Effect Of Socialism On Corporation Loans. Railway Debenture Stocks

And now a word or two on the security and risks of those stocks which, like Corporation Loans, rest primarily on a Money basis, and this in turn on a definite Industrial one - unlike Banks and Insurances, which rest on that basis more remotely and indefinitely - and which contain, besides, elements of Monopoly, partial or complete. Among such stocks the Debentures of Railway Companies take a high natural rank. To begin with, these companies usually enjoy either a full or partial monopoly of traffic to and from the great business centres, whose industries they unite and whose products they transport to the remotest ramifications of their system. Unless, therefore, these great industrial centres themselves decay, the Railway Debentures ought, when sufficiently secured against the ups and downs of trade, to form one of the safest of securities. This will apply even to small lines with little capital at their back, provided always they are the necessary connecting links between other great lines, and so have even a greater monopoly value than either of the separate lines which they connect.

Natural Value Of Railway Debenture Stocks

In young countries with great potential but as yet undeveloped wealth, these Railway Debentures have a high potential natural value - even where their income does not as yet yield a dividend on their Ordinary shares - from the mere fact of the large measure of monopoly which, when the country is fully developed, they are almost sure to enjoy over large fields and areas of production. To fix their natural value as securities, then, it is the risks that must mainly be kept in mind. As to these, we may say in general terms that they avoid the great standing risks to which Banks and Insurance Companies are exposed in the shape of crises, panics, earthquakes, and vast destructive fires, while being liable to all those risks which must necessarily inhere in loans based on the ups and downs of Trade and Industry, as distinct from those which, like Banks and Insurances, rest primarily on Money and the level operation over most of their field of the Law of Probabilities.

Railway Monopolies

As Monopolies, or partial Monopolies, they are not as free from risk as those purely Industrial Monopolies which deal in the great necessities of life - Oil, Beef, Soap, Sugar, and the like - muchmuch as these can not only fix their selling prices on an even level above their costs, but can coerce, to a great extent, and secure their customers as well - except when the public can slip the noose by the use of some substitute, as they have been doing in America with the Beef Trust; whereas the yield of the Railways on which the Debentures are issued, not only varies according to the state of trade, but the trades on which it depends do not necessarily rest on the supply of articles either of necessity or universal demand. And the consequence is that while the great Industrial Trusts can nearly always hit the mark both of price and profit which they set before themselves, the Railway Companies have to take chances of hitting their target amidst the hills and valleys and the ups and downs of Trade.

Railway Debentures Less Secure Than Corporation Loans

Again, these Railway Debentures being loans - and, therefore, resting primarily on Money - have less security, while subject to the same kind of risk as Corporation Loans. For while the Corporation Loans are secured on the property of a whole community, and on rates which not only have all the elasticity required for that security, but are enforced by law with the utmost rigour, Railway Debentures are secured only on the property of their own particular shareholders, and on the wide and deep fluctuations of good and bad trade. They differ, therefore, as much from Corporation Loans in the safety of their securities as the old unlimited liability Banks of years gone by - which made shareholders liable to the full extent of their fortune - do from the Limited Liability Banks of to-day, which make them liable only to the limited amount of their investment. Nor is this lesser security on the part of Railway Debentures made up by the absence of any risk to which Corporation Loans either now or in the future are likely to be exposed. For they, too, like Corporation Loans, lie on the border-line where politics and business intersect and commingle, and so can be "sweated" through the rates by local politicians with Socialistic proclivities in the same way, if not to the same extent, as they. On the whole, then, summing up the pros and cons, I should be inclined to say that for investment purposes over equal periods of time, Corporation Loans have less fluctuation, and so occupy, perhaps, a higher natural rank than Railway Debentures; and a fortiori than all other Industrial Debentures which do not enjoy, like Railway Companies, a full or partial Monopoly.