Vanishing Landmarks

Severity of punishment in the United States has not yet reached the limit witnessed in France late in the eighteenth century when direct government was carried to its logical extreme. At that time the death penalty was prescribed for those who took food products out of circulation and kept them stored without daily and publicly offering them for sale. Failing to make a true declaration of the amount of goods on hand for eight days, and retaining a larger stock of bread than was necessary for daily wants, were punishable by death. Death also awaited the farmer who did not market his grain weekly and the merchant who failed to keep his shop open for business. We may or may not go to this extreme in America. I do not at the moment recall any punishment at the present time in this country more severe than six months in jail and a fine of five hundred dollars for spitting on the sidewalk.

CHAPTER XVIII

THE INEVITABLE RESULT

As soon as the government changed its policy and denied exceptional rewards for exceptional risks virile Americans refused to assume these risks and internal improvements ceased. A distinction is drawn between pioneer capital and improvement capital.

The effect of this changed attitude toward internal improvement and business generally is exactly what every thoughtful person foresaw. No railroad construction worth mentioning has been begun in the last decade. A few unimportant extensions have been made. About five years ago, John D. Spreckels attempted the construction of a road from San Diego to the Imperial Valley, but a possible six percent return, if it proved a success, and total loss if it failed, did not prove inviting to capital. Facing disaster, he turned it over to one of the old established lines to be builded on the accumulated credit of that system.

The United States was never in such great need of additional transportation as during the last ten years and never before was so little done to supply it. James J. Hill, the great empire builder of the Northwest, used to furnish figures to prove that we must invest two billion dollars new capital per annum to keep pace with the development of the country. It did not require a sage or a seer to discern that if we multiplied production from farm and factory, mill and mine, indefinitely, and failed to provide transportation facilities, we would ultimately reach a time when crops would rot on the ground while those who had grown them would be freezing and coal miners starving. Truly, the American people are “kin-folks.”

For more than three years, liberty hung in the balance simply because the United States, with all her development, had failed to keep her transportation facilities abreast of her production.

We had no merchant marine and during the entire period of the war were dependent largely upon the Allies to transport our troops and our munitions. Adverse marine laws had been passed rendering it impossible to sail an American ship in deep sea transportation except at great loss even if the ship had cost nothing whatever. It became necessary for the government to take possession of the railroads in order to avoid the effect of statutes filled with restrictive and prohibitive provisions. If the railroads had been operated under private ownership as the government is now operating them, every railroad president in the United States would be in the penitentiary. The roads asked an increase of fifteen percent in freight rates, which raised a furore of objection from both shipper and public, and it was denied. Government control and operation resulted in a loss of seventy million dollars the first month. Then both freight and passenger rates were increased twenty-five percent, generally, and in many instances, one hundred percent, and no one murmured. And still the loss continues. It was four hundred million dollars the first year of government operation.

WILL WE EVER BUILD MORE ROADS?

If someone should predict that the last railroad ever to be built in the United States of America, has been built, are you prepared to question its correctness? Will it be necessary to change our policy if more roads are to be builded?

Listen! Will you invest money in railroad construction, knowing that if it succeeds you will be allowed no more than six or eight percent on the money wisely spent, and that if, through misfortune or want of foresight, it fails, you will lose everything? The theory of public utility commissions generally, is that if money is unwisely invested it ought to be lost, and when it is wisely invested, it should earn about six percent.

Suppose you and I install a hydraulic power plant and build our dam according to plans and specifications prepared by a reputable engineer. Then a flood destroys it and demonstrates that the money was unwisely spent and, therefore, according to these commissions, should be lost. If the dam stands the strain, and if it was wisely placed, and if it be economically operated, we will be allowed six percent. Are you ready to join in an enterprise of this character? If you will not, who will?

Suppose a promoter presents to you an engineer’s report made from a preliminary survey of a railroad extending, let us say, from St. Louis, around through Arkansas and Texas to Galveston. I am informed that such a report exists, and that it shows that the road will go through the largest body of uncut white oak in the world, extensive pine forests, tap that belt of zinc ore extending south from Joplin, Missouri, make available large coal measures, iron deposits and agricultural areas now obtainable at less than twenty dollars per acre, but which with proper transportation facilities, and a progressive citizenship, would be worth two hundred dollars per acre. The engineer estimates that the road when completed will earn twenty percent on the cost of construction, and you are asked to buy some of the stock at par. The statutes of most states forbid the sale of even initial stock issues for less than par. How much of this stock will you take? Will your neighbors and friends want some? How much stock in an unbuilt railroad do you think can be sold at any price when good farm lands adjacent can be bought at twenty-five percent of par?

While the wisdom of the modern law-maker prohibits the sale of stock at less than par few if any statutes have been enacted, limiting the price at which bonds may be sold. Suppose you are offered bonds instead of stock. Possibly you can get the bonds at less than par. What will you pay, and how large a block do you desire? Remember, the road has not yet been built. The money must be placed in the bank to be used in construction and you must wait for your interest until the road has earned it. If you will not buy, will your neighbors?

It will help to solve these problems if you recognize early in your calculations that men with much money are not much bigger fools than we with little. If you and I will not invest in railroad construction under present conditions, men of means and experience will not, and the last railroad ever to be built beneath the Stars and Stripes is now in operation unless – unless!

THE OLD WAY

During the half century and more of the unparalleled growth and development of the United States, bonds of unbuilt railroads were offered with fifty percent or more of stock as a bonus. The estimates indicated that the roads would earn not only interest on the bonds but dividends on the stock, and a portion of the unearned increment resulting from development was in this way awarded to those who took the risks. Investors were thus encouraged to expect reasonable returns, plus fifty percent or more of water. The promoters who had paid the expenses of preliminary surveys (often abandoned as worthless) also labored with hopes of great gain if they should discover a meritorious proposition. Those who bought and occupied the lands contiguous to new roads endured some hardships but took no risks and yet expected to add at least four hundred percent of water to their investments. They realized in most instances more than one thousand percent profit on the original cost.

Does anyone doubt that a return to the policy of apportioning unearned increment equitably among those who shall in any way contribute to the general result will revive internal improvements? No one asks, and no one would consent, that all the unearned increment should go to the stockholders of a railroad. Every one favors governmental supervision and control of rates. The point where a few diverge from the mass is in recommending that those whose vision and courage are solely responsible for development, shall have an equitable share of the unearned increment.

Lest I be misunderstood, I desire to state parenthetically that I have never owned a railroad bond or a share of railroad stock; and I have never promoted a railroad or been employed in any capacity by a railroad. Most of what little I now possess, I have made by watering the capitalization of real estate. Occasionally, in times past, when I have known of a railroad about to be constructed, and have recognized an opportunity to make a little money through another man’s vision, on another man’s courage and at the other man’s risk, I have purchased a little contiguous real estate, watered the capitalization from one hundred to one thousand percent, and then insisted that the road should haul me and my produce at cost plus six percent.

PIONEER CAPITAL

Does it occur to you that pioneer capital should be accorded pioneer rewards? Pioneer people make sacrifices, endure hardships, suffer privations; but in America they take no risks and their rewards have been certain and speedy. But their rewards would be neither certain nor speedy did not pioneer capital precede them, blaze the way and assume all risks. During the period when pioneer capital was liberally rewarded, development outstripped the imagination of men. It will do the same again if given like encouragement.

I assume that a return of six percent would be ample on capital, let us say, to construct an additional track for the Pennsylvania Railroad between New York and Philadelphia. That would be improvement capital. Would the same rate be satisfactory for money invested in an unbuilt road into an undeveloped country? To state the case is to state the argument, and yet no railroad commissioner has yet been created with both the wisdom and the courage to stand openly for a distinction between development capital and pioneer capital. Unless returns are permitted large enough to induce a reasonable man to take a risk none will take it, for the unreasonable man has no money to risk.

In a preceding paragraph I referred to the attempt of Mr. Spreckels to build a railroad across, or rather through, and much of the way under, the most barren succession of mountain peaks and defiles I have ever seen. An automobile road has been built at great expense across the mountain. Nine-tenths of the way not a green leaf or living thing – not even a bird or insect – will be seen.

Mr. Spreckels is a very wealthy man. He is supposed to own over fifty-one percent of the gas, electric light, street railways and ferries of San Diego. He does not, however, consume fifty-one percent of the food cooked by the gas he generates; he does not enjoy fifty-one percent of the light that illuminates that beautiful little city; he does not take fifty-one percent of the rides on street car or ferry; and not one percent of the unearned increment, the advance in the value of property occasioned by his public-spirited enterprises, inures to him. Having more money than he can use and more than his children can legitimately spend, why does he risk everything on a railroad involving an aggregate of more than twenty miles of tunnel through solid granite? I will tell you why.

For some reason, let us hope a sufficient reason, the All-wise Father has implanted in certain natures somewhat more than the average vision, somewhat more than the average courage, somewhat more than the average desire to achieve, and He seems to have ordained that these men shall be happy only when achieving. Service expresses the thought admirably when he put into the mouth of the returning Klondiker:

“Yes, there’s gold and it’s haunting and haunting;It lures me on as of old.But it isn’t the gold that I’m wanting,So much as just finding the gold.”

So it has ever been, and thus it is and ever will be. These daring, progressive souls risk their past, their present, their future and the future of their families, upon gigantic propositions, the consummation of which makes the appellation, “I am an American,” the proudest boast of man.

CHAPTER XIX

UNEARNED INCREMENT

Originally the government permitted each to enjoy the natural advance in the value of his holdings – the unearned increment. In recent years it has discriminated and in certain classes of investments has sought to limit rewards to the equivalent of reasonable interest rates.

The first piece of land I ever owned was a half interest in one hundred and sixty acres. My law partner and I got four hundred and eighty dollars together and we bought one hundred and sixty acres at three dollars per acre. We put part of it under plow, rented it and within a few years, sold it. That land is no more productive today than when we sold it, but the rascal who owns it has watered the capitalization until when I buy a pound of butter or a dozen eggs I am helping to pay him a dividend on two hundred and fifty dollars per acre. We watered it a little, ourselves. We sold it, I remember, for twelve dollars and fifty cents an acre. That was the first dollar I had ever received that I had not earned in the hardest way. It was the first dollar of unearned increment that ever came my way. It was the first water, so to speak, I had ever tasted. I liked it.

I remember when John Trumm purchased that land of us. If he had said to me: “The country is new, population sparse, commerce limited; if these conditions change and the land advances in value, to whom will belong the unearned increment?” Very promptly I should have told him it would belong to him. There was not only a competency but a speculation in the purchase of that land.

But suppose he had said to me: “If I do not buy this land, I shall put my money into the Chicago, Milwaukee & St. Paul Railroad that is now building through the county. The country is new, the population sparse and commerce limited. If these conditions change and the railroad advances in value, to whom will belong the unearned increment?” In my innocence, I should have told him it would belong to him. I might have warned him that if it resulted like the first three attempts to build a railroad across Iowa, he would lose every dollar he invested, but if the time had then arrived, and if the road was built economically and operated efficiently, and did prove a success, it doubtless would advance in value and the unearned increment would belong to those who had shown great vision, taken great risk and exercised great skill.

SOME CONCRETE CASES

I recall a man who purchased in an early day large bodies of Iowa land at from three to five dollars per acre. His rentals must have equalled twenty percent per annum on his investment. Then he watered the capitalization and sold these lands at seventy-five dollars per acre. They are now worth over two hundred dollars per acre. But, even at seventy-five dollars, they made him a millionaire, financially. Then he assailed the railroads for watering their capitalization, though money invested in a railroad never yielded a quarter as large returns as his land investments netted. His opposition to railroads, however, made him a millionaire, politically.

Some years ago a man asked me to join him and some friends in promoting a railroad to the coal fields of Alaska. I asked him who owned the coal and was told that anyone could have all he cared to buy at a nominal price. I called attention to a statute that forbade the same men owning both the railroad and the coal. Then I proposed that I take the coal and let him and his friends build the railroad. If they succeeded, I would then go to the Interstate Commerce Commission and get a rate that would give them six percent on their investment and I would take all the profit. I reminded him that the public thought six percent was enough for money invested in railroads. The road has never been built.

I met a friend not long ago who, in explaining that the world had been good to him, told me that some years before he had bought a large body of badly located but excellent timber back in the mountains of Washington, at fifteen cents per thousand on the stump. Then a railroad was built up to his holdings. That was some years ago and during the period of national development. When the road was completed, he went to the Interstate Commerce Commission and got a rate so that he was then selling his timber, which cost him fifteen cents per thousand, for five dollars per thousand, while those who builded the road are presumably getting six or eight percent on their investment and will until the timber is exhausted, when their road will be worthless. My friend is not a reactionary but is far-sighted. I think he said he studied finance from the standpoint of a farmer.

A few years ago, at a Chamber of Commerce dinner in New York, Myron K. Jessup asked me if I knew that he was once president of a railroad in Iowa. The road extended from Dubuque to Farley. I asked him if he remembered when an engineer by the name of Smith made a preliminary survey from Farley to Sioux City, and reported that there was nothing west of Iowa Falls worth building a railroad into. “Remember it!” said he. “He made that report to me.”

Think of it. A man living and in good health in 1906 who was old enough to be the president of a railroad at a time when two-thirds of the north half of Iowa was considered not worth developing. Ultimately the road was constructed and I happened to be at Storm Lake when the last spike was driven connecting the two ends of the road. This was in 1870. That whole stretch of country could have been bought at that time at an average of less than five dollars per acre. I remember riding forty miles without seeing a house. The lands I saw that day could not have been sold for two dollars and are now worth two hundred dollars per acre.

These lands were worthless without the railroad and the railroad relatively worthless without the lands. The lands, exclusive of improvements, have paid in rentals more than twenty percent on their cost and their present value is ninety-nine-one-hundredths water. No money invested in railroads or any other industry ever yielded returns comparable with that.

The wealth of the United States, estimated at two hundred and fifty billion dollars, is probably ninety percent water. Farm lands, timber lands, mineral lands, oil lands, town lots, originally cost very little. Deducting improvements, interest and taxes from rents and returns already received, plus the market value, and the difference is the unearned increment or the water that has been added to the original capitalization.

Suppose, if you please, we are just opening a new country. What policy would you recommend? Would you expect each one to attempt everything? Or would you encourage a division of labor and enterprise? I fancy we would follow the policy the Fathers adopted. We would encourage the improvements of lands, the construction of transportation facilities, the building of mills and factories, of stores and banks, the opening of mines and the development of water power, and then we would tacitly agree that whoever contributed in any manner to the common good should share equitably in the resultant unearned increment.

CHAPTER XX

BUSINESS PHILOSOPHIES

This is a preliminary chapter intended to show that management is the most essential factor in every business proposition. Several illustrations are given, and some advice offered.

Before discussing government construction, ownership and operation of railroads, and other so-called public utilities, I want to call attention to some well-known but seldom recognized principles.

All business stands on three legs. No business can stand on two legs. Notwithstanding the persistent nonsense that has emanated from press and platform, from pulpit and professor’s chair, by thoughtless politician and thoughtful demagogue, capital and labor, unaided, have never accomplished anything and never will. But management, plus capital, plus labor, have done wonders and still greater achievements await the cooperation of this irresistible trinity.

Some have tried to make it appear that the public constitutes a fourth leg. While the public has rights, and affords markets, business succeeds only when the public does not interfere.

Take the case of the farmer. His lands, his tools, his teams and other livestock, constitute his capital. He performs the labor, furnishes the management, and all goes well. Occasionally a farmer prospers when he furnishes only capital and management, notwithstanding Benjamin Franklin’s proverb: “He who on a farm would thrive, must either hold the plow or drive.” The one absolutely indispensable element of success in farming is management. No man ever prospered on a farm simply because he worked. He must wisely manage if he lifts the mortgage. When the farmer’s management fails, the sheriff becomes his land agent, and it matters not how productive his land, or how willing his team, or how fruitful his flock or how hard he works.

You never knew a merchant to fail except when his management buckled. You may have thought some failures were due to want of capital; but even in these instances management was solely at fault, for it attempted too much with its available capital. Barring accidental and incidental fortune, good or ill, management or the want of it is the prime factor in every success and in every failure.

The president of a certain Chicago federation of labor, after listening to this thought, brought a party of friends to my platform and in the course of a brief visit said: “They have talked to us about capital and labor, capital and labor, nothing but capital and labor. We knew there was another guy in there but we couldn’t find him.” Then he added: “And you have got to pay that guy, too.”

ILLUSTRATIVE INSTANCES

Some years ago and during the period of evolution in harvest machinery, Marsh Brothers put upon the market what was known as the Marsh Harvester. It was the first radical improvement upon the old self-rake. Two men rode upon the machine and bound the grain as it was cut. For some reason, perhaps disagreement among the interested parties, the concern was reorganized into three independent companies and certain territory was allotted to each. A local preacher by the name of Gammon took one allotment, associated with him William Deering, and the largest manufacturing plant then in the world was built where nothing had stood before. The other two concerns took equally favorable territory, operated under the same patents, obtained their capital in the same market, hired labor at the same wage, and utterly failed. Five years thereafter nothing remained except court records to show they had ever existed.

Did capital build the Deering plant? It did not. Did labor do it? By no manner of means. The germ of management in the brain cells of William Deering, which no crucible would disclose and no scalpel reveal, was wholly and alone responsible. Do you suggest that able subordinates and efficient labor were in part responsible? My answer is that William Deering was wholly responsible for having able subordinates and efficient labor. Andrew Carnegie said to me: “I have never been able to discover wherein I have been more clever than others except in selecting men cleverer than I.” That is the acme of clever management, and affords the only certainty of success.

During a congressional investigation of the meat industry the president of one of the “big five” packing houses appeared, and in the course of his examination testified that while holding a position of considerable responsibility to which he had been gradually advanced, he was asked to organize a company to take over a certain concern, the stock of which was selling at about ten dollars per share. The necessary capital was tendered and he was offered a salary of one hundred and fifty thousand dollars per year, quite a large block of stock gratis and an option on thirty-five thousand shares at ten dollars per share, which he subsequently exercised. When asked if he thought his salary was unreasonably large, he called attention to the fact that within ten years his company had become one of the five largest in the world and that its stock had advanced from ten dollars per share to par. Thereupon the chairman of the committee remarked that while he was opposed to large salaries, he thought that one hundred and fifty thousand dollars per annum was not excessive for this particular witness. Did capital accomplish that? Did labor? No, management did it.