on their bonds when it fell due, to give it up; in other words, that it should not continue as an unpaid debt of the company, but be regarded as discharged. These bonds are now known as non-cumulative income bonds, and the owners get interest on them if the company is fortunate enough to earn the amount required, otherwise they receive nothing. The gain to the company is apparent, for the former fixed obligation to pay interest has been turned into a conditional one, the performance of which depends on the profits earned by the company.

19. Profits. - Some of the older and larger trust companies have undertaken reorganization schemes. They are very profitable, involve but little risk on the part of the organizers, but great wisdom and tact are required to execute them successfully. One banking house in New York especially has been a successful reorganizer of several great railroad companies. Not infrequently years are required to bring a reorganization scheme to a close; but not having been undertaken until the company was in a hopeless condition, this condition of things continues to favor the reorganizer until he brings his difficult undertaking to a successful close.

20. Trusts. The last kind of undertakings financed by banks and bankers are industrial trust enterprises. Of these not much need be said here, for the mode of creating and financing them is familiar knowledge. Though the details of every trust differ from those of every other, the general features are the same. The property of two or more similar enterprises is bought and recapitalized at a sum greatly exceeding their former valuation. Sometimes the properties of several are bought and united, as in the case of the United States Steel Corporation. One or more of them usually have been prosperous, but it is

not an uncommon thing when uniting several to add some which have not had a profitable history.

21. Division of Bonds. The capital consists generally of three parts: first, bonds, which lie at the bottom and are a first lien on all the united property for their payment. In other words, should these not be paid, or the interest on them at maturity, the owners can foreclose the property and take it, and thereafter hold it absolutely as their own. The bonds are issued for about half the value of the property, so there is a wide margin for loss and depreciation occasioned by the ups and downs of business.

22. Preferred Stock. The second part of the capital consists of preferred stock, on which a fixed rate of interest is to be paid. The amount issued perhaps may equal that of the bonds, and it is expected that the company will, in ordinary times, easily earn the amount thus promised to the preferred shareholders.

23. Common Stock. The third part of the capital consists of common stock, a portion or all of which may be issued. The amount often equals that of the bonds and preferred stock combined, and is not all issued at the beginning. The residue of profits not required to pay the interest on the bonds and preferred stock belongs to the common stockholders. They take the skim milk of the enterprise, and in many cases this proves to be very thin indeed.

24. Services of Bankers. Bankers sometimes aid in forming the trust; generally this is the work of others. But when the several factories or other properties are bought, or are offered to the projectors of the enterprise, its success from their immediate point of view consists in selling the bonds and stocks and paying the seller, and still having a large quantity left as their profit, which they may

keep or sell as they may be inclined. To sell the bonds. and stocks is often the work of bankers, who receive a large profit on their undertaking.

25. Amount of Capital. The capital that is to be issued is based on the earnings of the property that is to form the subject of the trust. These are ascertained for a period usually of three years, or perhaps longer, and form the basis of the superstructure. If, for example, the net annual profits of a concern, or several that are to be united, are $75,000, it is deemed safe to issue bonds bearing six per cent interest for $500,000 preferred stock for the same amount, and bearing the same rate of interest, leaving $15,000 for the common stock; the amount which is authorized, and partly or wholly issued, may be another million. Supposing that the properties have all been bought for the money represented by the bonds and preferred stock, it follows that if the projectors can sell a considerable portion of the common stock, even at a low figure, they still realize large profits.

26. Remuneration. It is not an uncommon thing for the sellers to agree to receive in the way of payment a very considerable part of the purchase price in bonds, or preferred stock, or both. Sometimes they even take a part of the common stock. Thus it is reported that Mr. Carnegie was content to receive all or the largest portion of the price for his great steel works in the bonds of the new company.

The payment of the principal and bonds of a trust company may be guaranteed by a bank or banker, as in the case of the Morgan Ship Combination. For doing this the banking house receives a sum in addition to their other profits for financing the enterprise.

XXXIII. RAILWAY FINANCE

1. Mortgage Bonds. We have already seen how banks become interested in some of the financial operations of railway companies; they also participate in others, especially in negotiating loans for them, which are reserved for this chapter.

At the outset we will describe the various kinds of bonds issued by railway companies, beginning with mortgage bonds. These are notes or promises issued generally for the sum of $1,000, while the aggregate amount is determined by many conditions. They are payable to bearer, are negotiable, and are to be paid at a fixed date, -five, ten, twenty years, or perhaps longer, from the date of issue at a specified place. The interest is payable usually semiannually, and the bonds state what property is pledged for the payment of the principal and interest. They also state the mode of redeeming them: how a sinking fund is to be created for that purpose, or how they may be converted into other bonds or perhaps stocks. They are signed by the president and treasurer, and in many cases by the trustees to whom they are made out, who must defend the rights of the bondholders should the company fail to fulfill its promises made in the deed of mortgage of its property to trustees.

2. Security for Bonds. To secure these bonds a deed of mortgage is given of the company's property to trustees, and this deed is lodged usually with some well-known trust company to render the bondholders as secure as

possible. This deed in effect is a conveyance of the company's property to the trustees as security for the bondholders, to which an important condition is attached; namely, that if the company fulfills its obligations to its bondholders, paying them interest on their money and the principal at the time and in the manner promised, then the deed shall be of no account; but if the company fails to execute its promise, then the trustees can take possession of the property described in the deed for the benefit of the bondholders, and sell the same or make such other disposition of it as the bondholders or the law may direct.

This is the most important of all bonds given by a railroad company. Often in building a railroad the shareholders advance a part of the money required, and mortgage the company's property for the remainder, which by virtue of the terms of the mortgage is a first lien thereon, consequently, if it is not paid, the bondholders, or the trustees of the mortgage for them, can take the property in payment of their debt as already described.

3. Subsequent Mortgages. In many cases several mortgages are issued by a railroad on the same property, but they are not of equal worth. Each mortgage issued is subject to the one or more issued before it. The first mortgage, which is the oldest of course in time, is the first lien, and the subsequent ones are liens in the order of age. If the property should be sold to pay the mortgagors, and the sum received was equal to the amount only of the first mortgage, the holders of the second or third mortgages would receive nothing.

4. Value of Bonds. The value of such bonds depends on the worth of the security on which they rest. Usually the first mortgage bonds of railroads are amply secured, especially of the older railroads, but in some instances