Montague returned to New York and plunged into his work. The election at which he was scheduled to become president of the Northern Mississippi was not to come off for a month. Meantime there was no lack of work for him to do. It would, of course, be necessary for him to return to Mississippi to live, and he had to close up his affairs in New York. Also he wished to fit himself for the work of superintending a railroad. Through the courtesy of General Prentice, he was introduced to the president of one of the great transcontinental lines, and made a study of that official's office system. He went South again to inspect the work of the surveyors, and to consult with the engineers who had been selected for the work.
Price went ahead with his arrangements to take over the control of the road, without paying any attention to the old management. He sent for Montague one day, and introduced him to a Mr. Haskins, who was to be elected vice-president of the road. Haskins, he said, had formerly been general manager of the Tennessee Southern, and was a practical railroad man. Montague was to rely upon him for all the details of his work.
Haskins was a wiry, nervous little man, with a bad temper and a sarcastic tongue; he worshipped the gospel of efficiency, and in the consultations with him Montague got many curious lights upon the management of railroads. He learned, for instance, that a conspicuous item in the construction account was the money to be used in paying local government boards for right of way through towns and villages. Apparently no one even considered the possibility of securing the privilege by any other methods. Montague did not like the prospect, but he said nothing. Then again, the road was to purchase its rails and other necessaries from the Mississippi Steel Company, and apparently it was expected to pay a fancy price for these; it was not to ask for any of the discounts which were customary. Also Montague was troubled to learn that the secretary and treasurer of the road were to receive liberal salaries, and that no questions were to be asked, because they were relatives of Price.
All that he put up with; but matters came to a head about ten days before the election, when one day Haskins came to his office with the engineers' estimates, and with his own figures of the probable cost of the extension. Most of the figures were much higher than those which Montague had worked out for himself.
"We ought to do better on those contracts," he said, pointing to some of the items.
"I dare say we might," said Haskins; "but those contracts are to go to the Hill Manufacturing Company."
"I don't understand you," said Montague; "I thought that we were to advertise for bids."
"Yes," replied Haskins, "but that company is to get the contracts, all the same."
"You mean," asked Montague, "that we are not to give them to the lowest bidder?"
"I'm afraid not," said the other.
"Has Price said anything to you to that effect?"
"But I don't understand," said Montague; "what is this Hill Manufacturing Company?"
And Haskins smiled. "It's a concern that Price has organised himself," he said.
Montague stared in amazement. "Price himself!" he gasped.
"His nephew is president of the company," added the other.
"Is it a new company?" Montague asked.
"Organised especially for the purpose," smiled the other.
"And what does it manufacture?"
"It doesn't manufacture anything; it simply sells."
"In other words," said Montague, "it's a device whereby Mr. Price proposes to rob the stockholders of the Northern Mississippi Railroad?"
"You can phrase it that way if you choose," said Haskins, quietly; "but I wouldn't advise you to let Price hear you."
"I thank you," responded Montague, and brought the interview to an end.
He took a day to think the matter over. It was not his habit to act upon impulse. He saw that the time had come for him to speak, but he wished to be sure of his course of action before he began. He had dinner at the Club that evening, and, seeing his friend Major Venable ensconced in a big leather chair in the reading-room, he went and sat down beside him.
"How do you do, Major?" he said. "I've got another case that I want to ask you some questions about."
"Always at your service," said the Major.
"It has to do with a railroad," said Montague. "Did you ever hear of such a thing as a railroad president organising a company to sell supplies to his own road?"
The Major smiled grimly. "Yes, I have heard of it," he said.
"Is it common?" asked Montague.
"Not so common as you might suppose," answered the other. "A railroad president is commonly not an important enough man to be permitted to do it. If it happens to be a big road, and the president is a power in it, why, then he may do it."
"I see," said Montague.
"That was Higgins's trick," said the Major. "Higgins used to go around making speeches to Sunday schools; he was the kind of man that the newspapers like to refer to as a model citizen and a leader of enterprise. His brothers, and his brothers-in-law, and his cousins, and all his family went into business in order to sell things to his railroads. I heard of one story--it has never come out, but it's very amusing. Every year the road would advertise its contract for stationery. It used about a million dollars' worth, and there'd be long and most elaborate specifications published--columns and columns. But sandwiched away somewhere in the middle of a paragraph was the provision that the paper must all bear a certain watermark; and that watermark was patented by one of Higgins's companies! It didn't even own so much as a mill--it sublet all the contracts. When Higgins died, he left eighty million dollars; but they juggled the records, and you read in all the newspapers that he left 'a few millions.' That was in Philadelphia, where you can do such things."
Montague sat thinking for a few moments. "But I can't see why they should do it in this case," he said. "The men who are doing it own nearly all of the stock of the road."
"What difference does that make?" asked the Major.
"Why, they are simply plundering their own property," said Montague.
"Tut!" was the reply. "What do they care about the value of the property? They'll unload it before the public finds out; and in the meantime they are probably manipulating the stock. That's the scheme they're working with the street railroads over in Brooklyn, for instance; the more irregular the dividends are, the more violently the stock fluctuates, and the better they like it."
"But this is the case of a railroad that is being built," said Montague; "and they are putting up the money to build it."
"Yes," said the Major, "of course; and then they are paying it back to themselves by this dodge; and they'll still have the stock, and whatever they can get for it will be profit. And if the State Legislature comes along and asks any impertinent questions, they can open their books and say: 'See, we have spent this much for improvements. This is the cost of the road; and if you reduce our freight-rates, you will cut off our dividends and confiscate our property.'"
And the Major gazed at Montague with a mischievous twinkle in his eye. "Besides," he said, "another thing. You say they are putting up the money. Are you sure it's their own money? Commonly the greater part of the cost of railroad building is paid by bonds, and they work those bonds off on banks and insurance companies and trust companies. Have you thought of that?"
"No, I hadn't," said Montague.
"I know very few men in Wall Street who use their own money," the Major added. "Take the case of Wyman, for instance. Wyman's railroad keeps a cash surplus of twenty or thirty millions, and Wyman uses that in Wall Street. And when he has made his profit, he takes it and salts it away in village improvement bonds all over the country. Do you see?"
"I see," said Montague. "It's a bad game for the small stockholder."
"It's a bad game for the small man of any sort," said the Major. "When I was young, I can remember, a man would save a little money and put it into an enterprise of some sort, and whatever the profits were, he would get his share of them. But now, you see, the big men have got control, and they are greedier than they used to be. There is nothing hurts them so much as to see the little fellow get any share of the profits, and they've all sorts of schemes for doing him out of it. I could take a week off and tell you about them. You are manufacturing soap, we will say. You find there are too many soap manufacturers and too much soap, and so you propose to combine, and put your rivals out of business, and monopolise the soap market. Your properties are already capitalised at twice what they cost you, because you are naturally hopeful, and that is what you expected they would earn; but now for this new combination you issue stock to the amount of three times this imagined value. Then you fill the street with rumours of the wonders of your soap combination, and all the privileges and monopolies that you've got, and you unload your stock on the public, we'll say at eighty. You may have sold all your stock, but you've still got control of the corporation. The public is helpless and unorganised, and your men are in. Then the Street begins to hear disturbing rumours about the soap trust, and your board of directors meet and declare that it is impossible to pay any dividends. There is great indignation among the stockholders, and an opposition is organised, but you set the clock an hour ahead, and elect your ticket before the other fellow comes around. Or perhaps the troubles have already knocked the stock down sufficiently low to satisfy you, and you buy a majority of it back. Then the public hears that a new interest has purchased the soap trust, and that a new and honest administration is to be elected; and once more there is hope for soap. You buy a few more plants, and issue more stocks and bonds, and soap begins to boom, and you sell once more. You can work that regularly every two or three years, for there is always a new crop of investors, and nobody but a few people in Wall Street can possibly keep track of what you are doing."
The Major paused for a while, and sat with a happy smile on his countenance. "You see," he said, "there are floods and floods of wealth, pouring into Wall Street from all over the country. It comes to me like a vision. The crops are growing, the mines and the mills and the factories are working, and here is all the money. People don't like to take it and hide it up their chimneys--few people have chimneys nowadays. They want to invest it; and so you prepare investments for them. Take the street railroads here in New York, for instance. What could be a safer investment than the street railroads of the Metropolis? An absolute monopoly, and traffic growing so fast that construction can't keep up with it. Profits are sure. So people buy street railway stocks and bonds. In this case it's the politicians who organise the construction companies; that's their share, in return for the franchises. The insiders have a new scheme--the best yet; it's like a Gatling gun against bows and arrows. They organise a syndicate, and get the franchises for nothing, and then sell them to the company for millions. They've even sold franchises they didn't own, and railroad lines that hadn't been built. You'll find some improvements charged for four or five times over, and the improvements haven't yet been made. First and last they have paid themselves about thirty million dollars. And, in the meantime, the poor stockholder wonders why he doesn't get his dividends!"
"That's the investment market," the Major continued after a pause; "but of course the biggest reservoirs of wealth are the insurance companies and the banks. It's there the real fortunes are made; you'll find you lose the greater part of your profits, unless you've got your own banks to take your bonds. I heard an amusing story the other day of a man who was manufacturing electrical supplies. He prides himself on being an honest business man, and having nothing to do with Wall Street. His company wanted to extend its business, and it issued a couple of hundred thousand dollars' worth of bonds, and went to the Fidelity Insurance Company and offered them at ninety. 'We aren't buying any bonds just at present,' said they, 'but suppose you try the National Trust Company.' So the man went there, and they offered him eighty for the bonds. That was the best he could do, and in the end he had to take it. And then the trust company turns the bonds over to the insurance company at par. I could name you half a dozen trust companies in New York that are simply syndicates of insurance people for the working of that little game."
The Major paused. "You see it?" he asked.
"Yes, I see," Montague replied.
"Is there a trust company by any chance back of this railroad you are talking of?"
"There is," said Montague; and the Major shrugged his shoulders.
"There you have it," he said. "By and by they will find their first bond issue inadequate to meet the cost of the proposed improvements. The estimates of the engineers will be found too low, and there will be another issue of bonds, and your president's company will get another contract. And then the first thing you know, your president will organise a manufacturing enterprise along the line of his road, and the road will give him secret rebates, and practically carry his goods free; or else he'll organise a private-car line, and make the road pay for the privilege of hauling his cars. Or perhaps he's already got some industrial concern, and is simply building the road as a side issue."
The Major stopped. He saw that Montague was staring at him with an expression of perplexity.
"What's the matter?" he asked.
"Good heavens, Major!" exclaimed the other. "Do you know what road I've been talking about?"
And the Major sank back in his chair and went into a fit of laughter. He laughed until he was purple in the face, and he could hardly find breath to speak.
"I really thought you did!" Montague protested. "It's exactly the situation."
"Oh, dear me!" said the Major, fishing for his pocket handkerchief to wipe the tears from his eyes. "Dear me! It makes me think of our district attorney's lemon story. Did you ever hear it?"
"No," said Montague, "I never did."
"It was one of the bright spots in a dreary reform campaign that we had a few years ago. It seems that our young crusader was giving his audience a few illustrations of how dishonest officials could make money in this city.
"'Let us imagine a case,' he said. 'You are an inspector of fruit, and there is a scarcity of lemons in New York. There are two ships full of lemons on the way, and one ship gets in twenty-four hours ahead. Now the law requires that the fruit be carefully inspected. If you are too careful about it, it will take more than twenty-four hours, and the owner of the cargo will lose a small fortune. So he comes to you and offers you a thousand or two, and you don't stop to open every crate of his lemons.'
"The district attorney told that story at a meeting, and the next morning the newspapers published it. That afternoon he happened to meet a fruit inspector, who was an old friend of his. 'Say, old man,' said the inspector, 'who the devil told you about those lemons?'"
The next morning Montague called at Price's office.
"Mr. Price," he said, "a matter has come up in my discussions with Mr. Haskins about which I thought it necessary to consult you immediately."
"What is it?" asked Price.
"Mr. Haskins informs me that it is understood that the Hill Manufacturing Company is to be favoured in the matter of contracts."
Montague was watching Price narrowly, and he saw his jaw set grimly, and a hostile look come upon his features. Price had been lounging back in his chair; now, slowly, he straightened himself up, as if to receive an attack.
"Well?" he asked.
"Is Mr. Haskins correct?" asked the other.
"He is correct."
"He also stated that you are interested in the company. Is that true?"
"That is true."
"He also stated that the company did not manufacture, but simply sold. Is that true?"
"Yes, that is true."
"Very well, Mr. Price," said Montague. "This is a matter about which we must have an understanding without delay. In my preliminary talks with you I was informed that it was your wish to find a man who should run the road honestly. The situation which you have just outlined to me does not seem to me consistent with that programme."
Montague was prepared for an angry response, but he saw the other make an effort and control himself.
"You must realise, Mr. Montague," he said, "that you are not very familiar with methods in the railroad world. This company of which you speak possesses advantages; it can secure better terms--" Price stopped.
"You mean that it can purchase goods more cheaply than the railroad itself can?" demanded Montague.
"In some cases," began the other.
"Very well, then," he answered. "In any case where it can obtain better terms, there can be no objection to its receiving the contract. But that does not agree with what Mr. Haskins told me; he gave me to understand that we were to prepare to pay a much higher price because it would be necessary to give the contracts to the Hill Manufacturing Company; and that was my reason for coming to see you. I wish to have a distinct understanding with you upon this point. While I am president of the Northern Mississippi Railroad, everything that is purchased by the road will be purchased in fair competition, and the concern which will give us the lowest price for the quality of goods we need will receive our order. That is a matter about which there must be left no possible room for misunderstanding. I trust I have made myself clear?"
"You have made yourself clear," said Price; and so the interview terminated.