and as the incorporators allow themselves 5
per cent. for the negotiation of the bonds, only $1,500,000 is realized
for the construction of the road. The incorporators now vote to
themselves a contract to construct the road for $1,500,000 and at once
sublet it to a contractor who is ready and anxious to build the road for
$1,200,000. The incorporators thus realize $1,000,000 worth of stock, a
portion of which is unloaded upon unsophisticated investors, and
$300,000 in cash, at an outlay of $50,000; and the road, which cost
$1,200,000, is made to pay interest and dividends on a total capital of
$3,000,000, and this is subsequently watered indefinitely if the road
proves profitable or a consolidation with some other road justifies the
belief that its earning capacity might be increased. Nor is this an
overdrawn picture. On the contrary, instances might be cited where only
one-half of one per cent. of the company's stock was paid in by the
shareholders.

In the days of inflation such transactions did not seem to seriously
affect railroad securities. Even when they were no longer a secret to
the public, stocks and bonds sold readily, because, owing to the large
earnings of the roads, this class of investments was unusually
productive.

In 1868 the earnings of the railroads of Massachusetts averaged $15,400
a mile, and were equal to 38 per cent. of the total reported cost of all
the lines of the State. The Chicago, Burlington and Quincy earned
$15,386 per mile in 1867, and paid a 15 per cent. dividend. Its stocks
were quoted 100 per cent. above par. In 1867 the Lake Shore Railroad
earned more than 50 per cent., and the Terre Haute and Indianapolis even
as much as 57.2 per cent. of the amount of its cost. Previous to the war
the inflation of railroad securities was, as a rule, confined to the
stock. Where roads were bonded for more than the cost of construction it
was, with but very few exceptions, done to make their capital to
correspond with their earning capacity, or rather to divert public
attention from the fact that the rates in force had outlived their
reasonableness. It was reserved to the Union Pacific and the Central
Pacific companies to bond their roads from the beginning to an amount
equal to twice their actual cost, or, in other words, to virtually
receive them as a present from the Federal Government, bond them for all
they were worth, and, in addition, issue stock to an amount largely in
excess of the cost o