The burden of proof is on the buyer. If he turns to the District Attorney he finds perhaps a sympathetic official, without power to a.s.sist him. The man selling bogus mining stocks knows all this; therefore his harvest goes on. It is better than the green-goods game, better than the wire-tapping swindle, safer than selling any other form of gold bricks. A few years ago a reporter who was engaged in investigating the schemes of Cardenio F. King--now in Charlestown jail, but then posing as "the apostle of the golden rule in finance" and selling his stocks by the barrel in every mill town in New England--made a call on the late John B. Moran, then District Attorney in Boston and widely known as a reformer. He asked Mr. Moran's help in proving that King was a swindler.

"Young man," said Boston's reform District Attorney, "if King was selling corner lots in heaven and advertising them in the newspapers, I couldn't stop him, because I haven't anybody to send up there and prove that they are not there."

King wasn't selling corner lots in heaven, but he was selling stock in a Texas company that was the next thing to it, so far as tangibility is concerned. It was only when he actually took from investors money sent to him to buy real stocks, and pocketed it, that he was put in jail.

LAWS TO PROTECT INVESTORS

A plan for the protection of the investor by statute is embodied in a model law drafted by the American Mining Congress of Denver, and recommended for general pa.s.sage:

AN ACT.

To Prohibit the Making or Publishing of False or Exaggerated Statements or Publications of or Concerning the Affairs, Pecuniary Condition or Property of Any Corporation, Joint Stock a.s.sociation, Co-partnership or Individual, Which Said Statements or Publications Are Intended to Give, or Shall Have a Tendency to Give, a Less or Greater Apparent Value to the Shares, Bonds or Property, or Any Part Thereof of Said Corporation, Joint Stock a.s.sociation, Co-partnership or Individual, Than the Said Shares, Bonds or Property Shall Really and in Fact Possess, and Providing a Penalty Therefor.

Section 1. Any person who knowingly makes or publishes in any way whatever, or permits to be so made or published, any book, prospectus, notice, report, statement, exhibit or other publication of or concerning the affairs, financial condition or property of any corporation, Joint-stock a.s.sociation, co-partnership or individual, which said book, prospectus, notice, report, statement, exhibit or other publication, shall contain any statement which is false or wilfully exaggerated or which is intended to give or which shall have a tendency to give, a less or greater apparent value to the shares, bonds or property of said corporation, joint-stock a.s.sociation, co-partnership or individual, or any part of said shares, bonds or property, than said shares, bonds or property or any part thereof, shall really and in fact possess, shall be deemed guilty of a felony, and upon conviction thereof shall be imprisoned for not more than ten years or fined not more than ten thousand dollars, or shall suffer both said fine and imprisonment.

This law has been enacted in six states and a campaign for its general enactment is under way. But let not the credulous investor suppose that even such a law would guarantee him against loss. The Secretary of the American Mining Congress, Mr. James F.

Callbreath, offers the following comment:

CAMPAIGN OF THE AMERICAN MINING CONGRESS

"I do not believe that any one law can effect protection to mining investors, nor that the protection afforded through the Post Office Department forbidding the use of mails for fraudulent advertising matter can fully cover that ground. The greater part of mining frauds are perpetrated without the use of the mails.

"The proposed law, in our judgment, is the longest possible step toward preventing mining frauds. A second step has been taken in the form of a publicity law. My belief is that no system of laws, either state or national, will prevent men from gambling in mines more effectually than such laws now prevent gambling in its more common forms. These may restrict and furnish protection to those who are wise enough to open their eyes, but it will be impossible to protect all the fools all the time. It is the purpose of the American Mining Congress, after having secured the enactment of laws providing penalties for fraudulent representations and requiring publicity, to perfect an organization to SECURE EXECUTION of these laws, and also to carry on campaigns of education showing to investors, first, that mining is a legitimate business and not a gamble; second, that mines are found and not made; third, that investments in mining should be made with the same care and prudence exercised by business men when embarking in other business enterprises. . . . The next work of our organization will be along the line of developing some manner of control of corporations by which paid-up capital stock shall represent actual value."

Mr. Callbreath would seem to be one fore-doomed to his own troubles; yet it is clear that he and his organization stand for legitimate mining as opposed to prospect-selling. In strictly accurate phrase, it is the prospect which is found, and the mine which is made and investment cannot properly begin until a body of ore has been blocked out in a proved prospect. Add to the glamor of risk the haze of fraud, and the foregoing will show the nebulous condition of mining investments in relation to mining laws in America to-day.

What we really need is a Bureau of Mines at Washington. n.o.body protects the mining investor. n.o.body guards the widest open gate into the savings deposits of this country.

The American Mining Congress, it should be stated, had a quasi pre-inaugural pledge from President Taft in favor of a Federal Bureau of Mines. Toward this we have made a start. A bill establishing this Bureau has already pa.s.sed both the House and the Senate, and bids fair to become a law. But the activities of this new department will be confined to safe-guarding mineworkers. The next step should be to enlarge the province of the Bureau so as to include the supervision of the mining industry for the protection of investors.

It seems quite likely that the states and the nation will need to unite if adequate protection to the investing public is to be expected. But when did state and nation unite to solve a great popular problem? When did section ever unite with section or even resident with nonresident? This is America.

THE ENGLISH WAY OF MINING--HONEST BUSINESS

Back of any movement of this kind there must be popular interest in popular education. Thus far, the greater publicity idea is of more value than anything at hand. We may perhaps. best do our own little part by offering some studies in the theory of mining, showing just WHY it is risky, and just HOW we ought to tabulate the risk. In addition to this, we can present, and should perhaps first present, some of the results of intelligent mining as pursued in other countries.

Take the Rand Mines of South Africa, operated on the English basis--mines which turned out more than $12,500,000 in one month not long since. The English method of operating on the Rand is this: A corps of experts is sent to examine a proposed property--that is to say, a proved prospect. If their report be favorable, an estimate is made of the cost of a five-or seven-compartment shaft, to be sunk, say, 3,500 feet. The cost of producing a year's supply of ore for the mill is then considered.

The cost of the mill and the cyanide plant is also figured. The total cost is then cast up, and the company is ready to be formed for a half million to five millions of dollars, according to existing conditions. This money is paid in, and is ready to start operations. These men mine carefully, using all possible scientific knowledge and practical experience as guides. The operation may have risk, but it is perforce honest.

THE AMERICAN WAY--A GAMBLE

Now let us examine conditions not infrequent in the United States, by no means a.s.signing wings to all English mining men, or hoofs to all Americans:

A prospector discovers mineralized rock. He locates one or more claims as controlled by the laws of the district where he is.

Perhaps others also locate more ground. A little work is done, and then the claims are up for sale. A claim is perhaps sold for a few hundred to several thousand dollars; sometimes the seller receives in addition stock in the company to be formed. No attention is paid to the geology, but a company is formed ostensibly for the purpose of mining, with a capital of one million shares at one dollar par. Perhaps four hundred thousand shares are placed in the treasury to be sold for development purposes. Of course the whole thing is as yet on a wholly gambling basis. The property is still a prospect and not a mine, and hence it is not possible to put it on an investing basis.

Comparatively few companies have ever used the services of a real expert, although very possibly the company furnishes a report made from a purchasable local "mining engineer," one of the cheapest commodities in any mining district, where the wide hat and the high-laced boot often take the place of a mining education and a reputable character. This is the stage at which, this is the basis on which, most of the mining "investments" of America are made.

In this state of affairs grafters find their opportunity. Prices in a boom camp are always above any sort of industrial warrant.

There were literally millions of dollars poured into Goldfield and Tonopah for claims which never had any careful examination by competent men. Fortunes were made by local promoters and "operators" out of claims which could not show ten feet of actual work. Sometimes the entire capitalization was sold out, and the promoters put the money in their pockets. One operator of this kind sold $130,000 worth of stock, and omitted the precaution of putting even ten per cent. of it in the treasury. Fortunately, he got into the penitentiary. Many of his fellows never had actions brought against them except under the postal laws, which naturally are inefficient. There was one shaft of a hundred feet which cost twelve thousand dollars, charged up to the stockholders, the names of dead men being used on the pay rolls as "laborers." The mine boss and the local officers got big salaries to keep their mouths shut. The real mine was in the savings banks of America, in the pockets of non-residents. In Nevada alone, in the past four years, more than twenty million dollars have been invested in WORTHLESS properties. One engineer with a government certificate could have saved the clerks, stenographers, widows, washwomen, and orphans of America fifteen million dollars at the cost of, say, five thousand. Would that have been a good investment? What could a dozen do? What could an efficient corps do? Is there here yet one more future task for our patient and long-suffering United States Army? What police work would pay better dividends?

THE PROMOTER AND THE CREAM

Even when the mine wins, the small stock-holder rarely wins. The promoters often take the cream. Suppose a company is organized for three million shares. One million is put in the treasury for sale. Of this million shares, say, two hundred thousand are offered at twenty-five cents. This raises a working capital of fifty thousand dollars. Let us be very glowing, and suppose that, with this fifty thousand dollars, we really uncover five million dollars' worth of ore. The net profit would not exceed three million dollars; so that the man who put in twenty-five cents might, after a long time, get back a dollar. In the meantime, two million dollars would have gone to promoters, in "commissions,"

and so forth. There are thousands of such cases, and still the people continue to bite on such bait.

THE PUBLIC = THE MINE

Instances of actual Nip.i.s.sing rises caught in time by the lamb are very rare. I rom first to last, the PUBLIC is the mine, AND THE RETURNS COME OUT OF THE SAVINGS BANKS. In some mines "high grading"--the carrying away of valuable pieces of ore by the miners themselves--is fought as sternly as the diamond stealing by the Kaffirs in a Kimberley mine. In yet other mines, far more numerous, high grading is encouraged among the miners. The report gets out that the ore is so rich that the miners steal it in their dinner pails. That booms the stock. WALL STREET MAKES THIS MONEY OUT OF THE MARKET AND NOT OUT OF THE MINE.

In spite of all warning and all examples, the average American will to a certain extent persist in gambling in mining stocks.

Supposing this to be true, it is of value for the investor to learn something of the theory of mines, something enabling him to pa.s.s on the natural value of any mining stock which is offered to him. What, then, is a mine? What are some of the inevitable features in developing a mine?

In the first place, there must be prospecting. This is sheer and unavoidable risk on the face of it, and it is attended with economic waste which cannot be avoided. Of a hundred prospectors, ninety-nine die poor. The failures must be charged off to industrial waste attendant upon inherent conditions of the mining industry.

Again, in the development of a mine after it is located and proved in part, there is more unavoidable economic waste. The rock is blank and silent. It can only be explored by means of expensive drifts and drillings. In one mine at Bisbee, Arizona, a shaft was sunk which had drifts at the 600-and 900-feet levels, all without result. Later on they found a blanket of copper between those two levels, from which six million dollars were taken. Even in old established mines there is something of a chance, and there are often unwittingly false standards of values. Which is no argument for making all gamble that which originally was part gamble.

Any mine, no matter how rich, or how large, begins to be exhausted from the time the first pick is stuck into the ground and all its profits ought to be figured on the basis of diminishing deposits. When your deposit is drawn out, your bank does not honor your check. A mine is the reverse of a mortgage or a bond. The security does not remain stable nor increase in value, but, on the contrary, CONTINUALLY DECREASES in value. In a mortgage, six per cent. is wisdom; in a mining return, it is folly. A mine, instead of being figured on the basis of a mortgage, ought to be figured on the basis of a term annuity.

That is to say, on the basis of a wiping out date. When the mine is done paying dividends, there is no return of the face of the princ.i.p.al invested. Yet the great and gullible public forgets this all-important fact, which differentiates mining from every other form of business.

CRACKER-BOX INVESTORS

There is every probability that the average investor never heard of a proper "amortization charge" in the management of a mine.

Until he shall have heard of it, until he shall have learned something of the terms of life annuities, he ought never to invest a cent in any mining stock. After he actually has learned the theory of amortization, he will observe that ALMOST EVERY MINING STOCK LISTED IN PUBLIC PRINTS IS SELLING AT AN INFLATED VALUE. That is to say, even the best and most stable of mines are overrated, not to mention the purely wildcat ventures. Some mines may naturally be long-lived, others short-lived; yet, if either pays a good, stiff dividend, THE PUBLIC MAKES NO DISTINCTION BETWEEN THE TWO and will buy the stock of either. In this investing, the public has no protection on the part of the government, on the part of honest publicity, or on the part of its own careful education.

In the MAJORITY of cases, a mine ought to pay annually perhaps twenty per cent. of the investment, to be profitable. That is to say, the actual value of any mine is rarely over five times actual dividends paid after expenses of operation. How many mines are capitalized on any such real basis as that? The answer lies in our own ignorance, and in the shrewdness of the men who sell us mining stocks. Stocks that are the best dividend-payers often sell at TEN or TWELVE times the face of the annual dividends. Let the mine hit a brief streak of bonanza, and the stocks will climb yet higher. We buy such stocks, or worse; but even a fundamental acquaintance with the theory of mines would show us that such an investment is usually a bad one. In a mortgage we do not look to the interest to pay us back our princ.i.p.al; in a mine we MUST look to DIVIDENDS to pay us back our PRINc.i.p.aL AND INTEREST also. When the mine is done, our princ.i.p.al is gone. But how many mining investors ever thought of that? And how many, when offered a ten per cent. "guaranteed dividend" for five years on their money, ever stop to reflect that, for instance, I could take your money and put it in a cracker box, and myself make money by paying it back to you, ten per cent. a year for nine years--and then explaining what had happened to the cracker box! Now, most of us are just such cracker-box investors. We pay out millions and millions annually, just that foolishly. And our nation, our states, allow us to do it. They even--as recent legal proceedings prove--allow the "inside" operating stockholders to borrow money to pay dividends to the "outsiders." That keeps up the "values"

in the market. It does not enhance the real value in the mine.

ENGLISH VS. AMERICAN MINE REPORTS

Again, granted even a valid and a well-managed mine, how much information regarding it does the average investor in the stock secure? In a general way, he knows in advance that all mining, whether placer or quartz, is very expensive. Beyond that, he gets the annual report of the officers, which will tell perhaps the names of the men who are spending his money, the total earnings, the total output, the balance sheet, the statement of capital stock issued--and little else. All of which means nothing!

A well-regulated English company is obliged to go much farther than this. A good annual report will show the advertis.e.m.e.nt of the general meeting of stockholders, the list of directors and officers, reports of directors, giving details of the condition of property, including the development work, the tonnage of production, the values recovered from such tonnage, the costs of operation, the profits for the period covered, the balance sheet of accounts, the profit and loss statement, including a working cost estimate, the appropriation list showing what has been done with all the earnings, the reports of managers giving details of the development work, the estimated values of ores EXPOSED ON THREE SIDES, the probable values of ores not so well exposed, the working expenses, the construction account, general remarks on the physical condition of the property, and a map of the property itself.

What American promoter would trouble himself to make such a showing as that to the American sucker? Even if such detailed information existed in the records of the average American mining concern, the sucker could not get access to the books even did he have the temerity to demand it.

Professor H. S. Munroe, of the Columbia School of Mines, when asked whether such a thing as general supervision of mining investment could be possible, answered: "Yes, if some philanthropist will give us ten millions to endow such an inst.i.tution, and maintain a corps of engineers in the field who will do work similar to that accomplished by J. Curle under the auspices of the London Economist. Such work should, of course, cover all incorporated mining companies, not merely a few hundred of the more prominent gold mines; and it should be continuous and not spasmodic. Such a plan is of course Utopian, but I feel that anything less would be likely to do little good. Even Curle's opinions began to lose their value within a month or two after they were written, and are of less value every year. Mining can never be put on the same basis as agriculture, for the reason that the risk of failure is infinitely greater, and that it is impossible to prove the value of any mine or mining region without spending a large amount of capital, the greater part of which will inevitably be lost in this work of initial development."

Those are the sober words of an expert who spends his life in studying the theory and practice of mining. If such words shall teach us a little wisdom, so much the less need for laws. But let us consider what the laws ought to do in order to protect you for the sake of your family, and for the sake of society, and for the sake of the savings which lie back of the prosperity of this country.

Let us agree that no government can guarantee the safety of any investment. Let us admit that digging gold can never be put on the same amortization basis with digging potatoes, for instance, because the soil remains for more potatoes, whereas the ore of a mine is exhausted and does not raise more ore. Nevertheless, although the industries of potato growing and ore digging are not the same, the principles lying back of them ought to be precisely the same; and our governments, both state and national, ought to see to it that they are kept precisely the same, and controlled on the same plane legally. If it be true that no government can watch after every mine, none the less any enlightened government can establish general conditions for engaging in mining or engaging in the sale of mining stock; and, perhaps with yet better results, it can establish a general supervision over the mining intelligence of the public, just as it does over the agricultural intelligence of that public.