An Unsound Quarry Proposition

In the little village of Pompton, hardly thirty miles from New York, may be seen the remains of an equally ill-founded enterprise. In the mountains just back of the village is found a rough granite, coarse of feature, but pleasing in appearance. The stone is excellent for certain building purposes and has been quarried in an intermittent way for years.

The property came to the notice of promoters who saw in it the foundation for a large and profitable industry. No investigation or thorough testing was necessary. Had not the quarries been worked for years? What more could the most skeptical desire? Accordingly the matter was presented to a man of wealth but no experience in building stone. The proposition appealed to him. It sounded substantial and attractive. A large investment was authorized and the work begun. A spur was run in from the near-by railroad; a well-equipped power plant was installed; a large and commodious building for the handling and working of the granite was erected; machinery for cutting and shaping the granite was installed; adequate derricks and quarry machinery were purchased; houses for the men were erected, and active operations were begun.

Then and not till then it was discovered that the granite was not suitable for general use and that the demand it could supply was very limited-not enough to justify the upkeep of the plant. This was demonstrated by tardy but very convincing tests and the plant was dismantled.

An Ailing Sanitarium

In the pleasant valleys of Virginia a curious example of an unsound enterprise may be seen. Directly over the well-known caverns of Luray stands a large sanitarium, constructed of brick and stone to last for generations. According to the traditions of the neighborhood it was built for the accommodation of patients suffering from tuberculosis, who might there inhale cave air

which, according to the promoters of the sanitarium, was peculiarly beneficial for that complaint. For reasons best known to themselves and their physicians, patients suffering from tuberculosis did not care to inhale cave air. In consequence the project was basically unsound, the sanitarium—as a sanitarium—was a total failure and the building is now occupied, in part, as a private dwelling.

A Useless Railroad

To return to the Southwest, in one of the mining camps of that region the outcrops indicated ore bodies of great richness.

At the solicitation of the mine-owners, the railroad completed its branch before the workings were opened in order to be in a position to handle the large business that would presumably follow the development of the mines. The mining camp proved a failure because the ores contained too much sulphur to permit of their economical use, and the ore bodies proved too small to permit of the large smelter expenditures necessary to treat them. Not a carload of ore was shipped out of the camp. The railroad had expended upwards of $400,000 in money in building the line, yet, clearly, its property was worthless except as the rails could be taken up and relaid. '

Why Unsound Enterprises Are Selected for Financing

1. For Fraudulent Purposes. In some cases enterprises basically unsound or seriously defective are selected for financing because the real purpose of the promoter is to finance himself, directly or indirectly, and he cares little or nothing for the character of his enterprise, provided only that it offers an attractive setting for his swindle.

The purely swindling enterprise is usually easy to recognize, but occasionally enterprises are so skilfully disguised as to deceive even the elect. Of this kind were the trolley lines, widely financed in New England and the Middle States in the early years of 1900

1 Dewing, "Financial Policy of Corporations."

by men who merely wished to sell land along the right of way. The sale of their land was the measure of their interest in the undertaking—the fate of the trolley line was to them a matter of indifference. The result is seen in the many trolley lines in these states struggling to keep out of bankruptcy, operating under receiverships, or not operating at all.

2. From Force of Circumstances. In other cases worthless enterprises are selected for financing because their soundness cannot be determined in advance, the only practical test being a more or less complete development. Thus the worth of a prospective oil territory, in which the geological conditions are right and the indications good, cannot be conclusively proved save by actual drilling. Similarly, some mechanisms cannot be properly judged until a full-sized working model has been constructed. In such cases the enterprise is a purely speculative one and, if handled as such, is sound as a purely speculative enterprise until and unless it is proved to be otherwise. The results alone can show whether a prize or a blank has been drawn. The method of determining this is an expensive one, but, as stated, for some enterprises no other is possible. Generally speaking, however—and in all the specific instances cited in the present chapter-the value of a new enterprise may at least be approximated in advance. Where this is feasible, the exploitation of a radically defective undertaking indicates either ignorance, recklessness, poor judgment, or fraud on the part of the "man with the enterprise, usually coupled with "contributory negligence" on the part of the investor whose money is risked.

3. Mistaken Judgment. Occasionally it happens that an unlucky mortal undertakes in all good faith to finance an enterprise improbable or impossible in itself, in which he engages from lack of judgment, of knowledge, or of investigation. He sinks his own and his friends' money in its development and is finally threatened with ruin because of the worthlessness of the undertaking. The temptation is then strong to postpone the day of reckoning by

concealing material facts, to secure more money, and to push on in the hope that something may turn up to relieve the situation. The position is one that tends to turn an honestly mistaken man into an imposter. It is easily conceivable that the Keeley Motor discussed in a later chapter, was begun in good faith. Keeley may well have thought that he was on the brink of basic discoveries in motor force. His own and his friends' money went into the enterprise and at that time there must have been some honest belief that the expenditure was justified. When, however, twentyfive years later Keeley's death revealed the nature of the operations he was then carrying on, it disclosed a fraud pure and simple. Results of Financing Unsound Enterprises

It makes little difference in the results, however, whether a defective enterprise is foisted upon investors through fraud, ignorance, or other disabilities of the promoter, or because of their own carelessness. They are separated as effectually from their money in the one case as in the other. Therefore, as a matter of common honesty, no pains should be spared by owner or promoter to prove the value of his enterprise so far as it can be proved before it is presented to the investor. As a matter of ordinary business prudence the man who is to invest his money should see that this has been done.

Enterprises Dependent Upon Public Favor for Success

In a certain class of enterprises a final feature of uncertainty and one hard to determine in advance is the reception that will be accorded the undertaking by the public. Many such enterprises of this nature, basically good, have failed when it came to this crucial test. The subject matter of the enterprise may be apparently desirable and attractive, but in some way, or for some reason-often undiscoverable-it does not appeal. This may be because the matter is not presented properly or with

2 Chapter VIII, "Importance of Investigation."!

due insistence and continuity, or it may be due entirely to the indifference of the public.

The attitude of the public is something that cannot be reliably foretold. It is a matter of judgment only to be proved or disproved by the event-by an actual "try-out" on a sufficient scale to be decisive.

A difficult point in enterprises of this nature is to determine whether the failure-if failure it is-results from an unconquerable indifference on the part of the public, or to inadequate presentation of the subject matter of the enterprise. Thus in the case of the now well-known and widely used breakfast food, "Shredded Wheat," it was only perseverance and expenditure beyond the ordinary that "put it over." Apparently the public would have none of it, but the inventor was insistent that the public ought to want it, regardless of its own ideas on the subject, and he never gave up until he carried his point. With the average promoter the undertaking would have been a failure.

Floating a Breakfast Food

The discovery of shredded wheat as told in the Magazine of Wall Street, came about in the following manner. Henry D. Perky was interested in the building of all-strel cars and a costly plant erected by him for their manufacture was destroyed by fire just as it was ready to begin operations. Mr. Perky could not raise funds to replace the plant and was forced to abandon the undertaking.

The nervous strain of this failure was great and he became seriously ill-so ill that his doctors told him he had but a few months to live. This did not suit Mr. Perky, and instead of dying "as per specifications," he went to Denver, and there began experimenting with a new kind of wheat food product—the forerunner of shredded wheat. He tried this on himself and for a long time existed solely on his new food. It agreed with him, and he

3 October 2, 1920.