Part 21

The efforts of Daniel Webster and his contemporaries to protect "acquisitions" have been seconded, with extraordinary ability, by business organizers, accountants, lawyers and bankers, who have broadened the field of their endeavors until it includes not merely "acquisitions," but all "property rights." Daniel Webster lived before the era of corporations. He thought of "acquisitions" as property secured through the personal efforts of the human being who possessed it. To-day more than half of the total property and probably more than three-quarters of productive wealth is owned by corporations. It required ability and foresight to extend the right of "acquisitions" to the rights of corporate stocks and bonds. The leaders among the property owners possessed the necessary qualifications. They did their work masterfully, and to-day corporate property rights are more securely protected than were the rights of acquisitions a hundred years ago.

The safeguards that have been thrown about property are simple and effective. They arose quite naturally out of the rapidly developing structure of industrialism.

First--There was an immense increase in the amount of property and of surplus in the hands of the wealth-owning class. After the new industry was brought into being with the Industrial Revolution, economic life no longer depended so exclusively upon agricultural land. Coal, iron, copper, cement, and many other resources could now be utilized, making possible a wider field for property rights. Again, the amount of surplus that could be produced by one worker, with the assistance of a machine, was much greater than under the agricultural system.

Second--The new method of conducting economic affairs gave the property owners greater security of possession. Property holders always have been fearful that some fate might overtake their property, forcing them into the ranks of the non-possessors. When property was in the form of bullion or jewels, the danger of loss was comparatively great. The Feudal aristocracy, with its land-holdings, was more secure. Land-holdings were also more satisfactory. Jewels and plate do not pay any rent, but tenants do. Thus the owner of land had security plus a regular income.

The corporation facilitated possession by providing a means (stocks and bonds) whereby the property owner was under no obligation other than that of clipping coupons or cashing interest checks upon "securities" that are matters of public record; issued by corporations that make detailed financial reports, and that are subject to vigorous public inspection and, in the cases of banks and other financial organizations, to the most stringent regulation.

Third--Greater permanence has been secured for property advantages. Corporations have perpetual, uninterrupted life. The deaths of persons do not affect them. The corporation also overcame the danger of the dissipation of property in the process of "three generations from shirt sleeves to shirt sleeves." The worthless son of the thrifty parent may still be able to squander his inheritance, but that simply means a transfer of the title to his stocks and bonds. The property itself remains intact.

Fourth--Property has secured a claim on income that is, in the last analysis, prior to the claim of the worker.

When a man ran his own business, investing his capital, putting back part of his earnings, and taking from the business only what he needed for his personal expenses, "profits" were a matter of good fortune. There were "good years" and "bad years," when profits were high or low. Many years closed with no profit at all. The average farmer still handles his business in that way.

The incorporation of business, and the issuing of bonds and stocks has revolutionized this situation. It is no longer possible to "wait till things pick up." If the business has issued a million in bonds, at five per cent, there is an interest charge of $50,000 that must be met each year. There may be no money to lay out for repairs and needed improvements, but if the business is to remain solvent, it must pay the interest on its bonds.

Businesses that are issuing securities to the public face the same situation with regard to their stocks. Wise directors see to it that a regular rate, rather than a high rate of dividends, is paid. Regularity means greater certainty and stability, hence better consideration from the investing public.

Fifth--The practices of the modern economic world have gone far to increase the security of property rights.

Business men have worked ardently to "stabilize" business. They have insisted upon the importance of "business sanity;" of conservatism in finance; of the returns due a man who risks his wealth in a business venture; and of the fundamental necessity of maintaining business on a sound basis. After centuries of experiment they have evolved what they regard as a safe and sane method of financial business procedure. Every successful business man tried to live up to the following well-established formula.

First, he pays out of his total returns, or gross receipts, the ordinary costs of doing business--materials, labor, repairs and the like. These payments are known as running expenses or up-keep.

Second, after up-keep charges are paid he takes the remainder, called gross income, and pays out of it the fixed charges--taxes, insurance, interest and depreciation.

Third, the business man, having paid all of the necessary expenses of doing business (the running expenses and the fixed charges), has left a fund (net income) which, roughly speaking, is the profits of the business. Out of this net income, dividends are paid, improvements and extensions of the plant are provided for.

Fourth, the careful business man increases the stability of his business by adding something to his surplus or undivided profits.

The operating statistics of the United Steel Corporation for 1918 illustrate the principle:

1. Gross Receipts $1,744,312,163 Manufacturing and Operating expenses including ordinary repairs 1,178,032,665 --------------- 2. Gross Earnings $ 566,279,498 Other income 40,474,823 --------------- $ 606,754,321

General Expense, (including commission and selling expense, taxes, etc.) 337,077,986 Interest, depreciation, sinking fund, etc. 144,358,958 -------------- 3. Net Income $ 125,317,377 Dividends 96,382,027 -------------- 4. Surplus for the year $ 28,935,350 Total surplus 460,596,154

Like every carefully handled business, the Steel Corporation,--

1. Paid its running expenses, 2. Paid its fixed obligations, 3. Divided up its profits, 4. And kept a nest egg.

The effectiveness of such means of stabilizing property income is illustrated by a compilation (published in the Wall Street Journal for August 7th, 1919) of the business of 104 American corporations between December 31, 1914, and December 31, 1918. The inventories--value of property owned--had increased from 1,192 millions to 2,624 millions of dollars; the gain in surplus, during the four years, was 1,941 millions; the increase in "working capital" was 1,876 millions. These corporations, representing only a small fraction of the total business of the country, had added billions to their property values during the four years.

These various items,--up-keep; depreciation; insurance; taxes; interest; dividends and surplus,--are recognized universally by legislatures and courts as "legitimate" outlays. They, therefore, are elements that are always present in the computation of a "fair" price. The cost to the consumer of coffee, shoes, meat, blankets, coal and transportation are all figured on such a basis. Hence, it will be seen that each time the consumer buys a pair of shoes or a pound of meat, he is paying, with part of his money, for the stabilizing of property.

Fifth. Property titles under this system are rendered immortal. A thousand dollars, invested in 1880 in 5 per cent. 40 year bonds, will pay to the owner $2,000 in interest by 1920, at which time the owner gets his original thousand back again to be re-invested so long as he and his descendants care to do so. The dollar, invested in the business of the steel corporation, by the technical processes of bookkeeping, is constantly renewed. Not only does it pay a return to the owner, but literally, it never dies.

The community is built upon labor. Its processes are continued and its wealth is re-created by labor. The men who work on the railroad keep the road operating; those who own the railroad owe to it no personal fealty, and perform upon it no personal service. If the worker dies, the train must stop until he is replaced; if the owner dies, the clerk records a change of name in the registry books.

The well-ordered society will encourage work. It will aim to develop enthusiasm, to stimulate activity. Nevertheless, in "practical America" a scheme of economic organization is being perfected under which the cream of life goes to the owners. They have the amplest opportunities. They enjoy the first fruits.

4. Property Rights and Civilization

Under these circumstances, it is easy to see how "the rights of property" soon comes to mean the same thing as "civilization," and how "the preservation of law and order" is always interpreted as the protection of property. With a community organized on a basis which renders property rights supreme in all essential particulars, it is but natural that the perpetuation of these rights should be regarded as the perpetuation of civilization itself.