THE LIBRARY
OF
THE UNIVERSITY
OF CALIFORNIA
LOS ANGELES
ACO I 268
THE GREAT COLLAPSE
HIGHER FARES
OR
PUBLIC OWNERSHIP
BY
LOUIS WALDMAN
f
THE GREAT COLLAPSE
Higher Fares
OR
Public Ownership
BY
LOUIS WALDMAN
Introduction by
SCOTT NEARING
BONI AND LiyERIGHT
PUBLISHERS °^^»2o NEW YORK
Copyright, 1919, by
Louis Waldmax
Prtnted in the United States of America
t HE
'Co
My Brother, Morris Waldman
19: ^o
PREFACE
THE general chaotic condition of our trans-
portation facilities and the threatened and
accomplished bankruptcies have convinced the
writer of the supreme need for a popular explana-
tion of the whole problem of private ownership
and management of public utilities. The per-
sistent campaign of the traction trust for an in-
crease in fares, not only in New York but in al-
most every large city in the country, has been
calculated to convey the impression that the rail-
road companies are great public benefactors im-
posed upon by an ungrateful public.
A concerted effort is being made, in many cases
successfully, to hold up the public for more loot.
In this city, although some ground has already
been lost by the extra charge for transfers, the
people are still holding out against further en-
croachment by the corporations.
To strengthen the hand of the people in their
fight, to equip them with arguments, facts and
general knowledge of the situation, is the purpose
of this book.
Although written with special reference to New
York it is nevertheless of general interest because
the essential features of the railroad problem in this
5
6 PREFACE
city are the same as those in most of the cities in
the country. Moreover, the methods the corpora-
tions pursue, the modes of business organization,
the general laws of development of the traction
system in this city partake of the general character
of modern large industry. The suggestions for
legislative relief here made are, with slight varia-
tions, applicable to the national railroads as well
as to most of the other socially necessary in-
dustries.
Having in mind the difficulties the average per-
son has in understanding technical business terms,
such as amortization, common stock, preferred
stock, bonds, corporations, leases, operating agree-
ments and holding companies, it has been deemed
advisable to devote the first few chapters to an
explanation of the meaning of these terms and of
the modern instruments of business organization.
Once the reader has secured a clear knowledge
of these, he will have no difficulty in following the
facts related in the subsequent chapters.
This book will have achieved its purpose if it
succeeds in revealing the obscure operations of the
traction trust and throws some light on the per-
plexing problems which are pressing hard for im-
mediate solution.
PREFACE 7
Armed with the knowledge of the methods the
capitalists employ, the reader will be able to judge
for himself whether the claims made by the de-
fenders of the present order of private ownership
of social needs are correct, or whether the claims
of its assailants, the proponents of the new system,
the system of social ownership and democratic
management of industry, are correct.
The traction problem in New York presents
amazing incongruities. Busy trains, crowded
cars, comparatively short trips, and yet the com-
panies complain and show figures proving that they
cannot successfully operate on a five cent fare!
The following study exposes their deceptive and
vicious practices and shows their "proof" fal-
lacious. It clearly demonstrates the financial pos-
sibilities of operating the lines successfully on even
less than a five cent fare.
The circumstances of the recent bankruptcies
are given at the very outset, in order to enable the
reader to see for himself the extent to which the
lords of high finance are permitted to go under
their own capitalist-made laws to cajole the public
into doing their bidding.
Many public documents and official reports
have been issued, containing all the facts of the
8 PREFACE
case, but owing to the bulk and dry nature of
these reports the facts have escaped the notice of
the public. The story stating the plain facts in
plain language has not yet been written. As far
as the writer knows this is the first attempt.
While it is undoubtedly true that private owner-
ship and management of public utilities is the
source of the existing inconveniences, high rates,
and general chaos, it is not sufficiently convincing
merely to say so ; such conclusion must be backed
by showing specifically where this private owner-
ship is responsible for these evils.
And even this is not sufficient. It is necessary
to point the way out of the difficulties. General
proposals, such as "public ownership is the
remedy," may have been well enough when it
was confined to the domain of propaganda, but
not when it enters the realm of practical legis-
lation. The time has arrived when it is essential
that we get a clear idea of what our proposals
really mean.
Only by educating people to the real meaning
of public ownership can there be created an en-
lightened public opinion to resist the enactment of
sham reform measures, parading under the popular
name of public ownership. The various phases of
PREFACE 9
public ownership are discussed in the last few
chapters. It should be borne in mind, however,
that the suggestions there made are not offered as
ultimate solutions, but as steps to secure immediate
relief while the present system of private owner-
ship still predominates.
In publishing this little volume, the writer is
indebted to Miss Sylvia Miller and Gertrude
Weil Klein for their kind assistance in preparing
the manuscript, and to his friend William Morris
Feigenbaum for his kind assistance and valuable
suggestions.
L. W.
INTRODUCTION
THE economic history of the United States is
wonderfully enriched by the records of the
street-railway organization. Capitalism, at its
best and at its worst, is mirrored in the transactions
that have turned hundreds of millions in city
franchise values over to a clique of private ex-
ploiters, who have made it a point to use the ad-
vantage of their monopolistic position to fill their
own pockets. Through the whole story, there is
no known instance where the street railways, un-
der private management, have been operated for
the purpose of furnishing transportation. Instead,
transportation was furnished as a means of making
money. Profit — not service — is the aim of this,
as it is the aim of every other part of the capital-
istic organization of our economic life.
The tale is simple, consecutive and dramatic.
The capitalists came; they saw; they appropri-
ated. Thereafter they reaped millions in profits.
As the cities grew, and it became impossible
for people to walk or drive to their work, their
trade or their pleasure, a need arose for some
means of quick, dependable, cheap transporta-
tion. The streets were there — graded and paved.
11
12 INTRODUCTION
Plainly, those who could get the right to the use
of these streets, for the transportation purposes,
had a source of immense income value.
Promoters recognized the value of these fran-
chises. Office-holders, as the trustees of the public
rights had it in their power to dispose of them —
almost as they chose, until the immensity of the
issues at stake were called to public attention.
The result was easily foreseen. The politicians
sold, the financiers bought. There ensued that
disgraceful period of corruption, during the forty
years following the Civil War, that has made the
municipal government of the United States a by-
word among students of public affairs in all parts
of the world.
The financiers, once in possession of the fran-
chises, manipulated, leased, rented, consolidated,
merged, combined. Watered stocks flooded the
markets. Preposterous contracts were made.
Millions in social values were pocketed by men
who never turned a hand to render a public service.
These financial transactions, and these contracts
form the basis for the demands that the street-
railway interests are at present making upon the
American public.
For years the people have been paying huge
INTRODUCTION 1 3
returns on stolen, inflated values. Now costs are
rising. It is becoming difficult or impossible for
the companies to live up to the robber agreements
planned and executed during the past fifty years.
So the people are asked to pay again.
No one has stated that passengers cannot be
carried at the present rate of fare. The Cleveland
experiment has amply proved the contrary. It is
contended that at the present rate of fare, vested
interests in stolen property cannot be compensated
at the rates agreed upon among the original
thieves.
The following pages tell this story for New
York, a story that every New Yorker must know
if he expects to deal intelligently with the traction
controversy during the next few months. The his-
tory of New York traction is typical — therefore
it is doubly important. It is a symptom — pointing,
inexorably to the disease.
The story of the street-railway debauchery,
told here for New York alone, has been repeated
with sickening uniformity in one American city
after another. The amounts involved in New
York are larger. The principle everywhere is
the same.
The experience which the people of New York
14 INTRODUCTION
and other American cities have had with their
street railways is broad enough and bitter enough
to convince even the most skeptical that the only
safe place for public property is in public hands.
Private ownership of public utilities means private
profits from public sources. The people must
own if they are to rule.
Scott Nearing.
CONTENTS
PAGE
Preface 5
Introduction II
CHAPTERS
I. The Collapse 17
II. The Corporation — As Instrument of Busi-
ness Organization and Concealer of
Profits 29
III. The Combination 46
IV. The Holy Alliance 53
V. The Lease 63
VI. The Holding Company 73
VII. Franchises — How They are Obtained. ... 81
VIII. Stealing the "Underground Hole" — Sub-
way Contracts of 1 900- 1 902 99
IX. The Notorious Partnership — Subway Con-
tracts of 1913 Ill
X. "Dead Capital" Earning Money ... . 125
XI. Punishing the Public for Its Tolerance —
Amortization the Means 135
XII. The Bankruptcy of Regulation 152
XIII. Municipal Ownership We Do Not Want. 166
XIV. Public Ownership and Finance 1 85
XV. Public Ownership and Administration... 197
XVI. Public Ownership and The Workers .... 205
XVII. Public Ownership and Socialism 209
15
Chapter I
THE COLLAPSE
THE Brooklyn Rapid Transit System offi-
cially collapsed on December 31, 1918.
From the standpoint of service there had been
nothing to collapse. Its greatest efforts had been
in the direction of extracting nickels from the
people's pockets to the extent of almost $30,-
000,000 annually.
To the traveling public the B. R. T. has be-
come a veritable torture. It is a common jest that
the B. R. T. is the railroad that makes walking a
pleasure. It is as safe to travel on a B. R. T.
train as it is to be on a ship sailing in mined waters.
Of late, accidents on this system have been a
common occurrence.
The bankruptcy of this company, therefore,
will not be mourned by many. The people see
in it a hope for relief. Perhaps, at last, public
officials will bestir themselves to solve the problem.
"Judge Julius M. Mayer of the United States
District Court," said Timothy S. Williams, presi-
dent of the B. R. T., on January 1 , 1919, "to-day
made an order appointing ex-Secretary of War
17
18 THE GREAT COLLAPSE
Lindley M. Garrison receiver of the Brooklyn
Rapid Transit Railroad Company, the New York
Municipal Railroad Corporation, and the New
York Consolidated Railroad Corporation, these
two being subsidiaries of the Brooklyn Rapid
Transit Company. The order was made upon
the application of the Westinghouse Electric
Manufacturing Company, a creditor, for material
furnished. The companies did not oppose the
action, for they felt that they mould he subserved
by a temporary receivership*
"The immediate requirements were meeting,
January 1st, obligations for about $2,000,000,
and this could have been obtained * but to com-
plete the construction and equipment work now
under contract and to provide for additional ex-
penditures for similar purposes during the coming
year, will require the raising of many millions
more, and the general situation affecting street
railroads, with their stationary fares and rising
costs, had injured their credit and made impos-
sible up to the present time provision for the in-
vestment of fresh capital."
Col. Williams goes on to state that "the effort
on the part of the company to restore rates of
* Italics are mine.
THE GREAT COLLAPSE 19
fares authorized by their franchises or to get the
right to charge fares sufficient to meet the costs of
service, has thus far failed."
Three things are clear from this statement.
First — The company, for the B. R. T. is real-
ly only one company, contends that a five-cent
fare, which it had agreed to charge, is no longer
"sufficient to meet the costs of service," and that
all its effort "to get the right to charge" a seven-
cent fare "has thus far failed."
Second — That the company did not have to go
into bankruptcy at this time. It could have met
its obligations to the Westinghouse Electric Manu-
facturing Company, but chose this course because
of its apparent inability to raise money for prob-
able needs in the future. It "felt" that its interest
"would be subserved by a temporary receiver-
ship."
Third — That President Williams did not op-
pose the application of the creditor company. On
the contrary, he joined in the petition of the plain-
tiff company that the Federal Court take over the
property for the protection of the creditors, bond-
holders and stockholders.
Professor Gerstenberg of New York Univer-
sity says that a receiver is supposed to be "an
20 THE GREAT COLLAPSE
impartial person* appointed by an equity court to
hold and administer any property which is the
subject of litigation. "f
Travis H. Whitney, a former Public Service
Commissioner, was quoted in the New York Times
of January 1, 1919 as having said that Mr. Gar-
rison was named receiver at the suggestion of
George D. Yoemans, counsel of the B. R. T.
Moreover, only one week prior to his appointment,
Mr. Garrison was selected by the company as its
representative on an arbitration committee to de-
cide whether the large awards likely to grow out
of the terrible Malbone Street accident should be
charged against operating expenses.
Obviously Mr. Garrison does not exactly meet
the test of Professor Gerstenberg's definition. He
is an acknowledged friend of the Brooklyn Rapid
Transit Company.
All circumstances seem to indicate that this
receivership was staged for the benefit of a public
unwilling to grant increased fares to the traction
companies of the city.
On the 2nd day of January, 1919, taking ad-
vantage of the excitement caused by the collapse
* Italics are mine.
f Modern Business, page 164.
THE GREAT COLLAPSE 21
of the Brooklyn Rapid Transit System, Theodore
P. Shonts, president of the Interborough Rapid
Transit Company, sent a letter to the Public Ser-
vice Commission and the Board of Estimate and
Apportionment renewing his former application for
permission to charge higher fares. He did better
than his sister companies, requesting an eight-cent
fare for his system. It was, of course, the psycho-
logical moment to insist that "the city can gain
nothing by starving the Interborough into bank-
ruptcy."*
The New York Railways Company, a street
surface railway corporation, holding the club of
bankruptcy over a frightened public, came with a
like request. In a word, all the important traction
systems of New York received an irresistable im-
petus in their demand for increased fares. A sys-
tematic campaign has been launched in the press.
The statements of the companies, interspersed
with spicy and friendly journalistic arguments,
are published on the front pages, f
The reactionary section of the press, true to its
mission, has taken up the fight on behalf of the
*N. Y. Times, January 1st, 1919.
t Since this chapter was written, the New York Rail-
ways Company has been placed in the hands of a
receiver, Mr. Job E. Hedges.
22 THE GREAT COLLAPSE
corporations with great zeal. It employs the usual
tactics of appealing to the people's good nature
and extreme sense of fairness. It understands
how the plain people abhor driving anyone to
ruin. Thus, the New York Times of January 3,
1919, in an editorial entitled "77ie City's Re-
sponsibility," said:
"The remedy of increased fares which has
averted bankruptcies in so many other cities is the
one indicated here."
In a long editorial protesting innocence of any
unsound financial dealings on the part of the com-
panies, and bewailing the "loss and ruin to the
unfortunate investors," the New York Sun of Jan-
uary 3, 1919, said:
"Now there is only one way out of affording
relief to the companies. It is to convert the aver-
age loss on every passenger carried into an average
gain. The companies have no way of making
money save out of passenger fares. The present
fare nets the loss from which the companies are
perishing. Obviously the fare must be raised.
Nothing seems to afford an alternative to this
course."
Fortunately, the concerted effort of the press
creates no impression on the people. The appeals
THE GREAT COLLAPSE 23
seem to fall on deaf ears. There is little sympathy
for the companies.
The Brooklyn Rapid Transit Company trains
run as usual, if not with greater regularity. There
is no difference as far as the public is concerned
whether the company is technically solvent or not.
The old conception of bankruptcy is obsolete.
It has changed with the introduction of new
methods in business organization. The railroads
are no longer in the hands of individual propri-
etors. They are now carried on by corporations.
When the individual proprietor was declared
bankrupt he personally suffered. There was a
human touch in his plight. Socially it was a
calamity to him. The debts he could not pay and
which drove him to bankruptcy he usually owed
to people he knew. They were members of the
same church, of the same club, of the same com-
munity with him. They thought highly of him
and he cherished their good will. He who had
been a reputable citizen in the community now
would be a marked man. Economically he was
even more to be pitied. It meant his complete
ruin. He would become absolutely helpless. His
entire wealth, including his personal property,
24 THE GREAT COLLAPSE
could be taken from him to discharge his obliga-
tions. It may have meant unmitigated poverty
for himself and his family. Such possibilities
evoked sympathy and fear.
The Brooklyn Rapid Transit bankruptcy or,
for that matter, most corporation bankruptcies,
are "business" affairs. There is no human ele-
ment. The history of the traction system in New
York City is the history of bankruptcies and re-
organizations. For the press to continue to play
the chord of sympathy is useless.
Public utility corporations in New York seem
indeed to thrive on bankruptcies. After each
failure, instead of reorganizing the business on a
sound basis, eliminating the causes that led to the
insolvency, just the reverse has been done. Not
only have the poisons that ate the system's financial
tissues, bringing it to ruin, been retained, but more
of them were added. They multiplied weakness
upon weakness with every reorganization. Every
attempt on the part of government commissions to
place the companies upon a solid footing has been
fought bitterly. The investors, bankers and trust
companies, the real controllers of the transit sys-
tems, seem to feed on the weaknesses of corpora-
tions, as vultures feed and grow fat on corpses.
THE GREAT COLLAPSE 25
The New York Railways Company, which so
loudly protests its innocence of corporate wrong-
doing, is a classic example of corporation brazen-
ness. This corporation is erected upon the ruins
of the Metropolitan Street Railway Company.
In 1911, when the organizers of the new corpora-
tion applied to the Public Service Commission,
then in its infancy, for permission to issue new
securities, the latter, upon a careful examination
of the properties and a study of its outstanding
debts, declined to grant the application. The Com-
mission claimed that the securities the company
sought to issue would be far above the physical
value of the property ; that if the securities as pro-
posed by the companies were issued the system
would be based on a false foundation and would
lead either to excessive charges in the way of fares
or to bankruptcy. The companies, instead of dis-
proving the contentions of the Commission, turned
to the courts for assistance. The courts held that
the Commission had no right to look into the securi-
ties issued by a reorganized company if the issue
did not exceed the aggregate debts of the con-
stituent companies.
The New York Railways Company was quite
willing to avail itself of this decision to prevent
26 THE GREAT COLLAPSE
the Public Service Commission from protecting
"poor unfortunate investors," as well as the great
mass of fare-payers from being robbed.
One item for which the company issued securi-
ties was $4,740,000 to cover "Initial payments
for franchises" and "Interest on franchise security
deposits," which was never spent on these items;
at least, such an amount was never spent. The
company does not disclose who got this money.
Under the head of "Organization and Finance,"
the company issued securities to cover $8,149,580.
The items making up this huge sum consist of such
well deserved and indispensable expense as "Pay-
ments to underwriting syndicates, — $2,400,000."
The results of the issue of such securities will be
shown in detail in a later chapter.
The Commission refused to give its consent to
this gross imposition upon the public pocketbook.
It was later directed by the court to give its ap-
proval to the company's application, and it did.
The companies won. They did not win by
proving the charges of over-capitalization made
by the Public Service Commission to have been
false. They did not win by proving that for every
dollar of security issued there existed its equivalent
THE GREAT COLLAPSE 27
in property. They fought the Commission on a
legal technicality.
The court's decision has carried with it millions
of dollars to the promoters and bankers, excessive
fares, poor service to the public, and probably low
wages to the railway employees.
The outstanding fact is that these companies
now pleading financial embarrassment, threatening
bankruptcy, appealing to our sympathies in their
efforts to secure permission to charge higher fares,
deliberately chose to avail themselves of a legal
technicality when it suited their purpose to do so.
They reorganized the bankrupt business in a man-
ner clearly carrying within itself the germs of fu-
ture bankruptcy. It was not done out of igno-
rance; it was done to make money. It paid to
cast sound business principles to the wind and
choose the path of speculation.
The Commission argued not only in the New
York Railways Company case, but also in the
case of the Third Avenue Railway Company,
that the companies could not succeed, for they
were loading the business more than the traffic
could bear. The organizers responded: "You
have no legal right to say that." They did not
claim: "You are not correct in your contention."
28 THE GREAT COLLAPSE
And now, with the echoes of the Commission's
warning still ringing in our ears, these corporations
impudently use the club of bankruptcy over the
public to exact permission to charge higher fares.
The impudence of the corporations is measured
only by the tolerance of the public.
Chapter II
THE CORPORATION
AS INSTRUMENT OF BUSINESS ORGANIZATION
AND CONCEALER OF PROFITS
A corporation is an excellent instrument for
concealing the true earnings of capital. The aver-
age man is not familiar with the intricacies of
modern business organization. He loses himself
in the maze of technical words. Common stock,
preferred stock, cumulative bonds, adjustment
bonds, are all so many mysteries to him. And