[John Wiley & Sons, Inc., $3.00]
AT its graduation dinner some twenty years ago, a Harvard law class sang of its future exploits. Each chorus ended, ‘We shall live rejoicing, mortgaging the res.‘ A prophetic sentiment! Probably no greater per annum volume of mortgaging ever gladdened the hearts of lawyers and bankers than occurred during the first fifteen years after that class entered practice. But now comes Dr. Shaffner and points out that frequently, on the evil day of default, mortgages have failed to afford the protection investors reasonably expected and to which they were legally entitled. The high degree of safety once provided by Roman mortgages has been gradually whittled down through the centuries by law and equity. Dr. Shaffner recommends that corporate financing by bond and mortgage be abandoned. Of what future exploit will this year’s law class sing?
In early days the mortgagee (the lender-creditor) was the powerful party whose lawyers drew the indentures and drafted the contracts. When he needed money, the weak mortgagor (the borrower-debtor) signed the paper that was placed before him. To-day, however, the big corporation-mortgagors write the indentures, put in the hedge clauses, and pay the lawyers. No one represents the little investor-mortgagee. As a consequence mortgages (bonds are fractional mortgages) are becoming increasingly complex, difficult for the layman to understand, and are designed to protect the debtor. The trustee, also represented by counsel, thoroughly immunizes itself as against both lender and borrower. The gradual weakening of the lender’s position is a natural result of the law s delay, modern economic and financial development, and business expediency. This historical tendency has been accelerated by recent legislation, state and Federal, which virtually wipes out the safeguards bonds are supposed to possess and particularly those safeguards designed to give bonds a premier position during emergency periods. Now with the threat of inflation, even the safest bonds become less attractive as investment media. Since mortgagee protection depends finally on earning power, the investor might as well at the outset accept an equity security, preferred — if he insists — as to dividends or even assets. This conclusion of Dr. Shaffner is logical. The current trend is toward debt reduction in capital structures.
Besides the weakening mortgage, other pitfalls beset the investor. By various devices, including holding companies, non-voting or proportional-voting or management stock, protective committees, complexity and manipulation, the investor has been effectively relieved of control of his property. Through merchandising competition, trusted advisers have become unreliable. Remember the banks which recommended and sold foreign investments? An over-constant threat to the investor lies in the fluctuating business cycle which is inherent in our present economic system and which promises to increase in violence as we develop further divisions of labor and depend upon lengthened prucesses of production.
In view of these pitfalls there is no bond, stock, or other property which the investor can put away and forget. He must constantly supervise every security he owns. There are safeguards, however, by which he can reduce his risks, and there are helpful measures which investors coöperating can gradually bring about. Dr. Shaffner hopes but rather doubts that what is known as ‘economic planning’ can appreciably modify the fluctuation of the business cycle. Nevertheless, laissez faire is discredited, and something must be tried. Certainly better statistics, better industrial planning, better corporate regulation, better tax methods, unemployment insurance, public works programmes — these offer possibilities of moderating business swings. Among other helpful accomplishments would be uniform corporate accounting, increased publicity of operations, restriction and regulation of holding companies. Federal incorporation of interstate enterprises, and group investing through properly supervised investment, trusts and investment counsel organizations.
The losses of the depression focused attention on the raw deal investors had been receiving. Many states had had Blue Sky laws which gave a little protection to investors, but usually after the horse was stolen. The Federal Securities Act of 1933 covering new issues of securities, and the Securities Exchange Act of 1934 covering chiefly the operation of national stock exchanges, mark an all-time high for protection of the American investor. The government approves no securities, but it does compel timely and complete disclosure of many material facts.
Not alone the legislature, but the judiciary is making a substantial contribution to investment safety. Many corporate managements have accepted the property of the shareholder for use essentially at their own discretion. Having lost control, the shareholder receives little or no information about the operation of his capital. He is virtually in the position of an ignorant and incompetent beneficiary. In cases of this sort the courts show an encouraging inclination to associate responsibility with power. Instead of contemplating the shareholder as employing a manager, the relationship is assuming a fiduciary character in which the manager becomes trustee for the shareholder.
No remedy can serve as a substitute for the necessity of close scrutiny before a contemplated investment his been made, or for continual watchfulness thereafter.
No layman should attempt to handle his investment unaided, any more than he would try to diagnose his own disease if he were ill. Even with the aid of experts, however, the investor must make some study of the subject himself. Dr. Shaffner’s book offers a competent, up-to-date, and interesting approach to the investor’s problem.
A. VERE SHAW