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but that, if the encumbrancer expects a rate of (say) seven or eight per cent. on bonds which were originally bought at (say) sixty per cent. of their face value, or seven or eight per cent. on the capital of leased lines which were capitalized and taken up at prices representing two or three times their value, there cannot be enough to go round.

That the holders of junior securities get very little in any given year is not the worst feature of the situation. It has been said above that reasonably large fixed charges at a moderate rate of interest were not disadvantageous. The reasons are sufficiently simple. Outlay which ought to be charged to capital account can be so charged and provided at a moderate rate of interest. This leaves in the hands of the administration a large fund of ready money, which is of incalculable value in the conduct of their business. All that they need to purchase can be purchased in the most convenient market, of the best quality, and at the lowest prices, for cash. Labour is liberally and regularly paid, and the railroad service is improved thereby. The floating debt is not permitted to accumulate unfairly; nor paper put on the “Street” at extravagant rates of interest. The cost of incessant litigation, varied by an occasional receivership foreclosure and reorganization, is avoided. The immense economies, which are possible to a solvent road paying only reasonable interest on its fixed indebtedness, and employing its earnings so as to utilize the maximum purchasing power of ready money, go far not only to make the road generally successful, but to clothe its securities with stability. It may be worth noting that where American railroad securities have shown stability for some years, there is a very strong presumption of an indefinitely progressive increase in value. Exceptional circumstances may, of course, interfere with such a result. But, as a general rule, a railroad which has for some years produced a steady profit has an excellent chance of uninterrupted advance in prosperity. Everybody realizes that demand creates supply. It is sometimes worth bearing in mind that supply in turn creates demand. A sound railroad administration, and the effective service incident thereto, attracts to itself fresh accretions of business, not merely because the business of the country increases and grows up to meet the outlay originally made in construction, but also because peace, stability and credit are substantial factors in commercial

success.

Of course, it may be said that many railroad corporations which do not hold this creed hang on to life and, to a greater or less degree, satisfy the aspirations of their shareholders. That is no doubt true to a certain extent. But satisfaction in the present is heavily discounted by the confident forecast of difficulty in the future. A railroad which is hopelessly overburthened must some day or other face the axioms of the multiplication-table, and recognize that two and two make four, and not five. Take the case of a railroad which finds itself to-day unable to meet its funded indebtedness without immense prospective sacrifice. To make any show at all, it must let its track and equipment run down. It is strongly tempted to disguise to a greater or less extent its floating debt, and to ignore engagements on paper which have not matured. Its credit is impaired, and the purchasing power of paper is very inferior to the purchasing power of cash. It is constantly liable to the incidents of hostile action; it must get ready money somehow, and it gets it at an exorbitant price. When the end eventually comes, it is quite certain that somebody will be badly hurt. You cannot reasonably expect a syndicate to find money for a sinking concern, without adequate compensation and approximate security. But, if the situation is radically a false one, it is extremely doubtful whether it is worth while to prolong the agony. Our observer will do well to make note that the necessity of drastic measures of funding and the possibility of carrying them out may afford him profitable subject for reflection in connection with railroads in which he holds, or proposes to acquire, an interest.

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CHAPTER XI.

RECEIVERS' CERTIFICATES.

A FORM of security in which a good deal of money has been made and lost is the Receivers' certificate. It may be said shortly that investment in this form of security is good for the inside, and somewhat risky for the outside, investor. It goes without saying that the strength of the Receivers' certificate is the priority over all previous encumbrances with which it is invested by the special action of a court of competent jurisdiction. The validity and completeness of the order creating it is a very simple matter, calling for no special business knowledge. But other considerations occur which our enquirer will do well to note.

The purpose of this special form of security is to meet a grave emergency,—so grave that, in the opinion of the Court, it is entitled to take precedence over mortgagees. To arbitrarily set back the priority of a first mortgagee is obviously a tremendous exercise of power, and can be justified only by strict vigilance and close examination of the urgent need which it is proposed to meet, and by the enforcement of unconditional compliance with the orders of the Court. Suppose it to happen (and in the writer's experience it has often happened) that the certificates were duly issued and, so far as the face of the documents were concerned, were in every respect satisfactory. Let us suppose next that the proceeds of such certificates, instead of

being expended on purposes within the four corners of the order, have been diverted to other purposes. The chances are that the holder of the certificate will have to fight his battle with the first mortgagee, and is very likely to get nothing out of it beyond some valuable hints for his future guidance. Our enquirer's rough conclusion will be to invest freely in Receivers' certificates when he is inside, and to leave them alone when he is outside.

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