140 EDWARD SHERWOOD MEADE 



which guaranteed to the purchaser that passed dividends 

 would be made good before anything was paid on the common 

 stock. This cumulative provision had been inserted by reason 

 of the greater security which it carried with it. Preferred 

 stocks which are cumulative as to earnings, and which, in the 

 event of hquidation, constitute a preferred claim to assets, are 

 hardly inferior to mortgage bonds and are superior to ordinary 

 debentures. The owners of plants were more willing to re- 

 ceive such securities in exchange for their properties than if 

 the promoter had offered only one kind of stock for all pur- 

 poses. 



This cumulative feature, however, although a valuable aid 

 to speculative promotion, was a serious obstacle to the accu- 

 mulation of surplus reserve. It was impossible for the steel 

 trusts to decrease their liabilities by the passing of preferred 

 dividends, because the passed dividends remained alive as de- 

 ferred claims to future earnings. It is true that the directors 

 might, with perfect safety to the corporation, have allowed 

 the preferred claims to accumulate to any amount. The back 

 dividends need never be paid, and an adequate surplus could 

 in this way be gathered for future dividend payments on the 

 preferred stock. But the morality of such a course, in view 

 of the existence of an amount of common stock equal in par 

 value to the preferred, which had been purchased in good 

 faith by large numbers of people, would have been doubtful. 

 No matter how necessary the passing of their early dividends 

 and accumulation of large reserves by the steel trusts may be 

 judged to have been, so far as the preferred stock was con- 

 cerned, in view of the cumulative provisions included in the 

 contract with this class of stockholders, it was impossible. 



The payment of dividends on the common stock was 

 less imperative; but here also there is much to be said in 

 justification of the course pursued. The promoters had made 

 promises that common stock dividends w^ould be paid. The 

 earnings of the corporations were apparently large. The pre- 

 ferred stockholders were receiving their dividends, and to the 

 holders of common stock it seemed unreasonable and unjust 

 that, in such prosperous times, a discrimination siiould be 

 made in favor of the preferred stock. The reputation of the 



