Chapter XXIII
Canals and Rail-Roads.
§1. In carrying out the purposes of government, provision ought also to be made to secure to the people the means of obtaining a suitable reward for their industry, and to render the labor of all, as nearly as may be, equally profitable.
§2. The people of some states do not possess the same advantage as those of others; nor do all the people of the same state enjoy equal advantages. Those who reside at a great distance from market, or from navigable waters and good roads, are not so well rewarded for their labor as those who reside near them, because of the greater cost of the transportation, both of what they have to sell, and of the goods they buy. Hence the necessity of good roads, canals, or other means of facilitating trade between the different parts of the state.
§3. Among the works intended to effect this object, _canals_ are perhaps the most useful, and are to be preferred wherever their construction is practicable. Canals are sometimes constructed by incorporated companies; but generally these works, especially those of great magnitude, are made by the state, and are the property of the state. Although there are some states in which are no canals of this kind, it may be interesting to young persons generally to know how so important a state work is made.
§4. To raise the money necessary to make a canal, the legislature might levy a general tax upon the property of the citizens. But this would not be expedient or just; because, first, the payment of so large a sum by the people within the time in which it would be desirable to complete the work, would be inconvenient and burdensome; and secondly, the expense must fall alike upon the people of all parts of the state: whereas, those residing most remotely from the line of the work, would derive from it little or no benefit.
§5. When, therefore, a great enterprise of this kind is undertaken by a state, the law authorizing the work usually provides a _fund_, the income of which is to be applied to this object. This fund consists of such lands, property, and moneys as the legislature may grant for this purpose. Funds were thus constituted in some of the western states, to which funds congress made grants of the public lands of the United States lying within those states.
§6. These funds, however, furnish but a part, some of them but a small portion of the money necessary to complete the work; and some states undertaking public improvements may not have the lands or other property to constitute such a fund. The state therefore borrows the money for a long term of years, and depends upon the income of the canal fund and the tolls to be collected on the canals, for the repayment of the money borrowed. Should the revenues of the canal and of the canal fund be insufficient, the deficiency may be supplied by taxation.
§7. The business of borrowing the money is done on the part of the state, by persons duly authorized, who give for the money borrowed the bonds of the state, which are written promises to pay the money at the times specified, with interest at the rate agreed on; the interest generally to be paid semi-annually. These bonds are usually given in sums of $1,000 each, or less. The debts of a state thus contracted by issuing bonds, are called _state stocks_, as the capital, or stock required to construct a state work is obtained by the sale of its bonds. These bonds, like the certificates of stock in a rail-road or other corporate business company, are transferable, and may be bought and sold as promissory notes, and constitute an important article of trade.
§8. These stocks are taken by men who have large sums of money to lend, and who consider the state a responsible debtor; because, if it has no other sufficient means of paying its bonds, the legislature has power to raise the money by taxation. Most of the states have contracted debts in this manner for various purposes. State stocks are purchased and held not only by capitalists in this country, but by many in Europe.
§9. Officers are appointed to manage the canal fund, and others to superintend the canals. There are also officers, called _canal collectors_, at suitable distances along the canals, to collect the _tolls_, which are charges paid by the masters or owners of boats for the use of the canal.
§10. The states of New York, Pennsylvania, Ohio, and some other western states, have prosecuted the canal enterprise on a large scale. Although large debts have been contracted for the construction of canals in these states, the benefits derived from them more than compensate for the vast expense of their construction.
§11. _Rail-roads_, although they are of public utility, are not properly public works, being constructed by companies incorporated for that purpose. The necessity for an act of incorporation is readily seen. Rail-roads pass through the lands of private individuals; and without the authority of law, the land of no person can be taken for such purpose; nor can a law authorize it to be taken, unless the work is one of general advantage; nor even in such case, without compensation to the owner for his land; for it is declared by the state constitutions, that "private property shall not be taken for public use without just compensation."
§12. If, therefore, the legislature deem a proposed railroad to be of public utility, they pass an act to incorporate a company with the requisite powers to construct the road, on making compensation for the land, the value of which is to be estimated in such manner as the law prescribes. The law also prescribes the manner in which the affairs of the road are to be conducted.
§13. The amount of capital to be employed by the company, is mentioned in the act of incorporation, or charter, and is raised in this way: The amount of the capital, or stock, is divided into shares of $100, or less. Persons wishing to invest money in the road, subscribe the number of shares they will respectively take. When all the shares are thus sold and the money is paid in, the company is ready to proceed to the construction of the road. The owners of these shares are called _stockholders_, who choose from among themselves such number of _directors_ as the charter authorizes. The directors elect from their number a _president_.
§14. Persons buying shares receive certificates signed by the proper officers, stating the number of shares for which each certificate is given. The holders of these certificates, if they wish to make other use of the money they have invested in the business, may sell their stock to others, to whom they pass their certificates, which are evidence of the amount of stock purchased. Thus these certificates are bought and sold as promissory notes.
§15. Stockholders depend, for the reimbursement of their capital, upon the money to be received for the transportation of passengers and freight. Such portion of the income of the road as remains after paying all expenses of running and repairs, is divided semi-annually among the stockholders. Hence the sums thus divided are called _dividends_. The earnings of some roads are so large as to make the investment a profitable one; so that the holder of shares is enabled to sell them at an advance. When shares in the stock of any institution are sold at their nominal value, the price named in the certificates, the stock is said to be at _par_. When they are sold for more or less than their nominal value, they are said to be above or below _par_. In large commercial cities, as New York, Boston, Philadelphia, and others, the purchase and sale of state stocks, and stocks in rail-roads, banks, &c., is a regular and extensive business of capitalists.
Chapter XXIV
Banks and Insurance Companies.
§1. Banks, we are told, were first instituted in Italy, where certain Jews assembled, seated on benches, ready to lend money, and to exchange money and bills; and _banco_ being the Italian name for bench, banks took their title from this word. The first banks are said to have been only places where money was laid up or deposited for safe-keeping. But banks at the present day are not used for depositing alone.
§2. Banks in this country can be established only by authority of law. They are incorporated by an act of the legislature. The capital stock is raised by the sale of shares, and issue of certificates, as in the case of rail-roads. (Chap. XXIII., §13.) The stockholders elect of their number (usually) thirteen _directors_, who choose one of themselves as _president_. The president and directors choose a cashier and clerks.
§3. Merchants and others in commercial places, deposit in banks, for safe-keeping, the money they receive in the course of business, and then draw it out on their written orders as they have occasion to use it. An order of this kind is called a _check_.
§4. Persons depositing money only once, or very seldom, and intending to draw for the same at once, usually receive from the cashier a _certificate of deposit_, which states the name of the depositor, the sum deposited, and to whose order it is to be paid. For the use of money deposited for any considerable period, banks agree to pay interest, usually less, however, than the rate established by law. Certificates of deposit may, by indorsement, be made transferable as promissory notes and other negotiable paper, (Chap. LX., §2,) and are often remitted, instead of money, to distant places, where, by presenting them at a bank, they may, for a trifling compensation, be converted into money.
§5. A material part of the business of banks is to assist merchants and others in transmitting money to distant places. Thus: A, in New York, wishing to send $1,000 to B, in Philadelphia, puts the money into a bank in New York, takes for it an order, called _draft_, on a bank in Philadelphia, for that amount, to be paid to B. The draft is sent by mail to B, who presents his draft at the bank, and receives the money; and the bank charges the amount to the New York bank.
§6. But persons unacquainted with commercial business, especially young persons, may not know how the bank in Philadelphia is to be repaid. In the course of trade between the two cities, business men are constantly remitting money both ways through the banks, which thus receive the money and draw upon each other. Thus millions of dollars may be annually transmitted between the two cities, without any expense except the small charge of the banks for doing the business, and without the risk of loss by accident or robbery which attends the conveyance of money in person.
§7. Banks also lend money. The borrower gives a note for the sum wanted, signed by himself, and indorsed by one or more others as sureties. The cashier pays the money for the note, retaining out of it the interest on the sum lent, instead of waiting for it until the note becomes due. This is called _discounting_ a note.
§8. The bills of banks pass as money. A bank bill or note is a promise of the bank to pay the bearer a certain sum on demand, signed by the president and cashier. It passes as money, because the bank is bound to pay it in specie if it is demanded. Paying notes thus is _redeeming_ them. When a bank is unable to redeem all its bills, it is said to have failed, or to be broken; and the bill holders suffer loss, unless some security has been provided. This has been done in some states by making the stockholders individually liable for the redemption of the bills; that is, the property owned by them as individuals may be taken and sold on execution for that purpose. Such security, however, has never been generally provided.
§9. But a system of banking, sometimes called _free banking_, has more recently been adopted in some states. It is so called, because the business of banking is thrown open to all by a _general law_. Any person, or any number of persons, may, by complying with the provisions of this general law, establish a bank without a special law for this purpose. Hence it is also called the _general banking_ system.
§10. Persons, before commencing business under this law, must put into the hands of the proper state officers ample securities for the redemption of their bills; and they may not issue bills to a greater amount than the amount of their securities. These securities must consist of approved state stocks, or United States stocks, or partly of public stocks, and partly of real estate. When a bank fails, the lands and stocks held in pledge by the state are sold, and the avails are applied to the redemption of the bills. This system of banking seems to be growing into public favor.
§11. _Insurance companies_ also are authorized by law. Their business is to insure persons against loss by fire. The corporators, on being paid a small sum, consisting generally of a certain percentage on the amount for which the property is insured, promise to pay such amount if the property shall be destroyed by fire. There are companies also for insuring vessels at sea; and _life_ insurance companies, that agree to pay, in case of the death of the person insured, a certain sum for the benefit of his family, or of some other person named in the policy. The word _policy_ as here used, means the writing containing the terms or conditions on which the company agrees to indemnify the person insured in case of loss. The money paid to obtain insurance, is called _premium_.
§12. The profits of the stockholders consist of the excess of money received for premiums over the amount paid out for losses. Thus, if a company has issued 2,000 policies, each covering property of an average amount of $1,000, the amount of risk is $2,000,000; and if the rate of insurance is one per cent., the amount received in premiums is $20,000. Hence, if none of the 2,000 buildings is burned within the time the insurance is to run, the $20,000 are gained. If ten of them should be burned, there would still be a gain of $10,000. If twenty should be destroyed, there would be no gain, but an actual loss to the amount of the expenses of the concern.
§13. But from the average number and amount of losses annually for many years, companies are enabled so to fix the rates of insurance as to give the stockholders a fair profit on their capital. The rates are not the same on all kinds of property; a higher per centage is charged on that which is deemed hazardous, or more exposed to fire, than on that which is less exposed. The profits on the business of the company, or the _dividends_, as they are called, are annually or semi-annually divided among the stockholders, in proportion to the amount of their respective shares.
§14. There is another kind of insurance companies, which differ materially from the _stock_ companies described in the preceding sections. They are _mutual_ insurance companies. They are so called because the members unite in insuring each other. Every person having his property insured by such a company is a member of it. He has his buildings and the property in them valued; and pays a certain rate per cent. on such valuation. A fund is thus raised out of which any member suffering loss by fire is paid the amount for which the property was insured. When the fund is exhausted, it is again supplied by a tax assessed upon the members in proportion to the amounts for which they are respectively insured.