to show the relative stability of the financial set-up of a number of different holding companies in face of possibly fluctuating conditions of business from year to year.

Judged by this exhibit alone, these companies range in financial stability from top to bottom. Thus, for example, one of them, Columbia Gas and Electric, even precedes the almost impregnable American Telephone and Telegraph Company, in that it would require a reduction in operating income of 79 per cent to wipe out earnings applicable to dividends for the parent company, and actually 88 per cent reduction in earnings to cut the ground from under interest on its funded indebtedness. Detroit Gas and Electric, notably conservative and efficient in its management, even exceeds American Telephone in this latter regard. At the opposite extreme stands the American Water Works and Electric Company, in which so slight a reduction in operating income as 12 per cent makes dividends of the parent company impossible, 17 per cent cutting off even its interest on holdingcompany bonds. The knife, of course, cuts both ways; and in the present time of prosperity one may figure earnings for the last fiscal year in excess of 20 per cent on par of the common shares of the top company. Yet one cannot resist dubiety as to whether such a public utility engaged in indispensable service for 3,500,000 people, in fourteen states, is on entirely safe ground with so narrow a financial margin. It should be distinctly noted, however, that of course this particular test is but part of the story. One must dig much deeper in order to judge whether even such slight fluctuations as these in each particular case are apt to occur. A company like General Gas and Electric, or Public Service of New Jersey, operating in a dense industrial district, with many first-class stations, may more than counterbalance any defect in its setup by the inherent strength of the several units of which it is constituted. On the other hand, National Public Service Company, by reason of its high proportion of fixed charges (about 70 per cent), made up as it is of less dense traffic, may appear unduly strong in such an array of its rivals. Or, again, one has to consider the proportion of what may be called outside or unrelated income. Both Standard Gas and Electric and Cities Service, as has already been shown, are deeply involved in oil development — something which comports ill, when pushed to such an extreme, with the operation of a public utility. Thus it appears that this showing is by no means conclusive. But there can be little doubt that it is indicative of a dangerous tendency in certain quarters, which should be promptly taken in hand.

Answering this criticism, it is averred that these electrical utilities are inherently immune from the ill of fluctuating earnings which harasses other lines of business, and consequently that they may safely trade upon a much thinner equity. This is probably in part true. Yet their apparent stability is somewhat beclouded by the practice of loading retirement and renewal upon the good years, lessening the burden in the lean ones, thereby smoothing out the curve from year to year. It must be remembered, moreover, that since becoming really full-blown they have not been called upon to weather a really protracted period of frost. Sharp stabs we have had, but no long lingering chills since 1893. The drouth west of the Rockies in 1924, as affecting Pacific Gas and Electric, affords a good local example. Perhaps they may never recur. Who knows? Moreover, one is tempted perhaps to take a chance, so deep-seated has become what Lyon aptly calls ‘the growing habit.’ The worst that most of them have had to endure has been a lessened rate of growth, but always there is growth. Yet an examination of the ratio of net earnings before interest to the average plant, for two typical large utilities, each covering a wide territory (nine states altogether), indicates that earnings for one of them dropped in 1920 by about 50 per cent, as compared with 1918, and for the other dropped in 1921 by 33 per cent, as compared with 1919, only to rebound in 1922 by more than 40 per cent. The company which, disregarding compensation by deferred depreciation and facing the issue manfully, did not experience a real jolt in 1920 is the exception, not the rule. It is important to notice also that these utilities are handicapped on either a rising or a falling industrial cycle through their inability to shade prices to meet competition or to advance prices as an offset for heavy operating costs. They cannot change price policies, forestalling the future, without official administrative approval. The Steel Corporation, in its trade policy adhering to the principle of fixed prices, is yet free in a pinch to deal with extreme situations. This the public utilities may not do; and they must face the future, with whatever chance or change may come, without recourse to this advantage.

FISCAL YEAR 1925

Per cent reduction in operating (after taxes and depreciation, but before interest) necessary to wipe out all earnings of parent company, applicable to dividends income Per cent reduction necessary to wipe out all earnings of parent company, applicable to dividends and interest Per cent of depreciation for year to plant value, end of year
Columbia Gas & Electric 79 88 1.13
American Telephone & Telegraph 76 89 4.6
Detroit Gas & Electric 64 94 3.4
Standard Gas & Electric 56 60 .93
Public Service, N . J. 36 54 1.8
National Public Service 30.5 42.4 1.05
(1920 — 26.8 to June 30) (1926 — 38)
General Gas & Electric 26.4 26 1.4
Cities Service Co. 19 26 no data
American Water Works & Electric 12 17 1.4
Middle West Utilities Co. (no consolidated statements — not calculable)

A widespread criticism of the unwarranted complexity of the financial set-up of these top companies is not without foundation. An exaggerated instance is afforded by the Associated Gas and Electric Company. This concern is not unimportant, serving, as it docs, a population of 1,750,000 in 18 states, the Philippine Islands, and so forth. Its capital structure, however, was recently characterized by Barron’s Weekly, assuredly a competent critic, as ‘a financial nightmare.’ ‘If bond salesmen, like lawyers, had to pass a test of their competence to practise the profession, the problem of the complexities of the capitalization of this company would be too much for all but the most expert. As of December 31, 1925, there were four classes of preferred stock, Class “A” stock, Class “B” stock, and common stock outstanding. In addition there were outstanding interest-learing option warrants with the choice of conversion into several other securities. Several million dollars of convertible debenture certificates were also outstanding, which carried the unusual feature of conversion at the option of the company. Besides this miscellany of securities, there were of course large amounts of bonds, preferred stocks, and minorities common stocks of subsidiaries in the hands of the public. ’ It deserves to be added that plans are under way to straighten out this tangle. It would not be difficult, however, to match it with a number of others. Cities Service Company, with its B and double B preference shares, is another case in point. Such intricacy is always apt in any corporation to result from the gradual accumulation of financial operations through many years. Railroads, for instance, periodically go through a financial housecleaning in order to clear up such an accumulation of odds and ends. But the unusual circumstance is that among the public utilities some of the most complicated structures have been thus deliberately set up from the start. The best among them, however, are evidently working with more or less success toward plainer living and higher thinking in this regard.

VI

No comment upon public-utility finance could omit consideration of the age-old charge of stock-watering — that is to say, of the overissue of securities in proportion to the actual investment. Public interest in this matter usually arises from the misconception that over-capitalization creates in and of itself a higher scale of charges for service. This notion is now completely exploded. It is peculiarly vulnerable as respects these top holding companies, which of course have nothing whatsoever to do with the determination of rates. They simply live off the earnings of subsidiary companies, each of which in turn has its schedule prescribed nowadays under more or less strict state regulation. Under these circumstances there is no possibility of any interrelation between over-capitalization of the holding concern and the rate level for the subsidiary operating company. The industry itself never wearies of demonstrating this point. The experience of three generations demonstrates that the public has a rightful interest in this matter. But the foundation of that interest is in the fact that an over-issue of securities in proportion to the investment tends to dilute credit, to the end that there is an impairment of service rendered. In accordance with this principle, these top holding companies are tied in, then, with the public interest by virtue of the fact that they serve primarily as guide and financial next friend for their subsidiary hosts. If the financial company is weak, the operating concern is bereft of the advantage of this comfort and support. It is in t his sense, then, that an examination of this charge is warranted in the public interest.

The best way to demonstrate the customary technique of the issue of junior securities for no valid consideration is by a concrete case. At Conowingo, Maryland, on the Susquehanna River, a first-class hydroelectric enterprise was projected recently. As it lies in both Maryland and Pennsylvania, the matter came under the jurisdiction of the Federal Power Commission at Washington; and, inasmuch as no administrative control over finance was exercised by Pennsylvania, this Federal administrative body assumed fiscal jurisdiction. The enterprise was to cost $2,220,000. The financial set-up first proposed included the sale of bonds to yield $35,410,000 and of preferred stocks to yield $16,810,000, thus aggregating the entire estimated first cost of the enterprise, $52,220,000. With the project thus wholly paid for, in addition thereto a large number of nopar common shares were to be issued: Class A common shares, which were to ‘sweeten’ the distribution of the first preferred stock, and Class B common shares, carrying sole voting power, which would involve no investment whatsoever. All these common shares, therefore, represented that which in the popular view is held to be an overissue of securities. No valid consideration whatsoever was to be given for them. This set-up — entirely in good form, judged by customary standards — was disallowed by the Commission, however, and an order strictly conformable to the most advanced criteria of public regulation took its place. In this order the bond issue remained as before, to pay for the bulk of the installation. But the amount of the preferred shares was cut down, and it was then required that a par value of $25 per share should be paid in for the common issues to make up the balance of the total cost. The net result was, of course, the same; total receipts from sale of bonds, preferred shares, and common stock all together were to produce the estimated sum of the investment. Should it exceed this figure, additional common shares might be issued at a fixed par price, producing dollar for dollar what they purported to be worth.

Another prime cause of excessive issue of securities in relation to value at the present time is the frantic bidding for independent properties either for competitive and strategic purposes or for the immediate profit to be made by turning them over to some incipient combination. Just to be specific, evidence of such exorbitant prices paid has come to me personally concerning such widely separated places as Pensacola, Florida; Columbia, South Carolina; Derby, Connecticut; Keene, New Hampshire — Vermont, Minnesota, Michigan, and all over. Shares which little more than a year ago sold below par have been picked up for four times that figure. A well-known company with a par capitalization of $1,600,000 refused flatly an offer of $5,000,000 for the property. The recent Pennsylvania Giant Power Board reports a rise of 300 per cent in common stocks of electric holding companies in the five years to 1925. Promoters have not hesitated to overpass the normal limit of a price equal to ten times the net earnings in their zeal for a quick turnover, not troubling to examine too closely into the situation. The promotion of the Northeastern Power Company, above mentioned, is also apparently an instance of such excessive prices paid. Several, in fact, of the good-sized holding companies seem to have been constructed upon such a flimsy footing from the outset. Old-timers in the industry, with a background of long experience, do not hesitate to condemn such practice privately, holding as they do that such excess is bound to bring about a reaction.

The almost irresistible impulse to pad income accounts is one of the evils of permitting capitalization of these interstate public enterprises to go on without let or hindrance. The purpose, of course, is to lay a foundation for further public sale of securities. Customarily, since the common shares represent no value, it makes little difference how many there are. Every effort, therefore, is directed toward making a strong showing of earnings, in order to warrant as large an issue as possible of new preferred stocks or bonds. Promotions and new issues of securities, of course, always take place on the crest of the wave of prosperity, whenever feasible under stimulus of speculative furor. In consequence there is too often an overweening temptation to bank upon future prospects through inadequate provision for depreciation, retirement, and renewals; or to puff up the income account by crediting profits on intercompany transactions within the system; or to reappraise assets on a rising scale of general prices — all such procedure to lead up to a full capitalization of the earning power thus sometimes speciously demonstrated. It is this combination of overissue of securities regardless of plant value, supported primarily by the utmost demonstrable earning power, coupled with the high proportion of this new capitalization consisting of bonds, which tends sometimes to produce a condition of extreme topheaviness or of instability in the case of the weaker concerns. Rarely does it happen that a company like Columbia Gas and Electric, as in 1924, not only currently reduces the par value of its capital stock outstanding, but reënforces itself at the same time by peculiarly heavy reserves for retirement and renewals; or that one like the General Gas and Electric Company pays off all its funded indebtedness, clears up its current obligations, and accumulates a large reserve of unpledged securities in the treasury. Rather is the disposition all the other way, particularly among the companies which make it a practice to pay all or a part of their dividends in stock instead of in money.

An urgent disposition toward overstatement of earnings may even bring about the payment of dividends not warranted by the actual income. A prime service of most of the management corporations within the great systems is to market securities for their operating concerns; and assuredly, by reason of both volume and prestige, they can do this to better advantage than can the small or isolated companies acting alone. But a nice question is raised as to whether profits which flow from such financing by the management companies — either controlling or, it may be, owned by the top holding company, but in either event component parts of the one system — are really distributable profits of the system or not. Middle West Utilities Company (144,000 shareholders) for 1925 reports net income for the year of $5,842,000. Of this sum $3,265,000 is ‘net profit from sale of securities to subsidiary companies and others.’ This leaves a balance of only $2,577,000 of income actually derived from operation of subsidiary public utilities. Assuming that these companies contributed all that they conservatively ought to turn in, their earnings produced only about one half the sum paid out in top company dividends. The other half was the result of a banking or investment business. The disconcerting thing is that that is what most of these holding concerns, in greater or less degree, actually are, although few people fully realize it. The same year witnessed an increase of the authorized capital stock from 900,000 shares to 1,750,000. Of this doubled capitalization, a considerable number of shares became at once available for marketing. Will the profit on the sale of these for the next year be necessary in order to keep up the payment of its three classes of dividends?

Not merely are such profits not certain to be recurrent, but question also arises as to whether they are properly system earnings at all. If not, either one of two things must happen. Rates must go up or dividends will go down; unless, perchance, a steady stream of such additional securities can continually be marketed at a profit to the top company to produce the ever necessary total. Or, if you please, turn to Standard Gas and Electric for 1925. The income statement for the top company — no consolidated statement is available, eliminating duplications — again includes the item of ‘ net profit on securities sold, $1,266,000.’ This is practically equal to the amount carried to surplus for the year, after dividends on the common capital stock. Query once more: Is such an item sufficiently certain to recur year after year to warrant such a policy? And, even if it is, is it certain that all of it is clearly income? Baron Munchausen once performed a bootstrap feat, I think it was, of somewhat the same cast. In his case it seems to have worked successfully. But, as I remember it, he tried it only once.

VII

The Standard Gas and Electric Company is unique in adhering to the businesslike practice of reporting earnings only upon the basis of dividends actually received — a practice unfortunately not too common among some of its compeers. For 1925 this income was publicly reported to amount to 4.23 per cent upon the common stock. Then the annual report goes on: ‘For comparison with similar public-utility companies reporting consolidated earnings, which would include the collectible income, as recited above, and the Company’s interest in the undistributed surplus earnings (after deduction for depreciation and depletion) for the year 1925 of the operated public-utility companies and Shaffer Oil and Refining Company, there was earned $6 a share on the 765,635 shares of common stock outstanding on December 31, 1925.’ Yet examination of the annual statement of the oil company — not published along with the annual accounts of the other subsidiaries in Standard’s report — shows that no dividends have ever been paid on its common stock; that there are arrears of cumulative dividends on the preferred stock amounting to 19 1/4 per cent; although evidence is not lacking of substantial undistributed income. Does it not savor a bit of window dressing for the holding company to include any part of the net earnings of the oil company, to create an impression of enhanced earning power, without a more complete disclosure of the amount of these profits? The 110,000 stockholders of the company have a right to the information.

Whether or not there is to be a progressive over-capitalization of this great business depends in part upon the adequacy of its policy as a whole respecting depreciation and renewal. In paying the present rates of dividend, is it keeping the properties whole? Or is it in part ‘living off its own hump’?

Acute controversy prevails throughout the industry concerning this matter. The dean of the business, veteran president of its strongest company financially, Detroit Edison, is in command of a valiant corporal’s guard in this matter. He holds that in point of fact the whole policy of the industry is at fault. His view is that there is a definite life for each item of property in service; and that there should be set aside as a reserve, charged currently against income, although not entitled to returns upon it, an amount sufficient at the expiration of that ascertainable life to re-create the property without the issuance of any new securities whatsoever.

In opposition to this view, following a far pleasanter path so far as immediate showing of income is concerned, is the theory that for the most part, if plants by liberal maintenance expenditures be kept in prime condition for service, age is of no moment in a property sense, so long as an undiminished ability to serve persists. The practical difference between the two policies is demonstrated by the third column of figures on page 678. Detroit Edison, true to the sound conviction of Alexander Dow, its president, is the only electric utility in the lot which measures up handsomely alongside the American Telephone Company in this regard. The difference for all the others is symptomatic of conditions far and near throughout the industry.

The unanswerable refutation, of course, of this whole line of corporate conduct is that the mere advance in technique, particularly in the electrical industry, will certainly bring it about sometime that these old plants must be junked, and that entirely new ones must be created to take their place. Truly conservative managers would by this time have created funds available to take care of this matter without the necessity of new capital issues. Fairweather artists — in pursuance of the prevailing fashion — will trust to luck to be able to re-create the plant and equipment through a forth-putting of new stocks and bonds, again trusting to luck that the greater efficiency of the new plant will take care of interest and dividends on both the old capitalization and the new one combined.

This whole debate, which is of farreaching public importance, at bottom turns upon which generation, past, present, or future, is to bear the brunt of this consumption of a capital fund. The easy-going policy which provides that the retirement of old plants shall be paid for by the people to be served by the new ones has been aptly transliterated thus by the President of the Detroit Edison Company: —

They [the public] are to pay for the upkeep of the living critter which is serving them and also (for some time at least) for the dead horse. . . . Also I am afraid that there will be a succession of dead horses to pay for, and that some new horses may not go any easier on the feed box than did the old ones. . . . One would think that the gas company, upon shutting down an old plant, forthwith arranged to drown or otherwise summarily dispose of the population which had been served by it-or maybe they died of sorrow of seeing their gas plant, that ancient and holy thing, fade like a dream. . . . That sort of thing sounds too much like the song that these modern youngsters sing to us old folks to explain their purchase of a new automobile before they have paid the last installments on the old one. The new machine is going to run so much cheaper as to allow them to pay the deficit out of the savings in gasoline and rubber. They sing that song to me, those children, and I smile at them, and remember that I was young myself before the days of automobiles. But I don’t encourage them. Sometimes they do get away with it. Mostly they don’t.

When I find myself managing other people’s large investments, I prefer not to take the chance of being able to earn the price of a dead horse out of future economies.

Were the wholesome reasoning thus picturesquely stated to be applied to the overwhelming majority of the public utilities of the United States, except the American Telephone Company, it would make a profound difference. As a concrete illustration, one notes the peremptory call-down to the Boston Edison Company in 1922 as to the inadequacy of its depreciation reserves, on the ground that this policy resulted in an overly high investment as compared with output. This followed from the fact that such retirement and renewal reserves, if created, would not of course lie idle, but would ordinarily be invested in the plant. Without them the company is bound to be continually in the market borrowing money or issuing stock to obtain capital which otherwise should have been saved out of current income. And that fact, of course, uncovers the nigger in the woodpile, the real reason for the indisposition of the industry as a whole to pursue a more conservative path.1

VIII

The impotence of state administrative agencies in face of the growth of these great combinations is indubitable. The chairman of the Massachusetts Public Service Commission recently admitted before the state legislature the inability of his Board to pass upon the details of long-time contracts for interstate transmission of power, due to the fact that one party had been chartered in another state. The chairman of the up-state New York Utilities Commission, in connection with the recent creation of the Northeastern Power Company, likewise reported the impotence of his commission to deal with the terms of sale of the New York properties because the purchaser was chartered, as I recall it, in Delaware. Cases before the Supreme Court recently touch upon this issue. A company produces or buys natural gas in Kansas and pipes it to connections in Missouri, there to dispose of it to utilities engaged in local distribution. The Supreme Court held that neither state had power to regulate the rate. Apparently Congress has but to stretch forth the Federal arm in order to provide a suitable agency for this purpose. Matters of finance and accounting seem likely to play a larger part than those of rates in controversies of this sort. Over these the Federal Power Commission at the present time may take jurisdiction in those cases only where no competent state regulation obtains. But, even then, authority is specifically limited to electrical service generated by water power. It would be a relatively simple matter to enlarge the scope of this administrative body, by conferring plenary jurisdiction over all interstate matters, whether or not there were an existing state agency, and by authorizing it to deal with electric service however generated, by steam as well as by water power.

A concluding word about customer ownership as it has developed within the last decade. Its proportions are indeed prodigious. There are now approximately 1,307,000 customers of public utilities who are shareholders in their respective companies; and it is reported that the sale of securities direct to such customers amounted to $296,000,000 in 1925 — that is to say, about one quarter of the total new financing done by central station companies. Not a few of us from the outset regarded this movement not only as of doubtful value but as embodying elements of grave danger, certainly unless the movement were kept well in hand. At first it appeared as if the prime impetus came from the desire to create a more favorable public environment, to the end, for instance, that these great companies should to a lesser degree be operated in what might be called an enemy country. Unquestionably this phase of the matter under the sane and conservative management of the American Telephone Company has contributed substantially to a public understanding of the main problems confronting concerns of its particular class. Succeeding this argument, successful propaganda — and it too contains an element of truth — ran to the effect that beneficial results would flow from local coöperation and initiative. Housewives, either in the densely populated cities or out in the open, passing the time of day in neighborhood gossip, would perhaps keep a watchful eye upon Tony in the trenches or the lineman up aloft. Perhaps they would even report cases of inefficiency or malingering. But now the real reason has gradually thrust its head above water. It is this: that by this device of customer ownership an almost inexhaustible reservoir of new capital may be tapped; together with the further advantages that this capital may be drawn upon, not indirectly through payment of commissions to bankers, but by direct sales campaigns, through billboards and through the friendly offices (for a commission) of the meter man and the bill collector, as well as of the technical employees.

The menace of a development reaching such proportions as it has within little more than a decade arises from a number of circumstances. The first is that the creation of a great body of customer investors, while it may operate to bring about a more coöperative spirit among the people at large in matters of franchise rate regulation and the like, may conceivably work the other way in case of mismanagement or dereliction. The seriousness of such an occurrence is fully understood by great corporations like American Telephone, which treats the matter from the high standpoint of a trustee upon whom the direst penalties are bound to be visited in case of recreance. But in the electriclight industry, the appetite for new capital and the freedom from banking connections and chaperonage have opened the door on occasion to practices falling far below the level of trusteeship. Dewing, in his Financial Management of Corporations, concludes that the sale prices for such securities run on an average ten points above the market quotations. I personally know of an instance in New England, specifically cited by Dewing also, where farmers were paying seven or eight dollars a share more for such securities than the price which prevailed over the counter not far away. Such things, of course, are the exception. But the greatest danger of all is the chance that some one of these great companies may go on the rocks, a fearsome thing to contemplate under such circumstances.

The president of Electric Bond and Share, an ardent advocate of customer ownership, somewhat enthusiastically describes his clientage in the Lehigh Valley anthracite coal fields as follows:

The list of stockholders looks like the immigration roster at Ellis Island. There are all the Z’s and Y’s and W’s imaginable, Czechoslovaks, Jugoslovaks, Poles, Greeks, Italians, Finns, Huns, and in fact practically every known nationality. We advertise in the newspapers and through circulars printed in practically all of these languages. Our socialist friends in that section are in our list of stockholders. We have something like 70,000 customers and we feel that for a long time to come we can add to our list from 500 to 1000 of these customers per month. They are averaging about three shares each. One of our Czechoslovak employees was the other day heard explaining the advantages of this stock something like this: ‘These are the finest shares in the world — they are not like stocks in mines, patent medicines, or flying machines, which sometimes you see but generally you don’t. But with this stock push the button, and if the light shines you know your money is safe.’

Some of us have known what a run was like on an East Side bank in New York. The malcontents would perhaps number a few thousands. What would happen to one of these companies, with shareholders numbered into the hundred thousands? Both the proportions and the character of this customerownership movement make it clear that questions of public responsibility are involved which call for the same measure of supervision as those which for long we have been accustomed to extend to our savings banks. If for no other reason, the question of submission of these great interstate holding companies to some sort of Federal supervision and control would obtrude itself upon the public mind.

As to recommendations, several specific proposals for dealing with concrete issues are engaging. Disfranchisement of the stock of operating companies deposited as collateral for superposed issues of holding companies might perhaps act as a deterrent to undue corporate involvements; or the requirement by law that all public utilities engaged in interstate commerce should make their annual reports along standardized lines, and particularly that they append thereto a certified copy of their Federal Income Tax returns. But such proposals either require uniform state legislation, which is beyond the range of possibility, or else drive us into the arms of the Federal Government. And in any event such proposals call for precise data, in order that the legislation shall be practicable; and particularly that it shall not, in the endeavor to restrain the ill-intentioned few, operate to discourage the legitimate initiative of the many. About a hundred such things we need information. The light at present falls upon many of them in slanting shafts, due to the natural self-interest of those who now command the situation. The surest source of disinterested illumination would be a comprehensive examination into the whole subject of public utilities, preferably under the authority of the Federal Power Commission or some other special board temporarily created for the purpose. Consequently a wise policy at this juncture would seem to be to refrain—ostentatiously, as it were — from advocacy of any particular programme; but to urge instead that the President recommend to the Congress that provision be made for such an exhaustive inquiry, to be so prosecuted as to command the confidence of the entire country. The result would be a substantial contribution to the body of our information on a subject of profound importance at this time to some millions of the people of the United States.

A searching inquiry by real experts, stripped of all political bias and affording a field day for all comers; an open contest in which the truth, regardless of self-interest, shall prevail — this is the downright need of the moment. And if the objection be advanced that the whole truth might cast a blight upon development here and there, the answer is ready at hand. It was Abraham Lincoln who was wont to emphasize ‘the proneness of prosperity to breed tyrants.’ Something like this seemed recently to be taking place in the domain of corporate management. Fortunately it was possible effectively to nip it in the bud without an iota of disarrangement. Prosperity, not real but specious, may indeed be unduly protracted by artificial means; but in the end the truth is bound to prevail. Nor can the truth work harm to those whose custom it is to work in daylight. It is the wrongdoer alone, delving in darkness and diligent in deviousness, who fears the strong tonic of publicity. And so we close with those prefatory words from Abraham Lincoln’s ‘House Divided’ speech — second in importance only to the Gettysburg Address; ‘If we could first know where we are, and whither we are tending, we could better judge what to do, and how to do it.’

  1. At this point we omit criticism of reproduction cost as the basis for valuation in view of possible reversals of price movements through future years. — THE EDITORS