A good illustration of this business situation would be that you as owner of a house worth $4,000 should make or form a cooperative housekeeping company and sell shares in this new company, basing the value of the total amount of shares upon the $4,000 that the house is worth. You could sell forty shares each for $100. This would be perfectly legitimate and a good business transaction, because at any time every share would have back of it one-fortieth of the total value of the house. But suppose instead of selling forty shares, you should capitalize your house at $40,000 and sell 400 shares at $100 a piece, instead of the forty shares. The extra valuation would be known as watered stock, because there would be no real value attached to it. You would be selling something that neither you nor anybody else possessed. It is said that the term watered stock came from the practise of one of the early financiers who brought cattle from the West to sell in the New York market when New York was a very small city. He drove the cattle a long distance on the last day, and then gave them salt the night before arrival, so that they were inordinately thirsty. Just before they were sold and weighed he would let them drink all the water they wanted, so that the man who bought them was paying for a great deal of water in addition to the actual amount of beef he received. The result of this financial device known as watered stock has been disastrous for many of our railway companies, and the plight of the United States railroads has been a scandal for years.