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culty at all in paying the interest on their debt, cannot be expected to be ready with the principal; nor is it necessary that they should be so in ordinary times, for when the bonds come due, if the original holders do not care to continue them, then plenty of other lenders may be found. But when there comes a time of great depression in the commercial world, even those who have most confidence in the railway are likely to want their money, there being opportunities on all sides of lending it to greater advantage. Under these circumstances, they can of course only be induced to renew their loans by the offer of a much higher rate of interest ; in fact, with the extremely variable state of our money market, and the violent panics to which it is occasionally subject, the whole system of terminable debentures is little better than a lottery, as the profit to be derived from the transaction depends entirely on the condition of the market when the time comes for their renewal. If this occurs in a prosperous season, the company are the winners, as they can renew at a reduced rate. The lender, on the contrary, is the winner of a high prize if the bonds expire in the midst of a panic, and he can really get his money, for then he has a sum of ready money just when he can get ten or twelve per cent. for it elsewhere, or invest it in any kind of stock or shares at much below their ordinary value. The company, however, must endeavour to get their debentures taken up somehow; and even if they are fortunate enough to be able to do so, they have to pay the penalty of heavy premiums and commissions and a high rate of interest for the next five years, through the accident of the bonds having fallen due at an unfavourable time.
A debenture stock, that is a stock on which the payment of the interest is compulsory and may be enforced by legal process, while the principal is bought and sold like any other stock, is free from all these objections. Unfortunately, however, debenture stocks form a very small part indeed of the mortgage debt of railway companies, and the Legislature has made no distinction between them and other mortgages in respect of the amount that may be issued. Debenture stocks may be brought out in the place of debentures, or the latter may be converted into the former, but the issue must still be limited to one-third of the share capital. The loan capital of one company may consist of four per cent. debenture stock, and that of another of bonds bearing six per cent. interest, all maturing' at once; still the parliamentary provisions treat them alike, and, for the supposed benefit of the company, limit them alike in amount. But it is manifest that any proportion of debenture stock, however large, could never be productive of the evils which may be occasioned by even a
very small number of terminable debentures requiring renewal at an inconvenient time. The present is such a time, the worst, in fact, that has ever occurred in railway history. Two causes having combined to make it so; first, the general depression consequent' on the late commercial crisis
, and secondly, the interpretation recently put upon the law affecting the security of debenture-holders,-an interpretation quite unexpected by the latter, though not by lawyers. Consequently, the difficulty of renewing debentures is just now very great, even with some of the lines that have paid fair dividends. The effect of this state of things on debenture-stocks would be merely to cause a fall in their values; it is different, however, with the terminable loans. The lenders refuse to renew, and withdraw their money, and as soon as it is known that a good many of them are doing so, or proposing to do so, alarm is occasioned, and all hasten to adopt the same course as soon as they have the opportunity, while, of course, new lenders are afraid to offer. The effect is like that of a run on a bank by the depositors; it is more gradual, but it is a process which no company could stand against if continued sufficiently long.
In order to afford one means of winning back public confidence, a Bill is under consideration for giving to debentureholders that which, previously to the recent decisions, they generally supposed themselves to have, namely, a lien upon the rolling stock, &c.: that is, to alter the contract between two parties by giving to one an advantage to which he is not entitled by the terms of his bargain. As companies, in our opinion, should be free to manage their own financial affairs, there can be no reason why they should not borrow on any security it may be necessary for them to offer, although it would be better for themselves that their trade profits should be considered a sufficient one. And in fact it is far more in imagination than in reality that any power of seizure can benefit the bondholders. This power would be to them something like the parapet on a railway bridge. It would look very dangerous if there were nothing between the trains and the river, but were the engines and carriages really to get off the line and come against it, it would not save them for an instant from going over. So the rolling stock and moveable chattels of a railway could never really repay the bondholders ; their entire value is not equal to half the debenture capital, even where this does not, as with the Chatham and other involved lines, exceed its proper proportion ; and its seizure would, consequently, be of little benefit, except indeed to some few bondholders who might succeed in stealing a march upon the others, and who would thereby make it impossible for another farthing
to be earned for the others' benefit. It is very doubtful, therefore, whether a Bill like that proposed by Mr. Watkin, should it become law, would do much to restore confidence where it is already impaired, and, should the companies still not succeed in getting the accommodation, it will only place them in a worse position than before in the case of failure. As for any direct interference by the Government in the matter, it is difficult to see how such interference could be of avail, unless it assumed the form either of guaranteeing interest, or of purchasing the debentures themselves, either with or without their conversion into stock. If suffering be caused by panic, rather than by mismanagement, and the Government possess the means of allaying that panic, it is no doubt their duty to do so, even, for instance, by such a proceeding as the suspension of the Bank Charter Act; but it is quite a different thing for them to take upon themselves the debts of companies, even the most deserving or the most useful to the public. It is alleged that the loans would only have to be held for a short time, and could soon be placed again in the hands of the public, and in the much improved form of a debenture stock, but this is a thing which it is impossible to predict; the public might remain for a long time indisposed to offer, and it is difficult to tell what proceedings might be adopted by companies in receipt of Government aid, and by others which would have an equal right to expect it. The system, once begun, might become as permanent as that of the debentures themselves, they having been also originally looked upon as a temporary expedient; and so the credit of the country might be pledged to any extent to maintain the undertakings of private and often speculative investors. Failing, however, to see what more the Government can do in the present crisis, let us return to the question how far their action in the past has tended to produce or to avert this crisis. What have they done? They have regulated the capital of the companies, and, besides having a vetoing power with regard to every fresh arrangement of it, they have caused delay and expense. They have tried to limit the amount of mortgage debts; but they have failed in practice to secure any adherence to that limit: all who have wanted to evade it have been able to do so, while those outside have depended on its being complied with. They have tried to control the financial management; and yet a management has been adopted which has resulted in some cases in actual bankruptcy, and when the bankruptcy has come, the only danger to the public is caused by a class of debts which are out of their power, and, indeed, it is to be hoped, will continue to be out of their power. And now, to take another view of the
subject, subject, let us see the amount of trouble that is occasioned in Parliament by all this special regulation. About a fourth part of each railway Bill, on the average, consists of financial clauses, and in addition to this a considerable proportion of every year's Bills are exclusively financial, old companies having frequently to come before Parliament year after year for these purposes only. To take the Bills passed in the last session : there were 363 local and personal Acts in all, whereof 203 had reference to railways—some 75 of the latter being entirely capital Acts; taking, therefore, the whole of these 75, and a fourth part of the remaining 128, we obtain a total of 107 out of 363. The number of public Acts of the same year was 122; including these, therefore, we have a proportion of 107 out of 485, that is to say, nearly one-fourth part of the legislation of the past session was effected for the purpose of controlling the financial management of one particular class of companies. Our observations have been confined to railways; but were we to include other public works —such as harbours, gas and water works—to which, in all essential particulars, the same regulations apply, the proportion would probably become a third instead of a fourth. And all this special legislation forms a constantly increasing mass; in fact, it seems likely to increase from year to year in a geometrical ratio.
Suppose now that this complicated system were abandoned, and that railways, having to obtain special laws so far only as they require special powers, were in other respects put on the same footing as ordinary joint-stock undertakings, what would be the consequences? No financial clauses would appear in Bills at all; estimates of original capital would be stated and proved as at present, and could be taken into account in deciding on the merits of the case, but would not be inserted in the Acts. The capital so determined would be registered, as in the case of other companies, and as, in fact, the loan capital of railway companies is already: more money could not be raised, except by consent of three-fourths of the shareholders, at a special meeting; when, however, such a step became desirable in the opinion of the great body of proprietors, it could be adopted at once irrespective of the time of year, and without the delay and expense of Parliamentary proceedings. Debenture loans would be issued by consent of the shareholders, and they would be registered. Their proportion to the share capital would be apparent from the register, though no longer limited to one-third; intending investors would, like mortgagees of any other property, ascertain their position for themselves, instead of accepting the delusive security afforded by limitation clauses, which, in their true intent and meaning, never are or can be enforced. The debentures of good companies Vol. 122.--No. 244.
would always be the sound investments that they are at present. Members of Parliament would be relieved from a part of the somewhat uncongenial labours now forced upon them, and the statute book in future years would be diminished by one-fourth of its bulk. All these results would be brought about by the withdrawal of the Legislature from a position assumed with the best, although mistaken, intentions. It was assumed originally at a time when not only railways, but joint-stock enterprises of every kind, were objects of distrust and aversion, and when direct Government regulation seemed necessary to the existence of such undertakings; it has been maintained ever since with various alterations, amidst complete changes of public opinion and of surrounding circumstances, but its good objects have ever failed to be secured, while evil results have been more and more apparent
In order to meet this state of things, a measure entirely different from that here suggested has been from time to time recommended, namely, that the Government should undertake the management of the railway debt, or the management and ownership of the railways themselves. Such a course would involve many results, both good and bad, which it is not at all easy to foresee; but one thing is certain: there is no satisfactory middle
Debenture-holders can only be efficiently protected by a guarantee of their interest, and shareholders must either look after their own affairs, or have the audit and management taken entirely out of their hands. It is needless to say that railways have conferred very great advantages upon the country -advantages that can only be duly appreciated by imagining their absence. It is for the interest of the country that they should go on and prosper, but that they should go on steadily and surely, not with periods of spasmodic activity, to be followed by intervals of entire cessation and want of. confidence. They have not been made too rapidly for the legitimate wants of the population. But for bad and wasteful financing' and ruinous contests between companies, there is hardly a line that would not pay at the present moment. It is most important that the public should not be led to invest in bad undertakings, through misconception of the value of particular securities. It is most important, on the other hand, that capital should not be driven away from works of public utility through special and onerous conditions as to the manner of subscription. The legislative restrictions have contributed to both these results: their abolition, in other words, the entire removal of both undue protection and undue interference, would best assist in placing matters once more on their proper footing.