the investment function as a side line, represented by such banking companies as the Société générale de Belgique and the Banque Belge de chemins de fer. Those in Germany are inconsequential.

Criticism. In theory, the investment company is in a position to render a valuable service to small investors by eliminating excessive risk from investment in securities; but in practice this theory seldom works out in such a way as to be entirely satisfactory. This is due, not to any inherent weakness of the investment priciple, but merely to the fact that any type of ownership organization in business must be run by man, who is not infallible in his judgment of the future value of business undertakings. Another weakness militating against proper insurance of small investors who buy securities of investment companies lies in the fact that these companies are private undertakings usually operated by those who manage them, and who look first to their own private profit. This feature is emphasized by the extensive use of founders and managers shares which are usually held by those persons who were particularly interested in promoting such companies. Their stock is frequently guaranteed by a first claim to a fixed rate of dividend and on assets with right to share liberally in extra profits. This prospect of extra profit and security has led many managers of investment companies to put the capital into speculative securities, which as frequently as not prove unprofitable. For these reasons it is open to serious doubt whether the investment company really does render a service to modern industry that can not as well be left to the individual investor. The latter is no better equipped to ascertain the value and stability of the securities isssued by investment companies than of those issued by operating concerns. It would, in most cases, be much safer for him to invest in the stocks of the big, firmly established industrials and railways, or in government bonds.

CHAPTER XVI

PRINCIPLES OF CONTROL

THE INSTRUMENTALITIES OF CONTROL

CONTROL Over one ownership organization by another, while both retain their separate entities, is defined in a special report of the Interstate Commerce Commission1 as ability to determine the action of the organization. In explaining what constitutes ability to determine action, the report proceeds to enumerate eight conditions, the existence of which in the relations between two or more organizations is evidence of control. These may be reclassified according to the instrumentalities that are employed to establish the condition of control in the following

manner:

I. By contracts whereby control over the property other than the instrumentalities of organization is secured, namely, by leaseholds giving the controlling organization

2. The right to all property except the instrumentalities of organization

2. The right to all such property except money and choses in action other than securities and

3. The right to such portion of the tangible property as is capable of being employed to discharge the duties and functions of the organization.

II. By participation through ownership of securities either in the form of

A. Voting control, by virtue of

1 Interstate Commerce Commission, Special Report No. 1, Washington, D. C., 1908, p. 15.

1. The right to exercise the major part of the voting power attached to the securities

2. The right to name the major part of the board of directors or managers, whether by virtue of a voting trust agreement or otherwise, or

B. Foreclosure control, by virtue of

1. The right to foreclose a lien upon all the property of the organization

2. The right to foreclose a lien upon the major part of the property.

III. By agreements creating the right to determine the action of the organization in some specified respect or respects.

Control established by contract is not dependent upon any specialized form of organization, but may be instituted by any of the forms of ownership that have thus far been described, namely, by the personal ownership, the primary securities-issuing and the securities-substitution types. Because of its versatility it is difficult to assign contract control to its proper place. However, since, in practice, it is most frequently found to be used in conjunction with participation company organizations, it seems to be more logical to describe it in connection with that type than any other.

Participation control is by far the most common type to be found in this country, where it is used to such an extent, through the instrumentality of the holding corporation, that control may be said to be the chief use made of that form of organization.

Control by agreement includes several types of arrangements ranging from informal inter-organization agreements to formal agreements creating such forms of organization as associations, pools and kartells. These seldom result in so complete a control over the organizations affected as is possible under the first two classes.

CONTRACT CONTROL

In no other field of enterprise is control through contract of leasehold so common as among the American railroads. There is scarcely a single great railroad system that has not at least in part employed this method of control to build up and to consolidate its railway mileage. This condition arises from several circumstances. In the first place, railways, like all transportation enterprises, are very often dependent upon one another for business. A given company may operate a section of line connecting two other roads while most of its business originates in sections of the country that it does not reach. Again, in certain sections of the country, especially in the North and the South, there are innumerable short lines that serve merely as feeders to main line companies. These frequently lack complete equipment and are economically dependent upon the larger companies in this particular. It is only natural under such circumstances that the larger companies, operating great systems, should seek to secure this additional trackage for their own use without incurring the expense of purchasing it or acquiring the companies that own it. As a result, they lease such properties on an annual rental basis for long periods of time.

In the second place, a railroad, as are all public utilities, is practically a natural monopoly. Two railways can not well serve the same territory and return profit on their investment. Over long distances, it is true, they compete, as in the case of roads running from New York City and Philadelphia to Chicago, and from Chicago to the Puget Sound. But between these terminal points there is very little competition. As a result of this characteristic, the urge is extremely strong to acquire the use and control of roads already built rather than to build new ones. Here the leasehold offers the simplest solution.

The most prominent example of leasehold control in this country is to be found in the Southern Pacific railway system. In 1894, the Southern Pacific Company secured from the Central Pacific Railroad Company, through a 90 year lease, control over all of the properties, including 2,289 miles of line of the latter company. It pays for this right a fixed rental of $10,000 per year and out of the net profit, after operating expenses, maintenance and interest charges have been paid, 6 per cent on the capital stock to the lessor company. If earnings exceed that amount the surplus is divided equally between the two companies. In 1914, the arrangement was attacked by the Department of Justice as contravening the provisions of the Sherman Anti-Trust Act, but the decision of the court upheld the agreement as lawful.

As illustrative of the continued existence of the legal entity of the lessor organization under such agreements, it is well to point out that the Central Pacific Railroad Company was reorganized without disturbing the control over its properties by the Southern Pacific Company. In 1899, the original lessor company was dissolved and the title to its properties was acquired by the Central Pacific Railway, organized in that year in the state of Utah.

Most of the railway companies operating in the Northeastern part of the country have leased the lines of many smaller companies. The Delaware, Lackawanna and Western Railroad Company in this way controls some 14 companies with a total mileage of 702.6 miles. The larger units among these companies are the New York, Lackawanna & Western Railway, 214.4 miles, the Morris and Essex Railroad, 119 miles, the Utica, Chenango and Susquehanna Valley Railroad, 97 miles, and the Syracuse, Binghamptom and New York Railroad with 81 miles of

line.

There are also instances where the leased lines comprise