The parent company also held that the securities issued by its operating companies ought to represent legitimate values, not speculative or estimated values based on what the plant might earn in the future; that the intrinsic value of the telephone securities should be made clearly apparent to investors, and that the established integrity of the investment should be maintained by providing ample sinking funds and reserves to cover every contingency. Its expressed policy was:
Such conservative methods were not in accord with the sentiments of speculators who preferred to experiment with the credulity of thoughtless investors, so long as such experiments yielded rich profits. The people believed the newspaper stories about the fabulous profits small telephone exchanges were deriving from limited investments. Then why destroy such honest beliefs by presenting cold facts? Consolidation of exchanges was a good thing; it meant large profits for the promoters.
When these local exchanges were transferred to the management of the new organization, it was quickly perceived that many subscribers were receiving service at rates involving constant loss to the company, as already stated. An increase in rates naturally followed, which, in turn, resulted in some of these low-rate subscribers discontinuing the use of the service. Sometimes from 25 to 50 per cent, of the subscribers to these consolidated exchanges would drop out, and the loss in the income anticipated from these subscribers upset many plans. For most of these new organizations, in expectation of being able to readily dispose of the new securities, had proceeded to reconstruct the old plants absorbed with a view to giving a higher class of service and of promptly and properly handling a large increase in the number of subscribers. To meet the indebtedness thus incurred it was necessary either to sell shares of stock at a price considerably lower than the authorized price, or else to settle the indebtedness with the funds set aside for dividend payments, and in lieu of cash payments to shareholders to issue stock dividends. Again, this inability to raise the funds necessary to make needed extensions and improvements and to keep pace with the growing demands of the public, meant that for an indefinite period the gross earnings must provide for all construction and reconstruction, as well as for the operating and maintenance charges. In other words, in 1883-1886, until improved financial conditions permitted the sale of telephone securities at reasonable prices, growth and progress were necessarily limited within narrow lines that yielded sure returns to the holders of stock certificates.
