II.  TO INVENTORS?

It has not been generally enough recognized that business men owe it to investors to do their best to see to it that they get fair returns on their money invested -and only fair returns.  There are a number of ways in which, on the one hand, the investing public is “skinned,” and, on the other hand, stock in a business, largely owned by the management itself, has been rewarded with undeserved dividends at the expense of the public.

(1) There are, in the first place, the get-rich-quick swindles, the out-and-out impostures, which have deceived the credulous into investments that never could pay.  Bonanza mines, impractical inventions, town lots laid out on the prairie, orange groves that existed only on paper-such bogus hopes have enticed many an honest man and woman, who could ill afford to lose, into turning over their small earnings to the brazen exploiters.[Footnote:  For cases, see World’s Work, vol. 21, p. 14112.]

(2) But such arrant deception is not the commonest form of wrong.  A more usual practice, and more dangerous- because it deceives even the intelligent-is to overcapitalize an honest business, to issue “watered” stock-that is, stock in excess of the actual value of plant, patents, and other assets.  These stocks are issued merely to sell.  If the business is very successful, its profits may pay a fair return on all this capital; if not, low dividends or none can be paid until the business slowly catches up with its overcapitalization.  In all investment-as our industrial organization at present goes-there is risk; but to create a needless risk and deceive the public into taking it is plain dishonesty.  The extra money thus sucked from the public goes sometimes to pay excessive salaries to the officials of the company, sometimes to pay excessive prices for patents or plants purchased; there are many subtle ways, known to “high finance,” of misappropriating stockholders’ money and diverting it to the pockets of the promoters.  Many great fortunes have been made in this way; such exploitation is so new to society that it has not yet awakened to its essentially criminal nature.  Even if the business is able to pay good dividends on watered stock, the crime of overcapitalization is not lessened, though the harm done is now not to the investor but to the public.  Stocks should represent only the actual value of the property, so that dividends may be only a fair return for capital really invested in the business.  Where there is sharp competition, the possibility of overcharging the public to make returns on watered stock is cut out, and the loss falls upon the investor.  But in the case of monopolies, such as railways, or of combinations which practically stifle competition, the public may be charged enough to “pay a fair dividend to investors,” although the money upon which dividends are being made went not into improving the service, but into fattening the promoters’ purses. [Footnote:  On stock watering, see Dewey and Tufts, Ethics, pp. 561-64.  Outlook, vol. 85, p. 562.  Political Science Quarterly, vol. 26, p. 88.  International Journal of Ethics, vol. 18, p. 151.  C. R. Van Hise, Concentration and Control, pp. 115, 142, etc.]