Title: Railroad Reorganization
Author: Daggett, Stuart
Language: English
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HARVARD UNIVERSITY
CAMBRIDGE, MASS., U.S.A.



  HARVARD ECONOMIC STUDIES

  PUBLISHED UNDER THE DIRECTION OF
  THE DEPARTMENT OF ECONOMICS

  [Illustration]

  VOL. IV



  RAILROAD
  REORGANIZATION

  BY
  STUART DAGGETT, PH.D.

  INSTRUCTOR IN ECONOMICS IN HARVARD UNIVERSITY


  [Illustration]


  BOSTON AND NEW YORK
  HOUGHTON, MIFFLIN AND COMPANY
  The Riverside Press, Cambridge
  1908



  COPYRIGHT 1908 BY THE PRESIDENT AND FELLOWS OF HARVARD COLLEGE

  ALL RIGHTS RESERVED

  _Published May 1908_



PREFACE


It sometimes happens that experiences long since past seem to be
repeated, and that knowledge apparently forgotten proves again of
service. This is illustrated by the subject of railroad reorganization.
In the years between 1893 and 1899 an imposing group of American
railroads passed into receivers’ hands. In 1893 alone more than 27,000
miles, with an aggregate capitalization of almost $2,000,000,000,
were taken over by the courts, and in the following years the amount
was largely increased. Foreclosure sales aggregated 10,446 miles in
1895, 12,355 in 1896, and 40,503 between 1894 and 1898. Among the more
important failures were those of the Richmond & West Point Terminal,
the Reading, the Erie, the Northern Pacific, the Atchison, and the
Baltimore & Ohio;—to say nothing of the Norfolk & Western, the
Louisville, New Albany & Chicago, the Ann Arbor, the Seattle, Lake
Shore & Eastern, the Pecos Valley, and many other smaller lines.

The railroads which failed between 1893 and 1898 were subsequently
reorganized. In order to restore the equilibrium between income and
outgo the companies turned to their creditors, and demanded the
surrender of a part of the rights of which bondholders were then
possessed. This demand the creditors were forced to concede. Some
of them yielded without legal compulsion, assenting to “voluntary
reorganizations”; some insisted upon the sale of the property securing
their loans, but without escaping the loss which fell upon their more
pliant associates. Much injustice to individuals came to light at this
time. Men who had invested in good faith were obliged to sacrifice
their holdings through no fault of their own. The savings of years were
swept away. The demand of the railroads was one, nevertheless, which
the courts supported, and rightly. The companies could not be operated
unless the creditors were deprived of part of their legal rights. At
the same time, these rights no longer had a material basis on which to
rest, and their surrender meant but the recognition of a loss which had
already taken place.

Most of the reorganizations were completed by the year 1899. Since
that date the improvement in railroad earnings has been marvellous.
Gross earnings from operation were $1,300,000,000 in 1899, they were
$2,300,000,000 in 1906, the last year for which the figures of the
Interstate Commerce Commission are at present available. Total income,
after the deduction of operating expenses, was $605,000,000 in 1899,
and $1,046,000,000 in 1906. It is not to be wondered at that the
distress of the years 1893–9 has not been duplicated during the years
1900–7. On the contrary, weak roads have had opportunity to strengthen
their positions, and strong ones have spent enormous sums for
improvements, and have declared liberal dividends besides. In no year
save 1905 has the new mileage put into receivers’ hands been greater
than 800 miles, and in but one has the mileage sold at foreclosure
equalled that figure. Operating expenses have increased because the
amount of business has exceeded the ability of the railroads to handle
it. Equipment has been so inadequate as to provoke drastic legislation
by the legislatures of many states; yards and terminals have been
crowded until a prominent railroad officer has declared the expenditure
of over five billion dollars to be necessary to restore the equilibrium
between facilities and traffic.

These conditions have caused the earlier problems of failure and
reorganization to be lost to view. Nevertheless, the financial panic
of October, 1907, and the recession in activity which has become more
and more apparent since that time, have again brought these problems
forward. The Seaboard Air Line, one of the important railroad systems
of the South, failed on January 5, 1908. The Chicago Great Western
followed three days later. The Detroit, Toledo & Ironton, the Chicago,
Cincinnati & Louisville, the International & Great Northern, the
Western Maryland, and the Macon & Birmingham have since been put in
receivers’ hands. In all, the operation of 5938 miles of railroad,
with a capitalization of nearly $415,000,000, and total liabilities of
$462,000,000, has been taken over by the courts during the first ten
weeks of 1908. Whether this is but the beginning of still more extended
trouble it is of course impossible to say. There are a number of weak
lines in the American railroad system, and the difficulty in obtaining
credit is bound to reveal weaknesses where they exist. At present new
loans have for some months been difficult to obtain, and even strong
railroads have resorted to the issue of short time notes. The Erie,
indeed, escaped bankruptcy on April 8, 1908, only through the timely
aid of important bankers who took up its maturing notes. This points
to serious consequences for the weaker lines. It is true, on the other
hand, that American railroads are generally in better financial and
physical condition than they were in 1893. It is not probable that any
railroad collapse will be so widespread now as it was then. Whether
this be so or not, the failure of nearly 6000 miles of railroad in ten
weeks invests reorganization problems at present with an importance
which they have not had for ten years. How, it will be asked, shall
the financial operations necessary to reorganization be performed?
What methods shall be adopted, what dangers avoided, and what results
expected?

The experience of earlier years will provide answers to many of the
questions asked in 1908. In the hope, therefore, that a study of
railroad reorganization, on which the author has been intermittently
engaged during the last six years, will prove of service, the following
pages have been published. They discuss in some detail the financial
history of the seven most important railroads which failed from 1892–6,
and that of one railroad, the Rock Island, which was reorganized in
1902; and summarize in a final chapter the characteristics of the
various reorganizations in which these roads have become involved.
In some respects the history of each road considered is peculiar
unto itself. The Reading had coal to sell, the Atchison did not. The
Southern ran through a sparsely settled country, the Baltimore & Ohio
through a thickly settled one. The Erie has never recovered from the
campaigns of Gould, Drew, and Fisk from 1864–72, the Northern Pacific
was not opened until 1883. In other respects, however, the roads have
had much in common. Excepting only the Rock Island, each of them has
found itself at one time or another unable to pay its debts, and has
had to seek measures of relief. The problems of the different companies
at these times have been strikingly alike. However caused, their
financial difficulties have been expressed in high fixed charges, and,
usually, in excessive floating debts. Greater annual obligations have
been assumed than the roads could meet, and current liabilities have
accumulated while pressing demands have been satisfied. To this state
of affairs the remedy has been sought in comprehensive exchanges of old
securities for new. The exchanges, it is true, have been carried out
in different ways, and the collateral expedients employed have not been
the same. To similar problems different solutions have been applied.
It is possible, for this very reason, for a careful study of the
alternative reorganization methods which have been developed to point
out some policies which have been dangerous, and to make clear others
which are both just, and likely to be successful. Such a study also
throws light upon the history of the companies upon which it is based.

For the way in which the different roads have been handled, the
reader is referred to the text. The order of treatment is very
roughly determined by geographical location; that is, the Eastern
roads are first considered, then the Southern, and then the Western.
Each chapter, except the last, should be examined as a “case” in
reorganization experience, and as part, therefore, of a united whole.
No one has been so continuously with his work as the author himself,
and no one can more keenly realize its defects. It is offered as a
contribution in a field in which very little has as yet been done,
and it is hoped that it will prove of value to those concerned with
reorganization plans, as well as to those interested in the development
of corporation finance during the last generation.

Without the unselfish and intelligent assistance of the writer’s
Mother, the preparation of this book would have been long delayed. To
her, first of all, thanks are due. To Professor William Z. Ripley, of
Harvard University, should be made warm acknowledgment of his constant
interest and helpful suggestions. To the Carnegie Institution the
author is indebted for grants in aid of research in this special field.
Grateful acknowledgment should also be made of gifts by friends of the
University to cover the expenses of publication.



CONTENTS


  CHAPTER I

  BALTIMORE & OHIO 1

  Early history—Extension to Chicago—Trunk-line rate wars—Effect on
    the company—Extension to New York—Sale of bonds to pay off floating
    debt—Unsatisfactory traffic conditions—Receivership—Mr. Little’s
    report—Reorganization—Subsequent history.


  CHAPTER II

  ERIE 34

  Early history—Reorganization—Wall Street struggles—Financial
    difficulties—Second reorganization—Development of coal business
    —Extension to Chicago—Grant & Ward—Financial readjustment—New
    York, Pennsylvania & Ohio—Third reorganization—Later history.


  CHAPTER III

  PHILADELPHIA & READING 75

  Early history—Purchase of coal lands—Funding of floating debt—
    Failure—Struggles between Gowen and his opponents—Reorganization—
    Second failure and reorganization.


  CHAPTER IV

  PHILADELPHIA & READING 118

  Difficulties of the Coal & Iron Company—McLeod’s policy of extension—
    Collapse of this policy—Failure of company—Summary of subsequent
    history.


  CHAPTER V

  THE SOUTHERN 146

  Richmond & Danville—East Tennessee, Virginia & Georgia—Formation
    of the Southern Railway Security Company—Growth and combinations—
    Failure and reorganization of the East Tennessee—Reversal of
    position between the Richmond & Danville and the Richmond & West
    Point Terminal—Acquisition of the Central of Georgia—Failure and
    reorganization of the whole system—Subsequent development.


  CHAPTER VI

  ATCHISON, TOPEKA & SANTA FE 192

  Charter—Strategic extensions—Competitive extensions—Effect
    on finances—Raise in rate of dividend—Reorganization of
    1889—Acquisition of the St. Louis & San Francisco and of the
    Colorado Midland—Income bond conversion—Receivership—English
    reorganization plan—Mr. Little’s report—Final reorganization plan—
    Sale—Subsequent history.


  CHAPTER VII

  UNION PACIFIC 220

  Acts of 1862 and 1864—High cost of construction—Forced combination
    with the Kansas Pacific and the Denver Pacific—Unprofitable branches
    —Adams’s administration—Financial difficulties—Debt to the
    Government—Receivership and reorganization—Later history.


  CHAPTER VIII

  NORTHERN PACIFIC 263

  Act of 1864—Failure and reorganization—Extension into the Northwest—
    Villard and the Oregon & Transcontinental Company—Lack of prosperity
    —Refunding mortgage—Lease of Wisconsin Central—Financial
    difficulties—Receivership—Legal complications—Reorganization—
    Subsequent history.


  CHAPTER IX

  ROCK ISLAND 311

  Charter—Early prosperity—Reorganization of 1880—Conservative policy
    —Extension—Pays dividends throughout the nineties—Moores obtain
    control—Reorganization of 1902—Further extensions—Impaired credit
    of the company.


  CHAPTER X

  CONCLUSION 334

  Definition of railroad reorganization—Causes of the financial
    difficulties of railroads—Unrestricted capitalization and
    unrestricted competition—Problem of cash requirements—Problem of
    fixed charges—Distribution of losses—Capitalization before and
    after—Value of securities before and after—Provision for future
    capital requirements—Voting trusts—Summary.



RAILROAD REORGANIZATION



CHAPTER I

BALTIMORE & OHIO

  Early history—Extension to Chicago—Trunk-line rate wars—Effect
    on the company—Extension to New York—Sale of bonds to pay off
    floating debt—Unsatisfactory traffic conditions—Receivership—
    Mr. Little’s report—Reorganization—Subsequent history.


The Baltimore & Ohio Railroad was the first important railway company
to be incorporated in the United States. It was designed to aid the
city of Baltimore in securing the Western trade, and not only private
citizens but the city of Baltimore and the state of Maryland early
subscribed to its stock. When in the course of construction it became
expedient to extend into Virginia, the city of Wheeling and the state
of Virginia likewise subscribed, though the action of the latter was
subsequently withdrawn.[1] As a result the funds required for first
construction were obtained from the sale of stocks instead of bonds.
In 1844, seventeen years after the granting of the charter, the annual
report showed $7,000,000 in stock as against $985,000 in 6 per cent
bonds; while in 1849, though the loans had been increased, they yet
stood in the proportion of one to two.[2]

On December 1, 1831, the first train was run over the line, then 72½
miles in length.[3] The early history of the road does not much concern
us. It was one of steady growth, not through an unsettled territory,
as with our Western roads, but through a country the industries of
which were already established. Tracks led, not into prairies, but
to populous cities; and the future of the company, once the initial
difficulties should have been overcome, was at no time uncertain. Thus
extension to Cumberland increased the gross receipts from $426,492
to $575,235, and that to Wheeling in 1853 likewise brought a great
increase in traffic.

The Civil War bore upon the Baltimore & Ohio heavily because of the
peculiar location of its mileage. On May 28, 1861, possession was
taken by the Confederates of more than one hundred miles of the main
stem, embracing chiefly the region between the Point of Rocks and
Cumberland.[4] Government protection was temporarily restored in 1862,
but raids occurred until the end of the war. Each time the Confederates
occupied the line they tore it up, and as soon as they retired the
company hastened to make repairs. The road did not default. A portion
of the track yielded a revenue from first to last, and presumably the
Government paid generously for the transportation of its troops.

It was after the Civil War that the real history of the road began. The
key-note was competition;—competition of the fiercest sort between
parallel lines from Chicago to the seaboard, intensified by the rivalry
of the great seaboard cities, and involving traffic in both directions.
The decade 1850–60 had seen the extension of Eastern roads to Western
connections. In 1851 the Erie had reached Lake Erie; in 1853 the New
York Central and Lake Shore, and in 1855 the Pennsylvania and Fort
Wayne had opened continuous routes from the Atlantic to Chicago. In
1857 the Baltimore & Ohio had obtained connection with Cincinnati
and St. Louis; and in 1858 the Grand Trunk had arrived at Sarnia on
its way from Portland to Chicago. After the Civil War there was both
consolidation and extension. The New York Central was united with the
Hudson River, and the Pennsylvania leased the Pittsburgh, Fort Wayne
& Chicago in 1869. The Baltimore & Ohio reached Chicago in 1874, and
the lines which in April, 1880, were consolidated into the Chicago &
Grand Trunk were completed between Port Huron and Chicago in February
of that year. The completion of these through routes opened the way for
very bitter competition. Five independent lines struggled for Chicago
business, and all of them were prepared to cut rates deeply in order
to test their rivals’ strength. In particular the Baltimore & Ohio was
aggressive. “At the time of its [Chicago branch] opening,” said Mr.
Blanchard before the Hepburn Committee, “it was heralded all over the
Northwest as a ‘Relief for the Farmer,’ ‘the Grangers’ Friend,’ and all
other sorts of headlines were put into the Chicago and Northwestern
papers; and President Garrett’s public utterances, and those to his
Board, were filled with enough statements to show what he intended to
do.... I heard him [say] that upon the completion of his lines, like
another Samson, he could pull down the temple of rates upon the heads
of these other trunk lines.”[5]

Under these circumstances a dispute between the Baltimore & Ohio and
the Pennsylvania in 1874 over the former’s connection with New York
had far-reaching consequences.[6] The Pennsylvania refused to carry
Baltimore & Ohio cars over its line north from Philadelphia, and as a
retaliatory measure the Baltimore & Ohio reduced passenger fares from
Washington and Baltimore to Western points from 25 to 40 per cent.[7]
The reduction in rates thus begun inaugurated the first of the great
railroad wars. The cuts soon extended to east-bound passengers and to
freight, and forced corresponding cuts on the Pennsylvania, the Lake
Shore & Michigan Southern, the Michigan Central, the New York Central,
and the Erie. Rates on fourth class and grain from Chicago to New
York, which had been 60 cents per 100 pounds in December, 1873, and
40 cents in December, 1874, fell to 30 cents in March, 1875. Rates on
special, or sixth class,[8] went as low as 12 cents from Baltimore and
Philadelphia to Chicago. Passenger fares from Chicago to Baltimore and
Washington were reduced from $19 to $9, to Philadelphia from $19 to
$12, to New York from $22 to $15, and to Boston from $22 to $15. The
New York Central and the Erie quoted fares from New York to Chicago
of $18 and to St. Louis of $20, and the Baltimore & Ohio replied by
a cut to $16.25 to Chicago. In April, 1875, the Baltimore & Ohio cut
freight rates from Cumberland to Baltimore over 50 per cent on the four
regular classes, and the Pennsylvania at once announced still greater
reductions.[9]

The effect of this warfare on railroad revenues was sufficiently
serious to cause the Baltimore & Ohio to recede somewhat from
its independent position and to enter into negotiations with the
Pennsylvania;[10] but the terms of the resulting agreement proved
unsatisfactory to the other trunk lines, and no general pacification
was obtained. Late in 1875 rates nevertheless generally advanced,
and in December a general agreement was concluded, followed by a
general increase. This agreement was again hopelessly disrupted by the
following April, when cuts in east-bound rates followed each other with
rapidity. The published rates on grain, which had been 45 cents at the
beginning of March, 1876, fell to 40 cents on March 7, 35 cents on
April 13, 22½ cents on April 25, and 20 cents on May 5. In June rates
on west-bound freight fell to 25 cents first class to Chicago, and 16
cents fourth and fifth class, actual rates going much lower; and it
was possible to travel from New York to Chicago first class for $13.[11]

Warfare between railroads became intensified by the competition between
the cities which the railroads served, and by 1876 the question of
relative rates to New York, Philadelphia, and Baltimore had grown to be
of primary importance.[12] By an agreement in 1869 Baltimore had been
given a differential on east-bound freight of 10 cents per 100 pounds,
which had been reduced to 5 cents on grain in 1870. On west-bound
freight Baltimore had enjoyed a differential in 1875 which had ranged
from 10 cents on first class to 5 cents on special class freight, and
Philadelphia one which had been 2 cents less except on first class,
where the Philadelphia differential had been 3 cents less than that to
Baltimore. A temporary agreement of March, 1876, had replaced these
allowances by differentials of 13 per cent in favor of Baltimore and 10
per cent in favor of Philadelphia as against New York. This relation
was fought over in the rate war of 1876. In December of that year
another agreement was reached on the basis of equal rates from Western
points to Europe on export traffic via all four competing seaboard
cities, and reduced percentage differentials on local traffic to those
cities; but this proved temporary, the subsequent advances in rates
were not general, and final agreement was not secured until April,
1877. The contract then executed was in the nature of a compromise.
The differential to Baltimore was reduced from 13 per cent to 3 cents,
and from Philadelphia from 10 per cent to 2 cents, to apply equally
to local and to export traffic. Rates to Boston were at no time to be
less than those to New York. Differentials on west-bound traffic were
to be the same as those on east-bound on third class, fourth class, and
special freight, and on first and second classes to be 8 cents less per
hundred from Baltimore and 6 cents less from Philadelphia than from New
York.[13]

The years following the agreement of 1877 were marked by low and
fluctuating rates, extensive cutting under the published schedules,
and frequent attempts at pooling and at apportionment of traffic. At a
meeting at Chicago on December 19, 1878, tariff rates were agreed upon
by all lines, but the existence of time contracts depressed receipts
for months thereafter. Another meeting on May 8 was followed by sharp
competition. In June an agreement to raise rates was made, but proved
unsatisfactory owing to long time contracts. “During the period between
December 18, 1878, and July 5, 1879,” said Mr. King in a letter to the
Trunk-Line Arbitrators on July 17, 1879, “the Baltimore & Ohio Company
has practically been out of the market, on account of the low rates by
the Northern lines. It has not secured enough east-bound freight to
give return loads for the small west-bound traffic sent over its lines
to that city, and has repeatedly moved its cars empty from Chicago to
other points on its lines east of that city.”[14]

Early in 1881 the cutting of rates became sufficiently important to
force official recognition by the chairman of the trunk-line pool.[15]
By June 17 quoted rates on grain were 15 cents per 100 pounds from
Chicago to New York, and a railroad war was in full swing.[16] By
October the grain rate had been reduced from 15 cents to 12½ cents;
by August passenger fares were $7 from New York to Chicago, and $16
from Chicago to New York, and there was quoted besides a $5 Boston to
Chicago rate over the Grand Trunk. The radical nature of these cuts can
be appreciated from Mr. Albert Fink’s testimony before the Hepburn
and Cullom Committees. Fifteen cents, said he in 1879, just covered
the actual cost of hauling the grain;[17] twenty cents, he asserted in
1885, was the bare cost of movement, including the general expenses,
but without any profit to the road.[18] Grain was therefore not
repaying the specific cost of hauling, and passengers were obviously
in similar case. Temporary relief occurred through the large increase
in business which took place at the end of 1881. In October the
Pennsylvania and the Baltimore & Ohio advanced east-bound rates because
of the abundance of traffic offering, and the New York Central, Erie,
and Grand Trunk followed to a less degree. In November further advances
occurred, though west-bound rates remained low; but throughout December
and January rates were low and fluctuating,[19] and negotiations were
carried on for the settlement of the differential question which
underlay the trouble. None of the combatants were open to conviction;
the only outlet was therefore arbitration, and this was reluctantly
resorted to.[20] In January, 1882, the roads divided the through
trunk-line business, agreed to raise rates, and left the subject of
differentials to be investigated by Messrs. Thurman, Washburn, and
Cooley.[21]

This solution settled nothing. During the following three years
constant disputes arose over the proper division of traffic,[22] and
in 1884 the old struggle was resumed with unabated vigor. Rates on
grain to the seaboard fell from 30 cents to 20 cents on March 14 of
that year, and to 15 cents on March 21; remaining low and fluctuating
through the year.[23] Immigrant business from New York to Chicago was
handled by the Pennsylvania at one dollar a head. By February, 1885,
rates for traffic in both directions were completely demoralized.
Nominal east-bound charges on grain were 25 cents, or a 10 cent advance
since the preceding March, but actual rates were as low as 8 and 10
cents. Meanwhile published rates on west-bound freight were a third
less than the standard tariff, and passenger rates in both directions
were, roughly, one-half the regular charges. The following month still
further reductions occurred. The warfare was finally terminated by an
agreement to maintain rates late in 1885,[24] followed by an elaborate
pooling agreement between the competing lines.[25]

From 1875 to 1885 the trunk lines to the Atlantic ports were thus
engaged in active competition. What was the effect of this upon the
Baltimore & Ohio? This road was highly prosperous in 1875. Dividends
of 6 per cent and 10 per cent were being paid. The capitalization was
small, and the management conservative. During the ten years following
1875 the rate of dividend was not materially decreased. In 1876 10 per
cent was paid. In 1877 the old 8 per cent rate was restored, and the
following year the distribution was made in stock instead of in cash.
After the agreement of 1878 one-half year’s dividend was paid in cash;
and in 1879 9 per cent cash, and in 1880 10 per cent cash was declared,
this rate enduring until 1886. But although dividends were maintained,
the effect of the railroad wars appeared in the slowness with which
net earnings increased. A comparison of the net returns of 1884 with
those of 1874 reveals a gain of 40 per cent, on a mileage 27 per cent
greater; but the figures for 1885 show an increase of less than 2 per
cent over those for 1874, while the totals for 1884 were not again
equalled until 1900. Meanwhile more bonds had been issued, and the
percentage of fixed charges to net earnings had increased from 16 in
1874 to 63 in 1884. In other words, money was borrowed to put into the
road which did little more than keep the net earnings from declining.
In that same time the stock increased $2,900,000, and according to the
profit and loss account $15,559,636 were put into the property, making
a total of $55,743,092 (of this $37,197,696 were bonds); the only
result of which was the building of 313 miles of line, and the securing
of an increase in net earnings for 1884, which was swept away the
following year.

In 1884 the elder Garrett died, and his son Robert was elected to
succeed him. The old policy of independence and competition was
continued, the objective point being now an entrance into New York.
“When in 1885 the other trunk lines harmonized their differences, ...”
said the Chronicle, “the Baltimore & Ohio ... pursued its policy of
aggression.... The road must reach Philadelphia ... nay, must push
... on to New York.... Instead of seeking to avoid rivalry, its every
effort seemed to encourage it. Rates were reduced, concessions made
to shippers and travellers, the one idea apparently being to get
traffic no matter what the cost.”[26] The necessity of a secure New
York connection had been impressed upon the company in the course
of the rate wars. The first step was to be actual construction to
Philadelphia, the second, construction or traffic agreements from
Philadelphia to New York. Bonds were issued in April, 1883, for
construction of a so-called Philadelphia branch from Baltimore to the
northern boundary of Cecil County, Maryland,[27] there to connect with
the Baltimore & Philadelphia Railroad, which was being built through
Delaware and Pennsylvania to Philadelphia. Entrance into Philadelphia
was secured over the Schuylkill River East Side Railway, a corporation
organized under the laws of Pennsylvania and doing business in the city
only.[28] The distance was approximately ninety-nine miles; the cost
was later asserted to have been $20,000,000. Beyond Philadelphia the
Baltimore & Ohio relied on an agreement with the Philadelphia & Reading
for trackage to Bound Brook, New Jersey,[29] and on a traffic contract
with the Central of New Jersey for its line from Bound Brook to
Elizabeth.[30] Terminals on Staten Island were secured by purchase of
a controlling interest in the Staten Island Rapid Transit Company,[31]
and connection between Elizabeth and the Island was obtained by new
construction. The strength of this route was in its directness and
in its independence of trunk-line control; its weakness was in its
excessive cost between Baltimore and Philadelphia, and in its reliance
upon traffic contracts north of the latter city. A proposition was
advanced to unite the Baltimore & Ohio, the Philadelphia & Reading,
and the Central of New Jersey with the Richmond Terminal System. This,
however, fell through,[32] and the possibility still existed that
the Baltimore & Ohio might some day construct a line of its own from
Philadelphia to New York.

Pending the completion of the preceding arrangements rate conditions
remained naturally unsatisfactory. The Pennsylvania objected to the
paralleling of its Philadelphia-New York branch, and refused to allow
temporary use of that line by the Baltimore & Ohio while the latter’s
independent connections were being established.[33] Freight rates
were slowly and painfully raised after the conflict of 1884–5, and
did not regain a high level. In 1886 the Baltimore & Ohio was forced
to reduce its dividends from 10 to 8 per cent. The following year it
cut to 4 per cent, and in 1888 no dividend at all was declared. The
surplus on the year’s operations, which had not since 1878 fallen below
$1,000,000, dropped to $110,819 in 1885, and to $36,259 in 1886. As
dividends decreased, the funded debt increased,[34] the percentage
of fixed charges to net income rose from 63 to 89, and the floating
debt attained the portentous amount of $11,148,007. The only item
which did not grow was net earnings. There was nothing occult in the
situation. Every one was well aware that the competition to which the
Baltimore & Ohio had been subjected had been severe, and that the cost
of its New York extension had been large. In 1887 the bonds outstanding
were $56,868,201, the stock $19,792,566, and the accumulated surplus
$48,083,720, or a total of $124,744,487. This stood for the sums
invested in the property. Net income on the other hand was $4,994,721;
so that on an investment of over $100,000,000 but 4 per cent was being
obtained to cover interest, improvements, and whatever dividend might
be declared.

That no general apprehension was felt by investors before 1887 was
due to the great prestige which the Baltimore & Ohio enjoyed. The
long series of dividends counted heavily in favor of the road.
The enormous accumulated surplus, said to have been invested in
valuable improvements and extensions;[35] the enterprise of the
company in making extensions; the large volume of business; and the
confident statements of the president, all conspired to prevent a
too keen analysis of the business returns.[36] Relief of two sorts
was nevertheless required. In the first place the floating debt had
grown so large that some means of paying it off was necessary; in the
second place the road needed a sufficient reduction in fixed charges
to restore some of the margin of non-mortgaged earnings which had
been so great a safeguard in the early days. Only the first of these
requirements was met. Cash the road had to have; the existing fixed
charges, it was thought, it could endure if only some abatement of the
intensity of trunk-line competition could be obtained.

The method chosen for raising cash was the sale of bonds. In September,
1887, J. P. Morgan & Co. announced that a preliminary contract had
been entered into between the Baltimore & Ohio Railroad Company and
J. S. Morgan & Co., Baring Bros. & Co., and Brown, Shipley & Co.,
of London, and their allied houses in America, for the negotiation
of $5,000,000 Baltimore & Ohio Consolidated 5s and of $5,000,000
preferred stock, for the purpose of paying off the entire floating
debt, and of placing the company upon a sound financial basis.[37]
The consolidated bonds were to be part of an authorized issue of
$29,600,000, of which $21,423,000 were to be reserved to retire the
main stem mortgage indebtedness when it should fall due, and $8,177,112
were to be exchanged for securities in the company’s sinking fund, the
freed securities to be used to pay the floating debt in part. In case
this exchange should not be made, $7,500,000 of the issue might be sold
direct, and the syndicate before mentioned agreed to take $5,000,000 of
this amount and to place $5,000,000 in preferred stock on condition:

(_a_) That the statements of the company should be verified;

(_b_) That the management of the company should be placed in competent
hands, satisfactory to the syndicate;

(_c_) That satisfactory contracts should be made between the Baltimore
& Ohio and other roads for New York business, which should remove
all antagonism between them on the subject, and should ensure the
permanent working of the first-named in entire harmony with the other
trunk lines, besides avoiding the construction, or the threat of
construction, of expensive lines north and east of Philadelphia.

Annual payments to the Baltimore & Ohio sinking funds were to be made
in the future in consols instead of in cash.[38]

The essence of this arrangement was a funding of the floating debt,
plus agreements with other roads in order to maintain earnings. The
funding involved, however, a certain increase of charges through the
issue of bonds, while the agreements offered but a doubtful chance of
increased earnings. Only by an effective community of interest or of
ownership among the trunk lines could a saving have been secured on
which the new bond issues could safely have relied. That this was to
take place through the syndicate, that body was emphatic in denying.
“The statement,” said Vice-President Spencer, “that the Baltimore &
Ohio Railroad has passed into the hands of a syndicate, of which J. P.
Morgan is the head, is absolutely without foundation.... The syndicate
has the greatest interest now in the growth of the Baltimore & Ohio,
and to secure this growth and progress absolute independence of other
corporate predominance is essential, and the road must be worked in
the interest of the states and territories it reaches.”[39] This
declaration left only informal agreements as a resort; for pooling
had been forbidden in 1887. It did more, it implied the necessity of
a maintenance of competition, for to work the Baltimore & Ohio in the
interest of Baltimore meant to work it against the interest of New
York. In principle the plan was nevertheless adopted. Bondholders
saw no necessity for a radical reorganization, and were willing to
consent only to a new issue of bonds. Certain modifications were,
however, imposed. The exchange of new bonds for securities in the
sinking fund was abandoned, and the alternative of direct sale was
embraced. It was found impossible to secure the consent of stockholders
to an increase in the preferred stock, three attempts to obtain the
required authorization failing in the week ending January 20, 1888.[40]
Furthermore, the failure of the stock issue led President Spencer[41]
to request that the city of Baltimore extend for five years at 4 per
cent a $5,000,000 loan to the company, which was to mature in two
years, and that it return the sinking fund of $2,400,000 which had
accumulated in its hands for the eventual cancellation of the debt.[42]
It may be added that this suggestion was not accepted.

While awaiting final settlement of the syndicate scheme the Baltimore
& Ohio obtained some cash from the disposal of all its free resources;
that is, from the telegraph, express, and sleeping-car businesses which
it had conducted since early in the administration of John Garrett. In
August, 1887, it sold its express business to the United States Express
Company for a period of thirty years, in return for $1,500,000 of the
capital stock of the express company plus a certain percentage of the
annual earnings of the express lines handed over.[43] In October of
the same year its telegraph business was turned over to the Western
Union Telegraph Company in return for $5,000,000 of the Western Union
stock, and an annual payment of $60,000 in cash.[44] Finally, in June,
1888, its sleeping-car equipment and franchises were transferred to the
Pullman Company for a period of twenty-five years at a reported price
of $1,250,000.[45] The company agreed to furnish all the sleeping and
parlor cars required. This brought the incidental advantage of ending
long-continued suits over patents. The terms of sale to the telegraph
and express companies brought in no ready money, but the securities
obtained were readily salable, and being independent for their value
of the commercial success of the Baltimore & Ohio were available for
times of difficulty. It was this policy which offset the refusal of the
city of Baltimore to return the sinking fund to the company, and which
by March, 1888, rendered the road even to some extent independent of
the syndicate. At that date a modification of the syndicate agreement
took place. The bankers gave up all claim to the $5,000,000 of stock
so long under discussion, and took instead the balance ($2,500,000)
of the $7,500,000 consolidated mortgage bonds which the company was
authorized to sell. “The syndicate acted,” said the Baltimore _Sun_,
“in an entirely friendly spirit, and, with a desire to continue its
financial relations with the company, took the remaining $2,500,000 ...
at a better price than was paid for the $5,000,000.”[46]

With temporary financial requirements provided for, President Spencer
was enabled to achieve some much-needed reforms. At a meeting of the
directors on March 14 a complete reorganization of the service was
authorized, with changes and transfers affecting employees from the
first vice-president down. Later a committee of mechanical experts
was organized “to examine thoroughly all the shops, shop tools, etc.,
of the entire Baltimore & Ohio system, and to report on all the
improvements needed.”[47] The form of the annual report was improved.
The much-quoted surplus, which had proved such an unreliable support,
was cut in two by the writing off of bad investments, the marking down
of the price of securities, and the like; and, finally, a committee was
appointed to make a general examination of the financial as well as the
physical condition of affairs.[48] “Great anxiety,” said a resolution
of the directors, “exists in the public mind as to the financial
condition and the value and earning capacity of the road and property
... [and] it is due to all interests that a full, frank, and complete
statement of its affairs should be made public.” So far as lay in his
power President Spencer, and through him the syndicate, tried to secure
a real and permanent improvement in the condition of the road, and
to gain, through increased efficiency in operation, the margin which
the refusal to cut down fixed charges had denied. The failure of the
attempt may be ascribed to the continuance of the Garrett family in
power. Any irregularities or mistakes which had taken place in the past
reflected on the Garretts, so that it was to their interest to stifle
investigation. Moreover, any change in policy for the future implied
a criticism of their acts to which they were reluctant to accede. In
1888 the Garrett holdings amounted to from 50,000 to 60,000 shares out
of a total of 150,000 shares, or, deducting 32,500 shares held by the
city of Baltimore, which were not entitled to vote, to about one-half
of a total of 117,500 shares. This gave undisputed control. The effect
was seen in the annual election in November. Of 12 old members of the
board only 5 were reëlected, and of the 7 dropped 3 formed part of
the investigating committee engaged in securing “the full, frank, and
complete statement of the company’s condition” promised at an earlier
date.[49] The same month President Spencer was ousted and Mr. Charles
F. Mayer was elected in his place.

This revolution was fatal to any radical reform, so that during the
next seven years the condition of the Baltimore & Ohio improved but
little. Net income grew, it is true, up to the panic year of 1893, but
fell so sharply after that that the reported figures for 1895 exceeded
those of 1888 by but $1,283,843, and even this gain was practically
wiped out during the following year. Meanwhile fixed charges grew from
$6,550,972 in 1888 to $6,934,052 in 1895, and to $7,303,781 in 1896;
an increase which transformed the profits of the company the following
year into a deficit. A comparison of the balance-sheets of 1888 and
1895 shows an increase of $10,207,434 in stock, of $16,261,000 in
funded debt, and of $4,554,939 in floating debt. These changes were
offset mainly by increases in bonds and stock owned, or in the hands
of trustees, by advances to subsidiary lines, and by a reduction of
$11,080,000 in bonded debt secured by collateral or by mortgage on
the main line. During this time dividends were nevertheless steadily
paid on the preferred stock, and, beginning in 1891, upon the common
stock as well. The liberal tendencies of the management were also
evinced by a 20 per cent dividend upon the common stock, declared in
1891 to compensate shareholders for expenditures in betterments and
improvements of the physical condition of the property.[50] It will be
seen how different this was from the policy of retrenchment and economy
which had been inaugurated by President Spencer, and which might fairly
have been expected from a corporation barely escaped from bankruptcy.

Traffic conditions from 1887 to 1893 were very far from satisfactory.
The difficulties between the Baltimore & Ohio and the Pennsylvania were
indeed patched up, and the opening of the former’s lines to New York
rendered it independent of other trunk-line connections; but frequent
charges of rate cutting were made in 1887, and a war in dressed-beef
rates was inaugurated by the Grand Trunk in November of that year.
In 1888 rates were pretty much demoralized. Published rates on grain
dropped from 27½ cents in January to 20 cents in October. Emigrant
rates from New York to western points became the subject of active
competition; and, most important of all, the dressed-beef controversy
was pushed till it developed into a war of the most active kind. The
trouble here was started by cuts on dressed beef by the Grand Trunk.
In May other lines retaliated by cuts in live-stock rates; by July
14 published rates on cattle from Chicago to New York were 5½ cents
per 100 pounds, and on dressed beef and hogs 7 cents. In November
the New York Central extended the contest by a general reduction in
west-bound rates.[51] These struggles, though terminated for a time
by an agreement of February, 1889,[52] seriously diminished railway
revenues, and prevented the rapid growth which the general prosperity
of the country might have occasioned.[53] In fact, the Erie management
stated in their annual report for 1888 that their company had retired
altogether from certain classes of through business for a time during
the preceding twelve months, owing to the unremunerative level of
rates. Conditions during the greater part of 1889 were better,[54]
and during the following three years constant attempts at agreement
and arbitration, joined with a considerable volume of business,[55]
prevented a long continuance of any difficulties which arose.

It was perhaps traffic conditions such as we have described which
led the Garrett family to favor a community of interest scheme which
should improve the Baltimore & Ohio connections with the West. In June,
1890, Mr. E. R. Bacon formed a syndicate to control the stock of the
Baltimore & Ohio Company. Acting in harmony with the Garrett family,
the syndicate was made up of Philadelphia, New York, Baltimore, and
Pittsburg capitalists, including the Richmond Terminal, Pittsburgh
& Western, Northern Pacific, and Reading interests. The plan was to
establish a community of interest between a vast network of lines
reaching from the Atlantic to the Pacific, and from New York to the
Mississippi. “The buyers,” it was said, “came in simply as investors
without condition that their other properties would be benefited,
although it was of course intimated that something was to be done.”[56]
They were required to pool their stock for three years, and to give an
irrevocable proxy for that period to President Charles F. Mayer. The
amount of the syndicate purchase was 45,000 shares, of which 32,500
were obtained from the city of Baltimore, and 9686 (preferred) from
the state of Maryland;[57] and the purchase brought the incidental
advantage of removing city and state from any direct interest in the
road. The preferred state stock the syndicate later exchanged for
common stock owned by the Johns Hopkins University. The purchase once
made, the pool was formed on well-known lines. The stock was deposited
with a trust company, trust certificates were issued, and proxies
transferred to Charles F. Mayer.[58] The shares to be deposited were
limited in amount to 110,000; the actual amount put in was 89,750. The
results of the agreement were less sensational than the forecasts made.
It undoubtedly did much to promote friendly feeling among the roads
concerned. When, in 1891, the Baltimore & Ohio was compelled to vacate
the Chicago terminals of the Illinois Central, which it had occupied
for years, it was able to make prompt arrangements with a corporation
controlled by the Northern Pacific for the use of its facilities both
for passengers and for freight. But the influence of the Garrett family
was not lessened, and inasmuch as the main competitors of the Baltimore
& Ohio were not included there was no check to competition, and
earnings showed no striking change.

Matters stood thus at the beginning of 1893.[59] No progress had been
made toward restoring the Baltimore & Ohio to a permanently stable
condition, and the prosperity which its reports declared was fictitious
only. The reorganization to which bondholders had refused to submit
in the comparatively prosperous times of 1888 was compelled by the
depression following the panic of 1893. In 1894 earnings fell off. The
gross earnings for the year ending June 30, 1893, were $26,214,807,
and the net income $9,210,666; the following year the same items were
$22,502,662 and $8,719,830. The directors reduced the dividend and
called attention to the losses incurred through protracted strikes in
the coal and coke industry.[60] The following January (1895) President
Mayer stated that the fixed charges, including the car trusts, sinking
funds, etc., due January 1, amounting to nearly $1,000,000, had been
paid without borrowing one dollar. “I name this fact especially,” said
he, “because it is not unusual for us to make a loan for the unusually
heavy payments January 1. I doubt if the Baltimore & Ohio has owed so
small a floating debt for twelve or fifteen years, perhaps longer, and
it never had the large volume of stocks and bonds it now has, something
over $16,000,000, not put down at their face value but rather at their
market value, or far below their intrinsic value. I can safely say the
road has not been in so strong a position as now for at least fifteen
years.”[61]

It required more than confident statements by the managers, however,
to demonstrate the secure position of the road; and this all the more
because the acts of these gentlemen belied their public assertions.
Dividends on the common stock were passed in 1895, and again in 1896.
The ratio of charges to earnings, according to the company’s reports,
rose from 75 per cent of net earnings in 1894 to 80.2 per cent in 1895,
and to 98.2 per cent in 1896; that is, less than 2 per cent of the
net earnings of $6,300,000 was admitted to be available for dividends
on $30,000,000 of stock.[62] Some relief was evidently necessary. In
January, 1896, it was announced that arrangements had been made with a
strong syndicate to provide for all immediate financial requirements;
but the appointment of receivers in February could scarcely have come
as a surprise. During the two weeks just before the failure Mr. J. K.
Cowen, who had succeeded Mr. Mayer in the presidency, spent a great
deal of time in New York trying to borrow money to meet the pressing
demands. On his eventual failure and return to Baltimore the directors
felt that a friendly receivership was the only resource.[63]

To the well-wishers of the road this failure may have seemed an
opportunity as well as a disaster. It was now possible to accomplish
what the management in 1888 had refused to attempt, _i. e._ a
reduction in the fixed charges of the company which should remove
the burdens under which the road had labored, and should open up the
way for a long period of improvement and prosperity. At least one
more unpleasant experience was, however, to be passed through. With a
view to determining the Baltimore & Ohio’s real position, an expert
accountant, Mr. Stephen Little, had been set to work upon its books,
and from time to time notices had been appearing that he was at work,
that his examinations confirmed the statements of the company, and that
questions raised by hostile critics would be considered in his report.
Thus in April a reorganization committee, composed of Messrs. Alexander
Shaw, C. Morton Stuart, and six others, with whom were deposited the
Garrett shares, issued a circular referring to the large amount of new
capital, estimated by them at $30,000,000, which had been received by
the company since 1888 “without adequate or satisfactory results,” and
to the floating debt, which they asserted had been increased from about
$3,500,000 to $16,000,000. “We make no charges, or even intimations of
wrongdoing,” wrote their secretary, “but desire and require that a full
explanation of the management of the property from the year 1888, when
the road was set on its feet by Mr. Morgan, shall be given, and that
the causes which led to the wrecking of the property shall be clearly
shown.” To which another committee, which directly represented the
management, replied by reference to Mr. Little.[64]

The much-heralded report came out in December, having been withheld
since the previous March for fear of the effect on the company’s
securities; and so far from sustaining the management, it contained
charges of irregularity almost as sensational as those made against the
Atchison at an earlier date. The books of the company, according to Mr.
Little, were in error to the amount of $11,204,858. During the period
of seven years and two months which his report covered he found:

  An overstatement of net income of                       $2,721,068
  A mischarge of worn-out equipment to profit and loss of  2,843,596
  Improper capitalization of charges to income under the
    head of construction, main stem,                       2,064,741
  Improper capitalization of so-called improvements and
    betterments of leased and dependent roads,             3,575,453
                                                         -----------
            Total,                                       $11,204,858[65]

Deducting these sums from the annual income returns of the company,
he found that but $971,447 had been earned which had been properly
applicable to dividends, whereas $6,269,008 had been declared in the
seven years, of which $3,312,089 were cash and $2,956,920 stock.
Earnings had been increased by the most arbitrary of book-keeping
devices. In 1892 the value of the Western Union stock held in the
treasury since the sale of the Baltimore & Ohio telegraph lines in
1888 had been written up $468,038, and the stock of another company,
the Consolidated Coal Company, had been written up $114,300. Not only
had advances to branch lines been entered as assets, but the interest
on these advances had been credited to income, the only basis being
that it was hoped that such interest would some day be paid; and on
the other side of the account, charges against operating expenses had
been charged to profit and loss on the same principles by which the
Garretts had rolled up their fictitious surplus of 1888. Turning to the
capital account, Mr. Little showed an increase in liabilities from 1888
to 1895 of $22,180,000, not including $5,481,835 representing chiefly
the company’s endorsements of notes of its subsidiary roads which stood
here for the first time revealed. This money apparently had been put
into the property, and yet Mr. Little’s corrected figures showed net
earnings to be actually smaller in 1895 than in the earlier years.
Criticisms of the report attached themselves mainly to the last items
treated. That the extensive endorsement of branch-line notes, absent
as any mention of the practice was from the annual reports, was most
misleading and unsound, nobody could deny; but the broad question
of what charges during the seven years should have been paid out of
income, and what not, gave rise to lively discussion. Severe strictures
on Mr. Little’s statements were made by Patterson and Corwin, two
accountants appointed to re-examine the books of the company. “It would
appear,” said they, “that Mr. Little has made some curious errors, and
has been strikingly inconsistent.”[66] Nevertheless the more damaging
of the latter’s accusations seem to have been accepted, and the
Baltimore & Ohio took its place with other American corporations, the
managements of which have indulged in secret juggling with the books.

Pending Mr. Little’s report, reorganization was of course delayed.
The receivers were then in control,[67] and under their direction a
vigorous policy of improvement was carried out. The rolling stock
of the system was found to be insufficient to handle its business,
and the motive power was in similar condition. All testified to
the consistent desire of the old management to employ every device
which might contribute to greater apparent earnings. Contracts for
5000 freight cars were let as early as May, 1896, to be paid for in
receivers’ certificates, and bids for 75 locomotives were at the same
time received.[68] During their whole administration the receivers
purchased over 28,000 freight cars, 216 locomotives, 123,000 tons of
rails, besides ties, ballast, new steel bridges, and miscellaneous
improvements of various sorts.[69] On the financial side they had to
resist an attempt to compel payment of dividends on the preferred
stock. The case dragged on through 1897 and 1898, and was finally
decided in favor of the company.[70]

After the publication of Mr. Little’s report there remained no serious
bar to reorganization, while the needs to be met were more apparent
than ever before. If the proportion of charges to earnings had been
too heavy on the management’s own showing, how much more burdensome
was it when the reported earnings had been proved too high, and the
reported liabilities too low! The first step after the appointment of
receivers had been the springing up of reorganization committees. The
two most prominent were the Fitzgerald Committee, representing the
directors, and the Baltimore Committee. There were besides committees
representing the 5 per cent bonds of the loan of 1885, the consolidated
mortgage 5s, the 6 per cent bonds of 1874, the preferred stock, and
others. These were all to some extent antagonistic. It was hoped to
secure a reorganization without foreclosure, but to provide against all
contingencies a bill was introduced and passed through the Maryland
legislature, permitting a new company to succeed, after reorganization,
to the property of the Baltimore & Ohio system.

By April, 1898, a reorganization plan was ready, and was withheld only
on account, first of the threatened, and then of the actual, war with
Spain. Two months later this difficulty seemed no longer serious, and
a plan was formally announced.[71] There were contemplated two great
issues of bonds and two of stock as follows:

  3½ per cent prior lien gold bonds,             $70,000,000
  4 per cent first mortgage gold bonds,           50,000,000
  4 per cent non-cumulative preferred stock,      35,000,000
  Common stock,                                   35,000,000

These were to be parts of larger amounts authorized but not issued.
Thus the authorized amount of prior liens was $75,000,000, of which
$5,000,000 were to be reserved, and to be issued after January 1,
1902, at the rate of not exceeding $1,000,000 a year, for enlargement,
betterment, or extension of properties covered by the prior lien
mortgage; or for the acquisition of additions thereto.[72] The
authorized amount of first mortgage 4s was $165,000,000. Since
the prior liens matured in 1925, and this mortgage not till 1948,
$75,000,000 were reserved for retirement of the prior issue.
$7,000,000 were further put aside for the new company; $6,000,000
for the retirement of the Baltimore Belt Line 5s, and $27,000,000 for
enlargements, betterments, or extensions, etc., at a rate not exceeding
$1,500,000 a year for four years, and not exceeding $1,000,000 a year
thereafter.[73] The reserves from these two mortgages, therefore, made
liberal provision for new capital requirements. All of the common
stock authorized was to be issued at once; but besides the $35,000,000
preferred stock before mentioned, $5,000,000 preferred were to be held
in reserve for the new company.

Of the immediate issues $60,073,090 prior liens, $36,384,535 first
mortgage 4s, $17,218,700 preferred stock, and $31,178,000 common stock
went toward the retirement of old securities; and $9,000,000 prior
liens, $12,450,000 first mortgage 4s, and $16,450,000 preferred stock
were for cash requirements. The better of the old mortgages received
cash for their overdue interest, something over par in prior liens
for their principal, and from 12½ to 32 per cent in first mortgage
4s and preferred stock to compensate for reductions in their annual
return. Inferior bonds received new first mortgage 4s with preferred
stock (except in one instance) as a douceur. The old stock, common and
preferred, and the Washington City & Point Lookout 6s got mostly new
stock for the principal of their holdings, and preferred stock for
their assessments. The fundamental principle on which the exchanges
were based was the retirement of old bonds bearing high interest
rates by an increased volume of new bonds bearing lower rates; thus
permitting a much smaller reduction in fixed charges than occurred
in other reorganizations which we shall consider. To some extent
reductions in annual yield were made up by allowance of preferred
stock. The consolidated mortgage 5s of 1887, on which interest was
reduced from $50 annually to $41.75, received $85 in 4 per cent
preferred stock as a compensation. The Baltimore & Ohio Loan of 1874
saw a reduction in interest from $60 to $40.41, partially made up from
the dividends on $160 of new preferred stock. In fact, out of thirteen
cases in which new bonds were given for old, ten included an allowance
of preferred stock, thus bringing the Baltimore & Ohio in line with
other reorganizations of the period. But the proportion of preferred
stock given was small in each case, and the principle was not well
carried out.[74]

The cash requirements of the system were estimated at $36,092,500;
being swelled by arrears of interest, receivers’ certificates, need
for working capital, reorganization expenditures, and the like. The
plan proposed to cancel them by assessments on stockholders and by the
sale of securities before described. On the first preferred stock, $2
a share was levied, $20 on the second preferred, and $20 on the common
stock, with a syndicate guarantee for each. This netted $5,460,000.
Stockholders received new preferred stock for their payments. Deducting
$5,460,000 preferred stock from the securities reserved under the
plan to be sold for cash, there remained $9,000,000 prior liens,
$12,450,000 first mortgage 4s, and $10,990,000 preferred stock, or a
total of $32,440,000; all of which a syndicate agreed to take.[75]
In addition the company disposed of securities in the treasury,
including $3,800,000 stock of the Western Union Telegraph Company, for
$3,500,000.[76]

Both classes of stock were vested in five voting trustees, for a period
of five years. The trustees might, however, deliver the stock at an
earlier date in their discretion, and in fact did so in August, 1901.
No additional mortgage was to be put upon the property, and no increase
in the amount of the preferred stock was to be made, except in each
instance after obtaining the consent of the holders of a majority of
the whole amount of preferred stock outstanding, given at a meeting
of the stockholders called for that purpose, and the consent of the
holders of a majority of such part of the common stock as should
be represented at such meeting, the holders of each class of stock
voting separately. During the existence of the voting trust similar
consent of holders of like amounts of the respective classes of trust
certificates was to be necessary for the purposes indicated. Only a
portion of the leased and dependent lines were provided for in the
plan, but the various cases were left to be passed on separately. Thus
the Baltimore Belt Line was finally leased at a rental equivalent to
4 per cent on the outstanding 5 per cent bonds; while the acquisition
of the Baltimore & Ohio Southwestern and the Central Ohio railroads
involved the payment of a cash bonus, and an increase in the preferred
and common stock outstanding. The mileage of the system suffered little
change. Many of the branches were sold at foreclosure, and bought in
by the parent line; and a glance at the balance-sheet in 1899 shows
that besides the prior liens and the first 4s, an issue of Pittsburg
Junction and Middle Division bonds was the principal tool employed.
These securities, bearing 3½ per cent, and falling due in 1925, were
issued; 1st, to retire branch-line securities, and to weld the system
into one united whole; and 2d, to provide new capital for enlargement
and betterment and extension.

The success of this Baltimore & Ohio reorganization plan was very
largely due to the time at which it was put through. In other words,
the reorganization was completed just when an unparalleled era of
prosperity was fairly under way. The moderate reduction in fixed
charges which it secured proved more than adequate when earnings
rapidly grew. The net earnings of the property for the year ending
June 30, 1898, were estimated at $7,724,758, and the new fixed charges
were set at $6,252,351.[77] Net earnings for 1899 were $6,621,599.
In 1900, on a mileage 11 per cent greater, they were $12,359,443,
and fixed charges were $6,831,463 only. In subsequent years, with an
increase both in mileage and in earnings, the margin between charges
and income further increased. In 1903 $3,500,000 were spent out of
earnings for additions and improvements; $7,370,482 were declared in
dividends; and $2,947,681 were carried to surplus. In 1907 $3,000,000
were spent in additions and improvements, $6,965,245 paid in dividends,
$7,480,385 carried to surplus. This situation was in no way due to the
reorganization plan, and would have restored the company to solvency
even if no reorganization had taken place. It may be said that the
receivership did much to enable the road to take advantage of the later
prosperity. The character of the receivers’ work has been mentioned.
By June 30, 1899, they had spent as much as $17,000,000 for cars
alone, $2,500,000 for locomotives, $2,100,000 for rails, and other
sums for improvements and renewals of all kinds. The maintenance of
way pay-rolls in three years amounted to nearly $12,000,000, and the
total expenditure aggregated about $35,000,000; of which $15,000,000
were secured by the issue of receivers’ certificates, and the
balance through car trusts, earnings from the property, and from the
reorganization managers.[78] This was an indispensable and invaluable
preliminary to a growth in earnings, but was, however, distinct from
the financial problems of reorganization. In brief, the Baltimore
& Ohio increased its nominal capitalization more, and reduced its
fixed charges less than any of the seven other reorganizations of the
nineties which we shall consider except the Erie. Its need was perhaps
less crying, but not sufficiently so to explain the difference.

It will be remembered that, while provision had early been made for
foreclosure, it had been hoped to avoid such a drastic step. Hopes in
this respect were fulfilled, and while a number of branch lines were
sold the main stem escaped. Vigorous objections to the plan came from
the preferred stock, which was in 1898 suing to compel payment of its
dividends. In July, at a meeting of shareholders it was declared to be
the sense of the meeting that the preferred stock could not justly be
required to determine whether it would accept the proposition published
by the reorganization committee before the case in the Supreme Court
should be decided.[79] Late in July an injunction was obtained, which,
however, was dissolved in October. Still later in that year the suits
were settled by the sale of the bulk of the first preferred stock
to the reorganization committee.[80] The only other considerable
complaint came from the holders of the 4½ per cent Baltimore & Ohio
Terminal bonds, and was a protest against the reduction of ½ per cent
in their interest without, as they said, the smallest compensation.
Suits for the foreclosure of the mortgages of 1887, 1872, and 1874 were
instituted in October, 1898. Decrees were obtained in February. Decrees
were also given against the Philadelphia Division, the Parkersburg
Branch, the Staten Island Rapid Transit Company, and others. Separate
receivers had previously been appointed for the Sandusky, Mansfield &
Newark, the Central Ohio, the Washington Branch, and others. Decrees
were not asked for against the main line. In August, 1898, only three
months after the publication of the plan, the reorganization managers
were able to pronounce it effective.

The receivers surrendered control July 1, 1899,[81] and the company
started on its new career amid a buzz of satisfaction from all who had
participated in its reorganization. In an address before the Maryland
Bar Association Mr. John K. Cowen summarized the result as follows:

(1) Every bondholder of the Baltimore & Ohio Railroad has received new
securities which substantially pay his full debt. In other words, the
bondholders have been paid in full.

(2) The floating debt creditors have received every cent of their
indebtedness.

(3) The first preferred stockholders have received in cash 75 per cent
of the par value of their stock, the court overruling their claim of
preference over the bondholders and creditors. The second preferred
stockholders have received securities which, after payment of the
assessment, net about $70 per share, at the market price, and at times
over $80 net could have been realized.

(4) The common stockholders, instead of being wiped out, have received
their common stock in the new company upon paying an assessment, the
net amount of which (because of the value of the securities received
for such assessment) would not exceed $5 or $6.

(5) The company saves its old charter for whatever value may be
attached to it.[82]

This statement presents the favorable side of the picture. On the
whole, securityholders were tenderly handled, though the bondholders
were by no means paid off in full. And on the other hand, this very
tenderness made a voluntary reorganization possible, whereby the
charter of the company was saved. The pertinent objections were from
the point of view of the company itself, and these were silenced by the
increase in earnings.

Since reorganization the Baltimore & Ohio has been enjoying great
prosperity. On a mileage operated, which was some 1800 miles greater
in 1907 than in 1900,[83] it earned a return increased by over
$40,000,000; while its income from dividends and interest mounted
from less than half a million to over $3,000,000. Ton mileage figures
were about 11,300,000,000 in 1907 as against 6,800,000,000 in 1900;
passenger mileage had grown from 459,000,000 to 723,000,000. This
prosperity has but reflected the condition of the country at large, but
the Baltimore & Ohio has taken advantage of it in far-sighted fashion.
No less than $17,000,000 have been spent from earnings for additions
and improvements between June 30, 1899, and June 30, 1907, not to
mention maintenance of way expenditures which have ranged from about
$1500 to over $2500 per mile of road operated. Besides the provision
made by the reorganization plan, $15,000,000 convertible debentures
were issued under date of March 1, 1901, for new construction and
improvements. There were authorized $40,000,000 of common stock in
November, 1901, to go in part for improvements, and the bulk of
$27,750,000 new common stock of 1906 will be applied to similar ends.
As a result the company’s equipment has largely increased, grades have
been reduced, curves straightened, light rails replaced by heavy, and
subsidiary track increased. There were two miles of second, third,
and fourth track and sidings for every three miles of main track in
1900; there were three miles to every four in 1907. A considerable
increase in average freight train load has accordingly occurred. In
1900 the average load was 366 tons; in 1907 it was 433.02. That this
figure has not still more greatly increased from the 406.53 tons of
1901 is probably due to the somewhat greater proportion of manufactures
handled and to a considerable decrease in average distance hauled, and
is compensated for by an increase of over one cent in the average rate
received.

The events of most vital importance in the Baltimore & Ohio’s recent
history have been connected with its control. In September, 1898,
Philip D. Armour, Marshall Field, and Norman D. Ream, executors
of the Pullman estate, together with James J. Hill of the Great
Northern, bought a large interest in the stock, though whether or
not sufficient to control no one knew. From statements by Mr. Cowen
it would appear that the deal was somewhat similar to the earlier
one in which the Northern Pacific had been interested: that is, it
involved the sale of Baltimore & Ohio stock to secure the good will
of men strong enough to support the road in case of difficulty, and
influential enough to open desirable connections or to modify the
stringency of competition. “The recent transaction,” said Mr. Cowen,
“has been the realization of my hopes about the future of the road.”
It was not Mr. Hill’s influence, however, that was destined to be
dominant. By the end of the year rumors connected the Pennsylvania
with the purchase of an interest in the property, and the election
of Mr. S. M. Prevost, third vice-president of that company, to a
directorship, gave assurance of the truth of the reports. It was, of
course, impossible to purchase actual control so long as the Baltimore
& Ohio stock remained in trust; but the trustees seemed very ready to
accord to new buyers that representation and influence to which their
stock might give them claim. At the annual election in November, 1900,
an additional representative of the Pennsylvania was elected to the
board, showing the probable increase of the Pennsylvania holdings, and
the following year an absolute majority was said to have been passed,
the shares held by Mr. Hill and his associates, and apparently sold
to the Pennsylvania, being thought to contribute powerfully to that
result.[84] In May, Mr. Hill and Mr. Charles H. Tweed, chairman of the
Southern Pacific, resigned from the directorate, to be replaced by
two further representatives of the Pennsylvania. In June, President
Cowen was replaced by Mr. S. F. Loree, fourth vice-president of the
Pennsylvania lines west of Pittsburg, and in August the voting trust
was dissolved.

The last step has been the sale of part of the Pennsylvania holdings
to the Union Pacific system. It appears that the former’s interest in
the company was largely due to anxiety over the coal situation. Before
1895 rates on bituminous coal had been depressed and demoralized.
Rebates had been freely given in spite of any agreements which could be
arranged. Under these circumstances the Pennsylvania had determined to
buy enough stock of the Chesapeake & Ohio, the Baltimore & Ohio, and
the Norfolk & Western companies to control the policies of these roads,
and, through stock ownership in the Reading by the Baltimore & Ohio, to
influence that company also.[85] Unfortunately for the project public
attention became concentrated on the coal industry at this time because
of the discovery of certain flagrant abuses, and it seemed wise for the
Pennsylvania to dispossess itself of a part of its stock.[86] The Union
Pacific was in the market with large resources derived from its sale of
Great Northern and Northern Pacific stock. It was out of the question
for the Pennsylvania to sell its shares to a competitor, but there
was less objection to a sale to Mr. Harriman, providing a reasonable
portion should be retained. Accordingly, the Pennsylvania sold and the
Union Pacific interests bought, in October, 1906, some $39,540,600 in
Baltimore & Ohio common and preferred stock, being in the neighborhood
of half of the former’s holdings. This is the present situation of the
property. The Baltimore & Ohio is independent, in the sense that it is
not controlled by any single interest, but large amounts of its stock
are owned by its competitor, the Pennsylvania, and by its connection,
the Harriman system. On the whole the alliance with these interests
augurs well for the future of the company.[87]



CHAPTER II

ERIE

  Early history—Reorganization—Wall Street struggles—Financial
    difficulties—Second reorganization—Development of coal business
    —Extension to Chicago—Grant & Ward—Financial readjustment—New
    York, Pennsylvania & Ohio—Third reorganization—Later history.


The New York & Erie Railroad was organized in 1833 in the hope
of bringing to the southern tier of counties in New York State a
prosperity equal to that which the Erie Canal had secured for the
northern tier. It was to run from New York or some suitable point in
its vicinity to Lake Erie. A six foot gauge was adopted, partly because
the grades encountered were thought to require locomotives with more
power than a narrower gauge could accommodate, and partly because it
was wished to make the road independent of any connection which might
lead trade away from the city of New York.[88]

The events of the early years may be briefly dealt with. Difficulty
was experienced in getting subscriptions, and in 1836 the legislature
granted a loan of $3,000,000. An assignment was made in 1842, due to
the difficulty of getting the enterprise under way, which resulted in
the release of the company from liability to the state on condition
that it complete its line from the Hudson to Lake Erie by 1851.
Stockholders were to exchange two shares of old for one share of new
stock, and a first mortgage of $3,000,000 was authorized.[89] In 1851
the line was completed to Dunkirk on Lake Erie, and the following year
it reported a bonded indebtedness of $14,000,000, capital stock of
$6,000,000, and floating debt to the amount of $3,080,000, or a total
of $43,961 per mile of line; a high figure, but probably necessarily
so in view of the difficult work to be performed. Although nominally
completed, the troubles of the road were not over; and a precarious
existence was maintained only by the placing of additional loans in
1852 and 1855, and by the aid of Daniel Drew on two distinct occasions.
A war of rates with the New York Central aggravated the situation;
heavy storms and ice floods in January, 1857, caused serious loss, and
the panic of that year, with the ensuing depression, proved more than
the road could stand. Proceedings were begun in 1859 by the trustees
of the fourth mortgage, and in August a receiver was appointed.[90]
The wonder was that such action had been delayed so long. The income
of the road had been so far short of meeting current expenses that
claims for labor, supplies, rents, and unpaid taxes, and judgments
rendered against the company before the receivers were appointed, had
mounted up to $741,510; while not only had interest on three mortgages
fallen due in April, May, and June, but the principal of the second
mortgage, amounting to $4,000,000, had matured. The settlement of
claims and the reorganization of the company were put in the hands
of J. C. Bancroft Davis and Dudley S. Gregory. Since the earnings of
the road were at so low an ebb, wisdom would have seemed to dictate
some scaling of the charges to correspond. This did not enter into the
views of the trustees; instead, they proposed to give preferred stock
for all unsecured indebtedness, to extend the principal of the second
mortgage coming due, to exchange old common stock for new, to levy an
assessment of 2½ per cent on both classes of new stock, and with the
proceeds of the assessment to pay all coupons in arrears. Provision
was made for the retirement of certain fourth mortgage bonds, and
for a sale under foreclosure of that mortgage. By the arrangement no
saving in fixed charges worth mentioning was secured; no sacrifice was
demanded of bondholders; and, save for the payment of assessments and
the (new) stock given for floating debt, the stockholder’s position was
not made worse. The scheme was an easy and temporary means of escape
from an embarrassing position. Before the reorganization the bonds
outstanding had amounted to $18,006,000, the stock to $11,000,000, and
the unsecured indebtedness to $8,504,000. After reorganization the
totals were: indebtedness, $17,953,000, and stock, $19,911,000 (of
which $8,911,000 preferred); or a capitalization of $67,728 per mile.
The road was sold in 1862, and the Erie Railway took the place of the
original New York & Erie Railroad Company.

With 1864 began the career of the Erie as a speculative Wall Street
stock. Its large capitalization and the painful slowness with which
its earnings grew kept the quotations of its shares normally at a
low figure and invited speculation; while the location of its lines
tempted more serious efforts to obtain control. Up to 1867 Daniel Drew
was in power, while Commodore Vanderbilt spent his best efforts to
drive him out; after that date Jay Gould and Jim Fisk became more and
more prominent, and manipulated the Erie securities with enthusiastic
regard to profits which they might derive both from the Erie Company
itself and from operators who wished to speculate in its stock. In
the course of the abundant litigation to which Gould’s methods gave
rise, various receivers were appointed; but the orders of appointment
were subsequently vacated, and the receiverships were nominal only.
The details of the Wall Street struggles have little interest for us
here.[91] But the result is of importance. In the eight years from 1864
to 1872, when Gould was turned out of Erie by General Sickles and his
English backers, the bonded indebtedness of the company increased from
$17,822,900 to $26,395,000, and the common stock from $24,228,800 to
$78,000,000; in the one case a growth of 48 per cent and in the other
of 221 per cent, at a time when the mileage increased 53 per cent and
the net earnings but 22 per cent.[92] No more disgraceful record exists
for any American railroad. The stock was not issued for the sake of
improving the road, and it was subsequently shown that the road was
not improved; but it was thrown upon the market at critical times in
support of bear operations by the Erie managers, while portions of
it, on at least one occasion, were bought back with the funds of the
company to aid speculation for a rise. The result was to ruin the
credit of the Erie, and to make it the favorite tool of cliques of
gamblers. The increase in bonds occasioned an unmistakable increase in
fixed charges, which rose from 20 per cent of gross earnings in 1864
to 25 per cent in 1871, 21 per cent in 1872, and 30 per cent in 1873,
while the purchase of worthless bonds of subsidiary roads, such as the
Boston, Hartford & Erie, lessened the assets without disclosing the
real position to the casual observer.

In 1872 the control of Erie was taken from Gould through a vigorous
campaign managed by General Daniel E. Sickles, and an “eminently
respectable” board of directors was elected. Temporary relief was
obtained from the use of $6,000,000, available from an issue of bonds
previously approved,[93] and dividends, first on the preferred and
then on both preferred and common stock were declared. Unfortunately
the dividends were not earned; and this fact, which was suspected
from the previous record of the company and the marvel of its so
early restoration to a dividend basis, was shown in the statements of
ex-Auditor S. H. Dunan, who resigned in March, 1874, alleging that the
accounts had been falsified to suit the company’s purposes, and that
he was unwilling any longer to be a party thereto.[94] Investigations
conducted by representatives of English bondholders showed that in
the three years ending in September, 1875, the profits of the road
had been $1,008,775 instead of $5,352,673 as stated in the company’s
accounts; and the severity of this finding was scarcely mitigated by
the conclusion that in the opinion of the committee the dividends on
the preferred stock at least were justified by the books.[95] At the
same time the report of Captain Tyler, another English representative,
laid emphasis on the necessity for a change of gauge, a double track,
improvements in gradient, fresh extensions and connections, and other
similar matters.

The real position of the company at the time was shown but too well
by the frequency of strikes upon its road. Thus in February, 1874,
a strike of freight brakemen on the Susquehanna division broke out,
caused principally by an order to discharge one of the brakemen from
each freight crew, leaving only three on a train; and at the same time
there was a strike of the switchmen on some of the divisions owing to a
decrease in pay. In March occurred a serious strike among the employees
of the road in Buffalo, mainly on account of irregularity and delay in
payment of wages, and, finally, in April, there was trouble both in
the Susquehanna shops and in the Jersey City freight yard over this
same cause. The indications afforded by these troubles were borne out
by the figures of the annual reports. The gross earnings of 1874 were
$1,413,708 less than those of 1873, while the decrease in operating
expenses was so slight as to reduce net earnings by nearly the same
amount. If, now, there is deducted from the net earnings of the years
1871–3, inclusive, the sum which the London accountants declared to
have been improperly reported as profits, there results an average of
$4,175,699 net; or less than the net earnings for either 1864, 1865, or
1866, although the average charges for the years mentioned exceeded the
average of the earlier period by $1,769,060 each year. These figures
exclude the influence of the panic of 1873, which, as has been seen,
caused a still further falling off in the earnings of the company. It
was a time, moreover, when the Erie could not be content to sit still
and wait, for competition was daily becoming more severe. By 1874
the Baltimore & Ohio, the New York Central, and the Pennsylvania had
connections with Chicago, and the Erie was competing with them for
business by means of traffic agreements with connecting lines. The
next decade was to see the bitterest rate wars that the country has
ever known; and the Erie, with its exceptional gauge and single track,
was to compete with rivals of normal gauge, who were adding third and
fourth tracks to the two which they already possessed. The one bright
spot was the development of the coal traffic, which in 1874 formed the
greatest item of the Erie’s tonnage, and was in a measure apart from
the competition of other lines.

Suit was brought in July, 1874, for the appointment of a receiver.
The complaint reviewed alleged improper acts of the management in
declaring dividends, in buying Buffalo, New York & Erie stock and
sundry coal lands, and in issuing the new $30,000,000 mortgage before
mentioned.[96] In October the Attorney-General of New York instituted
suit on nominally the same grounds; not, as he explained, in the
expectation that the appointment of a receiver would be required,
but in order that this action might be taken if the conduct of the
directors should make it necessary. Still other suits were begun before
the year was out.

Meanwhile the management was changed. Whether or not Mr. Watson,
who had been president since 1872, had done all humanly possible to
set the Erie on its feet, his administration was not unnaturally in
bad odor after the charges of Dunan and the report of the London
accountants, to say nothing of the admittedly low earnings for the
year 1874. An attempt was made to secure the very best man possible
for the presidency, and to support him in necessary reforms, in the
hope of some different results from those with which securityholders
had become familiar. The man for the place was thought to be Mr. H. J.
Jewett, a railroad man then in Congress from Ohio; and this gentleman
was accordingly secured at an extremely liberal salary. Soon after his
election a ten per cent cut in salaries was decreed, and an examination
of the accounts of the stations along the line in behalf of the company
was begun. It was too late, however, for the company. The business
of the last of 1874 and first of 1875 was poor; floods in the spring
damaged the property of the road, and rumors of a receivership were
rife. On May 22 a private meeting of stockholders in New York passed
resolutions to the effect that the borrowing of money by the sale of 7
per cent bonds at 40 cents on the dollar, and other means adopted by
the Watson administration, would inevitably result in bankruptcy; that
sound interest required that the money needed to pay interest should
be raised by an assessment on the stockholders, and that the directors
should be thereby requested to open books to examination, and to
invite stockholders to contribute voluntarily a sum sufficient to keep
the company from immediate failure.[97] The proposal showed a proper
spirit, but was impracticable. Four days later Mr. Jewett was appointed
receiver on application of representatives of the Attorney-General and
of the Railroad.[98]

This was the second receivership which the Erie had had to face, and
the situation was materially worse than at the previous failure.
According to the statement of President Jewett the funded indebtedness
in May, 1875, amounted to $54,394,100, and the fixed charges to
$5,059,828; while the net earnings for the previous nine months had
decreased 13.4 per cent from the corresponding period for the previous
year, and a serious deficit was in view. Temporary measures of relief
had served but to drag the company further into the mire;[99] and,
most important of all, the causes for the existing difficulties
were of a permanent nature, so that the future gave promise of still
harder conditions than had existed in the past. What was needed was a
reorganization which should undo the evil work of Gould, Fisk, Drew,
and their associates, and which should secure the margin of surplus
earnings which the reorganization of 1859–62 had failed to provide.
Perhaps the chief difficulty lay in the fact that the men who were
responsible for the increased capitalization were not at all those on
whom the brunt of reconstruction would fall; for while the managers
of the road had been Americans, the gullible investors had been
Englishmen; and it was reported that much of the watered stock of the
Gould régime had been unloaded on the English market.

Committees sprang up promptly. The most important of them were the
English committees of bond- and stockholders, soon consolidated under
the chairmanship of Sir Edward Watkin. On August 7, Sir Edward left
England on a visit of inspection, accompanied by Mr. Morris, counsel
for the bondholders. Conference with the board of directors and with
President Jewett followed, and a provisional scheme of adjustment was
decided upon. In his report to his English constituents Sir Edward
outlined the results. Current indebtedness, said he, was $42,180,075;
estimated net revenues for the year ending in June last were
$3,715,609; operating expenses had been for that year 79 per cent, due
largely to the cost imposed by exceptional gauge, while the chief lines
with which the Erie competed showed proportions of only from 60 to 66
per cent. Out of fourteen branches only three showed a profit above
rentals, and pay-rolls had ordinarily been months in arrears. These
facts were familiar; the remedy proposed was unfortunately familiar as
well. “Let it be hoped,” said this English financier, “that the bond-
and stockholders will have the courage now to submit to a period of
self-denial, and will consent to pay their debts and complete essential
obligations out of available net profits, the bondholders receiving
in place of cash such equitable obligations, realized out of surplus
revenue in the future, as each, according to right of priority, may
justly expect.”[100] What could this have meant save an issue of stock
or income bonds for coupons falling due, with the result of adding
to the unwieldy capitalization of the road instead of reducing it as
should have been done! For the rest, Sir Edward Watkin concluded with
Mr. Jewett the following arrangement:

(1) Three nominees of the bond- and stockholders’ committee proposed by
Watkin were to take seats in the Erie board;

(2) Mr. Morris was to be associated with counsel for the receiver and
for the company, and was to be regarded and treated as one of the
professional agents and officers of the undertaking;

(3) Mr. Jewett was to transmit a memorandum of his views on
reorganization;

(4) Net earnings were to be retained for a while, and bondholders
were to have a voice in their expenditure. Thus a vote was to be
taken under the charge of the stock- and bondholders’ committee in
London on the constitution of a committee of consultation, consisting
of representatives of each class of bondholders and of preferred
and ordinary stock, and that committee was to designate a special
representative whose consent and approval were to be taken by Mr.
Jewett in the expenditure of net earnings;

(5) Monthly reports of actual earnings and expenditures, together
with reports from the president and receiver, were to be regularly
transmitted to the office of the committee in London;

(6) Bond- and stockholders were to be urged to give power of attorney
and proxies to Watkin, or to such other person or persons as the above
representatives of the bond- and stockholders should designate;

(7) Any scheme of reorganization was to include a provision giving
bondholders a voting power.

On the above resolutions Jewett, with his board, and Watkin, with
his committee, agreed to coöperate.[101] Under the circumstances the
increased power given the bondholders was both a natural and a just
demand, and it is probable that Mr. Jewett’s prompt acquiescence in it
had something to do with Sir Edward’s advice to the securityholders “to
rely on the honor, as I feel you may also upon the anxious labors and
full experience of the President and Receiver.”

The report did not go uncriticised. It was pointed out, first, that
a majority of English proprietors could not unhesitatingly share the
confidence expressed in Mr. Jewett; second, that the first mortgage
bondholders were well secured, and would surely refuse to fund their
indebtedness; and third, that the payment of the floating debt,
according to the Watkin plan, would simply create another debt of equal
or greater amount due to the bondholders whose coupons were not paid.
The only sound way, said a committee of bondholders in Dundee in a
letter to the Watkin Committee, is resolutely to shun an accumulation
of mortgage liabilities on the one hand, and on the other to give
increased reality to the bonds and stocks of the company already
existing as items in capital account, _i. e._ an assessment on the
stock and a sweeping reduction in the interest on the bonds secured by
the second mortgage:—the first mortgage bonds are in different case—
they represent investment of cash instead of mere water, and even if
foreclosure is difficult, they have beyond question an absolutely good
security for the ultimate payment of both principal and interest.[102]

In September, 1875, a plan of reorganization was anonymously put
forward as follows: Instead of assessment on the shareholders, it
suggested the issue of 50 per cent more common stock; one new share
for every two shares then existing. If a price of $25 per share could
be obtained a total of $10,000,000 cash would be thereby secured.
Besides the new stock issued bond- and preference-holders were to
capitalize their interest for two years in bonds or shares bearing
their present priorities. This funding should yield $8,000,000; and
the $18,000,000 in all obtained was to be expended on the road over
the next two years, during which period the new shares were to be paid
up by half-yearly instalments. With the line furnished and equipped as
proposed, continued this optimistic plan, the working expenses could be
reduced from 79 per cent to 60 per cent, and the traffic within three
years would be at least $24,000,000 per year, affording a net revenue
of $9,600,000 per annum, sufficient to meet all bond and preference
liabilities and to leave 3 per cent for the ordinary charges.[103] The
all sufficient criticism to this plan was that it required too great a
combination of favorable circumstances to ensure its success. In some
respects, however, it was not unlike the plan ultimately adopted.

Two months later appeared a plan by Mr. John C. Conybeare, an English
bondholder, which was superior to the foregoing in that it proposed an
assessment, and made some slight provision for an ultimate reduction
in fixed charges. Mr. Conybeare proposed to assess preferred stock
$11 and common stock $9. Payment of the assessment was not to be
compulsory, but was to have the effect of giving to the stock which did
pay a right to dividends before anything should be received by that
which did not pay. Shares of the company by the plan would thus have
ranked as follows:

(1) Preferred shares on which assessment had been paid, entitled to 7
per cent dividends before any other dividends were paid.

(2) Preferred shares on which no assessment had been paid, with rights
inferior to the preferred A shares, but superior to the common shares.

(3) Common stock on which assessment had been paid, entitled to 4 per
cent before further dividend on the common.

(4) Unprivileged, unassessed common stock which was to take what there
was left.

In addition there was to be a pre-preference 8 per cent stock, ranking
before all the above, which was to be issued to exchange in part for
second preferred and convertible bonds. First consolidated bonds and
sterling bonds of 1865 were to accept one or two per cent of their 7
per cent interest in bonds, secured perhaps by the coal property of
the company, while the second consolidated and the convertible gold
bonds were to receive 4 per cent in gold and 3 per cent in the new
pre-preference stock as above. To the obvious possibility that the
stockholders would refuse to pay an assessment the plan opposed no
remedy. In this case the very moderate amount of interest funded would
have been the only relief secured.[104]

These plans were, however, but preliminary to the elaborate Watkin
scheme which appeared in December. The most prominent feature herein
was, as previously indicated, the funding of coupons, both those
past due and those to become due for a time into the future. Given
net earnings sufficient to meet fixed charges, the postponement of
interest by this plan would obviously have released revenue with which
to make needed improvements on the road. This funding was to be,
however, limited to the first consolidated 7s, convertible sterling
6s, second consolidated 7s, and convertible gold 7s; the six earlier
issues were to be left untouched. One permanent reduction was also to
be made, in that for the second mortgage and convertible 7s were to
be given two classes of ninety-year gold bonds: the first for 60 per
cent of the principal, with interest at 6 per cent, and payable in
bonds of the same class from the dates of default until March, 1877,
and thereafter in gold; the second for 40 per cent of the principal,
carrying 4 per cent until 1881 and thereafter 5 per cent, payable
only out of net earnings. To start the company on its way and to
meet present obligations an assessment was proposed of three dollars
on the preferred and six dollars on the common stock, in return for
which 5 per cent income bonds were to be given; while finally the
dividends on the preferred stock were to be reduced from 7 to 6 per
cent, and foreclosure was contemplated, so that the opposition of an
irreconcilable minority might be more easily overcome.[105] According
to the figures in the Watkin plan, the old and new capitalization and
interest compared as follows:

The amount of capital stock was unchanged.

  _Total bonded indebtedness_    _Principal_    _Interest_

  Before reorganization,         $54,394,100    $4,073,106
  After reorganization,           61,330,241     4,139,240
                                 -----------    ----------
    Increase                      $6,936,141       $66,134

Indebtedness on which interest was obligatory:

                                 _Principal_    _Interest_

  Before reorganization,         $54,394,100    $4,073,106
  After reorganization,           46,634,134     3,316,238
                                 -----------    ----------
    Decrease                      $7,759,966      $756,868

The net earnings for 1874–5 had been $3,715,609, and those from 1871–3
inclusive, with the deductions declared proper in the report of the
London accountants, had averaged $4,175,699 each year, so that a safe
margin seemed to intervene. The extent of the margin depended, however,
on the fixed charges, such as rentals, over and above interest on the
funded debt; and although it was proposed to cancel burdensome leases
and contracts the actual leeway after 1880 was to be very small indeed.
To speak briefly, the plan was definite but not sufficiently radical
to meet conditions which were likely to arise. In counting upon the
ability of the company to spare considerable sums from revenue for
improvements during the next few years, it was leaning on a broken
reed; in increasing the nominal amount of bonded indebtedness, it was
making a step in the wrong direction; and by interposing additional
claims on earnings while leaving the volume of stock the same, it
took from the stockholders any very lively interest in the road’s
future welfare. The plan was nevertheless accepted by the English
securityholders, subject to such modifications as might afterwards be
found desirable.[106]

The next step was to obtain the unanimous acceptance of this Watkin
scheme. Messrs. Robert Fleming and O. G. Miller were accordingly sent
to New York in February, 1876, to consult with the officers of the
company and the securityholders in America. No very vigorous interest
was taken on this side, but the Erie directors appointed a committee to
confer with the English representatives, and discussions took place for
something over a month. The committee criticised the plan proposed from
the point of view of the stockholders; they maintained that it would
destroy all their interest in the property unless they made further
sacrifices, which they were unable to do, and suggested that the
funding of from four to eight coupons by the first consolidated, gold
convertible, and second consolidated bonds was all that would be needed
to put the road in a prosperous condition, provide for steel rails, and
for the narrowing of the gauge.[107] This was so plainly inadequate
that it is a matter of surprise that it was entertained by the English
committee; and even they insisted that the stockholders agree to put a
majority of the $86,000,000 of stock in the hands of the bondholders as
a preliminary, and would do no more than lay the proposal before their
constituents.

On their return home in April Messrs. Miller and Fleming stated that
the essential conditions to a successful reorganization were:

(1) An effective control of the management by the real owners,—the
bondholders;

(2) The restoration of the equilibrium between the compulsory interest
charge on the mortgage debt and the minimum net earnings;

(3) A change of gauge from 6 ft. to 4 ft. 8½ in.[108]

“The foreclosure scheme of the committee” (Watkin plan), said they,
“is certainly the soundest plan and would doubtless be preferred by
those shareholders who really care for the welfare of their property.”
Then referring to the directors’ plan, “If it were possible to present
to the bondholders the scheme of proceeding by amicable arrangement
as practicable, and therefore as presenting a real alternative for
their acceptance, we should suggest to you at the same time to lay the
option before them. We feel, however, that that scheme can only be
regarded as such an alternative when stockholders enough have signified
their willingness to vest their shares in trustees on the footing
of it, and so secure an effectual control to the bondholders for a
certain period. We must, therefore, content ourselves for the present
with suggesting that the committee should proceed with vigor in the
direction of foreclosure, at the same time inviting the stockholders
to signify their willingness to vest their stock in trustees as above
mentioned.”[109]

The suggestion of the directors was the last alternative plan proposed,
and from April, 1876, the only question was how to perfect and carry
through the Watkin plan. As eventually put forward, this differed
in a few points from its form as earlier announced. The fundamental
principle was still the funding of coupons of the first and second
consolidated and the convertible bonds. Of these the first consolidated
mortgage and sterling 6 per cents were now to fund _alternate_ coupons
from September 1, 1875, to September 1, 1879, instead of funding _all_
coupons to March 1, 1876, and receiving cash thereafter: and whereas
in the earlier plan mortgage bonds of the same class had been given
for funded interest, the later plan created special issues of funded
coupon bonds, secured by deposit of the funded coupons, and bearing
the same interest as the first consolidated bonds themselves. A more
serious difference appeared in the treatment of the second mortgage and
the gold convertibles. It will be remembered that it had been proposed
in December, 1875, to exchange these for two classes of new bonds,
of which 60 per cent were to bear interest at the rate of 6 per cent
and 40 per cent were to consist of 4 per cent income bonds. The new
plan did away with this permanent reduction in fixed charges. Instead,
the second consolidated and convertible gold bonds funded alternate
coupons from June 1, 1875, to December 1, 1879, and received a new 6
per cent bond for the principal of their holdings, and funded coupon
6 per cent bonds for the interest thus postponed; the new mortgage
bonds not having the right of foreclosure until after default for six
successive interest periods (3 years). The funded coupon bonds were to
be funded at the existing rate of interest on the second consolidated
and convertible bonds, _i. e._ 7 per cent, so that the reduction in
interest was compensated for by the greater volume of securities given;
and both classes of these coupon bonds were to bear lower interest at
first than that to which they would ultimately attain. The assessment
proposed in 1875 was retained in 1876, except that stockholders were
given the choice of paying $6 on common and $3 on preferred stock and
obtaining therefor income bonds, or of paying $4 on common and $2
on preferred and receiving nothing but new stock, dollar for dollar
for their old.[110] One-half of the shares of the new company (after
foreclosure) were to be issued in the name of one or more sets of
trustees, who were to hold them to vote on until a dividend had been
paid on the preferred stock for three consecutive years. Provision was
made for an issue of $2,500,000 in prior lien bonds, to take precedence
of the remainder of the second consols, the proceeds to be applied
to capital requirements. Voting power was conferred on the first and
second consols, funded income bonds, prior lien bonds, and income
bonds, in all about $57,000,000; one vote to every $100 of bonds.[111]
The property of the company was to be foreclosed by or under the
direction of certain reconstruction trustees, for the choice of whom
careful provisions were inserted.

Divested of all complications, what this reorganization plan proposed
for the salvation of the property was the funding of the coupons on
four classes of bonds from 1875 to 1879; the reduction of the interest
to be paid on $25,000,000 second consolidated and convertible 7s one
per cent per share; and the raising of a certain amount of cash by
assessment upon the stockholders; while it dropped the one point of the
earlier plan which might have given a key to the solution of the whole
problem, viz. the exchange of mortgage and income bonds for the old
second consolidated in the ratios respectively of 60 per cent and of 40
per cent. When we remember the desperate straits to which the company
had been reduced, the permanent relief seems slight enough; and given
the fact, which proved but too true, that the net earnings were to fall
off until the road was little more than able to meet the alternate
coupons which it was obliged to pay in cash, it appears to have been
nothing at all. If we suppose no changes to have occurred in capital
account between 1878 and 1883 save those provided for in the plan of
reorganization itself, a comparison of the two periods would have stood
as follows:

  _Before reorganization_       _Principal_   _Interest_

  Sterling convertible 6s,       $4,457,714     $267,463
  First consolidated 7s,         12,076,000      845,320
  Convertible 7s,                10,000,000      700,000
  Second consolidated 7s,        15,000,000    1,050,000
                                -----------   ----------
                                $41,533,714   $2,862,783
  Old Mortgages,                 13,155,500      921,062
  Guaranteed bonds, etc.,         6,003,360      449,411
                                -----------   ----------
                                $60,692,574   $4,233,256
      Rentals,                                   742,226
                                              ----------
                                              $4,975,482

  _After December 1, 1883_      _Principal_   _Interest_

  Consolidated 7s,              $20,005,794   $1,400,405
  Consolidated 6s,               33,516,666    2,011,000
                                -----------   ----------
                                $53,522,460   $3,411,405
  Old bonds,                     13,155,500      921,062
  Guaranteed bonds, etc.,         6,003,360      449,411
  Rentals,                                       742,226
                                -----------   ----------
                                $72,681,320   $5,524,104
  Total before reorganization    60,692,574    4,975,482
                                -----------   ----------
      Increase,                 $11,988,746     $548,622

It thus appears that this reorganization plan contemplated an immediate
increase in the cumbrous capitalization of the company to the amount
of nearly $12,000,000, and an eventual increase in fixed charges of
over $500,000. It offered no reasonable assurance that the solvency of
the company could be maintained under the average conditions existing
in the past, and left no margin for contingencies of any kind. The
trouble lay in the unwillingness of bondholders to sacrifice any part
of their holdings to meet difficulties caused largely by inflation over
which they had had no control. This reluctance was natural,—it should
have been met, however, by the realization that the question was now
of the future and not of the past, and that the best interests of the
bondholders themselves demanded a reconstruction sufficiently radical
to leave no doubt of the ability of the new company to pay its debts.

The plan adopted, foreclosure was in order, and suits which had been
begun as early as 1875 were taken up and pushed. In November, 1877,
a decree of foreclosure under the second consolidated mortgage was
obtained, appointing a referee to conduct the sale, and providing for
the sale of the road to representatives of the bondholders in case
they made the highest bid. The opposition, which had not been able to
prevent the approval of the plan, now appeared with a multiplicity
of suits to prevent its consummation. In January, 1878, demands were
made to secure a re-accounting from the receiver, and the reopening
of an earlier suit of the people against the Erie which had been
previously discontinued. On January 18 the postponement of the sale
to March 25 was obtained. On January 19 a suit demanded the removal
of Receiver Jewett, making sweeping charges of fraud; and on January
30, in still other proceedings, Mr. Jewett was arrested on a charge of
perjury for swearing to incorrect statements in the annual report to
the state engineer;—a culmination as disgraceful as it was absurd.
In February a suit in Orange County, New York, demanded the removal
of the receiver, and the appointment of a special receiver during the
pendency of the action, with an injunction to prevent the sale of the
road. In March a petition of one Isaac Fowler, a stockholder, for
permission to examine the company’s books, was granted; argument was
heard on the petition of James McHenry to intervene in the foreclosure
suits and further to postpone the sale; the application of Albert Betz
and others to be made parties was granted; and postponement of sale to
April 24 obtained. Last of all, on April 23 and 24, arguments in behalf
of John F. Brown and F. W. Isaacson were heard, asking for postponement
to a still later date. The litigation availed nothing. Judge Potter
in the Brown suit held that the courts could relieve against any
injustice occasioned by the sale, and on April 24 the property of the
Erie Railway was sold for $6,000,000 under foreclosure of the second
consolidated mortgage.[112] The new corporation formed to take over the
railroad was called the New York, Lake Erie & Western Railroad Company,
and had its articles of incorporation regularly filed at the office of
the Secretary of State. Mr. Jewett was elected president. In May the
receiver was discharged,[113] and a new stage in the history of the
road began.

For about seven years the Erie was to be free from the necessity for
further reorganization. This result, unexpected from the nature of
the adjustment of 1878, was due to the vigorous policy of Mr. Jewett,
first, in developing the coal traffic for which the Erie was well
located; second, in improving the condition of the road; and third, in
securing connections with Chicago.

For some time the Erie had been a considerable carrier of coal and a
large owner of coal lands as well. In 1877, the first year in which the
figures were separated in the annual report, roughly 273,000,000 out
of 1,113,000,000 ton miles reported, or something over one-quarter,
were due to the carriage of coal; and $2,697,776 out of a total of
$10,647,807 of the freight earnings came from that business. The
lands owned by the company consisted of 8000 acres in fee, and large
tracts in leasehold and mining rights in the anthracite territory in
the northeast corner of Pennsylvania; together with 14,000 acres in
fee and 13,000 acres of mining rights in the bituminous territory in
the northwest portion of the state.[114] Mr. Jewett felt that this
property could be made of great value to the road, and it was under
his administration as receiver that steps were taken to extend the
holdings of bituminous land, and to control branch roads leading into
the district. The result appeared in a remarkable extension of the
company’s business. While the total freight ton mileage from 1878 to
1884 increased 103 per cent, the ton mileage of coal increased 190
per cent, or nearly tripled; and while the gross earnings on ordinary
freight grew from $7,950,031 to $11,687,520, those on coal increased
from $2,697,776 to $5,437,000. At the same time McKean County, directly
north of the coal lands, and containing large tracts purchased by the
Erie in the course of its other negotiations, turned out to be an
abundant oil-producing district, and made the Bradford branch, which
tapped it, Erie’s most valuable collateral property.[115]

It was partly because of the success of the policy in respect to coal
lands that the Erie was enabled to spend large sums in the improvement
of its road. In the six years from 1878 to 1883 the company put nearly
$14,000,000 into improvements of the road, property and equipment, and
of this about one-half was paid out of surplus earnings. In December,
1883, alone, $304,565 were spent, and in the three succeeding months
nearly double that amount; making a total of nearly $1,000,000 in the
four months previous to April, 1884. The money went toward reducing
grades, straightening curves, increasing weight of rails, etc.,
including the completion of a third rail to Buffalo by which the
serious disadvantage of an exceptional gauge was removed. Its result
was seen in the decrease in the ratio of operating expenses from 75.13
in 1875 and 77.16 in 1876 to 64.78 in 1883; and in the rise of net
earnings per ton mile from .251 cents to .261 cents, while the gross
earnings per ton mile decreased from 1.209 cents to .780 cents. No
policy which the Erie managers pursued met a more crying need, and none
did so much toward maintaining the solvency of the company.

The project of controlling a line of their own to Chicago was brought
actively to the attention of the Erie managers by the danger of being
cut off from a connection with that city. The original line of the Erie
had run to Dunkirk on Lake Erie, from which a branch to Buffalo had
soon been built. For western traffic the Erie had had to rely largely
on the Atlantic & Great Western (later the New York, Pennsylvania &
Ohio), which connected with the main line at Salamanca, New York, and
extended by 1884 west to Dayton, Ohio. In 1857 the Erie first leased
this property. Placed in receivers’ hands in 1869, the Atlantic & Great
Western was re-leased to the Erie on January 1, 1870; sold July 1,
1871, it was again leased to the Erie in May, 1874, only to enter upon
a new receivership on December 9 of that year. The persistent attempt
to control the road showed the value which the Erie placed upon it,
and in fact it was invaluable as a link in a prospective line to the
West. Even while the leases were in force, however, the Erie lacked
that connection of its own with Chicago which seemed necessary to make
it a successful competitor for trunk-line business. In 1882 it was
forwarding passengers over not less than five different routes, over
no one of which could it feel assured of the continuance of contracts
of a favorable nature. In 1881 Mr. Jewett relieved the situation by
acquiring control of the franchise of the Chicago & Atlantic Railway,
extending from Marion, Ohio, on the line of the New York, Pennsylvania
& Ohio towards Chicago, and soon after he entered into a contract
with certain private parties for construction of the road. In 1883 he
executed a new lease of the New York, Pennsylvania & Ohio, which he
hoped would secure for the Erie permanent control of the property, and
about the same time (1882) he purchased a controlling interest in the
stock of the Cincinnati, Hamilton & Dayton, which extended the Erie
system to the important city of Cincinnati. These operations put the
Erie upon a footing which was secure so long as the obligations which
they entailed could be met, and showed a broad-minded appreciation of
strategic necessities. The terms of the arrangement with the Chicago
& Atlantic were as follows: For the construction of the road the Erie
agreed to give to the directors the entire proceeds of the mortgage
bonds of that branch ($6,500,000), and its entire capital stock
($10,000,000); making an aggregate of $61,710 per mile of line. The
proceeds were, however, to be deposited with the president of the New
York, Lake Erie & Western in trust, together with certain subsidies
which had been voted by the counties and townships along the line, and
upon him was to devolve the duty of seeing to the proper application
thereof; and besides this, 90 per cent of the stock was to be deposited
and an irrevocable proxy given thereon for the thirty years’ life
of the bonds.[116] The obligation which the Erie assumed amounted
in practice to guaranteeing that the road should be constructed for
the sum provided, and that interest on the bonds should be paid. In
leasing the New York, Pennsylvania & Ohio the Erie involved itself
more heavily. As lessee it agreed to pay the minimum sum of $1,757,055
yearly (the net earnings of 1882); the actual rental to be 32 per
cent of all gross earnings up to $6,000,000 and 50 per cent of all
gross earnings above $6,000,000, until the average of the whole rental
should be raised to 35 per cent, or until the gross earnings should
be $7,200,000. If 32 per cent of the gross earnings should ever be
less than the $1,757,055 to be paid yearly, then the deficiency was
to be made up, without interest, out of the excess in any subsequent
year. Out of the rental the New York, Pennsylvania & Ohio was to pay
the interest on its prior lien bonds, the rentals of its leased lines,
the expenses of maintaining its organization in Europe and America,
and for five years a sum of $260,000 each year to the car trust.[117]
Finally, in purchasing the Cincinnati, Hamilton & Dayton, the Erie gave
to the holders of the $2,000,000 of stock which it bought beneficial
certificates to the amount of $1,500,000, on which it agreed to make
good any failure of the Cincinnati company to pay 6 per cent per annum.

But though the Erie managers did their best with the conditions which
they were called upon to face, they were unable to hold the company
up under the enormous capitalization and heavy charges left by the
reorganization of 1874–8, at a time when rate wars were sapping its
resources, and when contracts which it was being forced to make
were entailing an annual loss.[118] In spite of the declaration of
sufficient dividends on the comparatively small amount of preferred
stock to terminate the voting trust, it is certain that for most of
the years from 1874 to 1884 the solvency of the road was a precarious
matter, and that there never was a time when any considerable falling
off in earnings or any severe shock to its credit would not have driven
it to the wall.

Such a shock was preparing in the early months of 1884. For some weeks
before the last of April there had been a tendency for the quotations
of Erie securities to fall; no reason was assigned, but it was hinted
that default might be made in the payment of the June interest on
the second consols, and that a receivership was not unlikely. This
weakness was accompanied, and perhaps accentuated, by a strike of
the brakemen on the New York, Pennsylvania & Ohio in consequence of
an order reducing the number of brakemen on each train from three
to two. The truth of the matter came out in May, when the failure
of the Wall Street firm of Grant & Ward both precipitated a stock
exchange panic and laid bare the straits to which the company had
been reduced. Investigation showed that a large floating debt had
been piling up for four principal purposes: First, advances to the
Chicago & Atlantic Railroad; second, advances for coal mines; third,
advances for improvements on the Hudson River at Weehawken; fourth,
equipment instalments.[119] Attempts to raise funds to cover the debt
had resulted in the negotiation of promissory short time notes with
the firm of Grant & Ward, for which $2,500,000 of Chicago & Atlantic
second mortgage bonds had been deposited as security. The company had
been attracted to Grant & Ward by their offer to purchase and dispose
of Chicago & Atlantic bonds at a price 15 per cent above that offered
by any other parties;[120] and had trusted so implicitly in their
integrity as to deposit notes and collateral for its short time loans
detached and independent, one from the other, so that Grant & Ward
were able to, and did, fraudulently raise money upon them to an amount
much larger than the advances they had made. The losses entailed by
the transaction were serious, and the blow to Erie’s credit was even
more severe. The floating debt which had been so hard to carry became
doubly menacing now that the possibility of further short time loans
was practically cut off; and to cap the climax, the earnings for the
first half of the year 1884 showed an unusually large decrease with
the cessation of the fall business. Under these circumstances it was
the part of wisdom to take advantage of every loophole of escape, and
the peculiar provisions of the second consolidated mortgage, denying
to these bonds the right of immediate foreclosure in case of default,
were turned to for relief. It will be remembered that by the terms of
the reorganization of 1878 no right of action was to accrue to the
second mortgage bondholders until on each of six successive due dates
of coupons (three years) some interest secured by the second indenture
should be in default. This being the case the Erie directors decided
to pass the June interest on these bonds. “As a general rule,” said
they in a circular, “the business and earnings of the company are much
less for the first half than for the last half of the year. The falling
off in earnings for the first six months of the previous year has
been unusually large. The coupons of the second consolidated mortgage
bonds are due and payable on the first of June prox.... Under ordinary
circumstances the board might at the present as on the former occasions
provide to some extent for the deficit of the first six months, relying
on the usual increase in earnings of the last half of the year, but in
the present depressed condition of the business of the country and of
the earnings of this company, as well as of others, the board does not
feel at liberty to deal with anything but the business and earnings as
now ascertained, and therefore deems it wise to accept the provisions
of the mortgage as the lawful rule for their government in the existing
emergency....”[121]

However necessary the action, the bondholders of the company could not
have been expected to receive it quietly; and naturally again, the
indignation was intense among the English securityholders, to whom,
more than to any one else, the existing situation was due. In June,
1884, a meeting of stockholders of the company was held in London, at
which much complaint was made of the fall in value of the securities
of the company, and an inquiry into the management was demanded. A
committee was appointed, and two of its members, Messrs. Powell and
Westlake, landed in New York July 15, with protestations of a friendly
spirit toward all concerned. The situation was not encouraging. The
day before their arrival President Jewett had offered his resignation,
and the directors were busy selecting his successor; a large floating
debt was demanding most vigorous attention, and confidence in the
company was at a low ebb. Beyond a doubt the raising of a large amount
of cash, $4,000,000 to $5,000,000, was a pressing necessity, and the
English representatives were anxious to make it plain that at least a
fair share of this should come from American as well as from English
bondholders. Force of circumstances compelled them to give assurance
that the money would be raised, and this done, Mr. John King accepted
the position which Mr. Jewett professed himself ready to resign.
Pending the annual election Mr. King took the position of Assistant to
the President.

On their return to London Messrs. Powell and Westlake reported the
floating debt to be as follows:

  Unpaid coupons, June 1, 1884,                             $1,007,922

  Balance of actual and early maturing liabilities other
  than the June 1 coupons over and above cash in hand and
  money assets considered good and available,               $4,447,316

“All the purposes, the expenditures on which have caused the floating
debt,” said they, “seem to us to have been in themselves wise and
politic, but the piling up of a large floating debt for even the
best of purposes is always more or less imprudent and dangerous.
The company’s credit might have borne the strain of the panic, but
it was broken down by the Grant & Ward disaster, and the funding of
its floating debt is now indispensable.... We have suggested to the
president and directors, and now recommend to the committee that an
effort should be made without delay to raise a permanent loan on the
securities available for a total of $5,000,000.”[122] This, it will be
observed, was the old remedy. Inability to meet current expenses was to
be removed by capitalizing the debts which this inability had caused.

The year 1885 was taken up with suits brought against the Erie by
certain of its branch lines. In February the directors of the Buffalo
& Southwestern Company brought suit to recover $345,000 interest
defaulted during the previous January. The complaint alleged that the
Erie was insolvent, and asked that it be restrained from using the
gross receipts of the road until the default should have been made
good. The Erie paid the back interest, but in July, after another
default, an injunction was obtained forbidding it to divert any part
of the earnings received or to be received from this property. It was
recited that on May 24, 1881, the Buffalo & Southwestern had been
leased to the Erie for 35 per cent of the gross earnings, subject to
certain deductions; that the Erie had delayed payment of the rental
due in January, 1885, and had refused to pay that due in July, 1885,
but that it was still receiving the gross earnings of the plaintiffs’
road, and had applied these to the payment of its debts other than
the rentals of this road.[123] In November, after the Erie’s other
troubles were settled, the litigation was terminated by an agreement
to reduce the Buffalo & Southwestern rental from 35 per cent to 27½
per cent. Other suits arose, directly or indirectly, because of the
control which Mr. Jewett maintained as trustee of the stock of the
Chicago & Atlantic and the Cincinnati, Hamilton & Dayton railways even
after his resignation from the Erie Company. On the one hand President
King was anxious to repossess himself of these important branches
for the Erie, and on the other Mr. Jewett was not disinclined to do
what damage he could to the managers who had succeeded in supplanting
him. In the matter of the Chicago & Atlantic Mr. Jewett gained the
first victory in a temporary injunction forbidding the Erie to divert
traffic from this line contrary to contract. This injunction was
soon, however, substantially vacated, and President King in his turn
obtained a decision that Jewett had been made trustee of the Chicago
& Atlantic simply because he had been at the time vice-president of
the New York, Lake Erie & Western Railroad Company and could be relied
upon to control the road as the western outlet of the Erie. A receiver
was subsequently appointed and the road reorganized as the Chicago &
Erie Railroad Company, the Erie agreeing to guarantee payment of its
first mortgage bonds, and receiving in return the $100,000 of capital
stock and $5,000,000 in income bonds, besides $2,000,000 first mortgage
bonds which were in part payment of old advances.[124] In his action
concerning the Cincinnati, Hamilton & Dayton President King was less
successful; and Mr. Jewett was sustained in his refusal to deliver
proxies for the stock held to the larger company. The result was to
turn the Erie to the Big Four, upon which, instead of upon the Dayton
road, the management was for some time to rely for an entrance into
Cincinnati.

During these various contests the suggestions of the English committee
were not lost to view, and in the latter part of 1885 they crystallized
into definite propositions. The floating debt then consisted of two
parts: first, the defaulted coupons on the second consolidated bonds;
and second, the current liabilities accumulated for the purposes before
described. The relief proposed was likewise in two parts, and involved
the issue of a 5 per cent mortgage, secured by deposit of the second
consolidated coupons maturing and to mature in June and December,
1884, June, 1885, and June, 1886, and a 6 per cent mortgage upon the
property of the Long Dock Company, comprising the valuable terminals of
the Erie at Jersey City.[125] The funding of the coupon issue proved
simplicity itself; the funded coupons were exchanged for bonds of the
new gold mortgage, which were to be redeemable at 105 at the pleasure
of the company.[126] By the end of 1886 these bonds had been accepted
by the holders of $32,982,500 of the outstanding $33,597,400 of the
second consols, and $3,957,900 of them had been issued. Dealing with
the Long Dock Company was slightly complicated by the fact that 8000
shares of that company were pledged as part security for the issue of
Erie collateral bonds. To free them $800,000 in cash were deposited
with the trustee of the mortgage, which were in turn employed by him to
pay off $727,000 of the 6 per cent collateral bonds, thus reducing the
interest charge on that issue $43,620 per annum. This done, the Long
Dock Company extended the lease of its property and franchises to the
Erie to 1935 at a rental of $480,000 per annum, and contemporaneously
therewith placed a consolidated mortgage upon its property to secure
$7,500,000 of 50-year 6 per cent gold bonds; of which $3,000,000
were reserved to retire existing indebtedness, and the proceeds of
$4,500,000 were paid to the Erie for the cancellation of its floating
debt. The total result was to increase fixed charges by $270,000 of
interest at 6 per cent on the Long Dock bonds, and by $197,895 on
$3,957,900 of the new funded 5s, less the reduction of $43,620 on
cancelled collateral bonds; leaving a net increase of $424,275.[127]
For its ingenuity the scheme was to be admired; from any other point
of view it was to be condemned as another example of that borrowing to
pay interest which had brought the Erie to its existing straits. The
incapacity of the creditors of the company to realize that continued
borrowing of money to pay current obligations was only to ensure
repeated bankruptcy seemed complete.

After this new “salvation,” the Erie started once more on its laborious
attempt to pay interest on its outstanding bonds. From 1887 to 1892
the business increased somewhat, and despite a decrease in the average
receipts per ton mile[128] a gain of about $4,700,000 in gross earnings
was secured; from which is to be deducted an increase of $310,996 in
fixed charges, and of $4,076,111 in operating expenses.

The prohibition of pooling in 1887 affected the company unfavorably.
Previous to the passage of the Interstate Commerce Act the other lines
had been paying it an annual average of $42,500 on west-bound business
from New York for shortages under the operation of the trunk-line pool,
besides about $88,000 annually on east-bound dead freight and $19,770
on live stock. These payments ceased when the Act was passed, although
a differential on west-bound traffic was subsequently allowed.[129]
But the leakage which was most apparent lay in the large rental and
heavy operating cost of the New York, Pennsylvania & Ohio. It will
be remembered that the Erie had leased that road for 32 per cent of
the gross earnings when earnings were $6,000,000 or under, and 50 per
cent when they should be above that figure. In 1887 this was amended
so as to provide that for every increase of $100,000 over $6,000,000
in the gross earnings the Erie should pay to the lessor an additional
one-tenth of one per cent of such gross earnings until the gross
earnings should be $7,250,000, and the rental 33½ per cent, after which
the percentage was not to increase.[130] Under the old lease the Erie
had guaranteed to carry over the line 50 per cent of all its east-bound
and 65 per cent of all its west-bound through traffic—under the new
lease, these maxima were increased to 55 per cent and 70 per cent; but
even this failed to make the branch road pay. Its grades were high,
its equipment and sidings were limited, its cost of operation was well
above 68 per cent; and the increase in tonnage provided for emphasized
each and every disadvantage. Up to 1893 the results of operations were
as follows:

                                             _Loss_      _Profit_

  First 5 months to Sept. 30,      1883                  $199,540
  Twelve months ending Sept. 30,   1884     $270,281
                                   1885      239,820
                                   1886                    51,322
                                   1887                    91,965
                                   1888      343,911
                                   1889      331,134
                                   1890                    77,376
                                   1891       19,586
                                   1892      425,888
                                   1893      197,106
                                          ----------     --------
                                          $1,827,726     $420,203
      Net loss,                            1,407,523

It thus appears that the terms of the amended lease were in reality
more onerous than the contract which they succeeded, and that whatever
the value of the branch as a feeder, its operation involved large and
fairly regular deductions from the net income of the parent line.
Emphasis on these facts was laid in the annual reports, and frequent
demands were made that the New York, Pennsylvania & Ohio bring its
road up to the standard of like connections of through trunk lines.
Meanwhile improvements were imperative on the Erie’s own lines: new
equipment was needed, new rails and new motive power, and at the
same time surplus earnings were somewhat less. The directors adopted
the expedient of allowing current liabilities to accumulate, and put
$8,496,572 into the road from October 1, 1884, to September 30, 1892,
of which $3,351,977 represented surplus earnings, $2,375,400 increase
in bonded indebtedness, and the balance floating debt. In the matter
of traffic policy they paid particular attention to the coal business,
which, however, lost ground as compared with other freight, and to
the local business, which it was the policy of the management to
encourage. In 1890 the board declared that “the time had arrived when
extraordinary expenditure for improvements and the necessities of the
property were no longer necessary.”[131] In 1891 3 per cent on the
preferred stock was paid, the first dividend since 1884.[132]

From 1887 to 1893, with all its struggles, the Erie was continually on
the verge of failure. The capitalization in 1892 was at the enormous
total of $163,607,485 on an operated mileage of 1698 miles, while
fixed charges were $4993 per mile, and the available net revenue but
$4830.[133] Given, with this condition, a gross floating debt which
amounted in 1892 to $9,163,166, and represented in a large measure
the inability of the company to make necessary repairs, no further
explanation is needed for the bankruptcy which soon took place.

Early in 1893 rumors were current that the Erie might be thrown into
the hands of a receiver. The reports were vigorously denied, but on
July 25, nevertheless, on application of the company itself, Judge
Lacombe appointed President John King and Mr. J. G. McCullough as
receivers of the property. The measure was taken to avoid the sacrifice
of collaterals deposited. “Within the last few weeks,” said President
King, “during the severe money stringency the floating debt of the
Erie ... became impossible of renewal, and in order not to sacrifice
the best interests of the company it was decided to place the road in
receivers’ hands, and preserve the system intact, and preserve and
develop the transportation business for the company.”[134] The action
occasioned no surprise, and there was even a disposition to praise
the management for having preserved the solvency of the company. “The
company was bankrupt _de facto_ when it passed to its new control,”
says Mott, and “that the time when it must become bankrupt _de jure_
was held off so long was a striking demonstration of the tact and
resourcefulness which the new _régime_ had been able to bring to
bear in the management of the company’s unpromising affairs, and in
judicious shifting and manipulating of the heavy burdens Erie bore upon
its chafed and weary shoulders.”[135] What a receivership meant was a
new opportunity to put the company upon a genuinely sound foundation,
by providing new capital to pay off the floating debt and to allow for
future additions and improvements, and by getting fixed charges to a
point well within the road’s capacity to earn. We shall see what use
was made of the chance.

The matter of reorganization was set about at once. On January 1 a plan
appeared, prepared, at least nominally, by a special committee chosen
by the directors,[136] and backed by the well-known firms of Drexel,
Morgan & Co. of New York and J. S. Morgan & Co. of London.[137] By
its terms no mortgage senior to the second consolidated mortgage was
to be disturbed save the first mortgage, which matured in 1897. The
bonds to be dealt with were thus reduced to $41,481,048, besides which
provision had to be made for the floating debt and for future capital
requirements. The plan proposed to authorize a blanket mortgage of
$70,000,000 at 5 per cent, of which $33,597,000 were to exchange at
par for the 6 per cent second consolidated bonds and funded coupons
thereof, $4,031,400 to exchange for the funded coupon bonds of 1885,
and $508,008 for the income bonds. Of the balance, $6,512,800 were to
be reserved to settle with the old first lien and collateral trust
bonds, $15,915,208 to supply capital requirements in the future, and
$9,915,208 to be offered for subscription in order to pay the floating
debt. The new management did not conceive that these last bonds could
be sold to advantage in the general market, but imposed as a condition
of the exchanges as above that second consols, funded coupon, and
income bonds should subscribe at 90 to the extent of 25 per cent
of their holdings; hoping that the grant of the right of immediate
foreclosure upon default would induce the second consols to come in.
Both these consols and the funded coupon bonds of 1885, it may be
remarked, were to be kept alive and deposited with the trustee for the
protection of the new bonds. Stated in tabular form the distribution of
securities was to be as follows:

  To acquire the existing second consols,                    $33,597,400
  To acquire the funded coupons of 1885,                       4,031,400
  To acquire the income bonds,                                   508,008
  For subscription as above,                                   9,915,208
  To acquire the old reorganization first lien and
    collateral trust bonds,                                    6,512,800
  To be expended for construction, equipment, etc., not
    to exceed $100,000 in any year, except that $500,000
    might be used to acquire existing car trusts,             15,435,184
                                                             -----------
                                    Total,                   $70,000,000

The new mortgage was to cover the property of the New York, Lake Erie &
Western, including its leasehold of the New York, Pennsylvania & Ohio,
and the capital stock of the Chicago & Erie Railroad.[138] There was
to be no assessment, no syndicate to raise money, and no voting trust.

This plan was advanced as adequate to restore the prosperity of the
company. Examination will show its weakness. It comprised two measures
of relief: first, reduction of interest by one per cent on the second
consolidated bonds; second, the settlement of the floating debt. The
first might be thought to have been the kernel of the plan, and the
reduction in fixed charges the principal thing aimed at. That it was
not is shown by the fact that so liberal were the new bond issues
that the total fixed charges after reorganization were to be greater
than those before. The floating debt which remained had arisen from
lack of funds with which to make current and necessary improvements
and repairs. This debt was the immediate cause of the failure of the
company, and its cancellation was the real purpose of the plan. The
method proposed was a forced levy upon bondholders, but the levy
took, not the form of an assessment, but that of a subscription to
new bonds on which payment of interest was to be as obligatory as any
other charge. The operation differed, therefore, from an ordinary sale
of securities in the more favorable selling price which it assured.
It did little, however, to lighten the burden which had crushed the
company. The only bright spot in the plan was the provision for future
construction and improvement, which, though involving a still further
increase in indebtedness, was justified because these improvements
would serve not only to maintain but to make greater the earning
powers of the company. Finally, it was the peculiar effect of this
plan that it put the pressure imposed upon the wrong parties: the
second consolidated and other junior bondholders were to be forced to
subscribe to the new issue, when in fact it was the stockholders who
should have been turned to, and whom it was consonant with no sound
principle of finance to spare. Other matters come out in the objections
raised by bondholders.

Opposition to the plan was vigorously headed by men like Kuhn, Loeb &
Co., E. H. Harriman, August Belmont, Hallgarten, Peabody, Vermilye,
and others.[139] In England a meeting of dissentients was held and a
committee was elected;[140] in America the first formal action was the
dispatch of a letter to the Erie managers by opposing bankers which is
important enough to be quoted in full.

“Consultations and comparisons of views have recently taken place,”
said these gentlemen, “between the owners and representatives of the
second consolidated mortgage bonds and other bonds of your company,
to whom the proposition as detailed in your circular of January 2 is
not satisfactory.... Your plan seems unjust, inasmuch as it demands a
permanent reduction of interest on the bonded indebtedness for which
no adequate equivalent is offered, and it levies a forced contribution
upon the bondholders through the demand for a subscription to new bonds
at a price considerably over and above the market value these new bonds
are likely to command, while the fixed charges proposed to be created
appear to be considerably larger than, in the light of past earnings
and experience, the property of the company can carry with safety.

“Instead of 5 per cent bonds, as provided in the published plan, 4 per
cent bonds, in our opinion, should be issued, while for the interest
to be surrendered the bondholders should receive an equivalent in
interminable non-cumulative 4 per cent debentures, interest payable if
earned; the holders of the debentures to have sufficient representation
in the management to protect them.

“The floating debt should be liquidated from the proceeds of an
adequate amount of new 4 per cent bonds (and debentures if desirable),
which shall be offered to the shareholders and bondholders at a
price rather below than above the probable market value of the new
securities, and under the guarantee of an underwriting syndicate.

“Provision should also be made to obtain the conversion on fair terms
of the reorganization prior lien bonds into the new bonds, so that it
shall become practicable to secure the new 4 per cent bonds at once by
a lien second only to the ‘Erie first consolidated 7 per cent bonds’;
the new 4 per cent bonds to be issued under a general mortgage to an
amount sufficient to provide for future additions and improvements, and
with adequate provision for the taking up of the underlying bonds, and
the issue of 4 per cent bonds in their stead.... Any plan now adopted
for the readjustment of the finances of your company should seek,
as its first object, to reduce the permanent charges so well within
the earning capacity of the property as to make another default in
the future an improbability.... We trust this communication will be
received in the spirit in which it is submitted.”[141]

The directors refused to modify their plan, and the bankers, therefore,
notified them of the election of a protective committee.[142] On March
6 a meeting of stockholders approved the plan, and the same week
Messrs. Drexel, Morgan & Co. gave notice that, having received deposits
of a majority of each class of bonds, they had declared the plan
operative as announced.[143]

Defeated in their appeal to the securityholders, the opposition
turned to the courts. As a preliminary, they obtained an opinion from
the well-known firm of Messrs. Evarts, Choate & Beaman, which held,
first, that the Erie could not legally pay interest on the new bonds
proposed until it had paid the interest on every one of the old second
mortgage bonds, regardless of whether the latter was deposited with
the reorganization committee; second, that if the old second mortgage
bonds which were deposited as security for the new issue should be kept
alive as proposed, the company would be increasing its obligations
beyond the legal limit;[144] and third, that much of the stock voted
at the special meeting at which the new mortgage had been authorized
was not really owned by the persons who had issued the proxies thereon
as the law provided.[145] Following the opinion, suit was commenced by
Mr. Harriman in April for an injunction against the recording of the
new mortgage, on the ground that the Drexel & Morgan proxies did not
represent the actual stockholders, and in June by one John J. Emery to
prevent the execution of the mortgage. Judge Ingraham in the Supreme
Court Chambers denied an injunction, using in his opinion the following
language: “While it is clear,” said he, “that there are certain
obligations resting upon the majority to refrain from infringing the
legal right of the minority, and that a court of equity will enforce
and protect the rights of the minority, still, when the holder of a
very small number of bonds or shares of stock seeks to enjoin a very
large majority from carrying out a plan such majority deem to be for
their benefit, I think the court should not interfere unless it plainly
appears that some legal right of the minority is endangered.”[146]

What could not be accomplished by the hostile bankers was nevertheless
to happen from the inherent weakness of the plan itself. It has been
said that the new scheme involved an increase instead of a decrease
in fixed charges. How this was to be met was not demonstrated; and
already in June, 1894, it was necessary to announce that the coupons
then due would not be paid for the present. In December matters were
even worse, and a circular from Drexel, Morgan & Co. confessed the
company’s inability to meet the coupons maturing. “Nevertheless,” the
firm continued, “it seems to us inexpedient to treat the inability of
the company to pay interest as an occasion for present foreclosure
without giving a further chance to the company, especially as payment
of bondholders’ subscriptions to the new bonds has not yet been called
to provide the company with money necessary to pay the floating
debt. It is, therefore, now proposed that the new bonds be issued
with the coupons of June 1, 1894, and December, 1894, attached, but
stamped as subject to a contract with the company which shall provide
that they shall be paid as soon as practical out of the first net
earnings over and above the railroad company’s requirements to meet
interest and rentals accruing after December 1, 1894, except in case
a default on later coupons shall give power of foreclosure, in which
event the stamped coupons shall retain all their original rights.”
The modification was assented to,[147] but could not save the plan.
Reluctantly the managers were forced to abandon it, and to consent to
more radical propositions.

August 26, 1895, the new and final reorganization plan appeared. There
were to be issued:

  $175,000,000 first consolidated mortgage 100-year gold bonds;
    30,000,000 first preferred 4 per cent non-cumulative stock;
    16,000,000 second preferred 4 per cent non-cumulative stock;
   100,000,000 common stock.

The first consolidated mortgage bonds were to be divided into prior
lien bonds to the amount of $35,000,000, and general lien bonds to the
amount of $140,000,000; the former to have priority of lien over the
latter for both principal and interest. Both classes of bonds were to
be secured by mortgage and pledge of all railroads and properties of
every kind embraced in the reorganization as carried out and vested in
the new company, and also all other properties which should be acquired
thereafter by issue of any of the new bonds. Both issues were to bear
interest at 4 per cent, except $29,435,000 of the general lien bonds,
which were to bear 3 per cent for two years from July 1, 1896, and 4
per cent thereafter. The stock was to rank for dividends in the order
given. Provision was made that no additional mortgage could be put upon
the property to be acquired, and that no additional issue of first
preferred stock could be made except with the consent in each instance
of the holders of a majority of the whole amount of each class of
preferred stock, given at a meeting of the stockholders called for that
purpose; and with the consent of the stockholders of a majority of such
part of the common stock as should be represented at such meeting, the
holders of each class of stock voting separately; also that the amount
of second preferred stock could not be increased except with like
consent of the holders of a majority thereof, and a majority of such
part of the common stock as should be represented at the meeting. All
classes of stock were to be deposited in a voting trust until December
1, 1900, and until the expiration of such further period, if any, as
should elapse before the Erie should in one year have paid 4 per cent
cash dividends on the first preferred stock; though the voting trustees
might terminate the trust earlier at their discretion.

Generally speaking, the prior lien bonds were relied on to pay the
floating debt, to buy in the New York, Pennsylvania & Ohio, and to
retire certain prior liens of the old company. The general lien bonds
were reserved for undisturbed bonds, and, with the first preferred
stock, exchanged for junior New York, Lake Erie & Western securities.
The second preferred stock went for old preferred stock and income
bonds, and the new common stock exchanged for old common.

The distribution was as follows: The old New York, Lake Erie & Western
reorganization first lien and collateral bonds were paid off from the
proceeds of the new prior lien bonds; the second consols received
75 per cent in new general lien bonds and 55 per cent in preferred
stock; the funded coupon bonds of 1885 received 100 per cent in general
lien bonds, 10 per cent in first preferred, and 10 per cent in second
preferred stock; the income bonds 40 per cent in general liens and 60
per cent in first preferred stock; the New York, Lake Erie & Western
preferred stock, on payment of assessment, 100 per cent in new common.
For all other bonds included in the plan there were reserved general
lien bonds in amounts usually equal to the par of the securities to be
retired.

The cash requirements and the floating debt were as follows:

  Floating debt, receivers’ certificates, etc.,      $11,500,000
  Collateral trust bonds (Erie), at 110,               3,678,400
  Reorganization first lien bonds (Erie),              2,500,000
  Early construction and expenditures,                 5,337,288
  Car trusts for three years,                          2,000,000
                                                     -----------
                                                     $25,015,688

The necessity for retirement of the first lien and collateral bonds
arose from the early maturity of the former, and from the fact that
stocks and bonds of various Erie properties which it was desirous to
consolidate with the new company were pledged for the latter. The
wisdom of allowing for early construction and expenditure could not be
denied; car trust payments were required to preserve the rolling stock,
and the floating debt and receivers’ certificates called obviously for
cash. Provision was made, first, by an assessment on the stock of $8
on preferred and $12 on common, with higher payments in case of delay,
and estimated to yield $10,023,368; second, by a contribution from
the New York, Pennsylvania & Ohio of $742,320; and third, by the sale
of $15,000,000 prior lien bonds as indicated above. A syndicate of
$25,000,000 was formed to subscribe to the prior liens, and to take the
place of and succeed to all the rights of stockholders who should not
deposit their stock and pay the assessment thereon.

With the settlement of cash requirements, unification of the Erie
system was assured; “subject only to the undisturbed bonds and stock
until retired by use of the bonds reserved for that purpose or the
rentals corresponding thereto.” “The new bonds and stock will,” said
the plan, “represent the ownership (either in fee or in possession of
securities) approximately of:

  N. Y., L. E. & W. proper,                   538 miles
  N. Y., P. & O.,                             600
  Chicago & Erie,                             250
  N. Y., L. E. & W. Auxiliary Companies,      550
                                             ----
              Total,                         1938 miles[148]

—with valuable terminal facilities at Jersey City, Weehawken, Buffalo,
etc., and also one-fifth ownership in the stock of the Chicago &
Western Indiana Railroad Company. Also all the Erie coal properties,
... representing an aggregate of 10,000 acres of anthracite, of which
about 9000 acres are held in fee, and 14,000 acres of bituminous, held
under mining rights ... also the Union Steamboat Company, with its
terminals and other properties in Buffalo, and its fleet of five lake
steamers on which the Erie mainly depends for the lake and railway
traffic,” etc.

Fixed charges under the plan were estimated at $7,850,000. Fixed
charges in 1894 had been $9,400,000. For the first two years after
reorganization, moreover, the charges were to be further reduced by
$300,000 per annum, as the new general lien bonds were to bear only
3 per cent interest during that period; and an additional saving of
$1,000,000 was looked for when the exchange of old bonds for new on
the maturity of its existing prior issues should have been eventually
completed. This sum of $7,850,000 the company was expected to have
no difficulty in earning in view of the immediate expenditure of
$5,337,208 for new construction, additions, and betterments, and the
gradual distribution of the proceeds of $17,000,000 of general lien
bonds to the same end. The compensation to Messrs. J. P. Morgan & Co.
and Messrs. J. S. Morgan & Co. for their services as depositaries, and
in carrying out the plan was put at $500,000 and expenses. Foreclosure
was finally to take place and a new company was to be organized.

This plan differed from its abandoned predecessors in four important
particulars, each of which was in its favor:

(1) It employed bonds and stock instead of bonds alone;

(2) It lowered instead of increased fixed charges;

(3) It procured cash from stockholders instead of from second
consolidated mortgage bondholders; and

(4) It absorbed the New York, Pennsylvania & Ohio into the Erie system
instead of continuing the lease thereof.

In the employment of bonds and stock instead of a simple issue of
bonds, the Erie managers adopted what experience has shown to be the
best method of dealing with the complicated situation arising from
a great railroad default. The use of securities on which return was
optional side by side with those on which return was obligatory tended
both to protect the railroad company when earnings were low, and to
benefit the recipients of the new securities when earnings were high.
As worked out, it gave to the second consols and funded coupons a less
return in the one case, and an equal or greater return in the other,
than did the plan of 1894, and to the income bonds, though it offered
no chance of equal gain, it at least promised a minimum below which
payments should not fall. It further made a far nicer recognition of
the relative priorities of different classes of old bonds possible, and
whereas the previous plan had made the same demands on, and had given
the same return to the second consols, the funded coupon bonds of 1885,
and the income bonds, the new plan gave, as has been pointed out, to
the first 75 percent in general lien bonds and 55 per cent in first
preferred stock; to the second, 100 per cent in general lien bonds, 10
per cent in first preferred, and 10 per cent in second preferred; and
to the third, 40 per cent in general liens and 60 per cent in first
preferred stock. Income, coupon, and consolidated bonds benefited
alike from the assessment upon the stock, which laid the burden of
raising cash upon the owners of the road, where it most properly fell.
No species of security was given for the assessment, not even common
stock, with which the managers might well have been generous; although
it must be remembered that the sale of $15,000,000 prior lien bonds
for cash was part of the reorganization plan. It may be remarked that
since, on July 2, 1895, the common stock was being offered at 10⅝, with
no sales, and the preferred at 22½, and since the chance for dividends
which the new stock was to enjoy was most remote, it was perhaps well
that the syndicate guarantee of the payment of assessments had been
obtained. Fixed charges by the new plan were lower, as a result of the
liberal use of stock in the exchanges and the cancellation of floating
debt as above; while the terms under which the outstanding New York,
Pennsylvania & Ohio bonds were retired were the most drastic part of
the scheme. In all, the total mortgage indebtedness of the Erie Company
and its leased or controlled lines of $234,680,180 for January, 1896,
was reduced to $137,704,100 by June 30 of that year.[149]

A weak point in the plan was, nevertheless, the small reduction in
bonded indebtedness which it occasioned. Although, to repeat, the
bonded indebtedness of the system was reduced from $234,680,180 to
$137,704,100, the shrinkage was more apparent than real, since it
consisted chiefly in the exchange of stock for New York, Pennsylvania
& Ohio mortgage bonds, on which interest had not been paid by the
Erie, and but seldom by the New York, Pennsylvania, & Ohio itself.
These securities were slashed in most drastic fashion, particularly
such of them as were inferior to the first mortgage. The amount of
the reduction in the volume outstanding is indicated by the fact that
for $5000 first mortgage New York, Pennsylvania & Ohio bonds were
given $1000 Erie prior lien bonds, $500 Erie first preferred, $100
Erie second preferred, and $750 Erie common stock; and for $500 second
mortgage, or for $1000 third mortgage, were given $100 Erie common
stock. If, now, we exclude the New York, Pennsylvania & Ohio bonds
from our consideration of the funded debt, we find the indebtedness
of the Erie system on January 1, 1896, excluding the non-assumed New
York, Pennsylvania & Ohio bonds to have been $121,399,431; and on June
30, excluding the new prior lien bonds used to exchange for these
securities, to have been $123,304,100; or an increase through the
reorganization of $1,904,669.[150] Further, there was an accompanying
increase in the capital stock of the combined companies, which did
not, of course, involve an increase in fixed charges, but which
increased the volume of securities outstanding.[151] What the reduction
in the capital of the New York, Pennsylvania & Ohio, joined with its
amalgamation with the Erie system, did do was to lessen the burdens of
that line to the parent company. For many years the Erie had engaged
to operate the branch for 68 per cent and had paid 32 per cent of its
gross earnings to the New York, Pennsylvania & Ohio, to be applied to
payment or partial payment of interest on the excessive issues which
were now retired. It was probably to be long before an operating
ratio of 68 per cent could be successfully maintained; but the Erie
after reorganization was obliged to turn over, not 32 per cent of
gross earnings, but 4 per cent on the $14,400,000 prior lien bonds
which had been given for New York, Pennsylvania & Ohio securities, or
an amount of $576,000; which amounted to a reduction of the minimum
rental of more than one-half, and of the sums actually paid of almost
three-quarters.[152]

Turning again to fixed charges, we find them estimated, after the first
two years, at $7,850,000. The average net earnings for the period
1887–94 had been $9,331,250. These earnings will not serve strictly as
a basis for calculation, for from 1887 to 1892 they include an average
of perhaps $750,000 derived from Lehigh Valley trackage payments
and other sums now discontinued. With the deduction, therefore, of
this amount from the net earnings of the period named, the average
is reduced to $8,768,750; or $918,750 more than it was thought fixed
charges would be. When it is considered that this $918,750 represented
the sum available for dividends on $146,000,000 of outstanding Erie
stock, it is plain that the over-capitalization of the company in 1895
was still very great.

With these comments it is necessary to leave the plan. It was far
the best that had ever been applied to the rehabilitation of Erie’s
affairs; it was discriminating in its nature, and, thanks to the
increasing prosperity of the last eleven years, it has been fortunate
in its results. In August, 1895, a decree of foreclosure was signed
in the city of New York, and the following November the property was
sold under the second consolidated mortgage, and purchased by the
reorganization committee for $20,000,000.[153]

Since 1895 the Erie has shared in the prosperity of the country. Its
ton mileage has increased from 3,939,679,175 in 1897 to 6,275,629,877
in 1907; its gross earnings have grown from $31,497,031 to $53,914,827;
and its net earnings, which had hovered for so many years near or
below the level of fixed charges, have now soared away above. Under
these circumstances it is but natural that large sums should have been
applied to improvements. Between December 1, 1895, and June 30, 1907,
$12,732,486 were spent in the purchase of land, in yards, stations,
and buildings, in reducing grades, relocating tracks, and in other
ways, and charged to capital; $36,511,046 were spent for new equipment,
and charged to capital; and $8,625,307 were taken from income for
equipment and improvements of various sorts. These expenditures have
had a most gratifying result. The average train load has grown from
224.74 tons in 1895 to 471.67 in 1907, although coal now constitutes a
smaller proportion of the freight; and the average revenue per train
mile has more than doubled, in face of a revenue per ton mile which
has only slightly increased. In 1907 the Erie’s ton mileage was 59 per
cent greater than in 1897, and its passenger mileage was 73 per cent
greater, but the expense of conducting transportation had increased
but 27 per cent. Instead of freight cars with an average capacity of
22½ tons the company now uses cars which average 34 tons. Instead of
locomotives which on the average could exert a tractive force of only
24,500 pounds as late as 1901, it has now engines which average 31,000.
Freight train mileage is 2,600,000 less than it was in 1896, and
passenger train mileage has only slightly increased.

And yet, with all this prosperity, it cannot be said that the Erie
enjoys an assured position. In 1907 it had to pay out 89 per cent of
the largest income which it had ever received for operating expenses,
fixed charges, and taxes. Of its net income of about $6,000,000 the
modest dividends of 4 per cent on its first and second preferred stock
absorb some $2,500,000, and the widespread financial difficulties of
1907 have led its management to declare the dividends for that year
payable in scrip and not in cash. And although the present period of
reaction dates back but a little way the company has been already
obliged to the issue of short term notes.

In matters of railroad policy the Erie has accordingly been
conservative. In 1898 it acquired control of the New York, Susquehanna
& Western, from New York City to Wilkesbarre in northeast Pennsylvania.
Three years later it bought the entire stock of the Pennsylvania
Coal Company in order to protect its tonnage, and, as the directors
expressed it, for other reasons which seemed good; and in 1901 also it
bought an interest in the Lehigh Valley. The most sensational episode
which has occurred has been the purchase and subsequent release of
the Cincinnati, Hamilton & Dayton. It seems that in 1905 Mr. J. P.
Morgan bought a majority of a syndicate’s holdings in Cincinnati,
Hamilton & Dayton stock, amounting to a majority of the total issue;
a purchase which carried control of the Pere Marquette and of the
Chicago, Cincinnati & Louisville, or of a total system of 3675 miles.
This stock Mr. Morgan turned over to the Erie at a price reported to be
$160 a share. From a traffic point of view the deal seemed likely to
strengthen the Erie’s position in Ohio, Indiana, and Michigan, while
more than doubling the mileage of its system. Because of the financial
condition of the new companies, however, the purchase was decidedly
unwise; and, after an investigation, Mr. Morgan’s offer to take the
road off the Erie’s hands was gladly accepted. On December 4, 1905,
Mr. Judson Harmon was appointed receiver of the Cincinnati, Hamilton
& Dayton and of the Pere Marquette, and the reorganization of these
properties is just being completed.

At present the Erie is operating 2169 miles of road as against 2166
in 1896. Its earnings have greatly increased, its capitalization has
grown in less proportion,[154] but it has not yet a sufficient margin
of surplus earnings to meet a decline in prosperity without serious
misgivings. Dividends on its first preferred stock have been paid since
1901, and on its second preferred since 1905. The common stock cannot
expect a dividend in any period which can be foreseen.



CHAPTER III

PHILADELPHIA & READING

  Early history—Purchase of coal lands—Funding of floating debt—
    Failure—Struggles between Gowen and his opponents—Reorganization
    —Second failure and reorganization.


The Philadelphia & Reading Railroad has been peculiarly unfortunate.
Although serving a region of abundant traffic, it failed three times
between 1880 and 1895, and was in the hands of receivers ten years.
It was reorganized after each failure, and each reorganization was
marked by bitter struggles between contending parties, due in part to
divergence in financial interests, and in part to personal rivalries.

In 1833 the Philadelphia & Reading Railroad was chartered by the
Legislature of Pennsylvania to build a road from Philadelphia to
Reading, a distance of 58 miles. Its early history does not concern
us. In 1862 it leased, owned, and operated 437.4 miles of track,
equivalent, roughly, to 119.4 miles of line; and derived $2,879,419
out of its gross earnings of $3,911,830 from the carriage of coal.
Its capitalization was extremely high, roughly, $193,417 per mile
of line,[155] and the necessary payments each year, not including
dividends, took up $1,454,635. At this time the road owned no coal
lands, but, like the Lehigh Valley Railroad and the Schuylkill Canal,
remained a common carrier, and relied upon the advantages of its
position in respect to the Southern coal fields to secure the tonnage
which it required.

From 1862 to 1865 inclusive the Reading enjoyed a period of extreme
prosperity. The Navy Department, during the war, required large
quantities of fuel, and in the revival of business after the conclusion
of peace the Reading took its part. Merchandise earnings increased from
$523,416 in 1862 to $1,165,277 in 1865; coal earnings from $2,879,419
to $8,627,292; and though expenses also increased, yet net earnings
grew from $2,375,247 to $5,236,655, and the balance of earnings, after
all charges had been paid, from $920,612 to $2,632,566. Dividends
meanwhile ranged from 14 per cent on the preferred stock in 1862 to 10
per cent on both preferred and common in 1866, though the majority of
the distributions were made in stock. On the whole, during the Civil
War and for a whole year afterwards, the Reading was able to carry
without difficulty the burden of an enormous capitalization. What
increase in capital occurred at this time was in stock, and did not
add to the load, although the desire to pay dividends on the increased
stock led to the piling up of new issues.

In 1869 an entirely new departure in Reading policy occurred. Whereas
the road had previously owned no coal lands, with the advent of Mr.
F. B. Gowen to the presidency it began to purchase on an enormous
scale. “The repeated and serious interruptions of the business of the
company,” said the annual report for 1871, “caused by strikers in the
coal regions during the last few years, and the many fluctuations
in the coal trade, produced by alternate periods of expansion and
depression resulting therefrom, have attracted the attention of the
managers of the company to the necessity of exercising some control
over the production of coal, so as to prevent a recurrence of the
difficulties heretofore experienced; and it was believed that the best
way to accomplish this result, without injuriously affecting individual
interests, was for the company to become the owner of coal lands
situate upon the line of its several branches.”[156] Further, it was
felt that some steps were necessary to retain for the Reading even the
coal tonnage which it enjoyed. In 1871 every rival carrier had invested
large sums in coal properties, and all the fields but the Schuylkill
and Mahanoy (western middle) were occupied, while carriers had begun to
enter the Mahanoy district, and it was reported to be their intention
to build lines straight through to the Schuylkill fields.

The anthracite coal regions of Pennsylvania lie in four main districts:
the Northern or Wyoming; the Southern or Schuylkill; and two smaller
intermediate fields known respectively as the Eastern Middle or Lehigh
region and the Western Middle or Mahanoy and Shamokin basins. The
Northern field is the more easily worked, and the Southern field is
the richer.[157] Between 1869 and 1881 the Reading Railroad and its
alter ego, the Coal & Iron Company, formed for the purpose, spent
$73,326,668 for lands in the Schuylkill and Western Middle districts,
securing 142 square miles, or 60 per cent of all the anthracite
lands of these districts, and 30 per cent of all in Pennsylvania. Of
the purchase money $69,816,204 were supplied either by the Railroad
Company or by sale of Coal & Iron Company bonds which the Railroad
Company guaranteed. The Coal & Iron Company incurred non-guaranteed
liabilities for the rest.[158] This gave ample resources for the
permanent supply of coal tonnage to the railroad, and was sufficient
also to give a considerable measure of control over production in the
Southern district. Independent operators did continue, however, and
the Reading coal was subject to the competition of coal from other
fields. More important still, in attaining control, “all kinds of coal
properties, good, bad, and indifferent, were purchased without regard
to original cost, location, or revenue producing capacity.”[159] In
1880 an engineer of reputation was appointed to evaluate the Reading
coal lands, and recommended the surrender of five properties that
originally cost $5,207,167, upon which there were encumbrances of
$5,015,000. “But little weight,” said he, “should be given to the
fear that rivals will possess the surrendered property; most of it
is not a tempting investment.” Exorbitant prices were paid for the
lands purchased. By 1881, as noted, there had been expended in all by
the two Reading companies $73,326,668. This same report said that,
“assuming the profit on the future coal product to be 30 cents per ton
of coal shipped, that the company will be able to reduce the rate of
interest on the money needed to hold and develop the property from 7
per cent to 6 per cent per annum, and that the development will be at
the rate just stated [outlined earlier in the report], the whole estate
has a value of $32,394,799: the company’s interest in the estate is
worth $30,630,648, and, including colliery improvements belonging to
the company, but situate on lands owned by others, the whole of the
company’s property is worth $31,197,484.”[160]

It is unquestionable that the Reading did acquire an enormously
valuable property in the decade succeeding 1870. It seems just as clear
that it paid more for this than was necessary; but what is perhaps
more to the point is the fact that the Reading paid more than it could
afford. Whatever the ultimate advantages to be gained by exclusive
possession of any considerable section of the coal fields, the Reading
was not large enough nor financially strong enough to make such vast
purchases within so short a space of time. The prosperity of the Civil
War had disappeared, net profits were fluctuating without marked
tendency to increase, the figures for 1870 being actually less than
those of 1863, while the interest on bonds had more than doubled since
1867, and the sum required for dividends had increased. To advance
$54,886,647 to the Coal & Iron Company under these conditions, and to
become responsible as guarantor for $14,929,557 more, would have been
ill-advised even had the prices paid by the company been in strict
accord with the commercial estimate of the time. Under the best of
circumstances returns from much of the property acquired could not
be secured for many years. The parts of the coal fields which were
worked yielded an income, though it was seldom that the collieries were
allowed to run to their full capacity; but those districts which were
bought for the sake of controlling the coal situation, or in order to
secure a future reserve, and which in many cases could not be worked at
existing prices, occasioned a drain upon the company to the amount of
interest on the purchase money, with no return of any kind. Moreover,
the purchase of the coal lands put the Reading in the anomalous
position of a railroad corporation interested in industrial lines. It
could no longer be content with encouraging the transportation of its
main source of revenue (coal), but had to care as well for the price at
which this coal was sold. When depression in the coal trade came, the
Reading lost both as producer and as carrier, for less was transported,
and that amount was sold at a lower price; but when good times came,
from which as a simple carrier it might have profited largely, it
struggled with conditions of over-production which should rightly have
been none of its concern. There was, finally, a peculiar fatality in
the time which the Reading chose for its expansion. The year 1873 will
always be remembered as one of the most disastrous in the history of
the United States. Commencing with the failure of Messrs. Jay Cooke &
Co. on the 18th of September, the panic spread with such rapidity as to
lead to the closing of the New York Stock Exchange on September 30. All
railroad securities were exceedingly depressed, call loans were high,
and it was nearly impossible to secure new capital. Business the next
five years was very dull, and the Reading actually earned less gross in
1879 than in the year before the panic, and this at the very time that
its liabilities were so largely extended. The natural result was the
financial difficulty which can be detected as early as 1876. In June it
appears that, owing “to the continued depression in the iron and coal
trades and the consequent falling off in transportation,” the road was
obliged to reduce its working force. In July the usual dividend was
passed; salaries were lowered in September, and still later a temporary
loan was secured to tide over the floating debt, which then amounted
to $8,272,359. By the next year the matter had become serious enough
to necessitate a formal proposition to creditors for the postponement
of interest payments and of payments on the floating debt. The company
professed itself able to carry out the following:

(_a_) To pay the interest on prior liens in full.

(_b_) To pay one-half the interest on the general mortgage bonds and
on the Perkiomen sterling mortgage bonds for three years in cash, and
one-half in five-year interest-bearing scrip, with the option to the
holder of receiving instead scrip for the three coupons first maturing
and cash for the rest.

(_c_) To pay for five years in scrip the interest on the debenture
bonds of both the Railroad and Coal & Iron Companies; the convertible
bonds of the Railroad Company, the bonds due in 1885, 1902, and 1918 of
the Tidewater & Susquehanna Canal Company, and so much of the rent due
to the Schuylkill Navigation Company as was applicable to the payment
of dividends to stockholders of the Company and to the interest upon
its mortgage loan of 1895.

(_d_) To suspend the drawings for the payments of sinking funds and of
the improvement and general mortgage bonds for a period not exceeding
four years, if so long a time should be required for the payment of the
floating debt.[161]

“The relief to be obtained from the above,” said President Gowen, “will
undoubtedly enable the managers, even with no improvement in traffic
or increase of rates, to meet the fixed charges on all obligations
of both companies other than those above named, and to pay off the
entire floating debt within such time as will be satisfactory to the
holders thereof.” Certain modifications were suggested by the London
securityholders, providing for trustees with some power to protect the
creditors,[162] and the plan went quietly into effect.

From now on matters went from bad to worse. The year 1878 showed a
falling off in almost every source of revenue, while expenses and
charges remained very nearly the same. Depression in the coal trade and
connection with the Coal & Iron Company, general dulness of business
after 1873, troubles with employees, over-capitalization, all had their
share in pushing the company still further into the mire. It became
unable to keep its share of the existing business, and the percentages
of the Schuylkill output carried by it steadily decreased from 83.49
in 1877 to 75.45 in 1881, while its percentage of the aggregate output
from all the anthracite region diminished from 32.82 to 24.44. “It
appears, therefore,” said the annual report for 1881, “that while
other companies have steadily increased their capacity of production
by regular and judicious expenditures for new openings, breakers,
machinery, and other facilities for mining and delivering coal, the
Reading Company has apparently remained stationary.... For this policy
the local officers in charge are not probably responsible, as it
was undoubtedly forced upon them by the management, because of the
impoverished and embarrassed condition of the company’s finances.”[163]

Throughout 1879 there was trouble over the payment of wages, perhaps
as good a sign of financial difficulty as can be desired. Employees
were paid in scrip, not cash, and even scrip wages were left overdue.
President Gowen went to Europe toward the middle of the year, but not
at all, as he carefully explained, in order to place a new loan, or to
transact any business except a little in relation to some railroads for
the company; in fact, the condition of the Reading was an open secret,
and new loans were impossible to obtain. In May, 1880, the New York and
Philadelphia banks began to refuse further accommodations. At the same
time the period during which, according to the agreement of 1877, cash
payment of general mortgage coupons was suspended, drew to a close, and
on May 21 the Philadelphia & Reading announced its inability to meet
its obligations. As was said at the time, the company did not fall with
a crash because it had not far to fall.

The failure occurred on May 21, and on May 24 Messrs. F. B. Gowen
(president of the company), Edwin A. Lewis, and Stephen A. Caldwell
were appointed receivers. Their resources were scanty and they had
to do with them as best they could. On the one hand they applied to
the court for authority to borrow $1,000,000 to pay the wages of
employees and interest falling due July 1, and on the other they cut
down expenses by reducing the working force in the repair shops, by
putting the shops on short time, by discontinuing many of the trains on
different lines, and by ceasing all dead work at the collieries.

Before any plan could be proposed for the rehabilitation of the
company the condition of its finances had to be known, and this again
the receivers took in charge. Their report in June, 1880, showed
a sufficiently serious state of affairs. The floating debt of the
Railroad Company had mounted up to $10,254,766, besides $1,900,482
more for the Coal & Iron Company. This represented an increase
of $3,604,000 as compared with November 30, 1879, and an English
bondholders’ committee declared that only $2,930,000 of it were
represented by value.[164] The rest had apparently been incurred in
desperate attempts to preserve the solvency of the company. The total
liabilities of the Railroad and Coal & Iron Companies, including
mortgage, debenture debt, floating debt, and miscellaneous items, but
excluding stock, were $152,436,890. The deduction from these figures of
the Coal & Iron bonds held by the Railroad Company, which would have
constituted a duplication of indebtedness, left a total of $106,215,830.

The stock of the two companies amounted to $42,278,175, and the
stock in the hands of the public to $39,278,175. The grand total of
liabilities was thus the enormous sum of $145,494,005. The charges for
interest and sinking funds were $7,542,094, and the annual payment of
$5,629,764, due on $87,558,482 of railroad bonded indebtedness, shows
that the rate of interest upon the bonds was high. The net revenue was
$5,494,979, and there was therefore a deficit of $2,047,115. Meanwhile
the Coal & Iron Company had reported a regular deficit up to 1880,
which, though not significant in itself, because of close relations
with the Railroad Company and the impossibility of determining how
much the Coal Company’s rightful profits were reduced by exorbitant
transportation rates, yet made it very clear that from this source the
Railroad Company could expect no aid toward the cancellation of the
railroad deficit revealed.

The combined companies were unable to earn their fixed charges: the
continuation of the struggle to do so was sure to mean, as it had in
the past, merely a piling up of the floating debt. The coupon-funding
scheme of 1877 had shown the inevitable result of temporary measures of
relief; and though business in 1880 was rapidly improving, there was
need for a radical reduction in the burden resting upon the company.
Pending action, a bill for foreclosure was introduced under the general
mortgage of 1874.[165] A valuation of the Reading coal properties, to
which reference has already been made, was started. It was entrusted at
first to Mr. S. B. Whitney, chief engineer of the Coal & Iron Company,
and to Mr. Frank Carver, the land agent; but was later given over to
Mr. Joseph S. Harris, chief engineer of the Lehigh Coal & Navigation
Company, in order to have the opinion of an unprejudiced expert.[166]

The first suggestion for a plan of reorganization came from England.
The consolidated mortgage, prior to the general mortgage, was to be
foreclosed; general mortgage bonds were to be deprived of their right
to sue or to foreclose; all unsecured bonds and junior mortgages were
to be exchanged for preferred stock; and a $15 assessment was to be
levied upon the stock, for which collateral trust 7 per cent bonds were
to be given. This assessment was relied on to pay off the floating
debt, and the new company was to start free, with but $33,564,000 of
mortgage indebtedness.[167]

This plan was a step in the right direction. It recognized the validity
of prior liens, followed a sound principle in providing for the
floating debt by assessments upon the stock, and relieved the company
from the likelihood of a future failure by its treatment of the general
mortgage bonds; but it was weak in that it reduced the general mortgage
to the anomalous position of a bond entitled to a fixed return without
the power to enforce it. Stockholders, moreover, objected strenuously
to the assessment, maintaining that business conditions were now such
as to make milder measures sufficient.

In October, 1880, Mr. J. W. Jones, formerly vice-president of the
Reading Company, urged that an assessment on the stock was not
necessary, and proposed the following:

(1) To convert the income, debenture, and convertible bonds and scrip
into second preferred stock bearing 5 per cent interest if earned;

(2) To issue $15,000,000 of first preferred stock, with which to retire
the floating debt;

(3) To scale the Coal Company mortgage bonds $200,000 per annum,
which could possibly be done by consent of holders, if not, then by
foreclosure.[168]

The main difference between this and the English scheme lay in the
treatment of the floating debt. It is improbable, however, that the
substitute which this plan offered would have been sufficient, and that
the preferred stock could have brought $66, at which price alone it
would have covered the floating debt. Reading common stock was selling
in the middle of the month at 16⅜; general mortgage 6s were bringing
only 74¼, while debentures and convertible 7s were being quoted at 28
and 37 respectively.

In October a representative of the English bondholders arrived in
Philadelphia for the purpose of examining into the condition of the
company, and the following month agreed with the board of managers
upon a reorganization committee to act in the United States. “The
probabilities are,” said this gentleman (Mr. Thomas Wilde Powell),
“that it will be found that the bondholders in London will be willing
to do as they did in the case of the Erie, that is, fund a reasonable
number of coupons ... for the purpose of setting at liberty a portion
of the revenue to pay unfunded claims.”[169] The next move in the
reorganization of the company came, however, not from this committee
but from President Gowen, the man who had led the Reading into the
purchase of coal lands, and who still remained in office in spite of
the hostility shown toward him. His scheme comprised two parts: the
first an issue of income bonds with which to pay off the floating debt
(together with $5,000,000 mortgage bonds); the second a grand general
mortgage to retire existing indebtedness. The plan in more detail was
as follows:

(1) The company was to create $34,300,000 deferred income bonds, on
which interest was to be deferred to a dividend of 6 per cent on the
common stock. After this amount had been paid the bonds were to take
all revenue up to 6 per cent and were then to rank _pari passu_ with
the common shares for further dividends. The debentures were to be
issued at 30 per cent of their par value, or $15 per bond; and before
selling or disposing of said bonds in the market the option of taking
a _pro rata_ share was to be first offered to the stockholders of the
company.[170]

(2) A more permanent relief for the company was to be obtained
from the proposal to issue a new long time or perpetual 5 per cent
funding mortgage of $150,000,000, divided into two classes, A and B,
of $75,000,000 each: class A having priority of lien and interest
charge over class B. With this issue it was proposed, by purchase or
exchange, to retire all outstanding indebtedness, and to acquire by
purchase the securities of the companies owning the leased lines. It
was estimated that $140,000,000 of the new issue would provide for all
of this, the total interest on which would be $7,000,000, as against
fixed charges for interest, sinking funds, and rentals, of $10,657,116,
making an annual saving of $3,657,116.[171] Mr. Gowen did not expect
to secure so large an annual reduction, owing to the impossibility of
purchasing the higher securities and the probable appreciation in value
of the lower ones; but he did expect to realize in all a saving of some
$2,700,000.

In part this plan was commendable; in part it was inadequate, and
in part it relied on a mere juggling with words. The proposal to
unify all classes of indebtedness by a grand consolidated 5 per cent
mortgage was a good one, both in the simplification of accounts which
was to be expected, and in the reduction in fixed charges so far as
this reduction went; but on the one hand a reduction of $2,700,000
in charges was too little for a company which had reported for that
very year a deficit of $2,000,000, and on the other hand too little
allowance was made for the difficulty of forcing securityholders
without a foreclosure sale to submit to a definitive scaling down
of their holdings, with not even a preferred stock to show for the
sacrifice. In its handling of the floating debt, the plan was a
second edition of Mr. Jones’s stock-selling scheme, with all the good
points left out. What justification there could have been for calling
securities, such as the deferred incomes, “bonds,” which were to
be issued for no definite time, ranked even after the common stock
for dividends, and were of such doubtful character that Mr. Gowen
himself proposed to sell them for one-third of their face value, does
not appear; unless it be that the lack of voting power, itself a
disadvantage, entitled them to the more respected name. The deferred
income bonds were a device for saddling the holders of the unsecured
debt with a worthless certificate which they might be induced to accept
because of its name, and to which not even the Reading stockholders
could object. Furthermore, even if the creditors had been eager for
this new issue, in itself it would not have been sufficient. The issue,
if taken up, would have yielded $10,200,000. It was proposed besides
to sell $5,000,000 of unissued general mortgage bonds, which, after
the success of the deferred income bonds, it was presumed would sell
at par. Income bonds and general mortgage together promised a total
of $15,200,000, or more than $1,000,000 over cash requirements after
commissions had been paid.[172]

However poor the prospect, there was no lack of syndicate guarantee.
In November, 1880, a London syndicate agreed to deposit with an
American bank, to be named by the company, the sum of $2,058,000,
to be forfeited in case they failed to take at the issue price all
deferred income bonds not taken by the shareholders. This syndicate
further agreed that the company might retain, up to $1,000,000, out
of the deposit money, whatever might be necessary to make up a second
instalment of $4 on such neglected bonds.[173] Nothing was asked from
the company in return except the chance to sell the bonds purchased
at a premium. “As long as the bond- and shareholders find the money,”
remarked the London _Times_, “there is nothing to be said. In all
probability, however, these deferred bonds will become a medium for the
very worst kind of gambling, and their chances for a dividend appear to
us to be very small.”[174]

In December Mr. Gowen’s plan received the approval of the American
committee and of the board of managers of the company. Bondholders were
in no way injured by the worthlessness of the deferred income bonds,
and only the most far-sighted could be expected to have demanded a
larger reduction in their claims. The same month a meeting of London
bond- and shareholders passed unanimously a resolution expressing
confidence in President Gowen, and adopting his scheme.[175] Opposition
came from the influential London banking firm of McCalmont Bros., and
the struggle centred about the annual election set for January 10,
1881. The last of November or first of December President Gowen issued
a circular in which he said: “As I am about to visit Europe on business
of the company, and as it is possible that I may not return until the
first week in January, I think it proper to call your attention to
the fact that it is highly important that all shareholders who can
possibly do so should attend the annual meeting in Philadelphia on
the second Monday in January. An effort will undoubtedly be made at
the next election to control the management of the company in the
interest of rival lines, and if the effort is successful the future
of the Philadelphia & Reading Railroad Company will be little, if
any, better than that of the Philadelphia & Erie Railroad Company, or
of the Northern Central Railroad Company.”[176] In Europe, or, more
strictly speaking, in London, Gowen busied himself in placing his
deferred income bonds, with apparently a very considerable measure
of success. As to the result of the coming election he professed
absolute confidence. It made little difference, said he, which way
the McCalmonts decided to vote their shares. He could be elected
without any English votes at all, and with the backing of the English
bondholders who had resolved to support him, the matter was not at
all in doubt.[177] On January 4, six days before the date set for the
election, Gowen actually issued a prospectus for his new income and
mortgage loans, and cabled to Vice-President Keim that he was satisfied
that he could dispose of the general mortgage A bonds at 110 and the
general mortgage B bonds at par.[178]

Meanwhile in America both parties had recourse to the courts: the
McCalmonts, to prevent the issue of the deferred income bonds, and
the friends of Mr. Gowen to get the election postponed in order to
give the president time to return from Europe. The latter suit was the
first decided. Judge McKennan, of the United States Circuit Court,
refused to grant an order, but unofficially advised postponement. The
board of managers therefore withdrew the notice of the annual meeting,
and on January 12 voted to postpone it indefinitely. Counsel for the
McCalmonts then made application to the Court of Common Pleas in
Philadelphia for a mandamus to compel the board to call a meeting. They
obtained a peremptory mandamus on January 24, but accepted the date of
March 14 as satisfactory, and forbore further proceedings.

The matter of the deferred income bonds was complicated by a full and
complete authorization which Mr. Gowen had before obtained from the
Circuit Court for the issue of his bonds. The request of the McCalmonts
was twofold: the court was prayed to revoke the previous decree, and
to enjoin any further action in the negotiation or consummation of the
said scheme; or, failing this, to direct the officers of the company
and the receivers to refrain from the issue of the bonds until the form
thereof should have been settled by the said court, and also until
deposit with the receivers should have been made of the $2,058,000
provided as a guarantee.[179] The first request sought a prohibition
of the issue; the second attempted to delay the negotiation of the
bonds until the annual election should have passed and the McCalmonts
should have had a chance to obtain control. The immediate result was
the transference to Philadelphia of the $2,058,000 guaranteed, from
its place of deposit in London. In February the McCalmonts obtained a
revocation of the original grant of authority for the deferred income
bonds, a continuance of the suit for a preliminary injunction, and
an order restraining the respondents from “making any agreement or
ordering any act by which the Philadelphia & Reading Railroad Company
[might] be definitely bound touching the deferred bond plan or the
proposed mortgage loan of $150,000,000.”[180]

In January the Coal & Iron Company quietly held its annual election,
and chose Mr. Gowen president. As the time for the postponed election
of the Railroad Company came round, the activity of both sides became
intense. Both Gowen, who was still in London, and the McCalmonts issued
calls for proxies. The former appealed to the shareholders to save
the property from passing into the hands of the Pennsylvania Central
Railroad Company, which he said was believed to be the ruling power
behind the McCalmont litigation. The latter objected vigorously to this
charge, and pointed out that the Reading managers held only 16,500
shares of the company’s stock, and that some of them had barely enough
to qualify them for the positions which they held.[181] The McCalmonts,
furthermore, applied to the courts for an injunction to prevent Gowen
from voting on the shares pledged as collateral for the floating
debt. They maintained with some justification that these shares could
not legally be voted, and that it was particularly illegal for the
president to use them to elect himself.[182]

On March 12 the Court of Common Pleas issued a decree regulating the
conditions under which the election should be held, providing for the
separate count of votes of shares transferred three months before the
election, and for the ultimate reference of all disputed points to
the Court. By this time Mr. Gowen had become alarmed at the apparent
strength of the McCalmonts, and had come to realize that a possible
disenfranchisement of a part of his own holdings on the ground of too
recent transference might lessen his chances of retaining control. He
recalled, however, that the annual meeting had been postponed from
January 10 to March 7, and finally to March 14. This, it occurred to
him, might transform it from a regular to a special meeting, and might,
according to the terms of the company’s charter, make necessary the
presence and vote of a majority of all the shares outstanding, instead
of a simple majority of all the shares on hand. If this should be true
a disenfranchisement of his holdings would be of less importance; for
whether disenfranchised or not, these would form part of the total
shares outstanding, of which an absolute majority would be required.

On March 12, two days before the appointed date, Mr. Gowen issued a
letter to the shareholders. “I hold,” said he, “up to the present time,
the proxies of 1921 shareholders of the company, owning 359,500 shares
of the capital stock, being very considerably more than a majority of
all the shares.... Of the shares for which I hold proxies, so large
a proportion, however, may possibly be disenfranchised by failure to
register, that if the legal meeting of the stockholders is held on
Monday next, and it should subsequently be determined by the Court
that three months’ prior registry is essential to confer the right of
voting, it may be possible that the wishes of the great majority of
_bona fide_ shareholders may be overruled by a minority.... I have
determined to abstain from attending the meeting, and I earnestly
request all shareholders who support the present management to absent
themselves from the meeting on Monday, and thus to give legal effect
to their wishes by making it impossible for the minority to secure the
attendance of a quorum....”[183]

Mr. Gowen’s friends, English and American, followed his suggestion;
and at the meeting on Monday but 211,095 out of 687,663 registered
shares appeared to vote. The immediate result was the almost unanimous
election of Mr. Bond, the candidate of the McCalmonts, which was
followed by litigation on the part of Mr. Gowen, disputing the legality
of the election. By the terms of the decree under which the election
had been held, the matter came first before the Court of Common
Pleas, which, on April 9, decided that the meeting had been a legal
one, and that the officers then voted for by the McCalmonts had been
duly elected. With the above court ranged against him, Mr. Gowen took
appeal to the Supreme Court of the state, and meanwhile declined to
surrender his position. On April 11 the new board proceeded to the
Reading offices in Philadelphia, made formal demand for admittance, and
were refused. On April 22 President Bond issued formal notice of his
election. An injunction was asked against Mr. Gowen, but was held back
until the Supreme Court should have taken action. Meanwhile the old
board of managers announced that if a decree supporting the decision of
the Court of Common Pleas should be rendered they would make no further
opposition; and the transfer agents of the company in Philadelphia
and New York refused to transfer any stock until the dispute should
have been settled. On April 19 an order of the United States Court
interfered with Mr. Gowen’s exclusive possession, and compelled him
to furnish to Messrs. Frank S. Bond, etc., suitable accommodations
in the offices of the Philadelphia & Reading Railroad Company, with
free access to all books and papers. In May the Supreme Court rendered
its decision, holding the meeting of March 14 to have been a regular
meeting, and a majority of all the stock outstanding not to have been
required for a quorum. Gowen asked for a rehearing, which was denied,
and in June, nearly four months after the election, he grudgingly
acknowledged Mr. Bond and his associates as the legally elected
president and board of managers.

During all this time the deferred income bond scheme had not remained
untouched. In April, 1881, on application of the McCalmonts, the
United States Circuit Court at Philadelphia had granted a preliminary
injunction against it. “Whatever power the defendant has in the
premises can only be found in the general authority to borrow money,”
said Judge McKennan, and went on to state that the issue did not
constitute a loan, because a loan implied reimbursement, and the income
bonds were redeemable at no special time.[184] Mr. Gowen promptly
proposed to make them redeemable, and insisted that this made them
still more desirable. A week later the $150,000,000 general mortgage
was also enjoined.[185]

Once out of the presidency Mr. Gowen endeavored to induce the
McCalmonts to accept his plan. If they would adopt the deferred income
bond scheme, he said in an address to shareholders, he would resign the
receivership of the road at once, give bonds never to stand for the
presidency again, and further coöperate with them in selecting a new
board of directors. As an alternative he offered to buy the McCalmont
shares at $40 each, and threatened to beat that party at the next
election if it refused.[186] In September he assured the stockholders
that he could without difficulty put the road upon its feet. “If Bond
and his colleagues will resign and reinstate the old management,” he
cabled from London, “and advise me by cable of the change, I can,
before sailing on Saturday, procure sufficient advances against the
proceeds of preferred [deferred?] income bonds and new 5 per cent
consols to pay the floating debt, receivers’ certificates, and all
arrears of interest.”[187] Finally, appealing to Mr. Bond direct, Gowen
made formal application that the new board should adopt his plan after
changing the form of the proposed obligations by making them payable in
100 or 200 years.[188] Bond refused. He pointed out that the deferred
income bondholders would be in constant conflict with the management
in their endeavor to secure dividends on their holdings, and would
attempt to prevent proper and necessary expenditures upon the property
from current net revenues. He declared that it was questionable whether
the company had authority to sell its unsecured obligations below par,
and that in any case the process would be enormously expensive; and,
further, that the language of the obligation did not limit the payment
of interest to the source of net revenue only, but might be construed
to compel the declaration of 6 per cent on the income bonds whenever
6 per cent should be paid on the common stock.[189] Failing in his
attempts to win over his opponents, Gowen turned his energies toward
securing their defeat.

Meanwhile President Bond brought forward a plan of his own. He had
grasped three points of weakness in Gowen’s scheme, namely,—

(1) The issue of a mass of worthless obligations in the deferred income
bonds;

(2) The high level of fixed charges which a $150,000,000 5 per cent
mortgage entailed;

(3) The lack of any security which had a right to interest only when
earned, and which might be given to the bondholders in return for
sacrifices which they would otherwise refuse to make.

He proposed, therefore, to create a general consolidated mortgage
to cover all the property of the Reading Railroad and Coal & Iron
Companies, together with the interest of both companies in all other
corporations and property, whether owned or controlled by lease or
otherwise. This mortgage was to be junior to the consolidated and
to the improvement mortgages only, but was to contain a provision
by which, as bonds under these senior mortgages should be retired,
additional bonds might be issued under the new mortgage, which was
eventually to become a first lien upon all the properties of both
companies.[190] The total was to be $150,000,000, to be divided into
two series: of which series A, for $90,000,000, was to run for fifty
years, and was to have a prior lien over series B upon the revenues
for interest at the rate of 4½ per cent, with a right to enforce
foreclosure in case of a twelve months’ default; and series B was to
run sixty years, and was to carry interest at 3 per cent, with a right
to enforce foreclosure in case of a three years’ default. In prosperous
years series B might receive more than 3 per cent: thus the mortgage
provided that from current net revenue applicable to dividends it
should get 1½ per cent additional interest before any dividend should
be paid on the stock of the company; after that 3 per cent might be
paid on the capital stock, and then 1½ per cent additional might be
paid on series B; it being understood that the interest in excess of
3 per cent should not be cumulative, but was to be paid only from
current net revenues of the company otherwise applicable to dividends.
These two issues of unequal worth were to be used for different
purposes. Series A was to be in part reserved to retire the senior
obligations, and in part to be sold to pay off the general mortgage
bonds, the general mortgage scrip, the income bonds, the floating debt
of the Railroad and Coal & Iron Companies secured by collateral, the
receivers’ obligations, and the mortgages on real estate that could be
paid off. Series B was to be exchanged for the junior obligations, such
as the debenture or convertible loans, or was to be held in reserve
for subsequent acquisition of the guaranteed stock or obligations of
affiliated corporations of the Railroad and Coal & Iron Companies.

What this meant for the immediate future was that all prior liens
were to remain untouched, while everything from the general mortgage
down was to be funded into the new obligations. In some ways this
resembled the earlier scheme of Mr. Gowen, since in each case there
was to be a $150,000,000 general mortgage in two parts, of which one
part was to have priority over the other, and in each case this grand
mortgage was to be used ultimately to retire all previously existing
indebtedness. An innovation was now made, however, in the difference
introduced between the two series. In Gowen’s scheme the amount of
each series was to be the same, and each was to fare alike, except
for the priority of series A; in that of President Bond, series A was
to be half again as large as series B, and was to bear a higher rate
of compulsory interest; although, a point of extreme importance, the
return upon series B was to run from a minimum of 3 per cent to a
maximum of 6 per cent whenever the road should earn it. Thus President
Bond gained two things: he reduced the rate of interest which his
new bonds could claim in any year from 5 per cent (as under Gowen’s
scheme) to an average of something under 4 per cent, which would yet,
in prosperous times, net them as much as the old bonds surrendered; and
as a still further concession, he gave to the 3 per cent bonds a term
of sixty instead of fifty years, raising their value to that extent.
As the various existing issues of bonds had different market values,
he thought it proper to equalize these values in the exchange by the
grant of a bonus in stock, for which the capital stock of the company
was to be increased one-third. Here were two of Gowen’s problems in a
fair way of solution: the reduction of fixed charges was accomplished,
while some incentive was given to the junior bondholders to assent.
Scarcely less from the point of view of sound finance was the gain
from the abandonment of the anomalous deferred income bond scheme,
with its $34,300,000 of worthless speculative securities. Instead,
the floating debt, under President Bond’s plan, was to be cared for by
the sale of series A bonds, not at one-third their face value, but as
near par as possible; by the best of the company’s new securities, in
other words, and not by the worst. And, finally, the acquisition of
the securities of subsidiary roads was provided for rather ingeniously
by the conversion into series B bonds of $10,527,900 convertible 7 per
cent bonds, against which had perforce been reserved an equal amount
of stock. Conversion released the stock, which became a free asset
available for any uses to which the company saw fit to apply it.

Yet while the advance which the plan of President Bond marks over
that of President Gowen may be recognized, its defects must also
be observed. It was, in the first place, in common with all other
schemes suggested, too mild, too little drastic in its operations.
The condition of the Reading companies was desperate in the extreme.
By President Bond’s own figures the previous five years had shown a
deficit of $11,479,217, or an average loss per annum of $2,295,853.
The net earnings for 1881 by the same computation had been $8,418,009,
and the fixed charges $11,265,666.[191] What was needed was a radical
scaling down of indebtedness, to take effect not in the far distant
future but at once. President Gowen, face to face with a similar
situation, had evolved a reduction in fixed charges from about
$11,000,000 to about $7,000,000, but had explained that, owing to
the impossibility of retiring all of the prior liens at once, the
actual figures would be approximately $7,957,000. President Bond, less
optimistic, or more honest, stated that the ultimate charge under
his plan would be about $6,000,000; but that the immediate reduction
would be to about $8,339,000 only, scarcely more than $100,000 below
the net earnings of the current year. Both estimates would probably
have been under the mark; but the relief which President Bond proposed
was utterly inadequate even on his own showing. A margin of surplus
earnings which could be wiped out in a single month was no answer to
the demand for a restoration of the Reading companies to solvency.
In regard to the floating debt, too, Bond’s plan left something to
be desired, in that it provided for no assessment, but cared for the
floating obligations by the sale of bonds. The danger in relying
upon the sale of securities to supply the cash requirements of a
bankrupt road has been mentioned in connection with Mr. Gowen’s
scheme, as indeed at other times before. At best it is advisable only
in prosperous times, and when the bonds offered are of high grade;
and though the series A bonds might perhaps have been considered high
grade, the prosperity of 1880 was not repeated in 1881, and a year of
bankruptcy and litigation had not improved the Reading’s credit. That
the plan failed, however, was due neither to its inadequacy nor to its
method of dealing with the floating debt; but rather to the resolute
and uncompromising opposition of Mr. Gowen and his friends, and to the
determination of the junior securityholders to stand out for better
terms. This twofold resistance caused a syndicate of bankers, which had
been relied upon to place the new loan, ultimately to reject it, and
the plan fell through.[192]

To return now to Mr. Gowen. This gentleman had been strengthening his
following in every possible way, and had secured one ally of particular
importance in the person of Mr. Vanderbilt, who in October, 1881, was
reported to be buying largely of the company’s stock. Early in November
Mr. Gowen and President Bond both issued addresses to the shareholders.
The former maintained that although the present management had been
in power for over four months it had done nothing to extricate the
company from its difficulties, and promised that if elected he would
“retain the office long enough to place the company in a good financial
condition, by completing the issue of deferred income bonds and by
issuing and selling the 5 per cent consolidated mortgage bonds, the
result of which will be the resumption of dividends upon the company’s
shares.”[193] The business prospects of the company were never better,
he continued, and the wisdom of the purchase of the great anthracite
coal estate was being demonstrated. Bond, on the other hand, alluded to
the failure of Mr. Gowen’s many promises, to the wasteful expenditure
of money, to the coal speculations in which the road had been engaged,
to the payment of unearned dividends, and to other points of Gowen’s
policy, actual or alleged;[194] and his statements were repeated by the
McCalmonts in spite of Mr. Gowen’s vehement denials.[195]

The election was held from January 9 to January 14, 1882. There were
cast 493,601 votes, of which Gowen received 270,984 and Bond 222,617; a
result mainly due to the 72,000 Vanderbilt shares voted for Mr. Gowen.
The same meeting approved by resolution Gowen’s financial plans, and
called on the incoming board of managers to carry them into effect. To
clear the way a test suit was brought in the Supreme Court of the state
of Pennsylvania, and a close decision obtained favoring the issue.[196]
Counsel for the McCalmont Bros. petitioned in the Circuit Court for
leave to withdraw their complaint, stating that the McCalmonts had
disposed of almost all their holdings, and the Circuit Court vacated
the injunction which it had previously granted.[197]

Gowen’s plan was now triumphantly brought forward, with the few
alterations which time had suggested. There was to be as before a
deferred income bond issue of $34,300,000, which was to retire the
floating debt; the general mortgage was to be increased in amount
from $150,000,000 to $160,000,000, but was still to be divided into
two series, equal in amount, and differing in privileges only on the
point of priority of lien; of which series A was ultimately to exchange
for the senior, series B for the junior obligations of the company.
$13,500,000 of the first series and $10,000,000 of the second series
were to be put out at once, and $4,000,000 convertible adjustment
scrip were to be issued to settle back coupons. Time had apparently
made more modest Mr. Gowen’s estimate of the saving to be secured; for
instead of not more than $7,000,000 as before, he now hoped for fixed
charges of not more than $8,000,000; but with undaunted optimism he
made up for this admission by glowing pictures of what the company in
the future was going to earn. “Net earnings last year” (1881), said
he, “were over $10,000,000—in 1882 they may be expected to reach
$11,000,000, and they will before long be over $12,000,000. With net
earnings of $12,000,000, and fixed charges of $8,000,000, there will
remain a dividend fund of $4,000,000, equal to 6 per cent on the share
capital, and 6 per cent upon the par, or 20 per cent upon the issue
price, of the deferred income bonds. “In order to get the property out
of the hands of the receivers an earnest effort was made to sell the
$13,500,000 series A bonds of which mention has been made, but at the
minimum price of 98 subscriptions for but $723,500 were received, and
the company was obliged to have recourse to the $5,000,000 unissued
general mortgage 7 per cent bonds, which it fortunately had at its
disposal. Even before this the management had been forced to abandon
any immediate attempt to retire the old general mortgage bonds,[198]
and had been compelled to answer inquiries as to the reasons for a
decline in the price of the deferred income bonds. On February 28
the receivers of the Railroad and Coal & Iron Companies formally
surrendered the control of the property to the officers of those
corporations.

One of the first acts of the reconstructed company was the lease for
999 years of the Central Railroad of New Jersey. This road in many
ways formed a natural complement to the Reading system. Like it, it
was a coal road, carrying something less than half as great a tonnage
as the Reading itself, and owning extensive coal lands in the Wyoming
region; while in location it supplied the necessary connection between
the Reading lines and New York. At a later date Mr. Joseph S. Harris
testified that all the business of the Reading coming from the South or
Southwest went to New York over the Central; while, on the other hand,
business from the Northwest was carried by the Jersey Central from
Scranton, where its lines began, to Bethlehem, and was there handed to
the Reading for transportation to Philadelphia.[199] The advantages
of the Central to the Reading were thus enumerated by General Traffic
Manager Bell in 1885: “The joint traffic with the Central Railroad,
outside of coal, and outside of passengers, adds $1,500,000 to the
revenue of the old Reading system. By means of the Lehigh & Susquehanna
division of the Central Road we extend from Phillipsburg to Scranton
or Green Ridge through the entire Lehigh Valley; that system feeds
our North Pennsylvania line; it is our connection for the Catawissa
system by way of Tamanend and Tamaqua; it is the connecting link in
the cross line or Allentown system; it creates the shortest line from
interior Pennsylvania, and from Northwest Pennsylvania to New York
waters. Through the operations of the lease we reach the largest slate
territory in Pennsylvania, and the largest iron producing furnaces
anywhere in this country, with the exception of Pittsburg.”[200] In
1883 the Central was bankrupt with no immediate prospect of recovering
from its difficulties, and had therefore an incentive to accept any
arrangement by which interest on its obligations should be paid; while
Mr. Gowen, with misplaced confidence in his scheme of reorganization,
was ready to put fresh burdens on his road in the hope of future gain.

Rumors of a lease were abroad in 1882, and after the termination of the
Reading receivership the operation was pushed to a speedy conclusion.
The Reading undertook to assume all the obligations of the Central,
and to pay 6 per cent on its capital stock then outstanding, as well
as $18,000 annually for maintaining the corporate organization of the
lessor. In case any of the Central bonds should be retired, or rentals
or interest reduced, the rental to be paid by the Reading was likewise
to be reduced. The roadbed and rolling stock of the Central was to be
maintained undiminished, but if the Reading should make any additions
or improvements, or if from its own funds it should pay off any of
the Central’s obligations, it was to receive equivalent bonds with
interest not exceeding 6 per cent from the Central Company. The lease
was terminable on 60 days’ notice in case the lessee should fail at any
time to carry out its provisions.[201] This involved something more
than a nominal obligation. The net earnings of the Jersey Central in
1882 had been $5,091,072, while the sum due for rentals, interest, 6
per cent dividends, etc., had mounted up to $5,898,087, not including
payments on car trusts or certain contingent obligations. Broadly
speaking, the Reading proposed to guarantee 6 per cent on the stock of
a road which had failed because unable to meet its fixed charges; and
however great the ultimate advantages, it is apparent that the prospect
of a drain upon the Reading Company was real. In order to get the road
out of receivers’ hands, the Reading had further to take care of a
floating debt of $2,062,000, and to compromise with certain creditors
by settling back interest on their bonds. This was done, and on May
29, 1883, possession formally passed over. The same day was concluded
another arrangement, whereby the Central of New Jersey leased the
coal and railroad companies comprised in the Lehigh Coal & Navigation
Company for one-third of their gross receipts, and the Philadelphia
& Reading Railroad became liable for the faithful execution of the
contract. The Reading agreed that the Lehigh coal lands should be
developed _pari passu_ with its own, so that the product of the two
estates should be constantly as 28 to 72 until the Lehigh production
should reach 3,000,000 tons. The rental of the road was not in any year
to be less than $1,414,400, nor more than a sum rising from $1,728,700
before 1887 to $1,885,800 from 1887 to 1892, and $2,043,000 after 1892,
plus certain minor payments; and there was provision for arbitration of
any disputes which might arise.[202]

The year 1883 now seemed to find the Reading imbued with new life.
Earnings increased, both gross and net, fixed charges as reported
rose less rapidly, and the net profits for the year, or balance on
all operations, showed a threefold increase. “The company,” said Mr.
Gowen, “has now surmounted the difficulties of the last four eventful
years.”[203] The annual meeting in January was a genuine love-feast,
marked by the presentation of resolutions highly flattering to Mr.
Gowen. “We trust,” said one, “we thankfully appreciate your herculean
efforts in our behalf, in the face of unparalleled difficulties and
obstacles, in rescuing our property from bankruptcy against the
malignant and determined efforts of its enemies and conspirators to
foreclose and wreck it.” “As citizens of this great commonwealth,” said
another, “we beg to add our gratitude and admiration for your untiring,
brave, honest, and able devotion, which has preserved the Philadelphia
& Reading Company intact, and has fairly started it on a broader
career of usefulness.”[204] Not less extraordinary was the further
action of this harmonious meeting. In the first place, it authorized
the creation of a collateral trust loan of $12,000,000 for the purpose
of paying the floating debt, the balance due upon the purchase of
Central Railroad Company of New Jersey stock, and the retirement of the
outstanding income mortgage bonds. What, may be inquired, had become
of the deferred income bonds of which Mr. Gowen had been so proud,
and the $5,000,000 additional first series consols which with them
were to cover the floating debt, if a new collateral loan was needed
for the purpose for which they had been considered ample? As for the
purchase of Jersey Central shares, an account would require a chapter
in itself. The intent had been to secure more complete control of
this subsidiary road. The purchase had been made on margin in May. By
January, 1884, more funds were necessary to carry the stock; and as
the business depression grew acute, the Reading was obliged to seek a
time loan from Mr. Vanderbilt, and to pledge the purchased securities
as collateral therefor. When the loan matured Reading was no better off
than it had been before, and Vanderbilt, who seldom mixed philanthropy
with business, sold the stock. The original purchase had been at 78;
the prices obtained when the stock was thrown on the market ranged from
57 to 50, and the Reading lost the difference, besides those advantages
which it had expected to gain.

In the second place, the meeting proposed a dividend of 21 per cent
on the preferred stock, representing arrears due, and of 3 per cent
on the common; both cash, and to be paid in case the collateral loan
should succeed.[205] In order to give shareholders time to consider,
an adjournment was taken for two weeks, after which the dividend on
the preferred stock was approved, though that on the common was not.
It seems almost superfluous to insist upon the folly of this dividend.
The Reading had not, in reality, “surmounted the difficulties of the
last four eventful years.” Scarcely any of the benefits promised by Mr.
Gowen’s plan of reorganization had been secured; fixed charges had not
been reduced, because it had been found impossible to get creditors to
take new securities in exchange for the old, and equally impossible to
sell any considerable amount of the new securities for cash. While old
charges had remained unabated, new charges had been added through the
lease of the Jersey Central, new car trusts, and the like, and the very
gain in earnings which might have been construed as favorable was due
to increased mileage, and was not proportional to the growth of the
system.[206] A fitting sequel to Mr. Gowen’s words and acts was the
scrip payment for labor and supplies which took place in May, 1884, and
the accompanying fall in the prices of the company’s securities. On
June 2 the company again passed into receivers’ hands. The same judges
were applied to as in 1880, and the same receivers were appointed,
except that Mr. Gowen, who had given up the presidency of the company,
was replaced by Mr. George de Keim, his successor.[207]

The various creditors had now to do what should have been done before,
and, by lightening the charges upon the road, to put it in a position
where its solvency could be maintained. The chances for obtaining
radical action from the bondholders were somewhat brighter, since
even the most obstinate were being forced to realize that no halfway
measures would avail; and a reasonable solution was even thus early
hinted at in the suggestion that some of the bonds under which the road
was staggering should be replaced by stock. Nevertheless, we shall
find in this reorganization a slow working out of the requirements for
a plan, and a slow process of at least partial reconcilement to the
inevitable.

The receivers’ report was issued in October, but contained little
not known or suspected before. From November 30, 1883, to June
2, 1884, there had been a net loss in operation for the Railroad
Company of $2,322,282, and for the Coal & Iron Company of $1,049,702,
showing conclusively the condition of the companies. The total
bonded indebtedness was $94,613,042; a total to be compared with
the $78,101,894 of four years previous. The total floating debt
was $16,549,968 as compared with $10,254,766 at the beginning of
the previous receivership. Including the Central of New Jersey,
the total fixed charges for the Railroad and Coal & Iron Companies
were $18,241,051; a sum which certain offsets, however, reduced to
$16,584,732.[208]

The first suggestion for a reorganization came from a committee
primarily representing the general mortgage bondholders, though
including other interests as well. The chairman was Mr. Townsend
Whelen, and the committee may be taken to represent the views of the
management. “The present fixed charges of the company,” said Mr.
Whelen, “are in round numbers $16,650,000, while the earnings of the
past fiscal year are, in round numbers and after proper deductions,
$12,900,000. The objects sought to be accomplished by the committee are:

“(1) To reduce fixed charges to the limit of last year’s earnings;

“(2) To preserve the proper order of priorities of each class of
securities, so that no income applicable to any senior security that
remains unpaid can by any possibility be diverted to paying the
interest on a junior security;

“(3) To provide a method of paying the floating debt.”

The plan was, roughly, to leave the prior liens untouched, to fund
one-half the coupons upon the general mortgage for three years, and to
convert all of the other obligations into income bonds. Preferred stock
was to be changed from cumulative to non-cumulative; rents of leased
lines, including the Central of New Jersey, were to be reduced to the
amounts which the properties had earned; the canal leases were to be
reduced; the interest on some of the divisional coal land mortgages
was to be reduced, and on some was to be paid in full. In regard to
the floating debt the committee decided to postpone any attempt to
raise money for its extinction. If the bondholders should accept
the scaling down of their indebtedness, the company might have no
difficulty in procuring cash by a collateral loan; if this should prove
impossible, the duty of providing funds would devolve upon the junior
securities.[209] The committee found it impossible to prepare within
the short time at their disposal a complete plan of reorganization
with exact figures of present and proposed fixed charges; and it is
therefore impossible to ascertain how great was the saving which they
expected to secure.

The plan marks sufficiently well the advance which had been made since
the reorganization of 1880–3. The best that could then be imagined
had been the creation of a grand general mortgage for which the old
bondholders might, but mostly did not, exchange their holdings; while
now the very first suggestion endeavored to retain for all bondholders
a chance for the same return as before, and found the salvation of
the company in the transformance of certain bonds from mortgage to
debenture obligations. The general criticisms which may be made are
three: first, that it was unwise to defer all provision for the
floating debt; second, that the new income bonds might better have been
replaced by stock; and third, that the probable reduction in fixed
charges would have been insufficient. So far as the committee suggested
any action in relation to the floating debt, it favored a funding of
it. This funding might have been either into mortgage or into income
bonds: if the former, the fixed charges of the company would have been
increased, or else the other mortgage bondholders would have been
compelled to accept a lower rate of interest; if the latter, the volume
of securities of slight value would have been increased, or the junior
securities would have had to take less for their holdings. The action
taken would have gone far to determine what classes of securities
would assent, while in the absence of definite declaration it was on
the whole likely that all classes would hold off. As for the income
bonds, it is in general true that they are an unsatisfactory sort of
security, and likely to hinder the legitimate increase of capital. Most
important was the question of fixed charges. It will be remembered that
of the first and second series 5s of the previous reorganization only
$23,500,000 had been intended for immediate sale, and that of these but
a portion had been disposed of; and yet these consols were the only
securities the nature of which was really changed by the Whelen plan.
Interest had been optional before on the income bonds, the convertible
bonds, the convertible adjustment scrip, debenture and deferred income
bonds; interest was not made optional on the general mortgage or prior
liens. The result would not have been, in spite of the reduction in
rents and the scaling of the divisional coal mortgages, any sufficient
lessening of the fixed requirements. This fact was, moreover,
perceived. The board of managers, to whom the scheme was reported,
concluded a favorable opinion with the declaration, “to conclude, we
are satisfied that the large economies already in operation, with those
which are still being introduced, should be regarded as a margin to
meet adverse contingencies.... That the revenue we reckon on, though
reasonably certain under such reorganization, will surely not be
realized in case the property should be torn asunder by foreclosure
sale.”[210] In other words they relied, much as Mr. Gowen had done
two years before, on a subsequent increase in earnings to ensure the
solvency of the company. A final objection made at the time was that
the plan asked too little of the junior securities.

The Whelen plan was reported to the general managers’ committee, and
was approved by them. Some slight modifications were made, and a large
number of signatures was secured. Opposition was not slow to spring
up. In February a meeting of general mortgage bondholders elected a
committee, known as the Bartol Committee, to prepare a plan more suited
to their interests. This body conferred with the Whelen Committee, and
two members from each were selected to construct a new reorganization
plan.[211] In March it reported to its constituents that it had made
all the concessions which were possible without sacrificing the
interests of the general mortgage bondholders, and that in spite of
this, the negotiations had not proved successful.[212]

In April, ten months after the beginning of the receivership, the
Reading managers evolved a plan for dealing with the floating debt.
Holders were to agree to accept renewals at intervals of three months
for three years, with interest at the rate of 6 per cent, paid at the
time of each renewal, and to hold the collateral pledged as security
until the whole of the debt should have been discharged. In case the
Philadelphia & Reading should fail at any time punctually to pay the
interest on any of the obligations agreed to be renewed, or should
fail to cause the same to be renewed, or in case nine-tenths of the
floating-debt holders should not assent to the plan, or in case an
adverse judicial sale should be made, the obligation to accept further
renewals should immediately cease.[213] The scheme deservedly fell
through. Creditors were asked to tie up their assets for three years,
with no concession in return except the payment of interest quarterly
in advance; while the unofficial suggestion that the Reading pay ¼ per
cent commission on each renewal was felt to be too expensive for the
company to entertain.

The following month the Whelen and Bartol committees came out with
a new edition of the Whelen plan, which introduced an assessment on
the junior bonds and stock, but preserved the same method of dealing
with the old securities as before.[214] Assent to the plan was to be
on the condition that sufficient money should be raised to pay off
the floating debt. Interest on such debt was not to have priority of
payment over interest on the general mortgage for longer than three
years; and during those three years the preference was to be limited to
that part of the floating debt secured by collateral yielding income
to cover interest, or important for other reasons to be retained.
There were to be seven reorganization trustees to receive the assents
of parties in interest, and to receive and hold the securities and
assessments thereon pending reorganization, and when accomplished to
return such securities duly stamped to their respective owners.[215]
The trustees were further to decide whether the assents to the plan in
question should be considered adequate, and if they should conclude
on or before May 1, 1886, by a vote of six of their number, that the
assents were not sufficient, they were to call into a council the
managers of the Philadelphia & Reading Railroad Company, the receivers
of that company, and the committees of the general mortgage (Bartol)
and income mortgage bondholders; and this council, by a vote of four
of the five interests therein represented, was to formulate a plan of
reorganization adapted to the circumstances, and involving no larger
contribution in money to be paid than under the plan as then modified;
and under such power the trustees were to proceed to foreclose under
such mortgage or mortgages as they might deem advisable.[216] The
plan was obviously a compromise whereby the Whelen Committee clung to
the main lines of its previous proposition, and the Bartol Committee
secured modifications which benefited the general mortgage at the
expense of the junior securities. Criticisms which applied to the
earlier plan largely apply to this also; but it is to be noticed that
at last the idea of funding the floating debt was abandoned for the
sounder scheme of paying it off in cash. The reorganization trustees
were an innovation, but were destined to be a useful one. On the whole
the compromise was a step forward; and yet it was not more successful
in obtaining assents than the scheme which had preceded it. Although
the directors approved it, as was to have been expected, the bulk of
the bondholders held off.

Matters now went on in much the same old way. The seven reorganization
trustees, representing the principal interests concerned, held meeting
after meeting with no apparent result. The courts became impatient;
bondholders clamored for their interest; but after the failure of
the earlier plan the way out seemed harder and harder to find. In
September, 1885, Mr. E. Dunbar Lockwood addressed an open letter to
Mr. John B. Garrett, one of the trustees, in which the following points
were made:

(1) “The trustees should recognize promptly and unequivocally that the
Reading Railroad is bankrupt, and has not sufficient available assets
to meet its obligations.

(2) “Two dollars of obligations cannot be paid with one dollar and a
half of assets, and the sooner all persons interested ... recognize
this fact, and agree to scale both principal and interest sufficient to
meet the obligations of the company and put it upon a strong financial
basis, with sufficient working capital to enable it to conduct its
future business economically, the better it will be for all concerned.

(3) “The trustees should look only at the facts as they exist ...
and while endeavoring to rehabilitate the road, also bring it into
harmonious relations with its adversaries.

(4) “The trustees should consider the problem ... precisely as business
men consider the matter of the settlement of a bankrupt firm. The
question at once presents itself, is it best that the company should
continue in business, or should it be wound up?”[217]

In his reply Mr. Garrett pointed out the difficulties to be overcome,
and concluded by saying that in his judgment no reorganization would be
final that did not ensure the establishment of credit, the entrusting
of the management to an interest having an actual equity in the
property, and just expectation of pecuniary return from it, and harmony
with competing lines, coupled with due regard for the rights of the
public.[218]

The reorganization trustees by this time appeared discouraged, and
the following month called a conference of creditors at which a
resolution was passed looking toward foreclosure. In November a suit
was actually begun, supplementary to a similar suit instituted a year
before. It was during the pendency of these proceedings that the plan
of reorganization devised by the reorganization trustees themselves
came out, and marked a third effort to rehabilitate the road. The first
plan proposed, it will be remembered, had suggested the conversion
of all of the junior securities into income bonds, plus a funding of
one-half the general mortgage coupons for three years; and the second
had introduced an assessment on the junior bonds and stock. This third
plan, while preserving the assessment, and making it more severe,
added a provision for the conversion of general mortgage liens into
3 per cent bonds, and of junior liens into preferred stock. For the
ultimate retirement of the prior liens a new fifty-year 5 per cent
mortgage was to be created; for both the prior and general mortgage
liens the difference between the return from the old bonds and that
from the new was to be adjusted by the use of 5 per cent preferred
stock, so that bondholders in prosperous times would not find their
incomes diminished. Preferred stock was to be of two kinds, of which
the first was to go to satisfy the general mortgage bondholders and
for assessments, while the second was to exchange at varying rates for
the junior securities above the second series 5s. Everything below the
second series 5s was to receive common stock instead. Under the scheme
the company’s obligations would have been reduced to $60,731,000, of
which $33,400,000 prior liens and $24,686,000 new 3 per cents; while
its stock would have been increased to the very considerable figure
of $96,516,282. The total cash assessments, if all paid, would have
amounted to $13,506,620; and, joined with the balance of stock, were
expected to be sufficient to cover the floating debt. The new fixed
charges were to be $7,064,830.[219]

Various points in the plan deserve mention. For the first time since
the failure of 1880 it was proposed to use two kinds of securities,
of which interest on one should be fixed, and interest on the other
optional. For the retirement of senior bonds President Bond had
suggested a bond on which half the interest should be fixed and the
other half variable, but his plan had been inferior in flexibility to
the one now proposed. The junior securities received less favorable
treatment than before; but the general mortgage itself did not escape,
and was required to accept 3 per cent plus preferred stock instead of
a mere funding of its coupons. The increase in the amount of stock was
very great, and naturally so, in view of the new uses to which it was
put.[220] Assessments were made heavier, and for the first time the
management frankly excluded from their calculations the Central of New
Jersey, foreshadowing the abandonment of the lease. To repeat, the
first two plans described had developed the idea of an assessment and
the conversion of the junior bonds into income obligations. To this
the reorganization trustees added the use of preferred stock, and, more
important still, the combination of two securities, respectively with
obligatory and optional liens, which were to be given for the general
mortgage bonds. In principle the result was excellent, in practice the
degree of reduction was somewhat too slight from the point of view of
the company, although it seemed more than the creditors were willing
to accept. The general mortgage bondholders in particular were loud in
their protest. “The truth of the matter is this,” said one of them,
“while the plan of the trustees has much to commend it, and is based
on an excellent theory, it fails to cover the whole ground, and falls
terribly short of meeting our reasonable demands.” Thus, although the
Bartol and Whelen committees accepted the plan, matters again stood
still for a while, while the financial powers talked and wrote and
threshed the question out.

In February, 1886, the reorganization trustees received a letter signed
by J. Pierpont Morgan and John Lowber Welsh, which is important enough
to be quoted in full.

“A syndicate has been formed,” said these gentlemen, “composed of
leading bankers and capitalists here and in Europe, together with
corporations or their representatives controlling large transportation
and coal producing interests, who have agreed to subscribe in the
aggregate $15,000,000 for the purpose of aiding in the reorganization
of the Philadelphia & Reading Railroad Company and its affiliated
lines. The syndicate has no commitment of any kind with any other
railroads or corporations upon this subject beyond securing a
management in harmony with the principle that capital invested in
internal improvements should be so managed as to result in a fair
return in the way of interest and dividends. Their object and purpose
is to secure the reorganization on business principles for the
Philadelphia & Reading bondholders, stockholders, and creditors without
prejudice to the relative position of either, and in their interest
only.

“To do this effectually there must be suitable arrangements made
with the Pennsylvania Railroad and other kindred coal interests for
harmonious relations, in order that suitable prices may be obtained for
coal produced and shipped. These objects we shall endeavor to secure,
and we now enclose you a copy of a correspondence with Mr. Roberts,
president of the Pennsylvania Railroad, on these subjects, which seems
to us sufficient to warrant the syndicate in placing reliance upon the
assurance given by that company.

“As the reorganization shall proceed our effort and expectation will be
to bring about satisfactory arrangements with all the anthracite coal
roads, and also the trunk lines, which shall secure to the Philadelphia
& Reading Railroad Company, when reorganized, its just share of the
business at remunerative rates.

“The syndicate have believed that your plan was, in the main, suitable
for the purpose of reorganization, and that your board was composed of
gentlemen who would command the confidence of all parties in interest.

“They therefore prefer to make an arrangement with you and to aid you
in working out a plan.

“But they also think that there should be certain modifications as to
your organization, and also as to your plan, as follows:

“(1) The syndicate would wish two persons, to be named by them, added
to your board.

“(2) Your plan should be made so flexible that it could be modified
hereafter in such respects as may be found necessary to success.

“(3) There should be an executive committee of five to take charge
of the foreclosure proceedings, the purchase of the property, the
organization of the new company, and generally of whatever may properly
appertain to reconstruction under the plan. There should be five voting
trustees who should vote on the stock when deposited under the plan,
and to whom the power of voting on the stock in the reorganized company
should be confided for five years after reorganization. These two
committees should be composed of parties satisfactory to the syndicate
and the trustees, and shall fill their own vacancies. But in case the
syndicate and trustees cannot agree upon the five, then, and in that
case, three shall be named by the syndicate and two by the trustees,
and each class shall fill any vacancy occurring in its own number.

“(4) The compensation to be allowed to the syndicate shall be 5 per
cent on the amount of the syndicate capital.

“(5) The syndicate to be allowed interest at the rate of 6 per cent
upon any amount they may advance the company in the course of the
process of foreclosure and reorganization.

“(6) Proper provision must be made for securing to the syndicate the
refunding of the money they may advance on account of interest not
exceeding 4 per cent per annum on the general mortgage bonds during
reconstruction, and also for the substitution of the syndicate in the
place of any creditor or stockholder who may abandon his holding and
refuse to pay his assessment, it being the purpose of the syndicate to
pay 4 per cent per annum interest on the general mortgage bonds during
reconstruction, and also to pay the assessments of such parties as may
abandon their holdings or right to take the securities to which they
may be entitled under the plan.”[221]

The correspondence with Mr. Roberts referred to contained the
assurance that the Pennsylvania Company would not hold aloof from
an understanding with the Reading either in respect to the coal or
transportation business, and would, moreover, “cordially unite in the
arbitration of all differences.”[222] This could not, of course, force
distasteful terms upon the Reading bondholders, but it could and did
supply sufficient capital to ensure the success of any plan adopted,
and it infused confidence and vigor into the action of the nearly
discouraged reorganization trustees. The executive committee which they
were to name was perhaps a useful tool, but the suggestion of a voting
trust was a genuine contribution, and aided powerfully in securing
necessary backing for future schemes.

It is to be remarked that the syndicate appeared with no panacea,
was without a plan of its own, and at first merely adopted that of
the trustees, with a few modifications which it thought advisable;
but that by March, 1886, it had so worked over the proposals of the
reorganization trustees as to make in many respects a new plan;
which retained the assessments, likewise the combination of fixed
and optional charges and the use of preferred stock, but reserved
4 per cent bonds against prior liens, gave 4 per cent bonds with
preferred stock in exchange for the general mortgage instead of 3 per
cents, and created four classes of stock instead of three. Somewhat
more in detail this plan was as follows: The Reading was to issue a
new 4 per cent general mortgage for $100,000,000, and four kinds of
stock: a preferred, income, consolidated, and common. Of the general
mortgage $9,792,000 were to be for future use in the improvement
of the railway; of the remainder $38,422,000 were to be reserved
against prior liens; $24,686,000 were to exchange for the general
mortgage if such should not be paid off in cash; $15,000,000 were
to take up shares or bonds of leased lines, and $10,000,000 were to
exchange for or to redeem Coal & Iron Company divisional mortgages.
The total amount issued was to be $90,208,000, and no mortgage in
addition was to be placed on the Reading properties for five years
after the reorganization without the consent of a majority of the
preferred stockholders. Of the different classes of new stock the
preferred was to be given dividends up to 5 per cent non-cumulative,
and then the income and consolidated stocks were to have up to 5 per
cent non-cumulative. Generally speaking, the preferred stock was to
go for assessments; the income stock for the income mortgage and
convertible adjustment scrip; the consolidated stock for the first
series 5s and one-quarter of the principal of the second series
5s; the common stock for the rest of the second series 5s, for the
convertible debentures, deferred income bonds, and for old preferred
and common stock. New fixed charges were estimated at $6,971,687, which
dividends on the preferred stock would raise to $8,198,636. There was
to be a voting trust for five years, consisting of J. Lowber Welsh,
J. P. Morgan, Henry Lewis, George F. Baer, and Robert H. Sayre; and
a syndicate was to advance necessary expenditures and disbursements
pending reorganization, including unpaid assessments. The syndicate
compensation was to be 6 per cent on its advances, plus a commission
of 5 per cent upon its $15,000,000 of subscribed capital. The property
was to be sold at foreclosure sale, and a new company was to be
organized.[223]

A comparison of this with the plan of the reorganization trustees at
first announced will show the changes made. Nothing of value which
previous reorganizations had worked out was cast aside. The fixed
interest allowed the general mortgage bondholders was raised in the
hope that they might support the plan, and more care was taken to
follow the order of priority in the advantages offered to the various
classes of junior securityholders; an end to which the four classes
of stock were admirably adapted. The voting trust was altogether new,
and was doubtless intended to ensure a policy in accord with the
syndicate’s wishes for a series of years, and to prevent a renewal
of the vagaries of Mr. Gowen’s administration. The provision for
foreclosure was to be expected in view of the extreme difficulty of
obtaining the assents of so many conflicting interests; but with a
net revenue of $12,026,309 (both companies) and fixed charges of
$6,971,687, the task of maintaining the solvency of the companies in
future did not seem an impossible one.

In opposition to the plan the Lockwood Committee urged that the scheme
was unjust to certain classes of bonds; that it was cumbersome,
expensive, conferred power on the trustees which should have been
reserved for the direction of the new company, and that the reserved
powers to change any part of the plan, and the uncertainties connected
with the settlements under it, involved risks which creditors should
not accept.[224] The objections were not weighty. If the Lockwood or
any other committee had proved itself able to formulate and carry
through a plan, or if the syndicate arrangement had been proposed at
the very beginning of the receivership, bondholders might fairly have
criticised its expense. In point of fact numerous attempts to reconcile
divergent interests had failed, and what with Messrs. Lockwood, Bartol,
Whelen, Gowen, and their respective followings, the future offered no
more promising result. Meanwhile bondholders were going without their
interest, and costs of the receivership were mounting up; so that a
greater expense than that of which Mr. Lockwood complained was being
incurred by delay. As for the general mortgage bondholders, they were
given a chance at their old interest whenever the road should earn
it, and could fairly ask no more; while that it was inequitable to
ask income bondholders to accept a reduction to $50 in their annual
interest, or holders of the first series 5s to wait for their interest
until liens before theirs had been satisfied, are conclusions to which
few will agree.

In April Messrs. Whelen and William H. Kemble, representing the
Reading consolidated mortgage bondholders, announced that they had
determined not to accept the syndicate plan. Even before this Mr.
Gowen announced that he was organizing a syndicate and would soon be
able to pay off overdue coupons on the general mortgage bonds, and
to prevent any foreclosure under that mortgage.[225] It is scarcely
necessary to say that he had a plan of his own. He proposed to issue
$100,000,000 4 per cent 70-year consolidated mortgage bonds much as did
the syndicate, part of which should go to redeem the general mortgage
and the floating debt; but second to this he suggested a cumulative 4
per cent first preferred income bond, to take the place of the income
and consolidated stock under the syndicate plan, and to be exchanged
for the first series 5s, a portion of the second series 5s, and some
of the leased canal securities; while finally he planned a second
preferred cumulative 4 per cent income bond, to be exchanged for those
securities down to the deferred income bonds, which under the syndicate
scheme were to receive common stock. The surplus of income offered by
the old general mortgage was to be made good by first preference bonds.
The existing preferred and common stocks were to remain as they were,
and the deferred income obligations were to remain untouched. Finally,
the New Jersey Central was to be retained in friendly alliance, either
under a modified lease at a rental equal to earnings, or under a
special traffic contract.

A comparison of this with the syndicate plan shows that Mr. Gowen gave
up the idea of an assessment; provided for the floating debt through
first preference bonds; swept away three of the four classes of stock,
replacing them by two kinds of income bonds; and retained the deferred
income bonds which the syndicate proposed to retire. His plan was to be
carried through without foreclosure, but outside of this its advantages
are rather difficult to ascertain. The abandonment of the assessment
was distinctly bad; the retention of the deferred income issue was also
bad; the reduction in the number of kinds of securities tended towards
simplicity, but made impossible the nice distinction of priority on
which the syndicate had relied; while even the replacement of stock by
income bonds must be condemned, substituting as it did an obligation
without any very distinct character of its own for a stock which
represented frankly only a share in the profits of the enterprise.
These things were realized, and the plan received no serious support;
but as every plan so far proposed contributed something to the final
product, so Mr. Gowen’s income bonds and his aversion to foreclosure
were not without influence upon the scheme which ultimately attained
success.

The next few months saw active hostilities between Mr. Gowen and the
syndicate; the former taking the position that he would never consent
to foreclosure, nor to the placing of the property for five years under
the management of a board of trustees named by his adversaries.[226]
To Mr. Garrett, chairman of the reconstruction trustees, he wrote
suggesting that the board should substitute his plan for that of the
syndicate, and that seven reconstruction trustees should be appointed
by the managers of the company to carry it through. “Upon this being
done,” said he, “I will engage that the plan shall be underwritten by
an association of capital sufficient for the purpose of paying off all
the general mortgage bonds which do not voluntarily accept the new
securities provided by the plan, and I will agree that the financial
responsibility of these subscribers to this fund shall be determined by
the presidents of the Bank of North America, the Farmers’ & Mechanics’
National Bank, the Pennsylvania Company for Insurance of Lives, etc.,
and the Union Trust Company....”[227] Mr. Garrett naturally refused.

As in many cases before, the struggle ended in a compromise. The
new agreement was as follows: The syndicate was to be enlarged by
$4,000,000 additional subscriptions, and the reconstruction trustees
increased to thirteen by the addition of certain friends of Mr. Gowen,
one of whom was also to be given place upon the executive committee.
The syndicate plan was to be carried through without foreclosure,
providing sufficient assents could be obtained, and was to be modified
by the substitution of first, second, and third 4 per cent income bonds
for preferred, income, and consolidated 5 per cent stock. Dividends
on the bonds, like those on the stock, were to be payable from net
earnings only; but net earnings were defined as the profits derived
from all sources after paying operating expenses, taxes, and existing
rentals, guarantees and interest charges, _but not fixed charges of the
same sort subsequently created_. All third preference bonds issued for
convertible bonds were to have the right to be converted into common
stock; and the company was to have the privilege of increasing the
issue, subject for five years to the approval of the voting trustees.
As finally worked out, the first preference bonds were to be given for
assessments; the second preference for all securities which had been
promised income or consolidated stock; and the third preference for the
second series 5s, convertible and debenture bonds, and preferred stock
to which common stock had before been allotted. Somewhat more emphasis
was laid on the possibility of paying off the general mortgage. It was
proposed to reduce the aggregate of rentals and guarantees (exclusive
of the Central of New Jersey, the Schuylkill Navigation Company,
and the Susquehanna Canal Company) to an annual charge of less than
$2,350,000 by direct negotiation with the companies affected. And to
deal directly with the three companies above named upon the basis of a
continuance of their respective leases at rentals involving no fixed
liability beyond the earning power of the leased line, or on the basis
of a surrender of the said leases, and the cancellation of the traffic
agreement with the Schuylkill Navigation Company for a consideration.
The voting trust was to be composed of three representatives of the
syndicate and one friend of Mr. Gowen, which four should elect a
fifth who should be satisfactory both to the syndicate and to the
reconstruction trustees. A united effort was to be made by the company,
the reconstruction trustees, and the syndicate to secure the immediate
appointment of Mr. Austin Corbin as an additional receiver; and, if Mr.
Corbin would take the position and legally qualify himself to fill it,
it was understood that the presidency of the company would be offered
to him. The other provisions of the syndicate plan were to remain
unchanged.[228]

The total capital and charges under the plan were to be as follows:

                                       _Est’d Capital_  _Fixed Charges_

  Prior mortgage liens,                  $85,807,920       $4,233,055
  Annual rental of leased lines                             2,350,000
    not to exceed                                          ----------
                                                           $6,583,055
  First preference income mortgage,       24,410,822        1,220,542
                                        ------------       ----------
                                        $110,218,742       $7,803,597
  Second preference income mortgage,      26,140,518        1,307,026
                                        ------------       ----------
                                        $136,359,260       $9,110,623
  Third preference income mortgage,       14,956,016          747,800
                                        ------------       ----------
                                        $151,315,276       $9,858,423
  Common stock,                           38,369,076
  Deferred incomes,                        6,225,327
    $20,751,090 at issue price,         ------------
                                        $195,909,679

We have now the reorganization in its final shape, and it will be
interesting to review briefly the gradual way in which this shape was
fashioned. With the company plunged anew into bankruptcy after a
reorganization insufficient to afford any genuine relief, the proposal
was made to fund one-half the general mortgage coupons for three years
and to convert all junior claims into liens on income. This scheme
failed because plainly inadequate to meet the needs of the situation,
and a modified version was presented providing for an assessment with
which to pay the floating debt. The assessment was approved, but not
the plan, and an ensuing scheme supplied an altogether new method
of treatment, whereby on the one hand the assessment was made more
heavy, and on the other two classes of preferred stock were proposed,
with one issue of bonds at 3 per cent. This plan failed, not so much
because of its inadequacy, although it was inadequate, but because
general mortgage bondholders felt that a 3 per cent bond was less than
they could reasonably expect for their holdings, and insisted on a
security with a higher obligatory rate of interest. The next plan took
note of these objections: it raised the interest on the bonds which it
proposed from 3 to 4 per cent; and in the endeavor to please the junior
bondholders as well, created four classes of preferred stock, by means
of which the relative priority of different issues was carefully and
completely recognized. Assessments were retained, and a guarantee by
a syndicate and a voting trust for five years was suggested. In the
discussion that followed, a new scheme was introduced, which replaced
the preferred stock by two classes of income bonds, and forced the
managers to realize the desire of the old bondholders for some new
security with at least the name of bond. As a result, the syndicate
which had fathered the previous plan consented to substitute for
three of their classes of stock first, second, and third preference
bonds. Meanwhile the fixed charges estimated for the successive plans
steadily decreased. The first looked for $12,911,000, or $14,266,051
as variously reckoned; the second for $14,143,384, or, deducting the
Jersey Central, for $8,223,177; the third for $7,064,830; the fourth
for $6,971,687; and the sixth for $6,583,055. Thus each plan took over
what was most satisfactory in its predecessor; and there was on the one
hand a steady decrease in the fixed charges proposed, and on the other
a continuous effort to discover some plan which might be satisfactory
to all concerned.

That the compromise plan last mentioned succeeded was in part due to
the feeling of all contending parties that concessions must be made;
it was due also to endorsement by the leaders of the more important
interests; and, finally, to an appreciation that the plan was after
all a good one, reducing largely the fixed charges which the company
would have to pay, while depriving no one of a return which, under the
circumstances, he could fairly expect to receive. Mr. Corbin proved
willing to undertake the new responsibilities put upon him. He was
therefore appointed receiver in October, and elected president in the
January following.

Nevertheless, it would be a mistake to suppose that the plan was
unanimously accepted from the start. The Lockwood Committee of general
mortgage bondholders were prompt in their disapproval, pronouncing it
“unjust, uncertain, and indefinite”; saying that reorganization under
it would be unduly expensive, and that it was more objectionable than
the plans which had preceded it.[229] Equally decided was a small
group of capitalists which held a majority of the first series 5s
outstanding, the members of which were said to have agreed to hold
their bonds and to abide the result.[230] The original time limit for
deposits expired on March 1, 1887; it was then extended to March 15,
and again to March 31, and deposits of $110,409,464 out of a total of
$117,972,859 were secured. By October certain other bondholders had
been induced to come in, and the trustees declared the plan operative.
Holders of $3,348,000 of first series 5s stayed out, and forced an
arrangement by which they were practically paid off in cash.[231]
Arrangements were made with some of the subsidiary Reading lines, but
the lease of the Central of New Jersey was not renewed. Only odds
and ends now remained to be cleared up, and all through the rest of
the year the managers were busy paying off receivers’ certificates,
floating debt, overdue interest, etc. On January 1, 1888, without
formalities, the Reading passed out of receivers’ hands and into the
control of the stockholders.



CHAPTER IV

PHILADELPHIA & READING

  Difficulties of the Coal & Iron Company—McLeod’s policy of extension
    —Collapse of this policy—Failure of company—Summary of
    subsequent history.


With the year 1888 a new period in the history of the Reading began.
The long struggle to bring the company back to solvency was fairly
over, and for the first time in seven years the road saw before it a
chance for genuine prosperity. Unlike the reorganization of 1880–3,
that of 1884–7 succeeded in accomplishing the greater part of the
saving expected of it. According to the plan, interest charges were
to be reduced to $4,233,055;—in 1888 they were $4,516,433, and in
1889 $4,058,139; rentals were not to exceed $2,350,000;—in 1888
they were $2,882,582, and in 1889 $2,842,319. Other payments, it is
true, the necessity for which was passed over by the advocates of the
plan, raised the total which the road was obliged to meet, but did
not prevent a comfortable balance of over $2,000,000 for the Railroad
Company in 1888, and one of $1,444,000 for both Railroad and Coal
Companies combined. During the next few years large sums were spent in
improving the permanent way. By January, 1889, almost the entire line
between New York and Philadelphia had been relaid with 85 and 90 pound
rails; grades had been smoothed, bridges strengthened, and culverts
strengthened or rebuilt.

Less satisfactory than the results for the Railroad Company, however,
were those for the Coal & Iron Company. In this case profits of
$654,211 for 1887 turned into a loss of $806,222 for 1888, and in the
following year a weak demand for coal, combined with a high cost of
mining, increased the loss to $974,373. President Corbin felt called
upon to explain that prior to 1886 the deficits of the Coal Company
had been habitually met by inflating the capital account of the
Railroad Company; so that with allowance for this fact the showing of
the companies under his management had been relatively good.[232] In
November, 1889, a letter of Mr. Gowen’s was issued, hopeful as ever,
criticising the management for their refusal or neglect to give
authoritative information about actual earnings, but pointing to the
large expense for new coal cars, barges, and collieries, and explaining
the benefit which these would confer.[233]

The weakened position of its allied company pulled the Reading
down, and prevented it from attaining the secure position which had
seemed in sight. The payment of dividends only increased the general
dissatisfaction. In February, 1889, holders of a considerable amount
of second preference bonds circulated a petition objecting to the
official statement of net earnings applicable to these securities, and
demanded an examination of the books. After an investigation their
expert declared that a 7½ per cent dividend had been earned, but the
bondholders could not induce the company to increase its distribution.
The next year preference bondholders fared even worse. The managers
declared that the surplus over all fixed charges for the year was
barely $100,000, and that no dividends at all upon their holdings
could be paid. Again an investigation was demanded and accorded,
and Mr. Howard Lewis, the expert appointed, reported that there was
applicable to the payment of interest upon first preference bonds the
sum of $90,101, or ⅜ of one per cent; a sum which the company promptly
agreed to pay. Meanwhile even the stockholders were becoming restless.
In June, 1889, a suit was commenced in Philadelphia, praying that the
company’s voting trustees and the trust under which they acted should
be set aside, on the ground that the trust was to be exercised by five
voting trustees, whereas only four had ever been appointed. Later on
the matter was taken up by London stockholders, and became serious
enough to force a concession of two seats in the board of managers of
the company.

There was no question but that the trouble was caused by depression in
the anthracite coal business, for in the carriage of both passengers
and freight the Reading in these years made steady and substantial
gains. In the three years following 1887 the number of passengers
transported increased by 2,400,000 and the earnings from them by
$470,000; while the freight tons moved gained 1,500,000 and the freight
earnings $1,000,000. Only in coal was there a decrease, which appeared
for the Coal & Iron Company in the figures for sales and gross and net
receipts, and for the Railroad Company in the earnings from anthracite
transported. The result was an attempt to improve the situation:
first, by a combination among coal producing roads which should raise
the selling price of that commodity; and second, by extension of the
railroad into new markets, whereby an outlet for increased production
should be obtained. At the instigation of Mr. Gowen a syndicate was
formed to purchase a majority of the stock of the Reading Company,[234]
which bought much more than 50 per cent, even though Mr. Gowen, the
prime mover, died in the mean time. The existing managers showed no
desire to combat the movement, although the voting power lay entirely
in their hands. In June, 1890, President Corbin resigned, and Mr. A. A.
McLeod was elected in his place.

Mr. McLeod now began a vigorous policy of consolidation and expansion
with the lease for the second time of the Central of New Jersey. He
evaded a New Jersey law which forbade the lease of a domestic to
a foreign corporation by incorporating the Port Reading Railroad
Company and then executing a lease of the Central to this minor
corporation.[235] The Port Reading promised 7 per cent on the Central
stock for 999 years, plus one-half the surplus earnings above the
dividend up to 10 per cent, and secured a guarantee of the fulfilment
of these promises from the Reading Railroad proper. Finally, Mr. McLeod
leased the Lehigh Valley to the Reading direct, on a guarantee of 5
per cent on the stock until May 31, 1892; 6 per cent from that time
until November 30, and 7 per cent thereafter for the rest of the 999
years. So far as control over the coal supply was concerned this put
the Reading in a very favorable position. The Lehigh Valley tapped
the northern Wyoming field, and the Central of New Jersey the Mahanoy
and Shamokin deposits, and both had access to New York through New
Jersey. The Lehigh, moreover, extended to Buffalo; and with a line of
steamers to Duluth, Milwaukee, and Chicago, promised to command a large
proportion of east-bound traffic in other things than coal. Figures
for the coal industry show that the Reading, Central, and Lehigh
shipped in 1891 53.3 per cent of the total production of 40,448,000
tons; in 1890 55.5 per cent; and in 1889 57.75 per cent. In addition,
control of the Delaware, Lackawanna & Western was said to have been
acquired by the purchase of a majority of its stock, which added 15.1
percent more;[236] making a total of 68.4 percent for the year 1891,
or sufficient to give a considerable measure of control over prices.
But the terms were severe; quite as severe as in the case of the leases
earlier put through; and though the Reading was in better shape than it
had been five years before, full interest on its preference bonds was
not being paid, and so long as this continued no outside payments could
properly be made. The subsidiary companies, on the other hand, were
not earning the dividends promised on their stock by nearly one-third
of a million dollars; and it seemed unlikely that sufficient economies
could be secured to cover permanently the deficit. The question could
fairly have been asked whether the Reading had not bought a chance
to contribute an annual sum to the Lehigh Valley and Jersey Central
stockholders; and whether these roads had not deliberately entered into
a contract which was little likely to be carried out. The justification
of the arrangement lay in the control of coal prices which it made
possible, and in the advantages of close traffic arrangements and
connection with both Philadelphia and New York. “The main reason why
the combination failed,” said Mr. I. L. Rice before the Industrial
Commission, “was that there was not an understanding of the first
principles of an operation of that kind, _i. e._ that it must reduce
prices and not increase them. The anthracite coal combination was
killed because prices were immediately put up....

“Q. Mr. McLeod has testified before this commission that it was his
intention to effect such economies as should be reflected in lower
prices. Do we understand that you criticise the policy in that it did
not so reduce the prices?

“A. He did not do it, no matter what his intention was.”[237]

The situation was, however, as clearly understood by the public as by
the managers themselves. Even before the combination had begun to carry
out its policy, outcry was made, and as prices went up the agitation
became intense. In New Jersey an act to legalize the combination
which passed both houses was vetoed by Governor Abbot on the ground
of the effect upon the price of anthracite coal;[238] and in June the
Attorney-General applied for an injunction to dissolve the lease of
the New Jersey Central to the Philadelphia & Reading, alleging that
the tripartite agreement between these companies and the Philadelphia
& Reading was illegal. The court granted a temporary injunction,[239]
which it continued in August to a final hearing, with conditions to
make it more effective.

Prices did not go down, and in October Attorney-General Stockton of
New Jersey again appeared before Chancellor McGill. He now charged the
Philadelphia & Reading, the Central, and the Port Reading with having
conspired to advance the price of coal in defiance of the order of
the court, and asked for the appointment of a receiver to enforce the
former decree, and to restrain the company from further using the New
Jersey railroads for carrying any coal until the advanced price should
have been reduced.[240] The officers denied the allegations, but the
Chancellor sustained the Attorney-General on every point; and only
the official announcement of the abrogation of the lease prevented
the granting of the order.[241] The lease of the Lehigh Valley fared
better. In a suit brought by M. H. Arnot, a stockholder in the Lehigh
Valley, Judge Metzger of the Court of Common Pleas held that the
Reading and Lehigh Valley were not parallel and competing lines in the
sense contemplated by the law; and that mere incidental competition
between branches or spurs of two systems would not prevent the
consolidation of their main lines.[242] So much then of the original
programme was allowed to stand.

Meanwhile, in the search for new markets, the Reading had stretched
into New England, having chosen that territory in the hope of
increasing its tonnage without a desperate struggle with its
neighbors.[243] The most available subject for control was the Boston
& Maine, which reached from Northampton and Boston, Massachusetts, to
Portland, Maine, was independent of the large trunk lines, and had a
profitable local business of its own. Purchases of this railroad’s
stock were quietly made; and in October, 1892, the public was surprised
by the election of Mr. McLeod to the presidency, although, as it
subsequently transpired, an actual majority of Boston & Maine stock was
not secured.[244] It was obvious that nothing could be gained from
the new arrangement unless the gap between the Reading and the Boston
& Maine should be filled; and so, even before the purchase of stock in
the latter was begun, the lease of the Poughkeepsie Bridge across the
Hudson was put through,[245] and a controlling interest was bought in
the stock of the Central, New England & Western. The last-named road
extended from Hartford, Connecticut across the Poughkeepsie Bridge
to Campbell Hall, 145½ miles, and connected at this point with the
Pennsylvania, Poughkeepsie & Boston, a road controlled in the interest
of the Reading. This completed a through route from Philadelphia to
Hartford. Later the Central, New England & Western Railroad Company and
the Poughkeepsie Bridge Railroad Company were consolidated into the
Philadelphia, Reading & New England, with Mr. McLeod as president;[246]
and a controlling interest was purchased in the New York & New England
Railroad, which ran from Poughkeepsie via Hartford and Providence
to Boston,[247] and afforded another entrance into New England. All
this involved a very great extension of the Reading system. The lease
of the Lehigh Valley had connected it with Buffalo; the subsequent
consolidations brought it into every New England state, and gave it a
total mileage of, roughly, 5000 miles.

Danger lay in two directions. First, it was possible that even the
union of the Lehigh, Jersey Central, and the Reading might fail to
secure a profit for the mining end of the business, and second, the
financing of the New England deals might be so conducted as to put the
parent road into a very difficult situation.

Both these contingencies occurred. The early termination of the Jersey
Central lease weakened the control of the Reading over prices, while
the severity of the winter of 1893, though assisting to maintain
prices, so increased the expense of operating the mines that earnings
fell below fixed charges for the three months ending February 28,
1893, by the amounts of $933,443 for the Railroad Company and $468,362
for the Coal & Iron Company. Moreover, losses of $616,351 accrued
during the same time under the Lehigh Valley lease, and were met by
the Reading, contrary to expectation, and contrary to the express
provisions of the mortgage by which its income bonds were secured. In
order to accomplish the New England extensions shares were bought on
margin by President McLeod personally with collateral in part supplied
by himself, in part taken from the treasury of the company, and
consisting of general mortgage, collateral trust, and income bonds. “On
or about September 22,” said Mr. I. L. Rice, a representative of the
bondholders, who had been examining the books, “Mr. McLeod entered into
certain individual stock transactions which resulted in the purchase
of 24,036 shares of the stock of the Boston & Maine Railroad Company
and 32,000 shares of the stock of the New York & New England Railroad
Company. On October 15, 1892, he withdrew from the control of the
company, without having previously obtained the authority of the board
of managers therefor, and without expressing the purpose for which he
intended to use the securities, 30,000 general mortgage bonds of the
company, which as afterwards appeared were used at that time as margins
in the transaction. He subsequently withdrew from the control of the
company in the same manner and for the same purpose, between October 28
and December 1, 1892, $713,000 of collateral trust bonds, and $99,000
third preference bonds. No reference whatever is made to these stock
transactions on the books of the company except the mention of the
withdrawal of securities against the personal receipt of the president,
nor are they referred to on the minutes of the board of managers prior
to December 24, 1892. On the latter date the board of managers in a
resolution approved the transaction, calling for the use of $613,000 of
the company’s collateral, and indemnifying Mr. McLeod for advances made
for the same purpose to the extent of $400,000. On January 17, 1893,
Mr. McLeod deposited $250,000 additional collateral trust bonds as
margin, making a total of $963,000. On February 15 Mr. McLeod directed
that the account be transferred from his individual name to that of the
company’s.”[248]

Leaving aside the matter of the propriety of Mr. McLeod’s action, it
is plain that the method which he employed was an extremely expensive
one, in that it raised the necessary cash by temporary loans at high
rates from brokers in New York and Philadelphia instead of by the sale
of stocks or bonds, or by the use of funds which the company might
have had on hand. According to President Harris, the average charges
paid on the floating debt in 1892, a large portion of which had been
accumulated in these operations, was 9 per cent. If the control over
the corporations acquired had been desired for temporary reasons the
operation would have been a stock speculation pure and simple, and
the Reading would have trusted to the possible rise in price of the
securities purchased to cancel the expense of advances to the brokers
who did the buying; but in this case the control was designed to be
permanent, not temporary, and Mr. McLeod expected results which could
be obtained only after a series of years.

This brings us to the beginning of 1893. Mr. McLeod had succeeded
in carrying out his plans for a combination of coal producing roads
and for the extension of the Reading into New England, but had seen
his first project bitterly attacked, and his second scheme become a
burden because of the insufficient funds behind it. Matters came to a
head in February with an attempt to borrow on $10,000,000 collateral
trust bonds. Speyer & Co. accepted the issue, but the Drexels refused
to handle it, and began to sell the company’s securities at any
price.[249] Quotations dropped from 46¾ to 40⅝ on February 17, and
continued to fall the two succeeding days, reaching 28 on February 20.
On this last day application was made to the United States Circuit
Court in Philadelphia, and Messrs. McLeod, Wilbur, and Paxon were
appointed receivers. “I am very sorry,” said President McLeod, “that we
were driven to the necessity for a receivership, but it was the only
thing to do. Our credit was attacked in a way which made it impossible
for us to meet our obligations, and we had the receivership established
before the property was further injured.... The trouble was brought
about by the fact that we were doing an enormous business on a small
capital, and when this attack was made ... it hurt our credit so that
we could not borrow money.”[250] Lack of capital was the repeated cry
of the management. At a later date Mr. McLeod again said, “When I
leased the Lehigh Valley and the Jersey Central and took over their
coal operations ... I found that I had $13,000,000 invested in coal and
in carrying the customers of the companies. The Reading did not have
that much capital, and I had to borrow $8,000,000 of that $13,000,000.
Then the panic of 1893 came on. I had arranged to fund that $8,000,000
of floating debt by selling securities, etc., giving me a working
capital of $17,500,000, but the parties who were to furnish the money
had six months in which to do it, and on account of that panic coming
on before I could get the money, there was nothing in the world for me
to do except to put the Reading in the hands of the receivers to save
its securities.”[251] The statements concerning the lack of capital
were a true explanation though not an excuse. Money had been tied up
in unsalable coal, acquired not only by the leases of the Lehigh and
Central, but also by purchases from independent operators[252] and by
production during the current year;[253] while whatever spare funds
the Reading had been able to provide had been put into New England
securities at high prices to carry out the road’s ambitious plans. In
the mean time the large purchases on margin made a fall in the price of
Reading securities of especial moment; and, as Mr. McLeod explained, it
proved impossible to liquidate the floating debt. The failure of 1893,
then, was caused less by a continued inability to meet fixed charges
than by an undue expansion of operations such as has ruined many a
solvent firm. Reading’s venture in the coal fields had not proved a
success, but the loss had not been sufficient to ruin it within a year;
its New England extensions had not brought all the results desired,
but they had not had a fair trial; the true cause for the failure was
the attempt to accomplish by means of stock speculation and temporary
loans at high rates more than the road could do out of its legitimate
resources, with the intent on the one hand to raise the price of coal
and on the other to secure fresh markets for the sale thereof.

After the failure the first impulse of the bondholders was to denounce
Mr. McLeod. A meeting of European creditors in London chose a committee
to represent them and solicited McLeod’s removal from the receivership
on the “serious ground” that the administration of their property
should not any longer be jeopardized by remaining under the control of
an official who had already brought it into its existing difficulties.
A New York general mortgage bondholders’ committee decided to act in
a similar direction, and Mr. Drexel represented to the president that
he should resign for the sake of the future of the company.[254] Mr.
McLeod unwillingly gave way. For successor the board of managers chose
Mr. Joseph S. Harris, a man of long experience in railroad affairs. Mr.
Harris had been for many years connected with the Lehigh Valley system,
and was the same man who, it will be remembered, had evaluated the
Reading coal properties in 1880. Following his election as president he
was appointed receiver in the place of Mr. McLeod.

The receivers’ statement came out in March and announced a floating
debt of $18,472,828, against which were held reported assets to the
amount of $15,779,784; but of these last $4,985,276 were in the shape
of coal, and $8,861,065 consisted of the items “due for freight,”
“tolls due from connecting roads,” “bills receivable,” “cash,” etc.,
a large part of which was probably of little worth. Both the current
liabilities and the current assets are instructive, and show that on
the one hand Mr. McLeod’s stock operations had involved the company in
heavy obligations to his brokers, and that on the other losses in the
coal business had necessitated current advances to branch lines from
which it was impossible to get return. It appears, for instance, that
the Coal & Iron Company had been unable to pay the sums charged it for
freight, and while the full amounts had been nevertheless included
in reported earnings, the actual result had been a swelling of bills
receivable by debts which the Railroad Company was quite unable to
collect.[255]

The general lines of the policy to be pursued were now sufficiently
clear; the more pressing claims were to be met by the issue of
receivers’ certificates, expenses were to be cut down, payments under
leases were to be amicably reduced where possible, holdings of Boston
& Maine stock were to be sold, and on the side of the bondholders the
various interests were to agree on some scheme for raising cash and for
improving the general condition of the property. There was need for
some reduction of fixed charges, but not for such radical cuts as in
1880 or in 1884.

The receivers and managers carried out their part of the work first.
Application was made in March, and again in June, for permission to
issue certificates in settlement of the most urgent claims. In May
Mr. McLeod resigned the presidency of the Boston & Maine after a
large part of the Reading’s holdings had been sold, and the same month
President Harris inaugurated a policy of retrenchment by the retirement
of four out of the five vice-presidents which the Reading had been
accustomed to maintain. In July the receivers obtained permission to
dissolve the agreement with the Pennsylvania, Poughkeepsie & Boston
Railroad, and in August the appointment of a separate receiver for
the Philadelphia, Reading & New England marked, except for the minor
matter of the Poughkeepsie Bridge, the final abandonment of New England
extension. Meanwhile an arrangement had been made with the Lehigh
Valley, whereby the payments under the lease were reduced for two years
from 7 per cent to 5 per cent, on condition that the Reading should
make extra payments at the end of that time if the Lehigh proved to
have earned more than 10 per cent in the interval; and permission
had been obtained from the Circuit Court to surrender the possession
and operation of the Eastern & Amboy Railroad and the Lehigh Valley
Terminal Railroad, both lines belonging to the Lehigh Valley in the
state of New Jersey. The Lehigh lease, even as modified, aroused much
opposition from bondholders, who rightly maintained that payments
under it constituted a diversion of funds which should have gone to
the creditors of the Reading proper. Suit was begun before the Circuit
Court, and on August 8, 1893, a formal abrogation was obtained. This
incidentally caused the resignation of Mr. Wilbur, president of the
Lehigh Valley, from his position as receiver of the Reading, and the
appointment of Mr. J. Lowber Welsh in his place.

The more complicated task of the bondholders was at first undertaken
by two committees: one for the general mortgage bondholders, of which
Mr. J. Edward Simmons was chairman; and one for the income bondholders,
led by Mr. George Coppell. Three demands were at once made: first, that
Mr. McLeod retire from the receivership; second, that the lease of the
Lehigh Valley be abrogated; and third, that the books of the company
be examined by a railroad accountant. The first and second points were
complied with, though not altogether because of the insistence of the
committees, and in the end the third was also granted, and Mr. Stephen
Little was set to work.[256]

On May 27, 1893, the managers of the company brought forward a
reorganization plan, which estimated the floating debt at $19,991,941,
and proposed to cover it by the issue of $22,000,000 collateral trust
bonds at 95. These bonds were to be redeemable any time before maturity
at 110, and the trustee was authorized “to apply the surplus income or
the proceeds of sales ... of any of the securities pledged until 1898,
and thereafter so much as might be determined from time to time by the
Railroad Company, to the purchase of the said bonds at the best price
obtainable, or, if necessary, to draw the same for redemption.” General
mortgage and first, second, and third preference bonds were to be
entitled to subscribe to the amount of 10 per cent of their holdings;
deferred income bonds to 4 per cent; and stockholders to 24 per cent;
while besides the $22,000,000 mentioned, $2,000,000 additional bonds
were to be issued each year for working capital and for the acquisition
of real and personal property. General mortgage bondholders were to
fund their coupons to and including January 1, 1898, and to receive an
equivalent amount of coupon trust certificates. The rental under the
Lehigh Valley lease was to be reduced, and the Reading stock was to be
transferred for seven years to a voting trust composed of Joseph S.
Harris, E. P. Wilbur, Thomas McKean, and two others to be afterwards
named.[257] Assents of 90 per cent of the general mortgage bondholders
and of 60 per cent of the stockholders were required by the 21st of
June to make the plan effective, and a syndicate was pledged to carry
out the provisions if such assents should be obtained.[258]

An issue of collateral bonds, a reduction in the Lehigh rental, a
funding of coupons, and a voting trust: these were the propositions
which President Harris and his associates presented for the
consideration of the bondholders. There was to be no disturbance of
existing securities, no assessment, not even a reduction of fixed
charges except as these were lightened by the lowering of rentals and
by the payment of the floating debt. It is to be presumed that the
attempt to extend the Reading into New England was not to be continued,
for no provision was made for the purchase of the shares of the New
England roads hitherto held on margin, and in fact large sales of
Boston & Maine stock had already taken place; but no formal mention of
the deal was made. The lease of the Lehigh Valley was to be continued
in the hope of better times, while the reduction of rental which the
plan required had already taken place. Under ordinary circumstances
any plan such as the one outlined would have been quite futile. Where
the failure of a road is due to deep-seated causes the remedy must be
fundamental; and when a piling up of indebtedness is due to inability
to pay fixed charges the situation must be met by a reduction of those
charges even though a foreclosure sale be a necessary preliminary.
In the present case matters were somewhat different: bankruptcy had
come, not from a long-continued drain, but from a rapid diffusion of
resources in an attempt to accomplish more than the finances of the
road would permit; and a change of policy was the thing most urgently
required. But this again was not a question with which a reorganization
plan had to deal, except in so far as such a plan might smooth the
difficulties which lay in the way; and any scheme which should restore
to the company the collateral imperilled in its rash campaign, fund the
floating debt at a reasonable rate of interest, and give the management
a chance to start again, was worthy of serious consideration. It may
be observed, however, that granting all of the above, the plan before
us did not go far enough. The extensions due to President McLeod had
been in the heart of the coal regions, as well as in New England, and
one of the most important of these, the Lehigh Valley, the managers
proposed to retain. This policy, it may be said, was of very doubtful
wisdom. The attempt to monopolize the production of anthracite coal had
already been fruitful of disaster, and the possession of the Lehigh
would have constituted a continual temptation to future purchases;
while it was far from certain that even under the reduced rental the
road could have been made to pay. What the Reading needed was a period
of quiet attention to its own business, undisturbed by meddling in the
business of other people; an attention which would be sure to result in
increased economies, and was the true remedy for the lack of prosperity
in the coal industry which had driven Mr. McLeod on his wild career. It
is to this latter judgment that we must in the end conform. The plan
of President Harris was not so inadequate as might at first appear;
it accomplished much that needed to be accomplished, and it gave an
opportunity to the management of the road to retrace many of the steps
of the previous two years; but on the other hand, it did not embrace
the chance to free the Reading from all its mistaken enterprises, and
passed by an occasion which could only again occur after much suffering
and loss.

Discussion turned, however, on other features. In a circular to
securityholders in June, President Harris said: “My deliberate opinion
is that the assistance asked for by the proposed plan ... is none too
great, and that there is a good probability that if it is afforded and
the plan is carried out prudent and careful management may prevent the
recurrence of such a crisis. My judgment is that the securityholders
will make a very serious mistake if they do not accept the relief
offered them, for I see no probability that the necessary assistance
can hereafter be obtained except upon much more onerous terms. I
strongly advise that the plan shall be promptly accepted.”[259] “We
cannot but regard these terms as very easy,” said the _Financial
Chronicle_. “To be sure a new collateral trust mortgage for
$30,000,000, bearing 6 per cent, is to be created, but the greater part
of this goes to take up floating debt and other existing obligations,
and will involve no increase in fixed charges....”[260] On the other
hand, it was objected that the plan was formed entirely in the interest
of the floating debt holders, income bondholders, and stockholders;
and that the management under the arrangement would have the power
to pay dividends upon the income bonds, while at the same time the
coupons on the 4 per cent mortgage bonds were being funded.[261] In an
editorial urging foreclosure proceedings the London _Standard_ said:
“That [foreclosure] will prevent holders of pledged collaterals from
getting a market for their securities, and, at the same time, bring a
good many doubtful matters connected with the finances of the company
into the light of day. It should also tend to make the ‘floating debt’
swindle less popular with eminent American financiers. At present they
pile these debts up in the full assurance that they can easily arrange
matters so as to put them, when funded, before existing mortgages. It
is for the Reading general mortgage bondholders to act promptly for
their own interests.”[262] Finally, it was objected that the plan was
in the interest of the McLeod management, and that the voting trust
was to be a McLeod organization, which would either whitewash the
ex-president’s operations, or by keeping them in the background would
virtually outlaw them.

The plan failed because the time allowed for deposits was too short.
In spite of the objections raised 31,356 general mortgage bonds and
411,218 shares of stock were deposited in twenty-five days, and it
was maintained that additional securities would surely be obtained to
make up the percentages required. The managers alleged, however, that
extension was impracticable, and announced that the scheme could not go
through.[263]

The year following this attempt at rehabilitation was full of the
struggles of different interests, each jealous of any concession and
working devotedly for its own hand. Prominent at this time was Mr.
I. L. Rice, the same gentleman who has before been quoted in connection
with Mr. McLeod’s operations in New England stocks. Mr. Rice had
been a member of the syndicate which had put Mr. McLeod into the
presidency, and had served as foreign representative of the company
during his régime. He had been instrumental in forming the anthracite
coal combination, and at the time of the Reading failure had been in
England raising money to finance the coal holdings then acquired.[264]
Returning from Europe upon the appointment of receivers, he examined
the Reading books with the results which have been noticed, and now
appeared as the active enemy of everything connected with Mr. McLeod,
even to the receivers who had succeeded him. In May, 1893, he resigned
the seat which he had held on the Reading board, on the ground that
the management had condoned the use by Mr. McLeod of the company’s
securities in carrying on his private and personal speculations;
in September he resigned from the income bondholders’ committee,
and attacked in a circular the McLeod régime and the succeeding
receivership;[265] and in December he applied for the removal of the
receivers, alleging that they had grossly neglected their duties to the
stockholders, and had ignored the financial transactions of Mr. McLeod
prior to their appointment.[266]

In spite of his hostility to the existing régime, Mr. Rice hoped
to rehabilitate the company without foreclosure or, indeed, formal
reorganization. The action of others was inspired by a less optimistic
view. The original suit on which receivers had been appointed had been
brought by one Thomas C. Platt; but as early as March Alfred Sully and
A. B. Rand of New York, and John Lowrie of London, holders of first
and second preference income bonds, petitioned to intervene. In July
Judge Dallas dismissed the Lowrie suit, but the petition was renewed in
September, alleging that Mr. Platt “did not file his bill in good faith
on his own behalf, and on behalf of all other holders of bonds, but
at the request and for the benefit and protection of the men who were
then managers of the Philadelphia & Reading Railroad Company and the
Philadelphia & Reading Coal & Iron Company, and that the suit was not
being pressed with due diligence.”[267]

All this time the receivers had been busy on a plan, which they
presented in January, 1894. By leaving out of consideration some
$5,000,000 of car trusts they arrived at the figure of $12,500,000
for the floating debt. This they proposed to cover by the issue of
$6,000,000 in 6 per cent ten-year trust certificates, based on the
stock of coal on hand, and by $10,000,000 in 5 per cent collateral
trust bonds then in the treasury of the Reading Company. They hoped
that a balance of $2,500,000 would then remain available for working
capital or other purposes. General mortgage coupons were to be funded
for five years, although the receivers planned to have a syndicate
formed to purchase at par for cash the coupons as they matured, giving
to the bondholders in each case the choice between receiving money or
coupon trust certificates for the interest due. There was to be no
formal reorganization, no cuts in charges, nothing but a provision for
the floating debt and for a temporary funding of interest payments;
and this was the more feasible because the Lehigh Valley lease had
been by this time abrogated and the New England extensions definitely
abandoned.[268] It will be remembered that to the plan of May, 1893,
it had been objected that the provisions contrived to bring in the
floating debt ahead of previously existing liens, and were a premium
on a kind of financial juggling too common among American railroads.
This plan, therefore, avoided a new issue of bonds, and used only
what the treasury already possessed. The coal notes were obviously
unobjectionable, and served at the same time to utilize the unsalable
stock which the management had earlier accumulated. If their value
should prove small the loss would fall on the holders of the floating
debt and not on the owners of the general mortgage bonds; while the
return to the company was assured by arrangement with Drexel & Co.,
Brown Bros. & Co., and J. Lowber Welsh on the one hand, and the Finance
Company of Pennsylvania on the other. On the whole this plan was gentle
even to tenderness with the creditors of the road, and its failure
revealed clearly the bondholders’ state of mind. The holders of the
general mortgage refused to fund their coupons for five years, they
refused to fund them for two years, and they insisted that foreclosure
proceedings should be instituted unless they should receive immediate
payment of their interest. “In view of this,” the receivers were
forced to remark, “it would be idle for [us] to continue the efforts
to readjust the affairs of the company....”[269] The trouble with the
receivers’ scheme was not that it demanded large concessions,—much
larger had been asked and granted in 1887,—but that the general
mortgage bondholders felt that on the one hand the road was very nearly
earning fixed charges, so that in the contingency of a foreclosure
sale their interests would be reasonably safe; and on the other that a
demand for concessions so soon after a complete reorganization of the
property was an irritant which might well be resented even at the risk
of some pecuniary loss. Fortunately the assent of the bondholders was
not necessary to the issue of the coal trust notes, and the receivers
executed them under the authority of the court, practically as proposed.

In April, 1894, Mr. Simmons, chairman of the old general mortgage
bondholders’ committee, resigned his position, and Mr. Fitzgerald,
president of the Mercantile Trust Company, was chosen to succeed him.
The committee presently issued a notice which, after reviewing its
early activity, went on to say that it had believed it prudent to
give the receivers every opportunity to familiarize themselves with
the affairs of the company, but that in its judgment the time had
come for action to enforce the rights of the bondholders under the
mortgage.[270] In May, 1894, a new general mortgage committee was
organized, with Mr. F. P. Olcott as chairman, designed not directly
to oppose the Fitzgerald Committee, but to hasten the rehabilitation
of the property. The committee prepared a bondholders’ agreement
calling for the deposit of general mortgage bonds, and in a statement
of their position said: “Difficulties in the way of a foreclosure and
reorganization thereafter are exaggerated; if any danger is wrought by
such foreclosure it will fall upon the junior securities and not upon
us.”[271] Lastly, at this time, there was a committee headed by Mr.
Earle, president of the Finance Company of Pennsylvania.

The first matured suggestion after the failure of the receivers’ plan
appeared in what was known as the Olcott-Earle Agreement, published on
September 25, 1894, which seems to have been in many respects a revival
of that scheme. It proposed to cover the floating debt by the sale
to securityholders of $10,000,000 collateral trust bonds, heretofore
held in the treasury, and to fund coupons on the general mortgage 4s
for five years. A syndicate agreed to advance $9,000,000, or as much
thereof as might be needed, to buy the coupons as they should mature.
The stock was to be held and voted by the reorganization committee
until all the money advanced by the syndicate should have been repaid;
that is, till June, 1898; a second syndicate guaranteed the sale of the
collateral bonds at 70; and the preferred bondholders were asked to
forego any claims for interest until all the general mortgage coupons
should have been retired and cancelled. Certain other details are of
interest. The collateral bond issue was to be taken up by the preferred
bondholders and stockholders, each individual subscribing to 10 per
cent of the par value of his holdings; but the bondholder might, if
he preferred, pay 3 per cent of the par value of the securities he
owned and receive nothing, instead of paying 10 per cent and getting
a collateral bond. Securityholders were given 60 days in which to
assent, and if at the end of that time the number of assents did
not amount to practically all the interests involved, the committee
proposed to reorganize by foreclosure for the benefit only of those who
had assented to the plan; while for the future the committee was to
provide by agreement with the railroad company that the latter should
call an annual meeting of general and income mortgage bondholders and
stockholders, at which bondholders as well as stockholders should vote
in proportion to the par value of their holdings.[272]

It will be observed that the source of relief sought by this plan
was precisely that of the receivers’ plan earlier described. Certain
changes, however, of considerable importance were introduced. The
subscriptions to the collateral issue were made distinctly obligatory,
and an alternate assessment was provided; greater use was made of
syndicate assistance; some voting power was given to the bonds; and a
voting trust was added to ensure permanency of control to the designers
of the reorganization till their work should be complete. On the whole
there were still few concessions to creditors, and indeed could be
few. Ten coupons of the general mortgage were to be funded, though it
was made easy for the bondholder to get cash if he preferred it; the
provisions concerning subscriptions to the collateral bonds were rather
more burdensome than before; and the voting trust, while redounding to
the ultimate advantage of creditors, was only indirectly a concession
to their demands. The grant of voting power to the bondholders would
have been a great concession, but the wording of the clause was vague
and probably little practical effect would have ensued. As in the
previous plans, no particular attention was paid to the reduction of
fixed charges.

So much for the provisions of the plan. It was a hopeful innovation
for the suggestions it contained to come from holders of general
mortgage bonds, and seemed to give some evidence of a change of heart;
especially since the Olcott Committee did secure the assent of a larger
proportion of the issue than had accepted either of the propositions
before brought forward. The Fitzgerald Committee strenuously protested,
still insisting on the advisability of foreclosure; and further
objections came from Mr. Rice and from the Hartshorne Committee.
Nevertheless, the general mortgage as a whole gave its consent, and
ultimate shipwreck was due only to the abstention of the income
mortgage bonds.[273] It is not surprising that the income bondholders
should have felt that the plan had little in it for them. They had
been given no voice in its making,—their wishes had at no time been
regarded. During the whole reorganization the question had been of the
terms to which the general mortgage bondholders would consent, and
the only sign of the existence of junior liens had been an occasional
fearful inquiry as to what would become of them under foreclosure;
until now the combination of a voting trust with the expenses of a
syndicate reorganization, and an assessment upon them and upon the
stock, touched the limit which they would stand. There was, moreover,
at this time no question of the wiping out of the value of their
holdings. The preamble to the Olcott-Earle plan stated that the annual
charges were $10,477,560 and that the net earnings for 1891 had been
$10,977,398; thus showing that something was left for the junior
securities even after the payment of interest on all prior and general
mortgage liens. It seemed also barely possible that the difficulties of
a foreclosure, with the danger under the laws of Pennsylvania of losing
the coal properties of the company, might secure better terms for the
holders of junior obligations in case they should withhold their assent.

Early in January, 1895, the following official notice was issued: “The
plan of readjustment, dated October 1, 1894, has not been assented
to by a sufficient number of income bondholders and stockholders to
make the same effective. The committee now hold over a majority of the
general mortgage bonds, and have, in accordance with the bondholders’
agreement of May 7, 1894, and their circular of October 1, 1894,
notified the trustees of the general mortgage to bring suit for the
foreclosure thereof ... as expeditiously as possible.”[274] Suit for
foreclosure was brought March 2 in accordance with the announcement,
and the Junior Securities Protective Committee, an organization with
purposes indicated by its name, was allowed to intervene.

Meanwhile the Fitzgerald and Olcott committees together prepared and
brought forward the final reorganization scheme. The conditions now
differed from those with which any previous plan had been confronted,
in that it was no longer necessary to seek for as little change as
possible, and a broader, more radical reorganization was in point.
“Unless,” began the scheme, “the managers shall decide to proceed
without foreclosure or sale, the properties of the existing Reading
companies will be sold and successor companies will be organized
under the laws of Pennsylvania, and the stock and securities of these
successor companies will be vested in a new company formed, or to be
formed, under the laws of Pennsylvania or of some other state.”

There were to be issued:

  General mortgage 100-year 4 per cent gold bonds,       $114,000,000
  Non-cumulative, 4 per cent first preferred stock
    (subject to an increase of $21,000,000),               28,000,000
  Non-cumulative 4 per cent second preferred stock,        42,000,000
  Common stock (subject to an increase of $21,000,000),    70,000,000

If at any time dividends of 4 per cent should have been paid on the
first preferred stock for two successive years the company might
convert the second preferred stock at par, one-half into first
preferred and one-half into common stock. These new issues were
ultimately to retire all outstanding securities, to provide for
expenses of reorganization, and to go for new construction, additions,
betterments, etc., in the succeeding years. Since, however, it was
obviously impossible to cancel prior liens before maturity, sufficient
general mortgage bonds ($44,550,000) were reserved from immediate
issue to retire these when they should fall due. This left new general
mortgage bonds with four classes of stock against old general mortgage
bonds with three classes of preferred bonds, common stock, and deferred
incomes; and, as might be expected, new general mortgage 4s were given
for the old general mortgage, second preferred and common stock went
for preference bonds, and new common stock for old common stock and
deferred income bonds. Certain cash payments were made on the general
mortgage, and $4,000,000 of the new issue were sold to a syndicate;
but on the whole we may say that the prior liens and general mortgage
bondholders occupied the same position in the new company which they
had occupied in the old; that the income bondholders exchanged a bond
with a lien on income for a stock with a right to dividends; and that
the floating debt, syndicate, and other expenses were given equal
rights with the general mortgage.

No additional mortgage was to be put upon the property, nor was the
amount of the first preferred stock to be increased, except with the
consent, in each instance, of the holders of a majority of the whole
amount of each class of preferred stock, given at a meeting of the
stockholders called for that purpose, and with the consent of the
holders of a majority of such part of the common stock as should
be represented at such meeting, the holders of each class of stock
voting separately; neither was the amount of the second preferred
stock to be increased, except in a similar way. These careful clauses
made some provision for future capital requirements necessary which
should be independent of the consent of the stockholders at any time;
and $20,000,000 general mortgage bonds were accordingly set aside,
to be issued in amounts not greater than $1,500,000 in any one year
for future construction, equipment, and the like. Additional general
mortgage bonds were provided to retire Philadelphia & Reading Terminal
and Coal & Iron Company bonds up to the sum of $21,000,000.

The floating debt, estimated at $25,150,000, was provided for in part
by assessment, and in part by the sale of securities to the syndicate
for cash; 20 per cent being levied on first, second, and third
preference income bonds, 20 per cent on the stock, and 4 per cent on
the deferred incomes; while the syndicate agreed to take $4,000,000
of the new general mortgage bonds and $8,000,000 of the new first
preferred stock. The assessment was expected to yield $20,862,289, and
the syndicate to contribute in cash $7,300,000; leaving an estimated
cash balance of $3,000,000. In addition, the syndicate (Messrs. J. P.
Morgan & Co., J. Kennedy Tod & Co., Hallgarten & Co., and A. Iselin
& Co.) undertook to underwrite the payment of the assessments on the
income bonds and stock, and to guarantee the extension or payment of
the improvement mortgage and Coal & Iron Company bonds, most of which
were to mature in the following two years. No great reduction of fixed
charges was of course to be expected. The cancellation of the floating
debt effected, nevertheless, a certain saving, so that charges for
the future were estimated at $9,300,000 as against net earnings of
$9,839,971 in 1894; while the refunding or extension of maturing bonds
was looked to for a reduction of $500,000.[275]

It is plain that this plan favored the general mortgage bondholders
to the last degree, and admitted them to the reorganized company with
absolutely no sacrifice save that of the addition of $4,000,000 to the
total general mortgage issue. They funded no coupons, they suffered
no diminution of interest and no shaving of principal; they paid no
assessment; and as an additional protection to them, the provision was
inserted that all classes of stock of the new company, except such
number as might be disposed of to qualify directors, were to be voted
by three voting trustees, of whom J. P. Morgan and F. P. Olcott were
designated in the plan. It has seldom happened in any reorganization
that a mortgage similar to the general mortgage in this case has been
able to take and hold so strong a position.[276] The secret lay in
the fact that the road had been earning the interest on the general
mortgage bonds; and that under these circumstances no interest or
combination of interests could force the holders to accept less than
payment in full of all their claims. The situation could never have
arisen in the earlier reorganization; it could never have occurred
where a reduction in annual payments was required for the salvation
of the property, or even where the amount of cash to be raised to pay
the floating debt was so large that junior securityholders would have
relinquished their holdings rather than pay the necessary assessments.
In this case none of these conditions existed, and all the burden
was thrown on the holders of junior mortgages and stock. It must be
remembered, also, that though in ordinary cases the difference between
the income bonds which the old first and second preference bondholders
surrendered and the preferred stock which they received would not have
been very great, yet here the provisions of the old income mortgage,
which forbade the deduction from net earnings of any interest on bonds
subsequently created until its interest should have been paid, rendered
the loss more serious.

To sum up, the holders of junior securities and stock paid the expenses
of reorganization, paid the floating debt, lost what right they had to
interest before the settlement of interest on subsequently created
claims, and got only stock, and for the most part second preferred or
common stock at that. The general mortgage bondholders got new 4 per
cent bonds, plus 12 per cent, or 2 per cent in cash, had no greater
interest charges ahead of them, and without paying any assessment or
making any concession, except to allow the immediate increase of the
amount of their issue by $4,000,000, and thereafter by $1,500,000 per
year, secured a lien on the assets of the company; a privilege which
was, moreover, extended to undeposited as well as to deposited bonds.
The company itself was dissolved, but the new corporation which took
over its assets enjoyed, with slightly decreased charges, freedom from
the old floating debt and from the extensions and combinations which
had caused the floating debt of the old management, and seemed besides
a strong financial backing.

In May, 1896, Judge Atchison of Philadelphia signed the decree for
the foreclosure and sale of the property of both the Railroad and the
Coal & Iron Companies, and on September 23 the sale took place, C. H.
Coster, of J. P. Morgan & Co., and Francis Lynde Stetson paying an
aggregate of $20,500,000 for the whole estate.[277] The sale ended
the life of the old Reading charter; and in view of the constitution
adopted for the state of Pennsylvania in 1871, which forbade any
railroad owning more than 30,000 acres of coal land, some device had
to be sought whereby the Philadelphia & Reading Railroad and the
Philadelphia & Reading Coal & Iron Companies could hold together.
Diligent search revealed the existence of the “National Company,” a
corporation chartered in 1871 by special act of the legislature of
Pennsylvania at the very time when the new constitution was under
consideration. This company, originally the Excelsior Enterprise
Company, had power “to purchase, improve, use, and dispose of property
to contractors and others and for other purposes,” with privileges
fully as broad, it was said, as those enjoyed by the Reading before
foreclosure.[278] The National Company now changed its name to the
Reading Company, called a special meeting, increased its stock to
the amount required by the plan of reorganization, and, jointly with
the Coal & Iron Company, authorized a mortgage to secure bonds up to
a possible amount of $135,000,000; to be secured on the property of
both companies, including the stock and bonds of the Railway Company.
Meanwhile the Philadelphia & Reading Railway Company had been organized
to succeed to the property and franchises of the old Philadelphia &
Reading Railroad Company,[279] with a capital stock of $20,000,000 in
$50 shares. The charter of the Coal & Iron Company was preserved in
spite of the foreclosure sale.[280] The next step was for the Reading
Company to exchange its bonds and stock for the general mortgage bonds
and stock of the two minor companies in the proportions already agreed
upon, and to deposit the securities so obtained in its treasury;
leaving the prior liens the only direct obligations of either company
in the hands of the public. This meant, of course, absolute control
of both companies by the Reading Company; and in the future, when
the prior liens should mature, it was to mean the replacement of all
outstanding obligations by the obligations of the holding company.
Both the Railway and the Coal & Iron Companies retained their separate
organizations; the belief was that there was no merger which might be
attacked before the courts; that it only happened that one corporate
individual had invested in both Railroad and Coal Company shares and
proposed to vote this stock, as was lawful, to further the policies of
which it approved.[281]

Representatives of the reorganization managers laid an elaborate
defence of the legality of these operations before Attorney-General
McCormick of Pennsylvania, and on January 2 secured an opinion
confirming the validity of the charter of the Reading Company. “After
due consideration,” said Mr. McCormick, “I reach the conclusion,
most reluctantly, that the Commonwealth of Pennsylvania cannot now
successfully attack the chartered rights of the Reading Company.... My
view of the whole matter is that the charter of the company authorized
it to do the kind of business in which it engaged prior to January 1,
1874, which business was of the same general character as that in which
it proposes to engage for the purpose of controlling the stocks of the
Railway Company and the Coal & Iron Company.”[282]

Like the Baltimore & Ohio and the Erie, the Reading has benefited
largely from the favorable business conditions of the last decade.
The combined income of the three Reading companies has grown from
$48,422,971 in 1898 to $95,715,088 in 1907.[283] Earnings on the
Philadelphia & Reading Railway alone are now nearly as great as the
combined income of the three companies at the earlier date. Net
receipts were $13,586,710 in 1898 and $29,190,316 in 1907; and the
surplus over all payments rose from $1,376,420 to $8,741,454 between
those years. It is important to notice that this showing does not
depend primarily upon the anthracite business. Not only has the
carriage of general merchandise increased until it affords to the
railway a return almost equal to the earnings on coal, but in the coal
business itself bituminous has assumed an importance nearly as great
as that of its harder rival. The Coal & Iron Company still concerns
itself almost entirely with anthracite, and has accordingly been more
affected by special causes. The strike of the miners in September
and October, 1900, and again from May to October, 1902, checked the
growth in production for a time; but the increased demand for domestic
consumption has made possible an increase in output from 4,849,002
tons in 1897 to 10,034,713 in 1907. Increasing business has stimulated
improvements. Over $15,300,000 have been withdrawn from income by the
Philadelphia & Reading Railway Company for this purpose between 1896
and 1907; and over $10,000,000 have been invested from earnings by
the Coal & Iron Company during the same time in colliery improvements
alone. Maintenance charges have been ample. Whereas $1300 to $1500
per mile of single main track are sufficient for normal repairs upon
a trunk line, the Philadelphia & Reading Railway has spent over $2600
per mile of line for the last seven years, and over $1700 for the three
years preceding. As much as $73 has been spent in a single year for
average maintenance per freight car, $609 in maintenance per passenger
car, and $3244 in maintenance per locomotive. In consequence of these
repairs and of renewals upon a considerable scale, the average value of
all locomotives has increased between December 1, 1896, and June 30,
1906, from $4906 to $8393; the average value of freight cars producing
revenue from $383 to $622; the average value of steam colliers and tugs
from $41,533 to $55,451; and the average value of barges from $7930 to
$21,074. The average freight train load was 194 tons in 1897 and 403
tons in 1907. Ton-mileage has increased during the period 159 per cent
and freight train mileage only 27 per cent.

It is true that no great sums have been spent from capital account.
$5,137,825 in car trust certificates were outstanding on June 30,
1907, and $5,608,000 in general mortgage bonds have been sold and
the proceeds invested principally in new equipment, but this is all.
Improvements have been made mainly from earnings, and fixed charges
have not had to be increased. In fact, the voting trustees stated at
the expiration of their trusteeship in 1904 that, eliminating the fixed
charges created since December 1, 1896, on account of the acquisition
of additional properties and interest upon the additional mortgage
bonds issued for the purchase of equipment, the fixed charges of the
Reading system were $1,018,065 less for the fiscal year ended June 30,
1904, than they were for the fiscal year ended November 30, 1896.[284]

It thus comes about that the finances of the Reading, while not as
secure as could be desired, are yet in better shape than they have been
for thirty years. Fixed charges, taxes, and operating expenses[285]
took 86 per cent of gross income in 1907, but a decline of nearly
$12,000,000 in net earnings must precede a default on any bonds
outstanding. To this margin should be added the considerable amount
by which maintenance expenses now surpass normal figures. An initial
dividend was declared on the Reading Company first preferred stock in
August, 1900; on its second preferred in October, 1903; and on its
common in February, 1905. Four per cent is now being paid upon all
classes of stock.

Large amounts of Reading stock are held by the Baltimore & Ohio and by
the Lake Shore. The Reading has again bought control of the Central
of New Jersey, and owns besides a steamship line and something under
500 miles in other subsidiary roads. Its large earnings, its troubles
with its mine employees, its influence over the supply of a necessity
of life, and the possibility of discrimination which its control of
both railroad and coal properties affords, have made it a target for
legislative attack from state and national governments. Action was
begun by the Department of Justice in 1907 to dissolve the merger
between the Reading and the Central of New Jersey. In June of the
previous year the so-called “commodity clause” of the Hepburn Act
forbade any railroad company to transport in interstate commerce any
article except timber and the manufactured products thereof which it
should have produced, or in which it should have any interest, except
those products necessary and intended for its own use in its business
as common carrier. The legality of the Reading’s position in these
matters is yet to be decided by the courts. The student may well doubt
whether legislative action will ever succeed in preventing the common
ownership of the Reading railroad and mining interests. What is more
probable is that a strict governmental control will come to be imposed.
Against this proper development no appeal to legal technicalities will
avail.



CHAPTER V

THE SOUTHERN

  Richmond & Danville—East Tennessee, Virginia & Georgia—Formation
    of the Southern Railway Security Company—Growth and Combinations
    —Failure and reorganization of the East Tennessee—Reversal of
    position between the Richmond & Danville and the Richmond & West
    Point Terminal—Acquisition of the Central of Georgia—Failure and
    reorganization of the whole system—Subsequent development.


At the present time there are in the South five great railway systems:
the Atlantic Coast Line; the Seaboard Air Line; the Southern Railway;
the Louisville & Nashville Railroad; and the Illinois Central Railroad,
which cover, in the order named, the territory between the Atlantic
Ocean and the Mississippi River.

The backbone of the Southern Railway is formed by the old Richmond &
Danville and East Tennessee, Virginia & Georgia companies: of which the
first formerly stretched with its subsidiary lines from Washington and
Richmond on the north to Atlanta, Georgia, and Greenville, Mississippi,
on the south and west; and the second reached from Bristol, Tennessee,
in a great half circle to the ocean at Brunswick, Georgia, and by means
of the Mobile & Birmingham straight to the Gulf at Mobile.

The Richmond & Danville was opened in 1856 between Richmond and
Danville, Virginia. It was largely aided by the state of Virginia.
Three-fifths of its stock were owned by the state in 1867, there was a
state loan of $400,000, and a state guarantee of $200,000 besides.[286]
In natural consequence the state elected three of the six directors.
It was not long, however, before the state was able to relieve itself
of a large part of its investment. On the 31st of August, 1871, all
of the state shares were taken over by the Pennsylvania Railroad
Company.[287] The money sunk in the company’s bonds still remained.
From Danville the Richmond & Danville steadily pushed south in the
years following 1856. Under the leadership of the Pennsylvania it
became its ambition to open direct rail communication from the great
Northern cities to the heart of North and South Carolina and Georgia.
To obtain a ninety-mile extension to Charlotte the company leased
the North Carolina Railroad, 223 miles in length.[287] To get into
Atlanta it allied itself with the Atlanta & Richmond Air Line Company,
projected to construct a line between Atlanta and Charlotte.[288] In
1878 it bought a controlling interest in the Charlotte, Columbia &
Augusta Railroad and secured entrance to the latter city.[289] The
Pennsylvania aided the new enterprise by advances from time to time,
and when the current liabilities became unmanageable took $1,000,000 of
a new refunding mortgage.[290]

Meanwhile the East Tennessee, Virginia & Georgia Railroad had been
established to the west of the Richmond & Danville, in the heart of
the southern Appalachians.[291] This company was a consolidation in
1869 of the East Tennessee & Virginia Railroad, from Bristol, on the
boundary between Virginia and Tennessee, to Knoxville, Tennessee; and
the East Tennessee & Georgia Railroad, from Knoxville, Tennessee, to
Dalton, Georgia. Both roads were aided by the state of Tennessee. In
1870, however, the new company extinguished its debt to the state by
the payment of $4,117,761 in state bonds. Not long after the completion
of its line from Bristol to Dalton, the East Tennessee fell under the
control of the Pennsylvania Railroad, which already dominated its
neighbor to the east. To facilitate the control and to unify the
interests of the Pennsylvania south of Washington a “Southern Railway
Security Company” was formed, with a capital of $5,000,000. This
company was entrusted with a majority of the stock of the Richmond &
Danville and of the East Tennessee. It also controlled the Coast Line
railroads from Richmond to Charleston, and the Memphis & Charleston
from Chattanooga to Memphis.[292] Unfortunately the financial results
of the combination were disappointing. Of the subsidiary roads the East
Tennessee managed to pay at least 3 per cent on its capital stock from
1872 to 1876; but the Richmond & Danville paid nothing, the Coast Lines
nothing, and the Memphis & Charleston barely earned the 3 per cent
guaranteed under its lease. In 1873, therefore, a special meeting was
held at the office of the Southern Railway Security Company to consider
the propriety of making sale of certain properties of the company.[293]
In 1874 the lease of the Memphis & Charleston was surrendered,[294]
and in 1876 the bulk of the securities held, outside of the Richmond &
Danville stock, were disposed of.[295]

The retirement of the Southern Railway Security Company marked the
beginning of the withdrawal of the Pennsylvania from investment in
the South. For the rest, it left the lines north of South Carolina
in three main competing groups. There were the Coast Lines from
Richmond south, the Richmond & Danville, and the East Tennessee,
Virginia & Georgia properties. And stretching from west to east was
the Memphis & Charleston, which was already in financial difficulties
of a serious nature. All three of these groups were now thrown upon
their own resources; and two of them, at least, took vigorous measures
in self-protection. The policy of the East Tennessee was the most
aggressive. Shut up in the narrow valley between the Clinch and the
Great Smoky Mountains, and flanked by hostile roads, it conceived it
to be necessary for it to acquire connections to the south, to the
east, and to the west. Accordingly, it leased the Memphis & Charleston
in 1877 and obtained an outlet upon the Mississippi River.[296] In
1878 it bought the Georgia Southern and the Selma, Rome & Dalton
and provided itself with a line as far south as the Flint River in
Alabama.[297] In 1881 it bought the Alabama Central, extending some 96
miles west from Selma. The same year it secured control of the Macon
& Brunswick in Georgia, and began construction from Macon to Rome to
complete a line to the South Atlantic coast.[298] In the north it made
an alliance with the Norfolk & Western, which opened that company’s
line from Bristol to Norfolk,[299] and arranged with the Louisville &
Nashville and the Kentucky Central for construction to a connection at
the Kentucky-Tennessee state line which should open to it the business
of the Central West.[300]

The Richmond & Danville fell under the control of a group of
capitalists who already controlled the Atlantic Coast lines and held an
interest in the East Tennessee, and who now bought the 24,000 shares
of Danville stock still held by the Pennsylvania Railroad.[301] Like
its rival, it enlarged its system. It leased the Atlanta & Charlotte
Air Line in 1881,[302] with certain minor roads in the Carolinas and in
Georgia. In 1882, under the charter of the Georgia Pacific, it began
construction westward from Atlanta to the Mississippi. It did not
stretch out, as did the East Tennessee, but it secured a very complete
control of the territory between Richmond in the north and Augusta,
Savannah, and Atlanta in the south. In 1881, also, the Richmond &
Danville took a step destined to have important consequences. Since
it desired to acquire certain railroads, and since its charter
allowed it to hold stock in none but connecting lines, it caused to
be incorporated a so-called Richmond & West Point Terminal Railway
& Warehouse Company, with authority to acquire stocks and bonds of
railroad companies in North Carolina, South Carolina, Tennessee,
Kentucky, Georgia, Alabama, Mississippi, and other states. This
company increased its stock by October, 1881, to $3,000,000; of which
the Richmond & Danville then owned $1,510,000. The most important
acquisition which it made at the time was the Virginia Midland Railway,
from Alexandria, Virginia, to Danville; but other additions were to
follow.

The independent action of the Danville and East Tennessee companies
was followed by a new consolidation which reunited most of the lines
dominated by the old Security Company. In response to queries in
August, 1883, Mr. Calvin S. Brice admitted that a syndicate in which he
was interested had bought control of the Richmond & Danville.

“We have secured,” said he, “about 28,000 of the 50,000 shares of stock
issued by the Richmond & Danville Company. Our syndicate controls,
besides our new purchase, the East Tennessee, Virginia & Georgia
Railway and the Chesapeake & York River line of steamers that ply
between West Point, on the Chesapeake, and Baltimore, and has close
traffic arrangements with the Clyde steamers, which run between New
York and Philadelphia and all Southern points. Our purpose is to
confine all our railroad and steamship lines under one management, and
to equip and operate the system in the best possible manner.”[303]

It appears from this statement that the capitalists who controlled the
East Tennessee now again consolidated with the leading interests of
the Richmond & Danville and lines east, albeit changes in personnel
and transfers of holdings occurred. Return to the old combination was
made desirable by the more intimate connection of the two groups of
roads. The Western North Carolina had been opened across the mountains
of North Carolina in 1882. This had made practicable the diversion of
the western traffic of the East Tennessee from the Norfolk & Western
to the Richmond & Danville; a traffic which the northern connections
of the East Tennessee promised largely to increase. Consolidation
was doubtless also prompted by the desire to save the East Tennessee
from serious financial difficulty which threatened it. It had become
apparent that this company, at least, had severely taxed its strength
in the rapid extension of mileage which had followed 1876. Before that
time its position had been secure. It had possessed a monopoly of the
somewhat limited local traffic between Chattanooga and Bristol, and had
formed part of the most direct route between New York, Philadelphia,
Baltimore, and Washington, and towns in Tennessee, Northern Alabama,
and Mississippi. Its extensions had changed the situation. They had
brought it into touch with the Mississippi River and the Atlantic
Ocean, and had increased its fighting power; but they had also endowed
it at large cost with a group of poorly equipped, unprofitable lines
located in a keenly competitive territory. The Selma, Rome & Dalton had
been purchased just after a foreclosure sale. The Macon & Brunswick had
never been able to earn much more than working expenses. The Alabama
Central had not seen fit to publish its financial figures after 1878,
while the Memphis & Charleston, as we have seen, had turned to the East
Tennessee only to escape bankruptcy.

The East Tennessee had hoped to make profitable the lines which it had
so rapidly acquired. Unfortunately the company was poorly equipped for
such a task. Its finance had been extravagant. In 1875, on 269 miles
of lines there had been $7317 in stock and $15,620 in bonds per mile.
In 1883 the mortgage bonds and car trusts outstanding per mile owned
amounted to $23,444, the income bonds to $15,404, and the capital stock
to $41,079. A grand total of $79,927 as compared with the $22,937 of
eight years earlier, and an average of almost $100,000 in securities
per mile of new line acquired! Ninety-nine per cent of net income
was being absorbed in paying interest on all classes of securities,
although maintenance figures were kept as low as $630 per mile of line.
This large volume of stocks and bonds made improvement from earnings
impossible, and prevented conservative management by taking from the
stockholders any chance of dividends, and by reducing the quotations of
common stock to less than $5 per share. And though in some respects
the location of the system was good, the route which it offered to much
of its business was indirect, the competition which it had to meet was
severe, and its Atlantic terminal, Brunswick, was of small importance
compared with the thriving cities of Savannah and Norfolk. The result
was a failure to secure the gains from consolidation which had been
expected. Surplus earnings were continuously small, and current bills
were left to run; until by 1883 the floating debt had become so large
that an issue of $1,200,000 in debenture bonds was required to take
care of it.

The failure of the East Tennessee to weld its connections into an
efficient transportation system left it helpless in face of the panic
of 1884. Earnings fell off in that year, a directors’ committee was
appointed,[304] and the resulting report revealed a plain inability on
the part of the company to meet its charges.

  “The interest charges proper for the calendar year
    1885 are,” said the committee,                         $1,476,505.85

  “To this must be added the principal due on car trusts
    and debentures in 1885,                                   280,954.11
                                                           -------------
  “Or a total of                                           $1,757,459.96

  “The payments on similar account will be—
     in 1886,                                              $1,739,196.28
     in 1887,                                               1,720,932.60
     gradually decreasing until the debentures and car
     trusts being paid off in 1894, the total fixed
     charges for the year 1895 will be                     $1,295,970.00

  “The net revenue for the year 1883–4 was                  1,699,925.84

  “The net revenue for 1885 and 1886, allowing for the
    decrease in earnings following the panic, and
    supposing the road to be operated for 60 per cent,
    may be estimated at                                    $1,400,000.00

“This will leave,” said the committee, “an annual deficit of $350,000,
to which must be added a total of $1,000,000 required by the general
manager for steel rails, iron bridges, and other needed improvements.

“The sums for covering these expenses should not be raised by temporary
loans, as this would not relieve the company of its embarrassments
nor place its finances upon a sound footing. It cannot be raised by
an additional mortgage, on account of the provisions of the mortgage
securing the income bonds. It must and can be raised from a funding of
coupons which shall leave the earnings of the company sufficiently free
to meet the demands upon them. The committee therefore recommends:

(1) “That the holders of the consolidated 5 per cent bonds be asked
to fund four coupons, being those maturing January and July 1, 1885,
and January and July 1, 1886, by depositing said four coupons with the
Central Trust Company of New York, as trustee, and receiving instead
the company’s funded coupon bond dated July 1, 1885, and bearing 6 per
cent interest per annum from that date, ... which bond shall run ten
years from its date and be redeemable at the pleasure of the company at
par and accrued interest after three years, on three months’ notice;
such funded coupon bond to be secured by the coupons so deposited, the
lien of which will be in all respects preserved.

“The total extensions under this clause would be $1,467,400.

(2) “That the holders of the $2,000,000 of the Cincinnati & Georgia
Division first mortgage 6 per cent bonds be asked to fund four coupons,
... being those maturing March and September 1, 1885, and March and
September 1, 1886, ... and accepting in lieu thereof a funded coupon
bond ... dated September 1, 1885.

“The total amount extended under this clause would be $240,000.

(3) “That the holders of the debentures be asked to extend for ten
years such of the debentures as fall due during the years 1885 and
1886, and to accept similar debentures running from five to ten years,
for the interest....

“The total amount extended under this clause would be $373,200.

(4) “That an arrangement be made with the holders of the car trust
certificates of the company, series A, for an extension for ten years
of all the payments of principal falling due in 1885 and 1886, being
$100,000 in each year.

“The total amount extended under this clause would be $200,000.”[305]

The committee had an apology to offer for the state in which the
company was placed. “The actual cost of the 190 miles of the new roads
constructed by the company has largely exceeded,” said they, “the
estimated cost. The physical condition of the roads purchased by the
company necessitated the expenditure of large sums in the improvement
of roadway and track; the construction and reconstruction of bridge
masonry and bridge superstructure. The facilities for the conduct of
the company’s business were entirely inadequate to the requirements
of its increasing traffic and had to be enlarged. Unfortunately the
company did not fully provide for these expenditures, and the shrinkage
of the value of its securities greatly aggravated the evil.” This much
was very true. In its criticism of existing facilities the committee
was on sure ground. In its suggestions for relief it was less well
advised. It seems to have felt that the East Tennessee’s difficulties
were due to a temporary inability to raise cash for the improvement of
its roadbed and equipment, and that the suspension of certain charges
for a few years would allow the expenditure of liberal sums from
income, ensure the improvement of the road, and bring about a condition
of permanent prosperity. The truth was that the East Tennessee was
in too bad a shape to be reëstablished by such means. The heavily
burdened and physically defective lines which made up the system were
past being restored from income even with the aid of a funding of a
few years’ coupons. They required a definitive surrender of portions
of the claims against them, extensive new charges to capital account,
and a correspondingly complete reconstruction of their whole operating
plant.[306] The practical service which the committee rendered was
not in suggesting an adequate remedy for existing troubles, but in
making plain how serious these troubles were. So imminent, in fact, did
they show collapse to be, that the management determined to forestall
hostile action by themselves asking for the appointment of a receiver;
and on January 7 the Circuit Court appointed Henry Fink to that
position.[307] The committee’s funding scheme fell of its own weight.
The decrease in the earnings of the company, a truer appreciation of
its condition, and, it may be surmised, the influence of New York
banking houses, forced it to make room for a thorough plan of financial
reconstruction.

Action looking toward reorganization of the East Tennessee, Virginia &
Georgia began with the year 1886. In January Mr. Nelson Robinson,[308]
who had held proxies for a controlling stock interest at the
previous election, returned from Europe; and after a conference with
certain large bondholders agreed with them to draft a plan for the
reorganization of the property. A reorganization committee was chosen
from members of large banking firms,[309] meetings were held, and in
the first part of February, 1886, a scheme was put forth. This plan
comprised the following points:

(1) Reduction of fixed charges;

(2) Exchange of new bonds and preferred stock for old bonds;

(3) Assessment on the junior securities;

(4) Foreclosure.

Foreclosure was to take place under the consolidated mortgage. A new
5 per cent seventy-year consolidated mortgage was then to be created.
Enough of the bonds under this mortgage were to be reserved to retire
the liens prior to the existing consolidated mortgage as they should
mature, and the balance was to be used for taking up the outstanding
consolidated mortgage bonds, the Cincinnati & Georgia division bonds,
and the ten-year debentures. It was estimated that the exchanges would
reduce the annual interest charge from $1,757,460 to $994,737.[310]
This necessitated considerable demands upon old securityholders. Thus
the old consolidated mortgage bonds bearing 5 per cent received only
60 per cent of their face value in new consolidated bonds with the
same rate of interest; and the old 6 per cent Cincinnati & Georgia
division bonds received only 48 per cent in consols, besides suffering
a decrease in interest rate from 6 to 5 per cent. The difference was
made up by the allowance of preferred stock, to which, moreover, was
given the right for five years to elect a majority of the board of
directors, unless before that time the new company should have paid
out of its net earnings 5 per cent dividends on such preferred stock
for two full successive years. To the Cincinnati & Georgia division
bonds were given 62 per cent in new first preferred besides the 48
per cent in bonds,—a total of 110 per cent; upon which the yield in
prosperous times might exactly equal the yield on the securities which
they surrendered. To the consolidated bonds were given 50 per cent in
new first preferred, making possible a total return greater than that
which they had formerly enjoyed. For the debentures was made the same
provision as for the divisional bonds. In order that net earnings might
go first of all to the prior liens and to the above securities, new
second preferred and common stock was issued for the benefit of the old
income bonds and stock. Of these the income bonds received 100 per cent
in new second preferred; while the old preferred received 100 per cent
and the old common stock 40 per cent in new common. Only in return for
their assessments did the income bonds receive first preferred stock,
and even for their assessment the common stock took second preferred.
Cash assessments were 5 per cent on the income mortgage and 6 per cent
on the new common stock. This was expected to yield $2,475,000, which,
with a surplus of new securities in the treasury of $1,534,000, was
thought sufficient to liquidate outstanding car trusts and to provide
the company with a fund available for future use.[311]

The plan may be criticised in some respects. It made no adequate
provision for future capital requirements. Two millions and a half of
cash and two millions of securities were considerable sums in hand,
but of these over half a million was in the form of stock, and from
the rest had to be deducted at least a million and a half for the
liquidation of car trusts. This left, it is true, enough for existing
needs,[312] but it did not allow for constantly recurring and
legitimate demands for improvements out of capital in future years.
Moreover, the securities given for the consolidated, the Cincinnati
& Georgia division, and the debenture bonds exceeded by 10 per cent
the nominal value of the bonds retired by them. But on the whole the
reorganization plan was an excellent attempt to solve a difficult
problem. It proceeded on a sound principle, it laid the burden on the
proper parties, it avoided a funding of current liabilities, and even
in respect to the volume of securities outstanding it accomplished a
much needed reform by wiping out 60 per cent of the almost worthless
common stock.[313] It was accordingly accepted by the securityholders.
On March 18, the reorganization committee obtained a decree of
sale.[314] By May 1, practically all the consolidated and income bonds,
with a majority of the preferred stock, had assented;[315] and on May
25, 1886, the East Tennessee, Virginia & Georgia Railroad was sold
for $10,250,000 to a representative of the reorganization committee.
Previous to this the opposition committee, which had been formed by
the minority stockholders, had disbanded.[316] The final step was
the organization of the East Tennessee, Virginia & Georgia Railway,
which on July 1 took over the title to the East Tennessee, Virginia &
Georgia Railroad and branches, a controlling interest in the stock of
the Knoxville & Ohio, and a controlling interest in the stock of the
Memphis & Charleston Railroad Company.[317]

During this time the Richmond & Danville had not been standing still.
It will be remembered that in 1883 the capitalists who dominated the
East Tennessee and the Coast Lines had purchased a controlling interest
in this company, with the purpose, according to Mr. Brice, of confining
all their railroad and steamship lines under one management and of
operating the system in the best possible manner. These gentlemen
had found the earnings of the Richmond & Danville sufficiently
unsatisfactory and the need for improvements sufficiently great to
lead them to pass the interest on its debenture bonds in October,
1883. The net earnings for 1882, out of which this dividend would have
been paid, they found had been fully taken up by the fixed charges
and the expenses for new equipment and betterments. The net earnings
for 1883 they believed sure to show large gains, but still not likely
to be equal to necessary expenditures.[318] Strict economy was to be
the order of the day. In the three previous years the company had
accumulated a large floating debt. This the new management reduced
more than one-half by the end of 1885. The funded debt it allowed to
increase largely, but the earnings it managed somewhat to improve. In
general, however, it secured no very striking gains. Union in interest
with the East Tennessee and the Coast Lines modified the severity of
competition, but the panic of 1884 checked business, and the real
saving in operating cost was very slight.[319]

In their search for means to reduce expenses the owners of the Richmond
& Danville came across the Richmond & West Point Terminal Company.
By 1884 this company was in peaceful possession of 1815.8 miles of
railroad, which included all the important branches of the Richmond
& Danville except the North Carolina Railroad, from Goldsboro to
Charlotte, and the Atlanta & Charlotte Air Line, from Charlotte to
Atlanta. It had been obliged to issue notes to retire its floating debt
in 1883,[320] but had no earnings apart from dividends on the stock
which it held, and no expenses other than its cost of administration
and the interest on the notes above mentioned and on its floating debt.
There was a possibility, nevertheless, that the maintenance of the
company involved the Richmond & Danville in unnecessary outlay, and
caused a certain loss of efficiency through indirectness of control.
The Terminal Company had originally been necessary because the Richmond
& Danville could by its charter hold stock in none but connecting
lines. By 1885 this prohibition had been removed, and there was open an
opportunity to consolidate the system.

Early in 1886 the directors of the Richmond & Danville appointed a
committee to report a plan of union with the Richmond & West Point
Terminal.[321] Apparently this committee recommended the elimination
of the Terminal Company; for in April it was known that the Richmond
& Danville was trying to buy from the Terminal the stock of certain
of the more important branches which it had formerly controlled.[322]
In that month the Richmond & Danville leased the Virginia Midland
Railway[323] and the Western North Carolina; in May it took over the
Charlotte, Columbia & Augusta and the Columbia & Greenville; in June
the Northeastern of Georgia; and in October the Washington, Ohio &
Western, or a total of 1483 miles out of the 1839 held by the central
corporation.[324] At the same time the Richmond & Danville transferred
into its own treasury $13,617,400 in stock and bonds of subsidiary
companies, giving in return 25,000 shares of the Terminal’s own stock,
and a guarantee of the Virginia Midland’s general mortgage bonds. This
done, the Danville Railroad threw the rest of its holdings of Terminal
stock upon the market; where they were bought by investors who knew
nothing of the above transactions. The operation left the Terminal
high and dry. It was of no further use to the Richmond & Danville, for
that company had made arrangements with its branch lines direct; and
it could not launch upon an independent existence, because the greater
part of its mileage was in its rival’s hands.

Fortunately for the small Terminal holders it so happened that men
of large wealth and resourcefulness were interested with them. Under
the leadership of these capitalists the Terminal Company began in its
turn the purchase of Danville stock. It may have been that the East
Tennessee group who had acquired a majority in 1883 had meantime parted
with their holdings, or members of that syndicate may have sold in 1886
to take advantage of a favorable price.[325] At any rate, 25,000 shares
were rapidly acquired, and the control of the company obtained. This
done the new Terminal interests turned to the East Tennessee, Virginia
& Georgia. Negotiations were at once begun, and culminated in an
agreement in 1887 by which the Brice-Thomas group sold 65,000 shares of
East Tennessee first preferred for $4,000,000 in cash and 50,000 shares
of new Terminal common. Since the Tennessee first preferred elected a
majority of the directors this ensured control. At the same time the
Richmond Terminal provided for its floating debt, and for the purchase
of the balance of the Richmond & Danville shares outstanding.[326]

Thus was the Richmond & West Point Terminal Company saved, and the
principal railroads east and west of the southern Appalachians still
kept under common control. The new grouping was weaker than the old,
however, in that it did not include the Coast Line railroads. It was
also imperfect as regards the nature of the control possessed over the
East Tennessee, Virginia & Georgia. It has been said that the Richmond
Terminal held a majority of the first preferred stock of this latter
road.[327] By the terms of the Tennessee reorganization of 1886 this
stock was to have the right for five years to elect a majority of the
directors, unless before that time it should have received 5 per cent
dividends for two successive years. This gave control to the Terminal
Company; but it plainly made a control precarious which rested, as this
did, on ownership of first preferred alone. In 1887 4 per cent was paid
in dividends, and in 1888 5 per cent. In 1888, accordingly, a lease
was drawn up, and the Richmond & Danville took the operation of the
road for ninety-nine years. For four years it agreed to pay over 33⅓
per cent of the gross earnings; for five years more 35 per cent; and
so on until 37 per cent should be reached. And, further, it guaranteed
that the percentage allowed should be sufficient to pay all the East
Tennessee’s fixed charges, including 5 per cent annually on the first
preferred shares outstanding.[328]

It cannot be denied that the ethics of the Tennessee’s lease were
questionable. The East Tennessee reorganization had invested the
first preferred stock of that company with temporary authority. To
use this to bind the property for years to come was neither fair to
the other stockholders, nor in accordance with the spirit of the
reorganization plan. We need not, therefore, be surprised at the prompt
application for an injunction and for the appointment of a receiver
which occurred.[329] In a circular to the second preferred and junior
stockholders the opponents of the lease urged that its consummation
would constitute an abuse of power on the part of the existing
board; that it was entirely in the interests of the first preferred
stockholders; that under no circumstances could the junior stockholders
derive any income from the lease; that it failed to provide other
safeguards and was in many respects improvident and imperfect. In one
suit before State Chancellor Gibson at Knoxville, Tennessee, emphasis
was laid on the statutory prohibition of the consolidation of competing
lines. In another, petition was even made that the holders of the first
preferred stock be enjoined from electing a majority of the board of
directors at the approaching meeting.[330] Chancellor Gibson handed
down two vigorous opinions. He refused to enjoin the voting of the
first preferred stock, on the ground that the plaintiffs had been in
possession for two years of stock certificates which bore on their face
the conditions and agreements under which they were issued, and that
the complaint was not justified, either in law or equity.[331] But he
held that the East Tennessee had no power under its charter to lease
its road as it had done; that the combination of the East Tennessee and
the Richmond & Danville was forbidden by the law of Tennessee against
the consolidation of competing lines; and that similar prohibitions in
the laws and constitution of Georgia were so stringent as to imperil
the East Tennessee’s charter in case the lease should be carried
through.[332] This effectually checked the lease. After Chancellor
Gibson’s first opinion the East Tennessee election had been held and
the arrangement with the Richmond & Danville approved.[333] After
his second the lease was cancelled, and the management of the East
Tennessee restored to its own officers.[334] The Richmond Terminal
was still left in control of the property. It was forced, however, to
secure a majority of all the East Tennessee stock outstanding if it
wished to make its control permanent, and it was prevented from using
the power temporarily given a section of the stock to bring about a
ninety-nine-year arrangement distasteful to the majority.

Master of the Richmond & Danville, the East Tennessee, and their allied
lines, the Richmond Terminal now took one step further; it acquired
the Central Railroad & Banking Company of Georgia. The importance of
this was very great. The Central Company owned the most considerable of
the lines in Georgia and Eastern Alabama. It stretched from Savannah
and Port Royal on the Atlantic coast to Spartanburg, South Carolina,
on the north; to Atlanta, Birmingham, and Montgomery on the west; and
to Albany, Georgia, and to Columbia on the south. Its system had been
formed by a consolidation in 1872 of the Central Railroad from Savannah
to Macon with the Macon & Western from Macon to Atlanta,[335] and was
compact, ably managed, and profitable. Previous to June, 1847, the
Central Railroad Company had paid seven dividends aggregating 10.68
per cent. From June, 1847, to June, 1889, the Central Railroad and
the Central Railroad & Banking Company which succeeded it, had paid
seventy-five dividends aggregating 337.5 per cent,[336] besides stock
dividends of 8 per cent in 1854 and 12 per cent in 1861, and a dividend
of 40 per cent in certificates of indebtedness in 1881. It was paying
8 per cent in 1888 when the Richmond & Danville was paying 5, and the
East Tennessee was congratulating itself on the 5 per cent which it was
able to turn over to its first preferred stock.[337]

So fruitful a piece of railroad property was naturally looked on as
desirable, especially since its acquisition was to free the East
Tennessee from one of its most dangerous competitors. From a traffic
point of view, nevertheless, the advantages of a consolidation were
doubtful. The local business of the Central was likely to be little
increased by a merger. The through business was in danger of being
decreased. The Central lines ran on the whole east and west. It was to
their interest to carry freight from Georgia, Alabama, and the West to
Savannah, and thence to send it north by way of the Ocean Steamship
Company which they controlled, and from which they obtained in 1889
one-fifth of their total net earnings; while the Richmond Terminal’s
interest was to send this traffic north by land so as to secure for
its own railroads the long haul. The advantages to the Terminal of a
union depended on the price at which the Central Railroad could be
acquired. The purchase was made, and the price was a high one. And this
price was paid, it was freely charged, not in pursuance of an honest
though mistaken judgment, but in order to allow a large personal gain
to individual capitalists who were interested in both the Central and
the Terminal Companies.

Among the most prominent owners of Central of Georgia stock at this
time were members of the Logan-Rice group of financiers, who had begun
to accumulate holdings at least as early as 1886. The average price
which these parties paid was later estimated at 130, and their holdings
were apparently secured with a view to resale at a higher figure. At
any rate, when 40,000 shares had been purchased, a double operation
was put through. The shares bought were turned over, with $400,000
cash, to a newly formed “Georgia Company,” and for them $4,000,000 in
5 per cent trust bonds and $12,000,000 in Georgia Company stock were
received in exchange. And, second, a vigorous campaign was entered upon
to secure control of the Richmond Terminal. Sully resigned the Terminal
presidency in April. For his vacant place the Logan-Rice people
offered General Alexander of the Central of Georgia, and the Terminal
management supported John H. Inman. The struggle which ensued was most
extraordinary. The existing board of directors charged the Central
group with trying to unload their Georgia Company’s stock upon the
Terminal system; and the Logan-Rice party insinuated that the purchase
of the East Tennessee Railroad had been the occasion of fraudulent
profits to the Terminal directors.[338]

“We understand,” declared the directors, “that a majority of the
names thus far proposed by the parties soliciting proxies to be cast
for directors and president of this company are gentlemen who are
well known to be the owners of a majority of the stock of the Georgia
Company, which owns railroads whose business and interests are at
all points of our system in competition with and antagonistic to the
business and interests of this Company; any diversion of traffic,
or exercise of influence favorable to the Georgia Company at the
numerous competitive points would work incalculable injury to your
prosperity.... If on the other hand the preponderance of the Georgia
Company’s interest in this Company should result in a sale to and
purchase by your Company of the Georgia Company stock owned by these
gentlemen, it would necessitate the issue of many millions of your
common stock, or some kind of obligation taking precedence of that
stock, the effect of which upon the value of your property you are
fully competent to judge.”[339]

The general election of the Terminal was held on May 31, and Mr. Inman
was elected president for the remainder of the unexpired term.[340]
The Rice party was apparently overwhelmingly defeated. In reality its
activity and the presence of its friends in the councils of the victors
resulted in the successful sale of the Georgia Company securities. In
October, 1888, little over five months after the directors’ circular
of April 6, the Richmond Terminal took over the Georgia Company stock
at $35 a share and allowed its owners to withdraw successfully from
their speculation. Subsequently it also took the Georgia Company bonds
from the bankers who had purchased them.[341] This left Inman, Hollins,
and the rest a profit of $60 a share on their original investment. It
meant for the Richmond Terminal a direct annual loss which there was
very little prospect of making good. To provide for the $4,000,000
in bonds and the 120,000 shares of stock acquired, this latter issued
approximately $8,200,000 of 5 per cent collateral bonds bearing
an annual interest charge of $410,000. Now both the stock and the
$4,000,000 of bonds were a lien on 40,000 shares of Central of Georgia
stock and depended altogether upon the dividends declared on these by
the Central Company. The Central never paid over 8 per cent, or a total
of $320,000 on 40,000 shares. The difference between this and $410,000,
or $90,000, constituted a direct loss which the Terminal pledged itself
to meet each year. If the victory of the friends of the company in May
is to be considered a genuine one, one wonders what price the owners of
the Georgia Company would have charged had the election gone the other
way.

With the Central of Georgia, the East Tennessee, and the Richmond
& Danville under its control the Richmond Terminal could look for
still further extension. In 1890 it acquired control of the Erlanger
group of roads from Cincinnati in the north to Chattanooga, thence
to Meridian, Mississippi, thence to Vicksburg, Mississippi, and to
Shreveport, Louisiana. At the same time it took in the Louisville
Southern, which joined Louisville with the Cincinnati lines.[342] In
1888 the Richmond & Danville had concluded a close alliance with the
Atlantic Coast Line,[343] and arrangements had been made for terminal
facilities at Norfolk.[344] In 1889 it leased the Georgia Pacific, and
two years later, when this road reached Arkansas City, it executed a
traffic agreement with the Missouri Pacific.[345] In 1891 the Georgia
Pacific leased the Central Railroad & Banking Company of Georgia
for ninety-nine years at 7 per cent on its capital stock.[346] This
immensely improved the connection of the East Tennessee with the
North and West, did away with the competition of a parallel line, and
afforded another outlet upon the Mississippi.

Here, then, was the Richmond Terminal system in 1890. Three great north
and south lines: one from Cincinnati through Birmingham to York, over
the Erlanger system; one from Bristol through Rome to Selma, over the
East Tennessee, Virginia & Georgia; and one from Alexandria and West
Point through Danville, Charlotte, and Atlanta to Montgomery. One of
these took business from Indiana, Illinois, and the North and Central
West; one from Baltimore, Philadelphia, and the East; one from both
West and East; and all three opened upon the Gulf over the Mobile &
Birmingham to Mobile. In addition, three parallel east and west lines:
from Chattanooga to Memphis, from Birmingham to Arkansas City, and from
Meridian to Shreveport in Alabama; outlets on the Atlantic coast at
Charleston, Port Royal, Savannah, and Brunswick; and dominance of the
local traffic of the whole territory east of Alabama, south of Kentucky
and Tennessee, and north of Florida. It was by all odds the leading
system in the South. It had a mileage of 8558.5 as compared with the
2383.4 of the Louisville & Nashville, and gross earnings, exclusive of
the Erlanger lines, of $41,361,095, or more than twice those of its
greatest competitor.

And yet, for all its size, the Terminal group was perilously near
collapse. Its physical condition was poor and much of its mileage was
unprofitable; its capitalization was tainted with dishonesty; and the
legality of its recent combinations had not been tested in the courts.
Let us quote from the results of an examination made by a well-known
banking firm three years later.

“While in a general way the _main lines_ of the Richmond & Danville
[West Point and Alexandria to Atlanta],” said this firm in its report,
“are in fair condition—better than those of the East Tennessee,
excepting parts of its main line between Bristol and Chattanooga, the
Cincinnati, New Orleans & Texas Pacific, and the Alabama Great Southern—
nearly all the rail in both systems is too light (50 to 60 lbs. while
on the main lines it should be 70 to 75 lbs.), many of the trestles
need renewing, and a large number of the bridges, principally on the
East Tennessee system, are not sufficiently strong to warrant the
use of heavy engines, which are essential to hauling long trains and
operating with economy. To a very large extent ballast is altogether
lacking or insufficient in quantity. Excepting that portion of the
equipment represented by equipment bonds or notes, the engines and cars
are generally small and weak and unsuitable for main-line service, and
are also insufficient in quantity for any considerable enlargement of
business. Other appointments, such as shops, yards, etc., are, with but
few exceptions, crude and uneconomical.

“On the branches and secondary lines, especially those of the Richmond
& Danville system, the condition is even worse, little or no effort
having been made to maintain them at proper standard, even for a
moderate traffic. About 700 miles of the Richmond & Danville secondary
lines and branches (including about 200 miles of narrow-gauge lines)
are still laid with _iron rails_. On July 1st, 1892, there were 72
miles of iron rails in the _main_ lines of the East Tennessee.

“An expenditure of several million dollars should be promptly made on
these properties for equipment alone, but it is no use to do so, even
if it were possible, unless additional track and yard facilities are
also provided, nor unless such enlargements of engine and car shops be
made as will permit of the equipment being kept in order.”[347]

This verdict was only reinforced by the characterization in detail of
a number of the subsidiary lines. Thus the Columbia & Greenville was
termed “a collection of weak lines of constantly decreasing value”;
the Mobile & Birmingham “of no value whatever to the East Tennessee”;
and the Memphis & Charleston “valuable, but in a condition totally
unsuited to modern requirements.” How the capitalization of the system
was tainted with fraud has already been pointed out. The legality
of the recent combinations had not been tested in the courts. In
January, 1889, counsel for certain unnamed parties had a plea for a
_quo warranto_ presented to the Attorney-General of Virginia.[348]
The petition alleged that the purchase of the control of the East
Tennessee, Virginia & Georgia Railway and of the Virginia Midland was
an abuse of the powers of the Richmond & West Point Terminal ... a
violation of public policy, and an usurpation to the great damage and
prejudice of the constitution and laws of Virginia. This petition the
Attorney-General dismissed on technical grounds. The legality of the
various mergers was soon, however, to be attacked again, and in 1889
the question was decidedly unsettled.[349]

The storm broke in August, 1891. On the eighth of that month the New
York _Herald_ published a vigorous onslaught upon the company. It
maintained that the Richmond & Danville system had failed to earn its
fixed charges by $526,560 in the year ending 1890; that this fact had
been concealed by deceptive or false entries on the books which made a
fictitious profit emerge by covering up the losses on auxiliary lines;
that the 8 per cent dividends which had been paid on the Central of
Georgia had not of late years been earned, and that the price paid for
the Georgia Central stock had been grossly excessive; that the East
Tennessee was just about paying its way; and, finally, that the other
recent acquisitions were either just paying their way or were showing
annual deficits.[350] Color was given to the charges by the trouble
caused by the floating debt. Though denied by the officials of the
company, the sale of 2000 shares of Baltimore & Ohio stock held in the
Terminal treasury;[351] the negotiation of a short time loan at 6 per
cent and 2½ per cent commission for the Central of Georgia and the
extension of another loan;[352] the placing of $500,000 at 6 per cent
for the Richmond & Danville; and the active financial support which
General Thomas felt obliged to render the East Tennessee showed the
anxiety which it occasioned.

On November 25 the directors held a meeting and appointed Messrs.
Eckstein Norton, late president of the Louisville & Nashville; Wm.
Solomon, of Speyer & Co.; Jacob H. Schiff, of Kuhn, Loeb & Co.; Chas.
S. Fairchild, president of the New York Security & Trust Company;
and Louis Fitzgerald, president of the Mercantile Trust Company, a
committee to carefully inquire into and examine the condition of the
Terminal properties and to aid the company in perfecting a plan of
readjustment. Owing to the financial depression, they explained, “the
company has been unable to sell securities based upon engagements they
had made prior to the period of depression and to pay for necessary
equipment and improvements. A large floating debt has in this way been
accumulated, but each of our important railroad systems is solvent....
After maturely considering the whole situation, we felt it wise to
invite the gentlemen whose names appear ... to aid us in perfecting the
best plan for a permanent adjustment of our affairs.”[353]

The committee reported provisionally on December 8. It then stated that
it was essential to the proposed plan of relief that the elections of
all the subordinate companies in the Richmond Terminal system should be
postponed till after the Richmond Terminal affairs were settled, and
requested that financial provision be made for the employment of an
expert or experts in the examination of the properties and accounts.
It was understood that the committee’s plan was to make a considerable
assessment on the stockholders. The board of directors refused to
respond and the committee therefore withdrew.[354]

The next day the stockholders selected Mr. F. P. Olcott to appoint
a new committee to take up the work.[355] They were not in favor of
radical action, and Mr. Olcott expressed the opinion that there was no
necessity for measures so stringent as those which the Schiff-Norton
Committee had had in mind. It was but natural that at this point there
should have been some delay. Meetings were held, expedients for raising
cash discussed, and a reorganization plan was gradually whipped into
shape. It was not, therefore, until March 19, 1892, that the public
were informed what Mr. Olcott and his backers did consider that the
situation required. The main points of the elaborate scheme which was
then proposed were as follows:

First, a consolidation of the Richmond Terminal, Richmond & Danville,
and East Tennessee properties. The Central of Georgia and the Erlanger
systems were not to be included in the reorganization, but the interest
of the Richmond Terminal and the East Tennessee in their stock was to
be made subject to a new mortgage.

Second, a reduction in fixed charges.

Third, the sale of securities to pay off the floating debt.

Consolidation of properties was found advisable for several reasons.
“While some of the companies show a surplus of earnings,” said the
committee, “in many instances it has been impossible to apply such
surplus earnings to make up deficiencies arising from the operations
of other companies. The committee finds that the various systems
have not been operated throughout for the common benefit of the
controlling interest, but that they have competed among themselves for
business, each system maintaining separate organizations for obtaining
business.... In the judgment of the committee the only adequate remedy
which can be adopted is to unite the several corporations, as far as
practicable, in one system under one management, and to consolidate
their obligations.”

In order to unify the system the committee proposed three great issues
of new securities as follows:

$170,000,000 four per cent first mortgage 35-year gold bonds, to be
issued by a new corporation representing the consolidation of the
Richmond & Danville Railroad Company and the Richmond & West Point
Terminal Railway & Warehouse Company.

$70,000,000 five per cent non-cumulative preferred stock.

$110,000,000 common stock.

In general, the new bonds were to exchange for old bonds and the new
common stock for old common and preferred, while the new preferred
stock was to be joined in varying proportions with each of the other
issues to make the exchanges look attractive. Thus, for the Richmond
& Danville consolidated 6s were offered 120 per cent in new bonds and
45 per cent in new preferred; for the East Tennessee first mortgage 7s
120 per cent in new bonds and 45 per cent in new preferred stock; for
the Richmond Terminal common stock 100 per cent in new common and 50
per cent in new preferred. This arrangement was not rigidly adhered to.
Some of the poorer of the outstanding stocks received new common only,
and the Richmond Terminal preferred was given par in new bonds besides
a bonus in preferred. These were, however, exceptions. The principle
which determined the various ratios of exchange is more difficult to
discover. It was not that of equivalence of return. The plan did not
attempt to allow to each holder a chance at the same receipts which
he had formerly enjoyed while reducing the amount which he could
demand, but gave sometimes more than this and sometimes less. And the
variations from what might be called a normal ratio did not always
correspond with the relative security of different issues as indicated
by their market quotations. For instance, the East Tennessee first 7s
sold in December, 1891, at 113½ and the Richmond Terminal collateral
6s at 83; yet the former received 120 per cent and 35 per cent and the
latter 120 per cent and 40 per cent in new bonds and preferred stock
respectively. Again, the Atlanta & Charlotte first 7s sold in October,
1891, at 118½ and received under the plan 120 per cent in bonds and 40
per cent in preferred stock; the Richmond & Danville consolidated 6s
sold at 109 and received 120 per cent and 45 per cent. It is clear that
the committee desired to reduce the interest which the various classes
of bonds should have a right to demand, and that it expected to make
compensation by means of preferred stock on which payments should be
made if earned. So much of its scheme was commendable. On the other
hand, the rates of exchange of old securities for new were in many
cases ill-advised. The reduction in fixed charges was to be $1,819,837,
although by the exchanges alone the capitalization was to be increased
by over $50,000,000. The charges on the system had amounted in 1891
to $9,474,837.[356] Net earnings had been $8,744,736. Fixed charges
under the plan were to amount to $7,666,000. As a matter of fact they
would have been greater than this, for some of the old bonds would have
remained outstanding, and the estimate did not include interest on any
bonds issued for improvements. The floating debt was to be retired by
the sale of new securities, namely, $18,235,800 new first mortgage
bonds and $6,382,530 preferred stock. These were to net $14,588,640, or
sufficient to cancel a debt of $6,310,000 and car trusts of $2,369,564
and to provide a balance for miscellaneous uses. A syndicate guaranteed
the sale, but holders of stock or of collateral trust 5 per cent bonds
were to be allowed to subscribe up to 16 per cent of their holdings
at the rate of $800 for one new mortgage bond and $350 in new stock.
New bonds to a maximum of $10,000,000 were to be issued only for the
acquisition of additional property, while beyond this the vote of
a majority of preferred stock was to be required to authorize any
additional mortgage on property covered by the first mortgage.[357]

Such was the plan laid before securityholders. It proposed a
considerable reduction in fixed charges, though probably not enough to
put the company out of danger, and a large increase in new securities.
It failed because it imposed losses upon the wrong parties. As between
the various classes of bonds its terms were frequently inequitable. As
between the bonds and the stock it altogether favored the latter. It
levied no assessment, it compelled no subscription to new securities,
and in three cases only did it announce an intention of reducing the
nominal value of the stockholders’ holdings.[358] The original time
limit for deposits was set at April 14, 1892. This was subsequently
extended, but without effect, and on May 16 the Olcott Committee
announced that the plan had failed.[359]

The collapse of this attempt at readjustment was a blow to those who
had hoped for a speedy and amicable reorganization of the Richmond
Terminal system. On the same day that failure was confessed the
stockholders met and appointed Messrs. W. E. Strong, Samuel Thomas,
and W. P. Clyde a committee to confer with the Olcott Committee to
ascertain what had best be done. A week later General Thomas reported
a plan for the reorganization of the Richmond & Danville alone. The
Richmond Terminal Company, he said, should be wound up and be succeeded
by a new company with $43,000,000 of preferred stock and $70,000,000
of common. The present 6 per cent bonds should be given 170 in new
preferred stock; the present 5 per cent bonds and preferred stock par
in new preferred stock; and the present common should receive par in
new common and be compelled to subscribe for $8,000,000 collateral
trust two-year 6 per cent notes at 92½.[360] This amounted to an
assessment of 10 per cent upon the common. It was not proposed to pay
off the floating debt with the proceeds of this assessment, but to buy
the claims held by bankers, and, if necessary, foreclose these claims
and take possession for the stockholders. If the full amount should not
be subscribed by the stockholders the preferred stock was to have the
right to make subscription for the balance, and to take the securities
that would have gone to the non-paying common stock; and the common
stock not subscribing was to have no rights to the common stock of the
new company.[361]

That this scheme was much more radical as well as more limited than
the Olcott plan appears upon its face. No serious attempt was made to
carry it into effect. On suggestion of General Thomas the stockholders’
meeting voted that a consulting committee of fifteen be appointed by
the chair to confer with the committee of three, and then adjourned
subject to call.[362] The enlarged committee found that application
had been already made to Messrs. Drexel, Morgan & Co. by a number
of prominent banking firms, asking that they enter upon the work of
reorganization. It therefore dropped the Thomas plan and joined in the
petition. Drexel, Morgan & Co. on their part agreed to undertake an
examination of the Terminal property,[363] but four weeks later replied
that while in their opinion a reorganization was feasible, the lack of
assurance of support from Mr. Clyde made them unwilling to undertake
the task.[364]

At this point efforts at reorganization were checked. One plan had
failed, one had been formulated but not pushed forward, and the task
of creating a third had been refused by the banking firm which was
apparently best able to carry a plan to a successful conclusion. For
a time now the field was left to the disputes between members of the
Richmond Terminal family, which made up in bitterness for what they
lacked in the matter of valuable result. Mention will be made only of
the wrangles between the Central of Georgia and the other parts of the
system.

The Central of Georgia had been placed under a receiver of its own
some two weeks before the publication of the Olcott plan. Some months
later this receivership was made permanent, and the Richmond Terminal
was enjoined from voting the 42,200 shares of Central stock which it
held. It can scarcely be said that the withdrawal of the Central of
Georgia from the Terminal system was unwelcome to the latter. Already
the Richmond & Danville had refused to carry out its guarantee on the
Central’s stock unless that company should deposit bonds to cover an
alleged sum due from it,[365] and President Oakman had hastened to
inform General Alexander, the temporary Central receiver, that the
Richmond & Danville would not operate the Central of Georgia after the
end of the temporary receivership.[366] When, however, the Central not
only insisted on withdrawal, but asked Judge Speer, of the District
Court of Macon, Georgia, to appoint a receiver for the Richmond &
Danville Railroad on the ground that that company was insolvent and
was indebted to the Central in the sum of $2,459,670,[367] prompt
action was made necessary. Application was made to Judge Bond of the
Circuit Court for the Eastern District of Virginia, and on June 16
this magistrate appointed Messrs. F. W. Huidekoper and Reuben Foster
receivers of the Danville road.[368]

“This appointment of receivers by Judge Bond,” explained the parties
responsible,[369] “is not only not inimical to nor in opposition to
any plan for the financial reorganization and rehabilitation of the
Danville system, but will be found to greatly facilitate and aid
any plan of reorganization, while if the Georgia court had obtained
possession of and jurisdiction over the Danville system this would
have been rendered practically impossible.... The necessity for such
action,” they continued, with a touch of pathos, “will be further
appreciated when it is known that for some weeks past the Richmond &
Danville Company has not been able to keep either a dollar in bank or
in its safes within the state of Georgia, because every such dollar
has been attached or garnished by parties alleging claims against the
company, and even the money sent by express for the liquidation of
pay-rolls has been attached in the hands of the express company, and
in every instance enormous bonds have been required to release such
moneys....”[370]

The temporary securing of their position by the receivership allowed
the Danville people to hit back at the Central in its weakest point—
the details of the sale to the Terminal of the Georgia Central Company.
On August 19 the Advisory Committee of Seventeen of the Terminal
securityholders declared that the investigations of their sub-committee
showed that certain trustees of the company, with their friends, had
profited to the extent of between three and four million dollars in
this operation.[371] Toward the end of the year tender of the Georgia
Company stock and bonds was made back to the original vendors and was
refused.[372] In December suit was begun to set aside the purchase on
the ground that there had been no ratification sufficient in law or
equity to bar the stockholders from cancelling the transaction. The
plaintiff charged that “the said combination and plan so formed by and
between its president and divers of its directors [referring to the
purchase of the Georgia stock], confederating with the other syndicate
defendants for the purpose of selling their unsalable and discredited
securities to the plaintiff at such prices as yielded them an enormous
profit and necessarily imposed on plaintiff a heavy yearly loss,
was contrary to equity and good conscience, and that the pretended
contract dated October 26, 1888, ... and all the acts done in pretended
purchase of the stocks and bonds of said Georgia Company ... and the
taking from the assets and money of the plaintiff of over $7,000,000
cash ... to put into the pockets of the said faithless directors, the
syndicate defendants, and their confederates, were all acts planned
... and performed by said Inman, or under his direction, in the
execution of such original fraudulent scheme, combination, purpose, and
confederacy....” And so the plaintiff prayed the court to decree the
contract of purchase void.[373]

These accusations and counter-accusations, justified though many
of them were, had little direct bearing on reorganization. In this
progress had completely ceased. At the same time some progress was
urgently required. The Richmond Terminal, the Richmond & Danville, and
the Central of Georgia were in the hands each of a different set of
receivers, unpaid interest was piling up, and the year 1893 was to show
a marked decline in earnings. Necessity and mutual distrust dictated a
second appeal to Drexel, Morgan & Co. to undertake the rehabilitation
of the property. On February 2, 1893, the following letter was
addressed to the firm in question:

    Messrs. Drexel, Morgan & Co.,

    Gentlemen: Since the time you were previously requested to
    take up the reorganization of the Richmond Terminal system
    much time and thought have been devoted to its affairs, and we
    realize that adverse financial conditions and also the present
    general distrust of all plans for the restoration of this
    system require that, to be successful, its reorganization must
    be undertaken by parties possessing the confidence of both the
    securityholders and the public, and also the financial strength
    sufficient for its accomplishment. We therefore ask you to take
    up this reorganization of the Richmond Terminal and its allied
    properties, each pledging you our personal support and aid in
    full confidence that the securityholders will support us in this
    request.

    We appreciate the labor and responsibility connected with this
    undertaking, and are therefore willing to do all in our power
    to give you full control of the reorganization, as suggested in
    your letter of June 28,[374] and to advise our friends and the
    securityholders generally to deposit their securities, without
    requiring the assurances customary in such cases.

        Very respectfully,
            WM. P. CLYDE,
            GEO. F. STONE,
            WM. E. STRONG,
            J. C. MABEN,
            THOMAS F. RYAN.

This letter was accompanied by a letter from F. P. Olcott, president
of the Central Trust Company, pledging his support. Inasmuch as lack
of the assurances contained in this correspondence had alone prevented
Drexel, Morgan & Co. from undertaking the task proposed the previous
year, their prompt though conditional acceptance was not surprising.
A definitive engagement to attempt the work followed on April
12.[375] The enlistment of Drexel, Morgan & Co. in the reorganization
provoked general satisfaction. Mr. Hollins, of the Central of Georgia
reorganization committee, expressed his pleasure in having responsible
parties to deal with not connected with any past differences.[376] The
directors of the Richmond Terminal urged all classes of securityholders
to deposit, and the Clyde Committee was emphatic in its recommendation.
It was recognized that the situation was the most favorable which could
be hoped for. No group of Southern railroad financiers seemed capable
of producing a fair reorganization plan, and it was also probable
that no plan from such a source, however fair, would have received a
sympathetic welcome. Drexel, Morgan & Co., on the other hand, were both
capable and sure of a hearing.

There was remarkably little delay in making public the Drexel-Morgan
plan. Less than three weeks after their final acceptance of
responsibility, though about three months after the correspondence of
February 2, the firm published a comprehensive plan, to the examination
of which the next few pages may be devoted. The principles of this plan
of May 1, 1893, were simple, and were clearly and convincingly set
forth. The property to be considered was to be that of the Richmond
Terminal, the Richmond & Danville, and the East Tennessee. The Central
of Georgia was to be omitted. The imperative needs of these properties
the plan declared to be two:

First, the provision of a large sum for the physical improvement of the
system;

Second, the reduction of fixed charges to an amount which the companies
could earn.[377]

The physical condition of the above roads in 1893 was extremely bad.
“One obvious trouble ... is,” said the plan, “that their maintenance
and repairs have been neglected. Another is that, while nearly all
the lines in the United States have been steadily substituting solid
roadbeds, heavy equipment, and other modern facilities for the light
and ineffective appliances formerly in use, these lines, because of the
constant drain to which they were subject for the obligations assumed,
and from the necessities of the Terminal Company for the payment to
it, as dividends, of every available dollar with which to meet its
own obligations, have not been in a financial condition to keep up to
the times in this respect, and now they find themselves so far behind
as to be, to a considerable extent, unqualified to handle business
with economy, or to compete successfully with other lines.”[378] The
financial condition was little better. The absolute fixed charges of
the Richmond Terminal, the Richmond & Danville, and the East Tennessee
systems, viz., interest on bonds held by the public, rentals, equipment
notes, and sinking funds, and interest on floating debts, receivers’
certificates, etc., the plan declared to amount annually to about
$9,900,000. The entire net earnings for the fiscal year ending June
30, 1893, were estimated at $7,000,000. The result was a deficit for
the year of about $2,900,000. This state of affairs required serious
sacrifices from somebody. The Olcott plan had illustrated the folly of
laying the burden largely on well-secured senior bonds. The Drexel plan
proposed to demand the necessary concessions from the junior bonds and
from the stock. “About $74,000,000 of the bonds and guaranteed stocks
of the Richmond & Danville and the East Tennessee systems held by the
public,” it continued, “are on properties which are believed for the
most part to afford adequate security, and for this or other reasons
this plan has not sought to disturb them. About $50,000,000 (mostly
recent issues) are junior liens, inadequately secured, or else are on
new or branch lines of uncertain earning capacity, and the holders,
in self-preservation, must make such reasonable concessions as the
situation necessitates, taking compensation therefor in preferred or
common stock of the new company....”

The tools of the reorganization were to be the following new issues:

$140,000,000 first consolidated mortgage and collateral trust 100-year
5 per cent bonds, secured by mortgage and pledge of all the property of
the new company. This total might be subsequently increased to acquire
the whole or part of the Georgia Central system, or to acquire the
ownership of the Cincinnati Southern Railway or any other line as a
substitute therefor.

$75,000,000 5 per cent non-cumulative preferred stock.

$160,000,000 common stock.

“The general theory of adjustment of disturbed bonds,” said the plan,
“is to substitute for them the new 5 per cent bonds to such an extent
as is warranted by earnings and situation of the properties covered by
the present mortgages, and the new preferred stock for the remainder of
the principal. In some cases, where the bonds are on properties of no
actual and little prospective earning capacity, a more severe reduction
is necessary. In several instances, where the bonds are on properties
which are likely to improve more rapidly than other disturbed parts of
the system, this fact is recognized, and an extra allowance is made
in compensation. Finally, in one or two cases, where the bonds are on
properties the loss of which would adversely affect the rest of the
system, a proper recognition is made of this fact.” In practice not
only bonds and preferred stock, but preferred and common stock, or even
common stock alone were exchanged for old securities of little value.

This provided for old securities but not for cash requirements. To
raise cash three devices were resorted to, all of which bore entirely
on the junior securityholders or on the stock. The most direct was the
levying of an assessment. Terminal common stock was assessed $12.50
per share, East Tennessee first preferred $3, second preferred $6,
and common stock $9; new preferred stock being in each case given in
return. This distribution was based on the idea that the stockholders
of each railroad should provide for its floating debt. The floating
debt of the Richmond & Danville was about $7,000,000, that of the
East Tennessee about $3,000,000, and that of the Richmond Terminal
about $100,000. But since the last named held practically all of the
Richmond stock and a considerable proportion of the East Tennessee,
its stockholders were saddled with a total of $8,300,000 or an
equivalent of $12.50 per share, while the East Tennessee was taxed
proportionately. The rest of the cash requirements were covered by the
sale of $8,000,000 new bonds at 85, and $33,333,000 new common stock at
15. Depositors of all classes of Terminal securities and of all classes
of readjusted securities of the other systems were allowed to subscribe
to the extent of $1000 in a new bond and $4000 in new stock trust
certificates for each $22,000 par value of stocks or bonds deposited.
The balance of the issues was looked after by an underwriting
syndicate.[379]

Future capital requirements were provided for mainly by new bonds.
$35,383,000 in new 5 per cents were set aside to be used only for new
construction, betterments, purchase of rolling stock, and extensions
and additions to the system. Not over $2,500,000 of these were to be
used in any one calendar year; except that, in addition to this annual
appropriation, a total of $3,000,000 in bonds might be specifically
appropriated with the unanimous consent of the stock trustees, for
the building of branches or extensions, if undertaken within three
years after the creation of the new mortgage. All property acquired
with these bonds was to be brought under the lien of the new mortgage.
$8,000,000 of the cash raised by assessment and sale of securities,
moreover, were to be available for new construction and equipment on
the Richmond & Danville and the East Tennessee. And, finally, there was
provision for the limitation of new bond issues, for a voting trust and
for the consolidation of the Terminal system.

“The ultimate object of the reorganization,” said the plan “(excluding
the Georgia Central Company from consideration), is to have the new
company acquire, so far as practicable, the ownership of the Richmond &
Danville and East Tennessee systems, including the various securities
now owned by the Terminal Company ... and the securities pledged for
the Richmond & Danville and East Tennessee floating debt....

“Both classes of stock of the new company ... are to be issued to
three Stock Trustees, who shall be appointed, on or before completion
of reorganization, by Messrs. Drexel, Morgan & Co. The stock shall be
held by the Stock Trustees and their successors, jointly, for five
years, and for such further period (if any) as shall elapse before the
preferred stock shall have paid 5 per cent cash dividend in one year,
although the Stock Trustees may, in their discretion, deliver the stock
at an earlier date....

“No additional mortgage shall be put upon the property to be acquired
hereunder by the new company, nor shall the authorized amount of the
preferred stock be increased without the consent in each case of the
majority in amount of the preferred stockholders.”[380]

The result of all these provisions was to be a cancellation of the
floating debt, a reduction in fixed charges, and a decrease in mortgage
bonds; though inevitably also an increase in stock outstanding.
The plan proposed to disturb $49,117,900 of outstanding bonds, or,
including the Richmond Terminal 5s and 6s, a total of $65,617,900. But
the new bonds which it offered in exchange amounted to $19,806,700
only. On the other hand it took $111,819,550 in stock from the hands
of the public, and offered $165,559,514 new stock in the course of
the exchanges.[381] This was very conservative, since the increase
in total capitalization through these exchanges was less than 4½ per
cent; and less too than the cash assessment for which preferred stock
was allowed. Somewhat greater increase in securities appears if we
consider, not only the exchanges, but the provisions of the plan as
a whole; for here we must include $33,300,000 new common stock and
$8,000,000 new bonds issued to retire in part the $12,900,000 of
floating debt and for other purposes. Even so the net increase was
only 6 per cent.[382] The natural result was a considerable reduction
in fixed charges. The absolute fixed charges of the system in 1893 the
plan stated to be $9,900,000. The fixed charges under the plan were to
be $6,789,000. This was certainly a step in the right direction. It was
the point, nevertheless, at which the plan was weakest. The clauses
which have been outlined made abundant and conservative provision
for cash requirements; and the sums which they allowed for future
development were not on their face inadequate; but the reduction in
fixed charges was less than should have been ensured. The net earnings
for the year ending June 30, 1892, were $7,725,000, and those for 1893
were estimated by the plan itself as not likely to exceed $7,000,000.
This would have left $936,000 over the proposed fixed charges in 1892
and $211,000 in 1893:—or a surplus of some 3 per cent in the latter
year. This was altogether insufficient. It not only put out of the
question dividends on the $200,000,000 of stock, but it precluded the
partial improvement of the road from earnings, and left the system at
the mercy of the slightest decrease in the annual returns. Compared
with previous fixed charges the plan proposed noteworthy reductions;
compared with the earnings of the lines involved it did not go far
enough.[383]

The reception of the Drexel-Morgan plan was, nevertheless,
satisfactory. Certain concessions were made to various classes of
bonds, and by June 17, over 95 per cent of the securityholders had
given their assent.[384] Unfortunately the earnings of the property
now steadily decreased. The gross receipts of the Richmond & Danville
proper were 15 per cent less in 1893 than in 1892; and Terminal system
lines which had earned $6,100,000 in 1892 earned $5,300,000 in 1893,
and promised to earn some $4,250,000 only in 1894. This decrease
was common to the country at large. It was of peculiar importance,
however, in emphasizing the weak point in the Drexel plan. From January
1 to July 1, 1893, the Terminal floating debt, exclusive of car trusts,
increased $2,600,000. From July 1 to March 1 it increased at least
a million more. The reorganization plan had been prepared “on the
assumption that, during reorganization, the receivers of the various
properties could provide for the interest charges on the undisturbed
securities, as well as accumulate a sum sufficient for the interest
accruing on the ‘disturbed securities’ as readjusted.”[385] As it
turned out, the receivers were obliged to make many defaults among
the undisturbed securities, and saved nothing for the disturbed. Some
modification of the published plan had perforce to be arranged.

These modifications were detailed in a pamphlet dated February 20,
1894. They comprised three proposals:

(1) To exclude from the reorganization certain unprofitable properties
which had previously been included. Certain alterations had already
been made toward this end in the exclusion of the Erlanger line, the
Memphis & Charleston, and the Mobile & Birmingham. Further modification
was to exclude the Northeastern Railroad of Georgia, the Macon &
Northern, and five other subsidiary lines.

(2) To fund for a year or two the coupons on new bonds given for
certain securities, and to provide in other cases that the new bonds
should not bear interest till 1895 or 1896.

(3) To lighten the assessment on Richmond Terminal and East Tennessee
common stock, and to allow to all assessed securities one-quarter of
their assessment in bonds and three-quarters in preferred stock instead
of all in preferred stock.

At the same time a few other modifications allowed to some bonds a
more liberal grant of new securities than they had obtained in May.
It was hoped by these means to raise the average earning ability of
the system, while reducing the new securities to be issued.[386]
The temporary funding of coupons further lightened fixed charges
until business should have had time to revive. “Under the plan as now
modified,” stated Drexel, Morgan & Co., “and assuming that one-half of
the new bonds to be sold are used in 1894 and the other half in 1895,
the fixed charges are estimated at about

  $4,100,000 in 1894,
   4,700,000 in 1895,
   5,400,000 in 1896.[387]

“The depression in the South began in 1890–91. There would appear to
be no reason why in a comparatively short time these properties should
not very easily earn, _gross_, as much as and more than they earned in
that fiscal year, viz., over $21,000,000. Operated at 70 per cent ...
there would remain, say $6,600,000 net against an interest charge of
$5,400,000.”[387]

The reduction in assessments was made possible by the decrease in
mileage. Although the floating debt had increased $2,600,000 from
January 1, 1893, and the equipment notes recorded were greater by
$1,048,000,[388] yet the debt to be provided for by the modified plan
of 1894 was estimated at only $12,200,000. Besides this the cash to be
reserved for new construction was reduced $3,000,000, and the surplus
for expenses and contingencies $1,380,000. Assessments were therefore
set at $10 a share on Richmond Terminal common instead of $12.50; $7.20
on East Tennessee common instead of $9; and $3 and $6 on East Tennessee
first and second preferred as before. The new securities to be sold
were reduced correspondingly to $8,000,000 of bonds and $25,000,000
of common stock. Finally, the bonds to provide for new construction,
betterments, and additions were reduced from $35,383,000 to about
$19,000,000, of which not over $2,000,000 (instead of $2,500,000) were
to be used in any calendar year. Other provisions of the earlier plan
were to remain unchanged.

It was this modified plan which was carried to a successful conclusion.
In principle it did not mend the weak spot in its predecessor of
May. That plan had contemplated a surplus of $211,000 over fixed
charges for 1893. This estimated charges at $4,100,000 for 1894 and
net earnings at $4,250,000 on a somewhat reduced mileage. There was
not to be more left for dividends and improvements than there had
been before, while the cash and bond provisions for improvements
were notably reduced. The concession of bonds to stockholders for
one-quarter of their assessments was unsound financiering, as was,
on the whole, the funding of coupons on the new mortgage bonds. The
success which the modification had, nevertheless, in restoring the
company to solvency, was due to the improvement in earnings which soon
took place. The original plan had based its calculations on the first
year of depression; the amended plan kept charges down till three years
had elapsed. By that time business had begun to mend, and all danger
of bankruptcy was past. Other points in either plan leave little to
criticise.

The modifications to the original plan were issued on February 20,
1894. Over 75 per cent of the system bonds had assented by March 24.
At one foreclosure sale after another the reorganization committee now
bought in the portions of the old system covered by the plan. Suits
against the Richmond Terminal had been brought under the two collateral
mortgages, and on July 13, 1893, the reorganization committee bid in
the pledged securities. On February 6, 1894, it bought the remaining
assets of the Terminal Company; on June 15 it bought the Richmond &
Danville, and on July 7 the East Tennessee, Virginia & Georgia. Two
trustees’ sales, one receivers’ sale, ten foreclosure sales, and six
conveyances without foreclosure had occurred by September, 1894, and
more minor sales were in progress.[389] On June 15 the Southern Railway
Company was organized with a charter from the state of Virginia, and
took over in succession properties to the extent of 4607 miles.[390]
Samuel Spencer was elected president. Some thirty corporations were
swept away and thirty boards of directors abolished; for the Southern
Railway was an operating company, and, unlike the Richmond Terminal
and the Richmond & Danville, controlled but an inappreciable fraction
of its mileage through the ownership of stock. The new securities
were issued at the proper times, and according to the plan the common
and preferred stock was turned over to three voting trustees,[391] who
issued trust certificates in their stead.

This completed the reorganization of the Richmond Terminal Company so
far as the principal part of its mileage was concerned. The portions
of the system excluded from the plan have been to some extent bought
back in later years. Control of the Alabama Great Southern was bought
in 1895; the Memphis & Charleston was acquired in 1898; the Richmond
& Mecklenburg was leased in 1898 and the Mobile & Birmingham in 1899;
and the Northeastern of Georgia was bought in 1899. The system has
not yet, however, fully regained its old position. The most important
loss has undoubtedly been that of the Central of Georgia. We left this
company engaged in active disputes with the Terminal management. During
1892 and 1893 efforts to reorganize it were made under the leadership
of Hollins & Co. The principal difficulties were the large floating
debt and the money required to put the property into good physical
condition.[392] A plan was actually prepared at the beginning of 1893
and submitted to securityholders, but failed because of that same
decline in earnings which had caused the modification of the Terminal
reorganization plan. A second plan, prepared in 1894, had a better
fate,[393] and in modified form was put into effect. The _Railroad_ was
sold at auction in 1895, the Central of Georgia _Railway_ was organized
to take its place,[394] and the corporation entered upon a new career
which we have not space to follow.[395]

As for the Southern Railway, the years from 1895 to 1907 have brought
it prosperity. It has extended considerably in mileage. Besides
reacquiring lines which formerly were part of the Richmond Terminal
system, it has grown south to Jacksonville and Palatka, east to
Charleston and to a more direct connection with Norfolk, and west from
Louisville to East St. Louis. It has further joined its Louisville-East
St. Louis line to Chicago by acquiring a half-interest in the Monon,
and to the rest of its system by a half-interest in the Cincinnati,
New Orleans & Texas Pacific; and it has bought control of the Mobile
& Ohio, which stretches through four states from East St. Louis to
Mobile. Instead of 4392 miles as operated on June 30, 1895, it now
reports 7546. The earnings of the system have increased more rapidly
than its mileage. The revival of business after 1897 occurred with
singular force in the South, and seems to have introduced there a new
industrial era. As a result, the Southern’s gross earnings have trebled
and its net earnings have been multiplied by two. Passenger receipts,
which were $4,329,499 in 1895, have become $14,683,006 in 1907. Freight
receipts have increased from $10,816,024 to $37,368,095.

It has been this increase in earnings which has at last allowed some
of that margin for improvements which the reorganization plans weakly
attempted to secure. And accordingly, large sums have been expended.
Maintenance of way charges are now over $1000 per mile instead of
$630. Expenses per locomotive mile have increased from 4.19 cents in
1895 to 7.54 cents in 1907; expenses per passenger car mile from .83
to 1.03 cents; and expenses per freight car mile from .47 to 2.18
cents. It is true that locomotives and cars are larger to-day and
that rails are heavier, but this fact is far from accounting for the
difference. Not only has the existing plant been kept in good repair
from earnings alone, but distinct improvements have been made. New
rail has been laid, additional ballast put in, wooden trestles filled
or replaced with steel. It was estimated in 1906 that $5,000,000 had
been spent in betterments and charged against income up to that time,
besides some $15,000,000 more paid for equipment out of earnings.
Meanwhile considerable sums had been spent from capital account. The
reorganization plan allowed for some $19,000,000 of new bonds to be
sold at the rate of $2,000,000 per year.[396] Of these the company had
sold $13,000,000 for improvement of the property by February 1, 1906,
besides disposing of some $23,000,000 of equipment obligations.

The appreciation of the need for still more liberal expenditure led
in 1906 to a comprehensive plan for the issue of new capital. Under
date of February 1, the company submitted to its voting trustees[397]
a scheme for a $200,000,000 mortgage, of which $15,000,000 were to
be issued at once and the rest were to be reserved. Of the immediate
issue $4,962,774 were to refund payments for equipment hitherto made
and charged to capital; $3,501,000 were to refund investments in
securities of, and advances to, subordinate companies, as well as
to be used for the acquisition of property not heretofore funded;
and $6,536,226 were for double track, revision of grades, new yards,
shops, etc. Of the securities reserved, $65,164,000 were for refunding
purposes: $20,000,000 for certain subsidiary lines: and $99,834,000
to go, first, for betterments and improvements on the entire system
and for new equipment in amounts not exceeding $5,000,000 in each
year; and second, in exchange for first mortgage bonds not exceeding
in amount the actual cost of railroads and terminals hereafter to be
acquired. In other words, about one-half of the total issue is to go,
sooner or later, for improvements, and the rest for refundings and for
new acquisitions.[398] It was believed that the Southern could readily
pay the interest on the increased immediate issue without endangering
dividends on its preferred stock, and that the subsequent increases
in earnings would more than provide for whatever additions to charges
might occur. Negotiations for the placing of the new securities were
concluded with J. P. Morgan & Co. at a reported price of 96½.

The results of the expenditures for improvements have been remarkable.
In 1895 the Southern Railway had in use 623 locomotives; in 1907 the
number was 1536. In the former year there were 487 passenger cars and
18,924 freight cars; in the latter there were respectively 995 and
56,225.[399] Only 370 miles of track in 1895 were over 65 pounds in
weight per yard; more than 3100 surpassed that limit in 1907. It is
nevertheless in its inability to handle the business offered it that
the Southern has provoked sharpest criticism. Over 3600 miles of its
system still have rails weighing 62 pounds or less to the yard;—that
is, rails incapable of meeting modern operating conditions. Only 206
miles of double and 1981 of side track exist. Equipment appears to
be still inadequate. Signals are imperfect, and speed and promptness
seemingly impossible to attain. The late tragic death of Mr. Spencer
was a forcible illustration of the deficiencies of the road which he
had done so much to improve.

The earning power of the system cannot yet, therefore, be said to be
secure. Moreover, the capitalization of almost $72,000 per mile,[400]
as well as the less dense railroad business in the South, the slight
construction of many of the Southern Railway lines, the lack of
adequate facilities which compels an operating ratio of 76 per cent,
and the absorption of minor roads less prosperous than the main stem,—
all these factors have kept down the net surplus from operation. On
the other hand, the management is making an earnest attempt to raise
the standard of the property. Bonds and notes to the par value of over
$32,000,000 have been sold to provide for additions and improvements
during the past year, and a very great change for the better has taken
place. Dividends on the preferred stock have been paid since 1897. As
the country develops, and as the sums spent upon improvements come more
and more to have their effects, a dividend upon the common stock will
be paid. The near future is more likely to witness the cessation of
dividends upon the preferred.



CHAPTER VI

ATCHISON, TOPEKA & SANTA FE

  Charter—Strategic extensions—Competitive extensions—Effect
    on finances—Raise in rate of dividend—Reorganization of
    1889—Acquisition of the St. Louis & San Francisco and of the
    Colorado Midland—Income bond conversion—Receivership—English
    reorganization plan—Mr. Little’s report—Final reorganization plan
    —Sale—Subsequent history.


The Atchison, Topeka & Santa Fe Railroad has been reorganized twice, in
1889 and in 1893–5; the first time without, but the second time after
a foreclosure sale. The keynote of its history has been extension. It
was the enterprise of the men in control before 1889 which gave it the
position and power it holds to-day, but it was also that enterprise
which necessitated its first reorganization by imposing upon it heavier
burdens than it could bear.

Chartered in Kansas in 1863, the Atchison spread west, southwest,
south, and northeast. It received some aid from the state of Kansas in
the shape of a grant of lands, but depended primarily on the investment
of private capital. Kansas itself was not, in 1870, a very encouraging
field for railroad building. It had been admitted as a state only in
1861, and could boast for the most part of less than two inhabitants
to the square mile;—although settlement was pushing westward with
considerable rapidity, and stores of mineral wealth had been discovered
in Colorado. The railroad in those days had to create its own traffic,
and population followed the means of transportation. The peculiarity of
Kansas was a central position, which lent itself to schemes of the most
far-reaching nature. A railroad reaching from one end of the state to
the other might almost equally well have been extended to California,
to Chicago, or to the Gulf; and could be sure in time, if it survived,
of the carriage of a vast volume of traffic out in every direction
from the Central West. The Atchison managers saw this opportunity, and
courageously and persistently endeavored to realize it;—part of the
project they announced, and part they kept back till the fitting time
should come.

The systematic extension of the Atchison Railroad may be divided into
four parts:

(1) The construction through Kansas to Colorado, to save the charter,
then down the valley of the Rio Grande to Albuquerque.

(2) The securing of a connection with the Pacific Coast by
construction, lease, or traffic agreement.

(3) The connection with the Gulf.

(4) The connection with Chicago.

As the system neared completion, and its territory came to be invaded
by other roads, there were added to this systematic extension what
may be called competitive extensions, consisting largely in the
construction of branch lines, and multiplied beyond anything which the
country could need for years to come. This sort of building was most
prominent from 1884 to 1888 and will be considered in its place.

The first stretch of road was built with few difficulties or
complications. It was commenced in 1869, and, after numerous delays, it
reached the western border of the state of Kansas on December 28 of the
same year; from this point it went on more leisurely, first west and
then southwest, to Albuquerque.[401] These early miles were paid for
from the proceeds of both stocks and bonds. From Albuquerque a variety
of routes presented themselves. The Southern Pacific had by that time
built to El Paso, and it was feasible to extend the Atchison to that
point and to rely on a traffic agreement for the handling of the
western business. Or, building to Deming near El Paso, Atchison might
have extended its line down the river valleys in the northwestern part
of Mexico to Guaymas on the Gulf of California. Or, Atchison might have
built directly west from Albuquerque. All three of these routes were
considered, and all three were eventually carried out.[402]

The connection with the Southern Pacific was not a very difficult
one to make, and the Atchison reached Deming in March, 1881. By the
traffic agreement then concluded the Atchison secured the use of the
Southern Pacific tracks from Deming to Benson, Arizona, and arranged
to build south into Mexico from this point; while the Southern Pacific
was allotted 51 per cent of the through rate on traffic passing over
Southern Pacific lines.[403] This formed the second through route
from the East, and in September, 1881, it took one-quarter as much
business as the Central Pacific. It was also the first of Atchison’s
projected routes to be completed. The line to Guaymas was added by
purchase. Instead of building, Atchison exchanged its stock for the
stock of the already existing Sonora Railroad in the proportion of one
to two, and guaranteed the interest on the Sonora first mortgage 7
per cent bonds.[404] This made up for the lack of an independent line
to the coast further north. The total of Sonora stock was $5,400,000,
requiring $2,700,000 Atchison stock in exchange. The total first
mortgage 7 per cent bond issue was $4,050,000. With the railroad came
a subsidy of $2,608,200 (American gold), equal to $11,270 (Mexican)
per mile. This subsidy kept cropping up in Atchison finance for some
time, and was finally adjusted in 1896 by the transfer to the company
of $1,159,800 in 3 per cent bonds of the Mexican Interior Consolidated
Debt.

For the direct route President Strong sought the help of the St. Louis
& San Francisco, and the use of the charter of the Atlantic & Pacific
which it owned. The Atlantic & Pacific was a road incorporated in 1886,
with a charter to build from St. Louis to California. In spite both of
its charter and of its name it had never gone further west than Vinita,
in the northeast corner of Indian Territory.[405] President Strong and
the Frisco now agreed to continue construction under the name of the
Atlantic & Pacific, both from Vinita and from Albuquerque. The Atchison
was to be given a half-interest in the charter, directors were to be
chosen equally from the two companies, and the cost was to be met by a
$25,000,000 loan, which the Atchison and the Frisco were to guarantee
jointly but not severally.[406] Before the new construction neared
completion, however, the St. Louis & San Francisco fell under the
control of Messrs. Gould and Huntington, who, as owners of the Texas &
Pacific and the Southern Pacific respectively, naturally disapproved of
the plan to extend the Atlantic & Pacific to the coast. The Atchison,
therefore, agreed to build no further west than the Colorado River. At
that point the Southern Pacific was to meet it with a line from Mojave.
The Southern Pacific gave to the Atlantic & Pacific an interest
guarantee on its bonds to the extent of 25 per cent of the gross
earnings derived from Atlantic & Pacific through business, and the
latter road retained all its rights for a line in California.[407] This
proved unprofitable, for the Southern Pacific persistently diverted
traffic to Ogden and El Paso, and in 1884 still another arrangement was
made. By this—

(_a_) The Atlantic & Pacific bought the Southern Pacific division
between the Needles (the Colorado River) and Mojave, 242 miles, for
$30,000 per mile, and, until such time as title could be given by the
discharge of the mortgage upon it, took a lease at an annual rental of
6 per cent on the purchase price.

(_b_) The Atlantic & Pacific secured trackage and traffic rights and
facilities between Mojave and Oakland and San Francisco, as well as the
use of terminals at the latter point.

(_c_) The Atchison (and the St. Louis & San Francisco likewise) agreed
to buy from the Pacific Improvement Company first mortgage bonds
and other securities of the Atlantic & Pacific of the par value of
$3,096,768, at the actual cost to the Improvement Company, to wit,
$1,524,356.

To complete the connection to the coast the Atchison built from
Waterman, some seventy miles east of Mojave on the Atlantic & Pacific,
to Colton on the Southern Pacific, and secured control of the
California Southern from Colton to San Diego.[408] In 1885 entrance was
obtained to Los Angeles by lease of the Southern Pacific track between
Colton and that city.[409]

The money for this rapid progress was obtained by the sale of both
stocks and bonds, but on the whole stock predominated. The directors
rightly considered it much more conservative to issue stock and sell
it at par than to load the road down with a heavy debt in the shape of
bonds; and what is more, they were able to make good their word, and to
sell stock at or near par in spite of the risk incident to operations
such as the Atchison was conducting and the frequent bonuses or stock
dividends declared.

By 1884, then, Atchison had reached the Pacific coast. The next great
steps were the extensions to Galveston and to Chicago. The year
of entrance to Los Angeles the Atchison did not cross the southern
boundary of Kansas. Certain of its stockholders were, however,
unofficially interested in the Gulf, Colorado & Santa Fe, which ran
from Galveston on the south to the Indian Territory on the north,
roughly 200 miles. In 1884 a charter was obtained for the Southern
Kansas Railway Company, a corporation organized solely to build south
from Arkansas City. The same year the Gulf, Colorado & Santa Fe
obtained permission to stretch north. The two roads met at Purcell in
the summer of 1887.[410] In 1886 the Gulf, Colorado & Santa Fe was
formally brought in. Gulf stock then amounted to $4,560,000 and bonds
had been issued to a limit of $17,000 per mile. For the entire capital
stock, subject to the above encumbrance, Atchison agreed to pay $8000 a
mile in Atchison stock, par value.[411] The final move was to get into
Chicago. “The Atchison Company has been much too conservative during
the last few years,” said the _Chronicle_, “and thus has allowed its
territory to be invaded.” The first intent was to build direct. There
were incorporated, in Illinois the Chicago, Santa Fe & California
Railway Company, and in Iowa the Chicago, Santa Fe & California Railway
Company of Iowa. In 1887 the Atchison was able to purchase the Chicago
& St. Louis Railroad, between Chicago and Streator, with a branch to
Pekin,[412] and to save itself construction between these points. The
whole line was opened for traffic in May, 1888.[413]

This completed Atchison’s systematic extensions before 1889. From a
local road in Kansas it had become a through route, taking freight
over its own rails from Chicago to Galveston and to the Pacific coast.
But especially in the latter eighties competition had become keen; and
to its strategic extensions Atchison was obliged to add competitive
building on an enormous scale. Of the 7000 miles in 1888, over 2700
had been added since January, 1886, and had been built, not to tap new
sources of traffic, but to defend what was thought to be Atchison’s
rightful territory by means of a desperate war of rates. “About three
or four years ago,” said a competent observer, “a mania seized three
great corporations (Atchison, Missouri Pacific, and Rock Island) to
gridiron Kansas with railroad iron, and each tried hard to see which
could cover the most ground, without regard to the character of the
ground, the result [being that] railroads were built where they would
not be required for ten years to come.”[414] Such roads could not
be expected to pay, and in fact did not. Even in the case of better
planned extensions, the lines had to be built in an unopened territory,
the traffic of which had yet to be developed. In Indian Territory,
Oklahoma, and Arizona, the bulk of the country had less than two
inhabitants to the square mile; in New Mexico and Lower California only
one-half of the area was more thickly settled; and it was largely from
this southwestern corner that local traffic for the Atchison had to be
built up.

The method of financiering these competitive extensions varied:
sometimes the parent company guaranteed the principal and interest
of the branch-line bonds; sometimes it took these into its treasury
and issued collateral bonds against them; sometimes, perhaps more
frequently still, it leased new roads for a rental equivalent to the
annual interest on their bonds. If the branches could have earned their
fixed charges the burden on the Atchison would have been nominal, but
as in large part they could not it was real and serious. In 1888 there
were actually paid in rentals, interest on Sonora Railway bonds, and on
sundry railway bonds, $2,361,300. Large sums were carried to capital
account. In 1888 there was an accumulated account of “due from sundry
leased, controlled, and auxiliary roads in construction and general
account” (net) $13,558,678, including various cash current construction
and other charges, which was carried as an asset, but which in
reality consisted of advances from which there was little or no hope
of return. Besides the claims for interest the parent company had in
practice other claims to meet. Where a branch failed to earn operating
expenses, as often happened, sums had to be advanced to keep the road
and rolling stock in repair. Thus the item “due from auxiliary roads in
current traffic and operation accounts” amounted in 1888 to $1,008,554.
Bills and accounts payable the same year were $6,553,775, and accrued
interest, taxes, and sinking funds totalled $915,337. The following
table shows vividly the effect upon the system of the rapid extension
of the years 1884 to 1888:

_Total System_

                                       1884              1888

  Mileage                                2,799              7,010
  Bonds                             48,258,500        163,694,000
  Stock (Atchison)                  60,673,150         75,000,000
  Gross earnings                    16,699,662         28,265,339
  Operating expenses                 9,410,424         21,958,195
  Net earnings from operation        7,289,237          6,307,145
  Net profits, excluding dividends   5,147,883     def. 2,933,197
  Net profits, including payments
    for dividends and interest on
    floating debt                                  def. 5,557,323

Whatever may be said as to the necessity of extension, it is evident
that the position of the system by 1888 had changed for the worse. This
last-named year was a bad one, it is true, but certain evils of which
the directors then complained were permanent, and should have been
permanently allowed for. Some realization of the fact that the Atchison
might be going too fast appeared in the financial journals of the time.
“Were these undertakings less solidly backed,” said the _Railway Age_,
“there might be apprehension that enterprise was being pushed too far
and too fast.”[415] But on the whole the rapid growth and enormous
extent of the system seem to dazzle beholders. “The career of this
company,” said the _Railway Age_ again, “has been one of the marvels
of railway enterprise, and it would be unsafe now to attempt to fix a
limit to its extension or to the ambition of its Napoleonic president
and its bold and enterprising directors.”[416]

In 1887 the directors increased the rate of dividend from 6 to 7 per
cent.[417] The action was thoroughly unjustifiable, and the rate was
speedily again reduced. By the end of 1888 the main company was liable
to be called on any year to the extent of $8,625,365, which was the
amount of interest on auxiliary roads either guaranteed or payable as
rentals. In four years the mileage of the Atchison system had increased
150 per cent; its bonded indebtedness 239 per cent; its fixed charges
216 per cent; and its gross earnings only 69 per cent; while the
deficits on its branch lines were obviously not matters of bookkeeping,
and the value of interchanged business was not equal to the increased
burdens which the subsidiary lines imposed. The floating debt mounted
up, as is usual in times of trouble. From a total of $3,317,446 in
1884 it increased to $8,076,059 in 1888. To offset it the directors
secured in October, 1888, subscriptions to a $10,000,000 issue of
“guarantee fund,” three-year notes. Not all of the amount authorized
was to be sold at once, but from time to time Atchison was to call on
subscribers to take part of their subscription, and the notes were to
bear 6 per cent from the time they were put forth.[418] For the rest,
the directors economized as much as possible. Salaries were cut 10 per
cent in every branch of the service, beginning with the president, and
the unlucky 7 per cent rate of dividend was reduced to 6 per cent, to
2 per cent, and then to nothing at all in successive quarters. None
of these expedients proved sufficient. In fact, the situation was so
critical that nothing short of a general reorganization could probably
have secured the radical reduction in fixed charges which the company
required.

In September, 1889, accordingly, Messrs. Libby, Abbott, Peabody,
and Baring were appointed a committee to consider the broad question
of financial and general reorganization,[419] and in October a plan
for the complete rehabilitation of the company was brought forward.
The obligations with which the plan had to deal are indicated in the
following table:

_Obligations of the Atchison Company in 1889_

                                             _Principal_      _Interest_

  Bonds, guarantee fund notes               $160,786,000   $9,203,620.00
  Contingent issue of additional bonds           775,000       38,750.00
  Car trusts                                   1,445,660       86,739.60
                                            ------------   -------------
                                            $163,006,660   $9,329,109.60

  Less interest on bonds and guarantee
    fund notes owned by the Company                           253,340.00
                                                           -------------
                                                           $9,075,769.60
  Sinking Fund                                                359,000.00
  Taxes                                                     1,221,000.00
  Rentals                                                     502,000.00
                                                          --------------
                                                          $11,157,769.60
Of the bonds outstanding $56,498,000 were direct loans upon the
Atchison’s main lines, bearing anywhere from 4½ to 7 per cent, and
$104,288,000 were bonds upon some of the thirty-two subsidiary
corporations for whose obligations the Atchison was responsible.

The dealing of the Libby Committee with this situation was intelligent
and comprehensive. It proposed an increase and simplification of
securities, a decrease in fixed charges, and a cancellation of the
floating debt. In place of the forty-one classes of bonds outstanding
it suggested that two grand issues be put forth, one of 4 per cent
general mortgage bonds to the amount of $150,000,000, and one of 5
per cent income bonds to a total of $80,000,000. From these issues
$13,750,000 should be used to provide for cash requirements,[420]
and the remainder should be employed in direct retirement of old
obligations. The exchange of some $216,000,000 of new bonds for
$163,000,000 of old was to mean an increase in securities outstanding,
but since interest on only part of the new bonds was to be obligatory
fixed charges were to be less than they had been before. The managers
figured on what the property could earn, good times or bad, and
capitalized this sum into 4 per cent general mortgage bonds. They
then calculated the difference between this and the former return to
bondholders, and capitalized the difference into income bonds.[421]
Each individual bondholder, therefore, was offered a chance to receive
the same return which he had previously enjoyed, although his right to
demand an annual payment was limited to an amount which the road could
earn.

A few points deserve to be specially noticed. The reduction in interest
was sufficient to have transformed the deficit for the whole Atchison
system for 1888 into a respectable surplus, providing that no dividends
had been paid; but this reduction was dependent on the retention of the
income bonds as optional obligations. There was no cash assessment. Had
the reorganization taken place in a time of general depression, the
sale of securities for cash would probably have been impossible, but
the days of depression had not yet arrived. The stockholder suffered
in the introduction of the principal of some $67,000,000 additional
indebtedness between him and his property, although he was not called
upon directly; but it should not be forgotten that for a long while
the Atchison stockholders had received very liberal dividends, both in
stock and in cash, and could not well complain of the moderate loss now
necessary. There was no voting trust, although one was proposed, and
the bonds were not even temporarily given voting power. The situation
seems to have been that the securityholders thought it more to their
advantage to reduce voluntarily the rate of interest than to force
a foreclosure sale and take their chances; for the directors, in
submitting the plan, said that they felt it necessary “to state in the
strongest terms that the non-success of this proposal will inevitably
result in foreclosure, with all its attendant misfortunes.”[422]

By the end of November, although the plan had not been promulgated
until well into October, more than one-half of the outstanding bonds
had assented, and the directors were enabled to announce success.
Certain changes in the management had already taken place. President
Strong had resigned in September, and had been succeeded by Mr. Allen
Manville, general manager of the St. Paul, Minneapolis & Manitoba
Railway.[423] Mr. Reinhart was credited with a large part in the
construction of the new plan of 1889, and his later promotion may have
been connected therewith.

After the reorganization Atchison resumed its policy of expansion,
its new directors being apparently as “bold and enterprising” as the
old. In 1890 it took in the St. Louis & San Francisco, a road running
from St. Louis west and southwest through Missouri, Kansas, Arkansas,
and Indian Territory, connecting at Paris, Texas, with the Gulf,
Colorado & Santa Fe, and through half-ownership of the Atlantic &
Pacific connecting Albuquerque in New Mexico with Barstow in Southern
California. The total length of the Frisco system, exclusive of jointly
owned roads, was 1329 miles, and this constituted the largest single
acquisition that the Atchison had ever made. The terms of the purchase
were highly favorable to the Frisco shareholders, but the benefits to
the Atchison were less than was expected. Although the consolidation
removed certain difficulties experienced from the joint ownership
of the Atlantic & Pacific, and although the united roads were in a
better position to compete for transcontinental and Gulf traffic than
either of them had been before, the Atchison directors were forced to
announce in 1891 that, “with every opportunity given it to work with
advantage, the property (Frisco) has failed to demonstrate its ability
to carry itself financially and to liquidate its debts; nor could it
hope to obtain such results without the provision of New Capital....
This is due largely to the absence of complete and proper facilities
and machinery with which to conduct operations in the nature of Round
Houses, Machine Shops, Stations and other buildings, improved Bridges
and Equipment.”[424] A bond issue was needed, and was in fact put
forth,—the Atchison taking a goodly share.

Less important than this was the purchase, in 1890, of the Colorado
Midland, a road 346 miles long in Colorado, valued chiefly for its ore
traffic. In August, 1890, the Mexican Government resumed payment of the
Sonora subsidy, on which nothing had been paid for eight years.[425]
It does not seem as if at any time after 1889 the Atchison enjoyed
unalloyed prosperity. The year 1890 showed an increase in net earnings
of 48 per cent according to the figures given, and the directors were
unhappy until they had increased the fixed charges to match, but the
year 1891 recorded a falling off, and 1892 showed a comparatively
slight gain over the figures of 1891. There was obviously nothing
in the reported figures to cause alarm, but there was nothing which
justified the payment of more than 2¾ per cent any year on the income
bonds, or of any dividends on the stock.

Toward the end of 1891 the guarantee fund notes fell due. They had been
issued, it will be remembered, to protect the property in 1888, and
were secured by an equal amount of general mortgage 4s; but now the
directors, disliking to put these 4s on the market at 83¼, decided to
extend the notes for two years at par with a cash commission of one per
cent.[426]

Extension of the guarantee fund notes did not increase the fixed
obligations, it merely postponed a reduction; but the conversion of
the income bonds of 1889 acted as a positive increase. There were
$80,000,000 of these incomes, and it was in the optional character
of payments upon them that the saving of fixed charges by the
reorganization of 1889 had consisted. They had been issued instead of
preferred stock probably because more acceptable to the bondholders;
but it was early found that their use involved difficulties which had
not been sufficiently regarded. By the conditions of their indenture
no bonds could be inserted between them and the general mortgage 4s;
they held a second lien for all time. But similarly it was difficult
to put bonds after them. Their lien was on income,—interest was
payable only when earned; any regular mortgage would of necessity have
taken precedence. The hindrance to new issues was real and serious,
and although some check on an aggressive management was salutary, yet
the system required additions and improvements from time to time which
could not be supplied from current income. Under these circumstances
the Atchison directors decided within three years to sacrifice the
reduction in fixed charges secured in 1889 in order to obtain new
capital with greater ease. “It is the opinion of the Management,” said
the annual report for 1892, “that the time has now arrived when all the
obligations of the Company can be returned to a Fixed Basis, sufficient
funds provided to take care of all Improvements ... required for at
least four years, and at the same time the junior Bonds and Capital
Stock be restored to a more permanent market value with assured returns
on the first, and probable balances for the latter.”[427] “The Atchison
plan of conversion,” said Mr. Reinhart, “... is the completion of the
reorganization plan put in effect October 18, 1889, and returns the
obligations of the company ... to a fixed and stable basis....”[428]

The plan so cordially referred to provided for the issue of a new,
second mortgage, 4 per cent bond, and the exchange of this security for
the outstanding income bonds. The second mortgage was to be issued in
two classes:

(_a_) $80,000,000. These were to exchange for income 5s, par for par,
and bore a rate of interest which increased from 2½ per cent in 1892 to
4 per cent in 1896, and then remained at 4 per cent until maturity.

(_b_) $20,000,000. These bore 4 per cent and were to be issued in no
greater sum in any year than $5,000,000 for specific improvements on
the Atchison exclusive of the Colorado Midland or the St. Louis & San
Francisco. There was reserved to the company the right, when all the
above should have been exhausted, to issue more bonds of the same sort
as in class B for the same purposes and on the same mileage, up to a
limit of $50,000,000.[429]

The conversion plan was approved at the annual meeting in 1892, and was
put into effect. The result was most unfortunate. The annual burden
on the company was increased at the very time when the panic of 1893
was about to reduce railroad earnings, while the advantages of freer
issues of new bonds were of little account in a year when the sale of
new securities was practically impossible. Moreover, a new light was
soon to be thrown on the whole operation by disclosures of dishonest
manipulation of figures in the Atchison reports.

In 1892 and 1893 rumors of trouble were afloat, and were repeatedly and
vigorously denied by Mr. Reinhart, president of the Atchison Company.
Thus in June, 1893, this officer declared that “the Atchison, Topeka
& Santa Fe Railroad Company, strictly speaking, has no floating debt.
Its current liabilities are more than equalled by its current cash
assets.”[430] In December Mr. Reinhart said again: “The interest on the
General Mortgage Bonds of the Atchison Company, due January 1, will
be paid. It seems hardly necessary to make this statement, because
doubts as to its payment have, in my judgment, been created solely by
speculators who have no substantial interest in the property.” These
official denials did not carry conviction, but opinions varied as to
the seriousness of the situation. The _Boston News Bureau_ cheerily
insisted that all the Atchison needed was “days of grace” during the
existing depression,[431] while in England it was thought that the
rumors of a receivership were at most but premature.[432]

At the end of the year President Reinhart went to Europe to float
a loan. On his return, after a failure to obtain subscriptions, a
receivership was applied for and granted. It had been hoped up to
the very last moment that the January interest could be met; but the
refusal of English bondholders to subscribe additional capital, the
failure to place a third mortgage loan in the United States, and the
death of Director Magoun, one of the strong influences in Atchison’s
affairs, made a crash inevitable. Current obligations had mounted to
over $10,000,000, credit had disappeared, and the railroad necessarily
succumbed. The Atlantic & Pacific, the Colorado Midland, the Gulf,
Colorado & Santa Fe, and the Southern California lines were not
included in the Atchison receivership, though the Atchison receivers
were given like office in respect to the Atlantic & Pacific.[433] The
Gulf, Colorado & Santa Fe announced that it would continue to operate
its own line, and was prepared to pay its current obligations as
before.[434]

No sooner was failure announced than committees of bondholders sprang
up. In Boston a committee was formed with six members, including J. L.
Thorndike and H. L. Higginson. In New York the Union Trust Company, the
Mercantile Trust Company, the New York Life Insurance Company, Baring,
Magoun & Co., and Giddes & Smith got together in a committee, with
Edward King as chairman. A second New York committee, R. Somers Hayes,
chairman, was formed by express invitation of the road. A directors’
committee was organized, of which E. B. Cheney, Jr., was chairman.
The London holders of the second mortgage class A bonds themselves
formed a committee. Even before 1888 Englishmen had invested heavily
in Atchison, attracted perhaps by glowing stories of the business to
spring up across the western plains. It was said that not only had
they been influential in shaping the reorganization of 1889, but that
from that date to 1893 the management had been controlled by a board
elected by proxies entrusted to representatives of English interest.
In particular Englishmen had become interested in the second mortgage
bonds of 1892, successors to the income bonds of 1889, holding about
one-half of the total issue, and they now fought for the protection of
this issue as against the stock.

A plan of reorganization was early matured after the English influence
substantially as follows: Either the general mortgage or the second
mortgage bonds were to be foreclosed and a new company was to be
formed. If the foreclosure should be under the general mortgage,
overdue interest on that mortgage was not to be paid, and new
securities, similar to the existing bonds, were to be issued, bond
for bond. If the foreclosure should be under the second mortgage, the
company was to provide for past due interest, and was to assume the
payment of principal and interest on the general mortgage bonds. The
capital stock was to remain as before. There was to be a new income
mortgage to the amount of $115,000,000, of which $84,000,000 were to
go for the existing second mortgage A bonds, and $5,600,000 for the
existing B bonds; the surplus to be given for assessments, or for
the securities of such auxiliary companies as it should be thought
advisable to acquire. These income bonds were to bear 5 per cent and
were to have voting power. There was to be a second mortgage, to amount
eventually to $35,000,000; of which $5,000,000 were to be used at once
to retire the floating debt and for other purposes, and $3,000,000 were
to be used each year for improvements. The new stock was to be held
in trust until 5 per cent per annum should have been paid in cash on
the new income bonds for three consecutive years. Finally there was to
be an assessment of $12 per share upon the stockholders, the proceeds
of which were to go as far as necessary to pay the debts of the old
company, including interest on the general mortgage.[435]

On the whole, the scheme was to put the Atchison back to the condition
of 1889, and to regain the margin of safety afforded by the income
bonds. So far it was acceptable enough. Conservative officers had
looked askance at the income bond conversion in 1892, and this was a
simple acknowledgment of the mistake. The old difficulty as to future
capital requirements, moreover, was evaded by a provision for an annual
increment of second mortgage bonds to take precedence of the incomes.
The notable part of the scheme was the anxious care of the bondholders
to protect themselves. Since their bonds had been converted from income
bonds less than two years before they could not claim a large allowance
for the reconversion; but as a condition of their assent to this and
to the introduction of a second mortgage for $35,000,000 before their
lien they demanded not only a bonus of 5 per cent in the new incomes
for their holdings, but the grant of voting power to the income bonds,
a stock assessment of $12 per share, and the interposition of an
additional $5,000,000 of bonds between the stock and the property of
which it was nominally the possessor. “It is true,” said the _Railway
Review_, “that the scheme contemplates the issue of income bonds which
shall be given to assenting stockholders at par in return for the cash
assessment, but it is a little difficult to see wherein such bonds
are of very much more value than the stock of the company except that
they are not subject to assessment.”[436] The reception of the plan
was what might have been expected. On July 30, in London, the London
bondholders’ committee met and passed a resolution in its favor. Having
now secured, they said in substance, the substantial features for which
they had contended, and although the plan was not altogether what they
could have desired, they considered, after very prolonged and anxious
negotiations, that a plan had been arrived at which was the best
obtainable in the interests of bondholders.[437] Meanwhile meetings of
stockholders were held in New York in protest. Resolutions were adopted
condemning the plan, and a stockholders’ committee was chosen.[438]

Debate was stopped by the publication in August of the report of an
expert who had been selected to examine the books of the Atchison
Company. Few more disgraceful instances of the juggling of figures have
been brought to light in the history of American railroad finance.
Whereas the reports of the company had shown net earnings steadily
increasing from $7,600,000 in 1890 to $12,100,000 in 1893, being ample
to meet existing charges and to pay from 2 to 2¾ per cent on the income
bonds besides to the time of their conversion, Mr. Little, the expert,
reported that the net earnings had never exceeded $8,085,608; and
maintained that an annual deficit had occurred each year from 1894,
which reached the portentous amount of $3,000,000 for 1891 alone. The
condition of the company was far worse than had been imagined, and all
plans had to be thoroughly recast. The following is an abstract of the
report in question:

“I have already advised you verbally,” said Mr. Little, “that income
was, in my judgment, overstated in these several years (since ’89), to
the extent of $7,000,000 or more, and I now confirm this specifically.
These overstatements may be classified as follows:

“(1) _Rebates._ For the four years ending June 30, 1894, the debits
for rebates to shippers on the Atchison system aggregated $3,700,776,
and on the St. Louis & San Francisco system $205,879, or a total of
$3,906,656.

“This sum was charged, not to the earnings from whence it came, as it
should have been, but to an account entitled, ‘_Auditor’s Suspended
Account-Special_,’ and was reported from year to year as a good and
available asset, while in fact it had no value whatsoever.

“(2) _Additions to Earnings and Deductions from Expenses._ Next in
order of importance to the rebate account comes an aggregate of
$2,791,000, which, on instructions from the East, was credited from
time to time to the earnings and expenses respectively, but which
credit has no foundation in fact. Of this aggregate $2,010,000 was
added to earnings and $781,000 deducted from operating expenses, the
sum of the two being debited to ‘_Auditor’s Suspended Account_.’

“(3) _Improvements._ The sum of $488,000 was in the period under
consideration transferred, improperly as I contend, from Operating
Expenses to Improvements or Capital Account, these Improvements being
finally closed into the account of Franchises and Property, which
represents the cost of the road and property.

“(4) _Traffic Balances._ It further appears that a traffic agreement
for a division of business was formed in November, 1890 (running to
July, 1891), between the Atchison Company and certain other companies,
whereby such other companies were charged with a balance of $305,843,
which the Atchison Company was unable to collect, and which is
absolutely uncollectable, and should have been heretofore written off,
though it still stands as an asset, and hence must be written to the
debit of profit and loss.”[439]

Two facts appear from these charges on which emphasis was laid from
different points of view: (1) That for four years the Atchison had
been persistently violating the law by the granting of rebates. (2)
That to conceal these rebates, and for other purposes, the books had
been so systematically falsified as to defy detection, and to deceive
not only the investing public but the whole railroad world. The
report was handed to Mr. Reinhart, and an answer was requested by the
following day. The answer was made, and proved inadequate; for though
Mr. Reinhart pointed out some half-dozen items which he argued that
Mr. Little had wrongly excluded, he explained no one of the charges
directly brought against him.[440] There is no doubt at the present
time that Mr. Reinhart was guilty, though perhaps because of the
difficulty of fixing legal responsibility he was never prosecuted for
falsification of the books. He resigned, of course, and Major Aldace
F. Walker was appointed receiver in his stead. Two months later he was
indicted with other officers of the company and certain shippers, not
for falsifying the books, but for the illegal granting of rebates. His
defence was that he had been, at the time the rebates were given, only
the general auditor at Boston, and had had no part in the fiscal or
executive business of the road.[441] The Government failed to prove
connection, and the case fell through.

All this completely altered the requirements to be met by a
reorganization plan. A more sweeping reduction in charges, and a
more general distribution of losses was needed than before had been
the case. Old proposals were laid aside once and for all, and a new
scheme was built up from the beginning. The mortgage indebtedness of
the Atchison in 1895 was $233,595,247, of which the first and second
mortgage bonds comprised $217,258,276. The reorganization of 1889 had
done its work in one respect at least, and the reorganization managers
were able to concentrate their attention on two issues. The annual net
earnings, according to the company’s reports had been:

  1890      $7,632,348
  1891       7,631,598
  1892      10,953,896
  1893      12,126,866

but as corrected in Mr. Little’s report were:

  1891      $5,204,880
  1892       7,853,173
  1893       8,085,608
  1894       5,956,615

Inasmuch as Mr. Little had discovered annual deficits of

  1891      $1,964,285
  1892          60,938
  1893         134,825
  1894       3,008,242

it was very evident that a reduction in interest charges was called
for. As in 1889 the salvation of the company was sought in the
substitution of securities on which payment was optional for securities
bearing an obligatory charge.

Soon after Mr. Little’s final report in November three of the existing
committees, namely, the General Reorganization Committee, the London
Committee, and Messrs. Hope & Co. of Amsterdam, joined in a Joint
Executive Reorganization Committee, with Edward King as chairman.[442]
With these now worked a committee chosen by the directors themselves.
The result was a reorganization plan under date of March 14, 1895. The
purposes announced were:

(_a_) To reduce fixed charges to a safe limit;

(_b_) To make adequate provision for future capital requirements,
subject to proper restrictions as to issue of bonds for this purpose;

(_c_) To liquidate the floating debt, and to make adequate provision
for existing prior lien indebtedness shortly to mature;

(_d_) To reinstate existing securities upon equitable terms in their
order of priority;

(_e_) To consolidate and unify the system (so far as practicable) and
thus to save large annual expense.

It was proposed to foreclose the Atchison general mortgage ... and to
vest in a railway company the bonds, stocks, and other properties of
the existing company, acquired at foreclosure sale or otherwise. The
new company was to issue:

  (_a_) Common Stock                                   $102,000,000
  (_b_) Five per cent non-cumulative preferred stock    111,486,000
  (_c_) General mortgage 4 per cent bonds                96,990,582
  (_d_) Adjustment 4 per cent bonds                      51,728,310[443]

Of the above the interest on only the general mortgage bonds was to be
a fixed charge;—the stock obviously got a return only when earned,
and the adjustment bonds were income bonds in fact if not in name.
Additional issues to a comparatively small aggregate were provided
for, but no mortgage, other than the general and adjustment mortgages,
was to be executed by the company, nor was the amount of preferred
stock to be increased, unless the execution of such mortgage, or such
increase of preferred stock, should have received the consent of the
holders of a majority of the whole amount of preferred stock at the
time outstanding, given at a meeting of the stockholders called for
that purpose, and the consent of the holders of a majority of such
part of the common stock as should be represented at said meeting. The
securities mentioned were to retire all previously existing issues.
Old common stockholders were to receive share for share in the common
stock of the new company. They were to be assessed $10 per share,
and to receive for the assessment $10 in new preferred stock, while a
syndicate guaranteed payment of assessments by engaging to take the
place of non-assenting or defaulting stockholders. The general mortgage
bondholders were to get 75 per cent of their holdings in new general
mortgage 4s and 40 per cent in adjustment 4s. The second mortgage and
income bondholders were to be assessed 4 per cent and were to get
new preferred stock.[444] The prior lien bondholders were dealt with
separately, and were to be paid either in general mortgage 4s of the
additional issues (over the $96,990,582) mentioned, or in the new
prior lien bonds. If in the latter, the general mortgage bonds which
would otherwise have been issued were to be held for the ultimate
retirement of these bonds. Provision was made for future construction
and additions by the allowance of $3,000,000 general mortgage bonds, to
be issued each year to a limit of $30,000,000, and then of $2,000,000
adjustment bonds, to be issued each year to a limit of $20,000,000.
Additional new general mortgage bonds, up to $20,000,000, might be
issued and used in such amounts respectively and in such proportions as
the Joint Executive Committee might determine, for the acquisition of
the Atlantic & Pacific, the St. Louis & San Francisco, and the Colorado
Midland; and for like purposes $20,000,000 preferred stock. The lien
of the new general mortgage was to cover all properties which should
be vested in the new company, and also any other property which might
be acquired by use of any of the new bonds, but the Joint Executive
Committee might, in its discretion, except from the new general
mortgage the stocks and bonds deposited under the existing general
mortgage, representing branch lines, the operation of which should
be found to be unprofitable and an unnecessary burden to the system.
A voting trust was considered, but was rejected as unsatisfactory;
and the committee confined its efforts to the securing of the best
possible management.

  The proposed fixed charges amounted to                 $4,528,547
  Net earnings according to Mr. Little had been in 1891   5,204,880
                                                   1892   7,853,173
                                                   1893   8,085,608
                                                   1894   5,956,615

Thus the new charges appeared well within the earning power of the
road. The plan made the following, provision for cash requirements:

  Assessment on Atchison stock at $10 per share         $10,000,000
  Assessment on second mortgage and on income bonds at
    4 per cent                                            3,567,644
                                                        -----------
                                                        $13,567,644

The estimated cash requirements were:

  For receiver’s debt, preferred or secured floating
   debt of the Atchison Company, estimated as of
   January 1, 1895                                       $7,793,875
  Leaving for receivers and floating debt, accrued
    interest and undisturbed securities, etc.,              773,769
                                                        -----------
                                                        $13,567,644[445]

This reorganization had certain interesting features. As before
remarked, it sought, as did the reorganization of 1889, to replace
securities, the interest on which was a fixed charge, by securities
on which payment of interest or dividends should be optional. But
whereas the earlier reorganization had depended on income bonds,
this plan included both income bonds and preferred stock. There are
several reasons why preferred stock is preferable to income bonds,
and it will be remembered that a peculiar difficulty experienced
from the income bonds of 1889 had arisen from the impossibility
of putting other mortgages ahead of them; yet that this was not
the chief obstacle sought to be avoided by the use of preferred
stock at this later date appears from the current use of adjustment
bonds. Provision for future capital requirements was in fact made in
another way, and the question was not here involved. So far as the
acceptability of the income bonds and the preferred stock respectively
to the old bondholders was concerned, it should be noted that the
men who received the greater part of the new issue were the holders
of the old income and second mortgage bonds; that is, Englishmen
who had already shown their preference for income bonds as opposed
to stock. The chief reason for the new expedient seems to have been
the desire to retain for the general mortgage holders a priority
of lien, while reducing part of their holdings to the level of an
optional obligation. If income bonds or preferred stock alone had
been used, these would necessarily have been given to the owners both
of general mortgage and of second mortgage or old income bonds; so
that the former might have received a larger amount, but not any lien
different in kind. By the scheme proposed, all possible interest on
the securities given for old mortgage 4s was to be met before anything
was to be paid on the equivalent of issues which had been inferior
before the reorganization took place. Abundant provision was made for
future capital requirements. That lesson had been learned once for
all. Cash requirements were met by an assessment. In speaking of the
reorganization of 1889 the rule was laid down that the disposal of
securities for cash is impossible except at an enormous sacrifice in a
time of general depression. There was widespread depression in 1895,
and the reorganization managers wisely made no attempt to negotiate
a sale. The amount of the assessment on the common stock was very
considerably above the quoted price of the shares, but it was correctly
figured that the hope of future increase in value would be sufficient
to induce stockholders to furnish the sums required. Not to tax them
too heavily call was made also on the junior securities. On the whole,
the decrease of $5,000,000 in fixed charges more than compensated the
stockholders for the additional obligations put between them and their
property; their claim on the road itself was made more remote, but
their chances for dividends were improved. Examination of the plan
shows clearly that nothing was taken from either bonds or stock which
those securities had a right to retain. The bondholders could not, in
any case, have received more than the earnings of the road; and an
amount equal to the return previously due them was assured, whenever
the road should earn it, by the new combination of mortgage and income
bonds and preferred stock. As it was, in return for an assessment they
retained the right to participate in any future prosperity, a right
which has proved of extreme value.

The plan was underwritten by Messrs. Baring Bros. & Co. and other
strong foreign and American bankers, who assumed the liability of
paying the assessment and of taking the stock.[446] The comment at the
time was favorable. “On the whole,” said the _Railway Age_, “we do
not believe that any one who is acquainted with the properties could
have expected a more satisfactory plan than that which the committee
has evolved.”[447] The London bondholders promptly accepted the plan.
“We are disposed,” said the _Railway Times_ of London, “to regard the
latest of Atchison reorganization schemes as a praiseworthy attempt
to grapple with a very thorny problem.”[448] Such opposition as there
was came from a minority of the stockholders, and was directed at two
points: the prevention of foreclosure, and the inauguration of an
entirely new administration. It was asserted that certain old members
of the board of directors who had been forced to resign by the earlier
disclosures, had nevertheless secured the election of successors to
perpetuate their policy and to protect their interest. With a directory
so constituted, it was maintained that the stockholders would have no
guarantee of important changes in the executive offices, financial
policies, or business methods of the company.[449] Sharp criticism was
directed to a statement of the existing board which referred to the
“mistakes and misfortunes of the previous management.” “Only those who
believe,” said the Stockholders’ Protective Committee, “that gross
irregularities, if not worse, have been perpetrated ... may be relied
upon to probe to the bottom the acts of the former officers of the
Atchison.”[450] On the other hand, the accusations of the committee
were asserted by the directors to be unqualifiedly false.[451] It soon
became apparent that the opposition could not muster enough votes to
control an election, and although their fight had been begun in August,
they had proxies by November for only 250,000 out of the 1,020,000
shares of stock. Recourse was had to the courts, and an attempt was
made to secure at least a minority representation on the coming board
by the enforcement of a provision for cumulative voting embodied in
a Kansas law of 1879. This failed in November, 1894, and no further
obstacle to reorganization was encountered.

Practically all of the assessments were paid in by September 21. On
November 25 Mr. E. P. Ripley was elected president, and in the first
week of December, 1895, Mr. Aldace F. Walker was elected chairman of
the board of directors of the new company. On December 10, 1895, the
property and franchises of the Atchison were sold at foreclosure, and
were purchased for $60,000,000 by Edward King, Charles C. Beaman, and
Victor Morawetz, representing the reorganization committee.[452] The
Atchison, Topeka & Santa Fe Railroad Company was then organized by
the purchasers pursuant to the laws of Kansas, under a certificate
of incorporation dated December 12, 1895. A board of directors was
elected, and by-laws were adopted. The entire estate embraced in the
foreclosure sale was duly conveyed by deed of the same date as the
incorporation of the company, in consideration of which the company
executed a delivery to the Joint Executive Reorganization Committee
of the securities acquired under the plan of reorganization. Certain
subsidiary roads were subsequently foreclosed and bought in, notably
the Atlantic & Pacific and the Chicago, Santa Fe & California. The St.
Louis & San Francisco was not so bought in. “The question of retaining
the St. Louis & San Francisco as a part of the Atchison system,” said
the annual report of 1896, “received very careful consideration from
the Directors.... A series of conferences was held, which resulted in
the matter ultimately presenting the alternative of the sale of our
existing interest upon favorable terms, or the purchase by us of all
other outstanding interests upon terms involving the outlay of a very
large amount of both cash and securities. While the future control
of that road was regarded as important, the financial considerations
affecting the situation prevailed, and the sale was decided on the
whole to be more prudent than the purchase.” “With the acquisition of
the Frisco,” said Mr. Fleming of the Joint Executive Committee, “the
fixed charges on the Atchison system of 7780 miles would have been
increased from $7000 to $9000 per mile. Atchison is financially much
stronger without Frisco.”

This ends that part of the history of the Atchison Company which can
be connected with either of its reorganizations. From 1895 to the
present time the Atchison has enjoyed a rapidly increasing prosperity,
due in part to the lightening of the charges upon it, in part to able
management, and in part to the great increase in volume of business
which has been a characteristic of the time. One or two things may
be noted. A final settlement has been made of the relations between
the Southern Pacific and the Atchison in the Southwest. It will be
remembered that the final result of the negotiations in 1882 had been
the purchase of the former Mojave division from the Needles to Mojave,
but that since title could not be acquired until the maturity of the
outstanding mortgages, Atchison had leased this track at an annual
rental of 6 per cent on the purchase price. In 1897 this rental was
cancelled. The Southern Pacific could not even then give a clear title,
but exchanged a long time lease of the Mojave division against a
similar lease of the Sonora Railway, the Atchison branch which reached
from Deming to Guaymas. The rentals cancelled each other, and the
actual transfer is eventually to take place.[453] The arrangement is
mutually advantageous. On the one hand the Mojave division formed a
spur of the Southern Pacific, and on the other the Sonora Railway was
totally disconnected from the Atchison, so that the latter company was
obliged to use the Southern Pacific’s tracks to reach the property at
all. In 1898 Chairman Walker of the Executive Committee was able to
announce the substantial completion of negotiations for the purchase
of the San Francisco & San Joaquin Valley Railroad, running from
Bakersfield to Stockton, California; the former town being sixty-eight
miles from Mojave and the latter something less than that from San
Francisco.[454] Atchison at once began building at the Stockton end,
and reached San Francisco the following year. The Santa Fe Terminal
Company was then incorporated with a capital stock of $1,000,000,
Atchison secured a traffic contract with the Southern Pacific, and
through freight trains were run from Chicago to San Francisco on May 1,
1900, through passenger trains following two months later. Besides this
there have been important extensions in Arizona and New Mexico. In 1901
the Atchison purchased two-thirds of the bonds, and practically all of
the capital stock of the Pecos Valley & Northeastern Railway Company,
stretching 370 miles from Texico through the southeastern corner of
New Mexico to Pecos City, Texas. In July of the same year it bought
the Santa Fe, Prescott & Phœnix Railroad, from Ash Fork, Arizona, to
Phœnix, Arizona, some 195 miles. Construction has been practically
completed between Belen, New Mexico, a few miles south of Albuquerque,
and Amarillo, Texas, to afford an alternative and somewhat shorter
route from California to Eastern Kansas. A still more noteworthy
project is under consideration for a road to join the Gulf, Colorado &
Santa Fe at Brownwood with the Belen line at Texico, and to open direct
connection over the Atchison from California to the Gulf.

Briefly stated, the Atchison’s mileage has increased from 6479 miles in
1897, to 9273 in 1907. Its gross earnings have grown from $30,621,230
to $93,683,407; its net earnings from $7,754,041 to $32,153,692; and
its surplus above all charges from $1,452,446 to $21,168,724. This
marvellous showing has been accompanied by heavy expenditures for
improvements, so that the physical condition of the system is much
better than before. Operating expenses, fixed charges, and taxes
took less than 77 per cent of gross income in 1907, and a decline
of over $21,000,000 can be suffered in net before interest on even
the adjustment bonds becomes imperilled. It is not to be wondered
at that Mr. Harriman saw fit to invest $10,395,000 of Union Pacific
money in Atchison preferred stock in 1906,[455] nor that dividends
of 5 per cent on preferred, and 5 per cent on common stock are being
paid. The Atchison owns 1791 locomotives instead of 953 as in 1897;
1135 passenger cars instead of 622; 49,770 freight cars instead of
26,776. There has been a large increase in the capacity and power of
rolling stock. The average freight train load has increased from 131
to 320 tons. Freight train mileage has grown but 35 per cent, while
ton mileage has more than tripled. Thus, although the average length
of haul has increased and the average receipts per ton mile have
diminished, the earnings per freight train mile are actually more than
double in 1907 what they were in 1897. And, finally, the Atchison is
not dependent for its revenue upon any single kind of business. Coal,
ore, and other mineral products yielded but 30.87 per cent of its
tonnage in 1907; products of agriculture 25.34 per cent; manufactures
17.37 per cent; and products of the forest 12.12 per cent.

The capital account, meanwhile, has been kept from undue expansion. The
funded debt has increased from $174,196,750 in 1897 to $284,171,550 in
1907, but the capital stock has decreased somewhat, and the greater
part of the new bond issues have been convertible serial debenture
bonds, which occasion no permanent increase in charges. It is within
the last two years only that Atchison stockholders have authorized
the issue of new capital on a scale commensurate with the growth of
their property. In 1906 $26,060,000 in 4 per cent convertible bonds
were offered to them at par, and this last year they have authorized
the issue of $98,000,000 of common stock for improvements, extensions,
and the like. This provides ample facilities for the future without
endangering the solvency of the road.



CHAPTER VII

UNION PACIFIC

  Acts of 1862 and 1864—High cost of construction—Forced combination
    with the Kansas Pacific and the Denver Pacific—Unprofitable
    branches—Adams’s administration—Financial difficulties—Debt to
    the Government—Receivership and reorganization—Later history.


The construction of the Union Pacific was made possible by direct
grants of lands and government bonds by Congress. The motive for the
project was military and political as well as economic; on the one hand
California was to be cemented to the Union, and aggression on the part
of England was to be forestalled; on the other a great and fertile
territory was to be opened and an additional market provided for the
products of the East.

In 1862 the first act “to aid in the construction of a Railroad and
Telegraph Line from the Missouri River to the Pacific Ocean, and to
secure to the Government the Use of the same for Postal, Military, and
Other Purposes” was passed.[456]. It created a corporation to be known
as the Union Pacific Railroad Company, with a capital of 100,000 shares
of $1000 each, and authorized it to construct a railroad from the one
hundredth meridian of longitude west from Greenwich at a point within
the territory of Nebraska westward to the western boundary of the
territory of Nevada. It granted the right of way, and in addition five
additional sections per mile on each side of the track, plus a varying
amount of United States bonds per mile, the use and delivery of which
was to constitute a first mortgage on the property of the company. All
compensation for services rendered to the Government was to be applied
to the payment of these bonds and interest thereon; and after the road
was completed, until the bonds and interest should have been paid, at
least 5 per cent of the net earnings of the road was to be annually
applied to the payment thereof. The directors were to be not less than
fifteen in number, of whom two were to be appointed by the President
of the United States. It was hoped that the offer would be sufficient
to attract private capital to the undertaking, and when it failed in
this, the inducements were increased. The Act of 1864 amended that
of 1862. It reduced the par value of the shares of stock from $1000
to $100, and increased their number from 100,000 to 1,000,000. It
increased the land grant from five to ten alternate sections per mile,
and subordinated the government lien to the rank of a second mortgage.
Only one-half the compensation for services rendered for the Government
was required to be applied to the payment of the bonds issued by the
Government. The directors were to be twenty in number, of whom five
were to be appointed by the Federal President.[457]

It was under these main provisions that the Union Pacific Railroad was
constructed. In their final shape they were intended to provide for the
greater part of the cost of construction, while allowing the company
to supply deficiencies by the issue of its own first mortgage bonds.
Capitalization under these conditions would not have been excessive;
the Government’s investment would have redounded unmistakably to its
own benefit, as well as to that of the country, and the corporation
would have looked forward to a long and prosperous career. Three things
interfered to swell the cost of the construction of the road, and with
that its capitalization: First, construction was carried on during a
time of high prices, swollen not only by depreciation of the currency,
but by artificial conditions occasioned by the war; second, the normal
level of the prices paid was raised by the speed with which the road
was completed; third, construction was entrusted to a construction
company, the famous Crédit Mobilier.

In its comparison of the prices of the years 1864–9, with those of
1860, the Aldrich Committee arrived, in 1893, at the following result:

                                              _Metals &
                                              Implements
                      _Bar Iron    _Rails,    exc. Pocket     _All
  _Year_   _Food_      Rolled_      Iron_       Knives_     Articles_

   1864     165.8       249.3       262.5        198.0        190.5
   1865     216.5       181.1       205.5        218.7        216.8
   1866     173.8       167.0       180.7        192.7        191.0
   1867     163.9       148.2       173.2        178.9        172.2
   1868     164.2       145.8       164.3        167.1        160.5
   1869     162.9       139.0       160.9        157.9        153.5

These figures may be divided by the premium on gold, in order roughly
to ascertain gold prices. The index numbers then become:

                                               _Metals &
                                              Implements
                      _Bar Iron    _Rails,    exc. Pocket     _All
  _Year_   _Food_      Rolled_      Iron_       Knives_     Articles_

   1864     106.6       160.3       168.8        127.3        122.5
   1865     100.1        83.7        95.0        101.1        100.3
   1866     124.1       119.2       128.9        137.5        136.3
   1867     121.8       110.1       128.6        132.9        127.9
   1868     118.6       105.2       118.6        120.6        115.9
   1869     120.1       102.5       118.6        116.4        113.2[458]


The tables show that both currency and gold prices were much higher in
1866 than before the war, and that both remained high while the Union
Pacific was being built. Wages were also above the normal, and for
similar reasons. During the war the demand for men and goods of all
kinds was great. After 1865 the country turned with tremendous energy
to industry; and the upward swing, which was unchecked until the panic
of 1873, and which was especially directed toward railroad building,
maintained both wages and prices at an unusual height. Besides this,
American rails were at the time in a period of transition from iron
to steel; and much of the work carried through at such expense had
completely to be done over within the next ten years.

The high prices were made higher by the speed of construction. The
Union Pacific built west from the Missouri River, but at the same
time the Central Pacific was building east from Sacramento, under
similar conditions as to government aid. The two roads were expected to
meet at the western boundary of Nevada; but to encourage their early
completion, the Act of 1862 authorized the road which first reached
the designated point to continue construction, east or west as the
case might be, until junction with the second road should be made.
Since the amount of land granted depended on the mileage completed, the
haste of the companies was feverish. “The Union Pacific Company,” says
Davis,[459] “had its parties of graders working 200 miles in advance
of its completed line in places as far west as Humboldt Wells.” The
Central Pacific had completed 105 miles east of Sacramento by the
autumn of 1867, hauling iron and supplies over the mountains without
waiting for the piercing of its tunnels. No less than 1038 miles of
the Union Pacific, including the difficult stretch over the Rocky
Mountains, were completed by 1869, four years after construction was
commenced. The prize of additional land was thereby secured, but this
land was long unsalable, and the cost of construction was largely
increased.

Finally, large sums were misapplied through a construction company.
The story of the Crédit Mobilier has been so often told that only
brief mention need be made of it here.[460] In 1864 T. C. Durant,
vice-president of the Union Pacific, induced one H. M. Hoxie to bid
for a contract to build from Omaha to the one hundredth meridian.
Hoxie was financially irresponsible, and four days later assigned the
contract to a company composed of Durant and other stockholders of
the Union Pacific. Meanwhile Durant had purchased the charter of the
Pennsylvania Fiscal Agency, a corporation which possessed convenient
powers. Later in 1864 the members of Durant’s construction company
were given stock in the Fiscal Agency, now called the Crédit Mobilier
of America, for the amounts they had paid in, and stockholders of the
Union Pacific were allowed to receive Crédit Mobilier stock for the
amounts they had paid in on their Union Pacific shares. Stockholders of
the Union Pacific thus became also stockholders of the Crédit Mobilier,
and in their former capacity were enabled to vote lucrative contracts
to themselves as constructors of the railroad. Durant’s company
assigned its contract to the Crédit Mobilier. Subsequently it was
found more convenient to assign contracts to certain individuals, who
transferred them to seven trustees, who built the required road with
funds furnished by the Crédit Mobilier, and turned over the profits to
that organization, but the practical result was the same.[461] These
various devices removed all incentive to economy on the part of the
Union Pacific stockholders. Instead of gaining by cheap construction,
they profited by dear; instead of aiming to reduce the cost in every
possible way, they schemed at making the construction contracts as
lucrative as possible to the persons to whom they were assigned. The
advantages to them as stockholders of the Crédit Mobilier outweighed
the disadvantages to them as stockholders of the Union Pacific. The
profits realized by the Crédit Mobilier are still a subject of dispute.
H. K. White figures them as 27½ per cent, or $16,700,000; Davis
says that the profit was safely over $20,000,000; but whereas White
calculates the percentage of profits to the total cost of construction,
Davis insists that a large part of the capital invested was replaced
on the completion of each section of twenty miles by the proceeds of
the government bonds and railway bonds and stock, and that though from
$50,000,000 to $70,000,000 were expended, in all probability not more
than $10,000,000 were sunk at any one time; in which case a profit
of $20,000,000, spread over four years, represents $5,000,000 per
year, or 50 per cent annually on the capital employed. Finally, the
Union Pacific Railway Commission estimated the actual cash profits at
$23,366,320, and remarked that the obligations incurred by the railroad
company represented a very much larger sum, being measured by the bonds
and stock at their par values.[462]

The result of the three factors was a corporation bonded at an
extremely high rate. The cost of road in 1870 was reported to be
$106,245,978, or $102,951 per mile, against which was a capitalization
of $107,907,300, or $104,561 per mile, of which $32,715 per mile was
stock, $26,080 government bonds, and $45,765 first mortgage, land
grant, and income bonds. In 1873 the net earnings were $4,092,032, and
the interest on the funded debt, not including the government interest,
was $3,403,660. In 1874 the figures were $5,291,243 and $3,431,720;
in other words, the corporation started with a heavy handicap, which
its monopoly of transcontinental business at first helped to overcome,
but which grew heavier and heavier as the years went on. During
the seventies, to repeat, the Union Pacific enjoyed generally large
prosperity. The volume of stock outstanding remained the same, the
bonded indebtedness but slightly increased, and the ratio of operating
expenses to receipts declined. The first dividend was paid in 1875;
in 1876 and 1877 8 per cent was declared, in 1878 5½ per cent, and in
1879 6 per cent. In 1880, however, a consolidation took place with the
Kansas Pacific and Denver Pacific railroads, and this operation may
well receive somewhat detailed consideration.

The Kansas Pacific, as well as the Union Pacific, was a creation of
the Acts of 1862 and 1864, which required it to be constructed from
Kansas City westwardly to form a junction with the Union Pacific at a
point on the one hundredth meridian. Later, an Act of July 3, 1866,
authorized it to change its route, and to connect with the Union
Pacific at a point not more than fifty miles westwardly from the
meridian of Denver in Colorado.[463] Like the Union Pacific the Kansas
Pacific was built by means of construction contracts, which resulted
in a total capitalization on its 638 miles of line of $9,437,950 in
stock and $22,651,000 in bonds, or $14,793 and $33,455 respectively
per mile,—high figures in view of the comparatively level character
of the country traversed.[464] The road was not a paying one. It
was poorly built and poorly managed, and running parallel with the
Union Pacific, it had to meet competition of a very bitter kind. The
report of Mr. Calhoun, expert accountant for the United States Pacific
Railway Commission of 1887, showed that the total receipts of the
road from 1867 to 1879 had aggregated $9,220,218, while the bond and
interest account, exclusive of United States interest, had amounted to
$15,745,287; leaving a deficit of $6,525,069, or, including the United
States accrued interest, of $11,330,772.[465] That is, the Kansas
Pacific was in a state of chronic insolvency. In 1874 it was placed
in the hands of receivers, and the following year, by an arrangement
with its creditors, it funded a considerable amount of overdue
interest.[466]

In 1878 a number of securityholders of the Kansas Pacific got together
in an attempt to reorganize that property, to take it out of receivers’
hands, and to “unite in interest the Kansas Pacific and Union Pacific
Railway Companies.” Twelve large securityholders consented to
contribute to a common pool or fund holdings of securities taken at
a fixed valuation, their interests in the pool to be proportional to
the amounts of said securities and stock taken at the value referred
to.[467] For the securities deposited they were to receive stock at a
reduced rate: thus for eight shares of old stock they were to receive
one share of new; for $2000 unsubordinated income bonds they were
to get ten shares, and for $10,000 subordinated income bonds thirty
shares of new stock.[468] The final result would have been to replace
securities with a par value of $17,330,350 by stock with a par of
$4,855,300, and greatly to lighten the burdens upon the road; though
it must be remembered that the $17,330,350 were less than half of the
total volume of securities outstanding, that the payment of interest on
much of these had been optional only, and that no provision was made
for the floating debt.

The scheme fell through, according to Mr. Gould, who was a party to
the agreement, because securityholders outside of the pool refused
to consent to so drastic a reduction of their holdings; and at his
suggestion a consolidated mortgage was substituted for the issues of
stock. This mortgage was for forty years at 6 per cent. The total issue
was to be for $30,000,000, of which $24,000,000 were to be issued at
once for the retirement of earlier bond issues and for payment of
arrears of interest.[469] Like the previous proposition the scheme
contemplated a scaling in the principal of the junior securities, and
the same rates of commutation were retained; but in this case the old
Kansas Pacific stock was withdrawn from the operation of the plan, and
certain reservations were made for other purposes, so that an actual
increase in indebtedness was finally to result, and even the interest
charges were certain to increase.[470] For the time being, however, by
force of the reduction of interest on the funding mortgage in January,
1879, from 10 to 7 per cent, and by the disallowance of some claims for
overdue interest, relief was obtained, while the consolidated mortgage
was duly issued.

The Kansas Pacific ran west to Denver. Between Denver and Cheyenne the
Denver Pacific, 106 miles long, served as a connecting link between
the larger systems. The Denver Pacific stock was held by the Kansas
Pacific, and 29,979 shares of it were pledged in 1877 as part security
for an issue of 10 per cent funding mortgage bonds.[471] The total
earnings of the Denver Pacific from 1870 to 1879 had been $3,122,141;
the expenses had been $1,709,477, and the net earnings from operation
$1,412,664, or an average per annum of $141,266; while for the first
eight years of that time the annual interest charge had been about
$185,000. The only value of the Denver Pacific stock lay in the
control which it secured over a connecting link between Denver and
Cheyenne.[472]

Under the conditions of competition existing between the Union
Pacific, Kansas Pacific, and Denver Pacific, some sort of agreement or
consolidation was both desirable and likely. The Kansas Pacific was
entirely dependent on its competitor for access to western business,
and this was soon perceived to be equivalent to continuous bankruptcy.
Extension to Ogden would have removed the dependence; but this, while
to be dreaded by the Union Pacific, was beyond the power of the
Kansas Pacific for financial reasons, and no capitalist or group of
capitalists before 1878 or 1879 seemed interested in the undertaking.
On the other hand, rates were low, and the very success of its
exclusive policy forced the Union Pacific to meet the competition of a
road which, with no interest charges to pay, was able to cut all rates
to the very verge of the cost of operation.

As early as 1875 there was talk of an agreement whereby the Kansas
Pacific was to give up its claims for a pro rate on its Pacific
business in return for a monopoly of the local business of Colorado,
and in connection with the deal was to acquire the Colorado Central
Railroad on issue of $10,000,000 Kansas Pacific stock to parties
designated by the Union Pacific Company; but this was never carried
out. In 1878, when Gould began to be interested in the property,
a union by means of stock control seemed feasible. Gould’s first
purchases were of bonds, and it was as a bondholder that he entered
the pool of 1878; but with the purchase of the holdings of the “St.
Louis parties,” he and his friends obtained control of a majority
of Kansas Pacific stock. In fact one of the provisions of the pool
was that if on the first day of June, 1878, it should be found that
Messrs. Gould, Dillon, and Ames, all large stockholders in the Union
Pacific, had not a majority interest in said pool, then they should
have an option on such an amount of other interest ratably and for cash
as on the basis of the schedule should give them such an interest;
and though this majority did not necessarily involve a majority of
stock, the operations of the pool aided Gould in the acquisition of
control. The union between the Union Pacific and the Kansas Pacific
thus secured was, however, of the frailest kind; for Mr. Gould at no
time had the permanent interest of either road at heart, and looked
for his personal profit rather in their struggles than in agreement
between them. For this reason, as he bought Kansas Pacific, Gould
sold Union Pacific stock, reducing his holdings from about 200,000 to
about 27,000 shares.[473] In 1879 the situation of the two roads was
thus much the same as before, and the harmony apparent was of the most
superficial kind. One change, however, had taken place to the serious
disadvantage of the Union Pacific; for the Kansas Pacific, although
still badly built and dependent upon its rival for an adjustment of
rates sufficiently favorable to let it into the western business, had
now interested in it a group of capitalists quite capable of financing
an extension to Ogden, and even of securing connections from Kansas
City to the East.

In 1879, doubtless relying upon the strength of Kansas Pacific’s new
backing, Gould proposed to the Union Pacific a consolidation of the
Union, Kansas, and Denver Pacific roads, in which the shares of each
were to figure equally at par. The terms were absurd by every test of
productive capacity which could have been applied. The relative earning
power and annual interest per mile of the three roads at this time were
given by a government accountant as follows:

                    _Annual Net       _Annual Interest
                 Earnings per mile_       per mile_

  Union Pacific        $5617                $3185
  Kansas Pacific        1602                 2295
  Denver Pacific        1333                 1750[474]

The Union Pacific had reported an annual surplus, the other two roads
an annual deficit; the Union Pacific had not defaulted, the Kansas and
Denver Pacific had done little else; the highest mark which the Kansas
Pacific stock had touched in January, 1879, had been 13, that of the
Union Pacific had been 68½. But the question, as Gould well knew, was
not one of productive but one of destructive capacity, and the means
of coercion which he employed was a demonstration of the ease with
which the Kansas Pacific could be made formidable as a competing line.
In November, 1879, he purchased the Missouri Pacific from Kansas City
to St. Louis; about the same time he bought two minor roads between
the Kansas Pacific and the Union Pacific in Kansas, and announced his
intention of extending the Kansas Pacific to Salt Lake City, there to
connect with the Central Pacific and to form a third transcontinental
route. The story is clearly told in the report of the United States
Pacific Railway Commission.[475] The result was the consent of the
Union Pacific directors to the terms imposed, and the execution of an
agreement dated January 14, 1880, whereby the Union and the Kansas
Pacific, with all their respective assets and liabilities, were put
together at par of their respective capitals,—$36,762,300 and
$10,000,000,—to which was added the capital of the Denver Pacific,
$4,000,000, forming a new company called the Union Pacific Railway
Company, with a capital of $50,762,300, and a bonded indebtedness of
$92,984,624.[476] This corporation was larger in every way than the old
Union Pacific Railroad, except in one particular—earnings above fixed
charges. It had 1821 miles of line instead of 1042; $22,455,134 gross
earnings instead of $13,201,077; $10,545,119 operating expenses instead
of $5,475,503; and yet, since the consolidation was a union of some
strength with a vast deal of weakness, there were few who profited by
it save the holders of Kansas Pacific or Denver Pacific stocks. Those
lucky and skilful individuals saw the quotations of Kansas Pacific
common rise from a high level of 13 in January, 1879, to one of 59 in
June, and of 92½ in December; and the stock which had been a football
in the market thus become of such value that in 1887 Gould was able
to lay before a committee of Congress, in justification of the terms
described, a table which showed for 1880 market prices of Kansas and
Union Pacific stock which were approximately the same.[477]

It was to Gould, as chief owner of Kansas Pacific and holder of
practically all of the Denver Pacific stock outstanding, that the
lion’s share of the profits went; but Mr. Gould was not satisfied
with a harvest on these stocks alone. In the course of his operations
he had become possessed of certain branch and minor roads in whole
or in part. Thus he held $945,887 in bonds of a company known as the
St. Joseph & Western Railroad Company, and 5013 shares of its stock;
$634,000 in bonds of the St. Joseph Bridge Company; and $59,000 in
St. Joseph & Denver Pacific Railroad receivers’ certificates; while
to convince the Union Pacific directors of the wisdom of accepting
his plan of consolidation he had acquired the Missouri Pacific, the
Kansas Central, and the Central Branch Union Pacific railroads.[478]
The earning capacity of none of these lines was large, that of the
Missouri Pacific being the greatest. The St. Joseph & Western had
been sold in foreclosure in 1875, and had continued to be managed
thereafter by a receiver. What value it had was due to the fact that,
as extended to Grand Island, it gave to the Union Pacific an outlet
to the East other than the one at Omaha. The value of the Bridge
Company bonds and of the receivers’ certificates was dependent upon
this same property. The Kansas Central was a narrow-gauge road and
had been sold under foreclosure in April, 1879. The Central Branch
Union Pacific had been designed to join with the Kansas Pacific, but
had been left without western connection when this latter road had
failed to meet the Union Pacific at the hundredth meridian. At the
time of the consolidation, according to the United States Pacific
Railway Commission, “the coupons for six years were in default, and
were retained uncancelled as security for the income mortgage. The
company had never earned sufficient to pay its own coupons, without
taking into account the accruing interest to the United States in any
form.”[479] The Missouri Pacific was more prosperous, but need not here
concern us. Mr. Gould had paid various prices for the above, ranging
from $40 for the St. Joseph & Denver bonds to $238 for the stock of
the Central Branch Union Pacific. In the case of each road he turned
over his purchase to the Union Pacific for the same or a greater
price.[480] Thus for the St. Joseph & Western bonds, for which he had
paid 40, he received par in Union Pacific stock selling as high as 94
in January, 1880; for $634,000 bonds and 4000 shares of stock of the
St. Joseph Bridge Company, costing $480,440, he received 6340 shares
of Union Pacific stock; for $479,000 in bonds and 2521 shares of stock
of the Kansas Central, he received 4790 shares of Union Pacific; and
for 7616 shares of Central Branch Union Pacific, costing $1,826,500,
he received $913,500 in Union Pacific six per cent bonds and $913,500
in Kansas Pacific six per cent bonds.[481] The result was the issue
of considerable amounts of stock of the consolidated and bonds of the
consolidating companies, without equivalent value received.

The Union Pacific Railway Company, therefore, began its career in
1880 in worse shape than the Union Pacific Railroad Company, which
had preceded it, for it suffered not only from an initial watering of
stocks and bonds, but from a watering of assets which had followed.
Including the government subsidy and accrued interest thereon, the
total bonds and stocks of the company in 1880 were $179,058,902, or
$98,329 per mile, of which $27,876 were stock, $45,372 mortgage bonds,
and $25,081 government subsidy and interest. The figures per mile were
slightly lower than in 1870, and yet the water in the capitalization
was more abundant, for the average value of the assets had declined
still more. A dividend-paying road had been combined with non-dividend
payers, with the result of large profits to the promoters of the
consolidations, but of serious harm to the solvent party.

Between 1880 and 1883 a number of branches were constructed, to provide
funds for which the capital stock of the Railway Company was increased
$10,000,000. Of these the Denver & South Park was constructed in the
years 1881 to 1883, and was the last of Mr. Gould’s gifts to the
parent line. This road was handled by several construction companies,
in the last of which Gould took a quarter interest, receiving stock
of the Denver & South Park Railroad Company as a dividend on his
investment.[482] In November, 1880, acting in behalf of the Union
Pacific Railway Company, he bought the stock of the Denver road at par
for cash, benefiting in his capacity as quarter owner by his action as
representative and stockholder of the Union Pacific.[483] In relation
to the road Mr. Charles F. Adams, Jr., subsequently said: “The chief
source of revenue ... was in carrying men and material into Colorado
to dig holes in the ground called mines, and until it was discovered
that there was nothing in those mines the business was immense.”[484]
A more important and genuinely beneficial project was the organization
in 1881 of the Oregon Short Line Railway Company to construct and
operate a railway from Granger on the Union Pacific to and into the
state of Oregon, a distance of 610 miles, with the intention of
securing the Washington and Oregon business. The Northern Pacific was
in financial difficulties at the time, and it was not expected that it
could anticipate the new road; but even though this expectation was
disappointed, and the Oregon Short Line was second in reaching the
disputed territory, its value was great and steadily grew.[485] The
road was built by the construction department of the Union Pacific,
and was financed by the organization of a subsidiary corporation which
issued stock and bonds to an amount of $25,000 per mile, one-half of
the stock being reserved in the Union Pacific treasury for the purpose
of control, and the Union Pacific guaranteeing the payment of interest
on the bonds. This branch at least was not unloaded on the main line by
interested parties, and forms an essential part of the system to-day.
Other branches were bought or constructed at the time, but do not
require detailed mention.

Gould for the time had obtained from the Union Pacific all that he
thought possible, and quietly unloaded his stock, while keeping up the
payment of dividends. By 1883 he was substantially clear, but he had
left his mark; the consolidation of 1880, with the forced purchase of
worthless branches, aided as it was by the high capitalization caused
by extravagant original construction, and accompanied by a steadily
increasing intensity of competition between transcontinental lines,
had diminished the surplus to a dangerous extent. At the same time the
prosperity of the country as a whole was declining; the wheat crop of
1881 was only three-quarters as large as the crop of 1880, and the corn
crop was the smallest since 1874; though the decline was not so marked
in Kansas and the far West as in the states east and south of Omaha and
Kansas. By 1882, says Noyes, all the markets were moving downward, and
after the reaction of that year, the volume of internal trade decreased
continuously until after the panic of 1884.[486]

The evidence of distress on the part of the Union Pacific was the
mounting up of the floating debt. In November, 1882, President Dillon
stated that it then amounted to $3,400,000, and that a loan of
$5,000,000 was to be negotiated to take care of it.[487] The annual
report at the end of the year stated the net debt to be only $842,743,
but included in the assets used to offset the gross debt $2,768,437 in
fuel and material on hand, and $927,648 in balances due from auxiliary
roads; so that early the following year it was again a subject of
discussion, and the stockholders recommended to the directors the
issue of collateral bonds in order to wipe it out. Pursuant to the
recommendation the directors executed to the New England Trust Company
of Boston an indenture under which it proposed to issue trust bonds to
an amount equal to 90 per cent of the securities deposited. By 1884 the
gross floating debt amounted, nevertheless, to $11,306,595, as against
$9,852,325 gross in 1882, and the quick assets, exclusive of fuel and
material, counted up to $8,068,898, instead of to $6,241,145. The chief
increase in liabilities, as always, had taken place in bills payable,
meaning that the road had been giving its notes for the payment of
current indebtedness, with the consequent necessity of paying a high
rate of interest, and of making frequent renewals. Meanwhile dividends
had been stopped and salaries cut down.

At this juncture Mr. Sidney Dillon resigned the presidency, and Mr.
Charles Francis Adams, Jr., was elected his successor. Mr. Dillon was
well along in years, was said to be in poor health, and doubtless
missed the support which Mr. Gould had been accustomed to render him.
Mr. Adams was a younger man, only forty-nine years of age as against
the sixty-nine of Mr. Dillon. He had been a member of the Massachusetts
Railway Commission from 1869 to 1879, had served as government director
of the Union Pacific in 1878, and now brought to his position as
president an inexhaustible fund of energy, large resourcefulness,
and more important still, a nice sense of his obligations towards
the bondholders and shareholders of his road. Under his régime the
economies earlier initiated were continued and extended; employees were
discharged until, by June 28, 1884, the company had only about 10,000
men in its employ instead of the 20,000 who had been on the rolls at
one time; and rolling mills, etc., were closed wherever the company
found it cheaper to purchase rails and equipment at current prices.
This, with the cessation of dividends, left a considerable surplus
revenue applicable to the payment of the floating debt. In addition,
bonds and stock from the company’s treasury were sold between January
1, 1884, and January 1, 1887, for which $6,550,000 were obtained; and
the aggregate of resources made available was $16,200,000, of which
$8,251,368 were applied to the floating debt, $6,708,632 to betterment
of the road and branch-line construction, and $1,240,000 to increase of
equipment.[488] In addition the proceeds from land sales were used to
the same general end. In August, to reassure investors, President Adams
stated that no part of the floating debt was pressing, and in November
he repeated the statement; the truth of which was made evident by the
payment of the last bit of net unfunded indebtedness on August 22, two
years later. The result was highly creditable, although the continued
cessation of dividends provoked some protest.

Much could be done at this time by able and energetic management; there
was, however, much that could not be done; and it is to this that we
must attribute Mr. Adams’s failure to put the road in a permanently
stable position. For first, the competition which the Union Pacific
was obliged to meet was constantly increasing in severity. In 1881
the Atchison, Topeka & Santa Fe was extended to a junction with the
Southern Pacific at Deming; in 1883, in the language of the annual
report, “Not only was the Rio Grande completed to Ogden, making, in
connection with the Atchison, Topeka & Santa Fe and the Burlington
& Missouri extension of the Chicago, Burlington & Quincy, a direct
competing route with the Union Pacific from Chicago and all eastern
points to a common western terminus, but the Northern Pacific also was
connected through, making a third transcontinental route.”[489] In 1887
the Atchison built 450 miles of line and the Chicago, Rock Island &
Pacific was scarcely behind, so that Kansas and Nebraska were covered
with a network of lines, which transformed the natural local traffic of
the Union Pacific into competitive business of the most uncertain kind.
At the same time the profitable high grade business was giving way to
a larger volume of mineral traffic, and the average length of haul was
increasing, all of which resulted in a decrease of about 45 per cent
in the average receipts per ton mile between 1881 and 1890, a slow
increase in gross earnings which bore little relation to the greatly
increased volume of business done, and a fluctuating progress of net
earnings, which were actually over $3,000,000 less in 1889 than they
had been eight years before.

And second, during this time the fixed charges of the Union Pacific
did not materially decrease. They were $7,626,626 when Mr. Adams
assumed the presidency, and $7,309,142 five years later; and the
necessity for further decrease was shown by the fact that the total
net income of the road was $11,402,199 in 1884, $10,339,402 in 1889,
and $9,561,673 in 1890. What Mr. Adams could do he did, and the funded
debt under his régime decreased from $90,760,582 in 1884 to $82,090,585
in 1889, and to $73,968,885 in 1890; the company steadily buying up
its own indebtedness: but the conditions which he had to face were too
exacting, and the saving made here was offset in other ways.

To save itself the Union Pacific was driven to a rapid extension of
its branch mileage, which Mr. Adams held to be the only means by which
fixed charges could be paid.[490] Between 1884 and 1890 3132.45 miles
were built or acquired, all under separate organizations, but with
their accounts and management under the supervision and control of the
officers of the parent line; and the amount invested in branch-line
securities was raised from about $28,000,000 in 1881 to $41,879,724 in
1892. These roads reported annual deficits, which were either paid out
of earnings or carried as floating debt. The report of the Government
Directors in 1891 declared that $15,000,000 out of $21,400,000 of
floating debt were the result of expenditures and advances in the
construction of branch and tributary lines and the purchase of stock in
such lines for the purpose of control.[491] But speaking in 1887, Mr.
Adams declared the branches to be worth $5,000,000 a year to the main
line, entirely apart from anything which appeared in the accounts of
the branches themselves, and in a letter to the Government Directors in
1884 he said: “The branches and auxiliary lines of the Union Pacific
should be considered the only real security the Government has for the
repayment of its indebtedness.... Were it not for these branches the
Union Pacific would be confined to such small local traffic as it could
pick up at points directly upon its main line; and to its share of the
through transcontinental business which has recently been subdivided
by four through the construction of competing routes.”[492] The most
important of the branches remained the Oregon Short Line, with the
connecting line of the Oregon Railway & Navigation Company, of which
the Union Pacific became finally possessed in 1889. This last road had
been long considered the natural outlet of the Northern Pacific to the
Pacific coast, but had been leased by the Union Pacific in 1887 through
the Oregon Short Line with a guarantee of 6 per cent dividends upon
its stock as well as interest upon its bonds for 999 years. In 1889
negotiations with the Northern Pacific resulted finally in the sale
of the Oregon Railway & Navigation stock held by Mr. Villard and his
friends. Pending the issue of a collateral trust mortgage the stock
was deposited with a trust company, a note was given for the amount,
and the sum was carried as floating debt. Whatever the value of the
property to the Northern Pacific, it proved of great worth to the Union
Pacific, providing it with an independent outlet to the coast, and
giving it a haul on its main line of over 800 miles on all interchanged
traffic. The method of payment proved a dangerous one, however, in
that it so largely swelled the volume of the Union Pacific’s quick
liabilities.

In 1891 Mr. Gould again began buying Union Pacific stock. Mr. Adams
therefore resigned late in the year, and Mr. Dillon was elected to
his position. The time was not ripe for expansion of any kind, and
Mr. Gould’s death the following year put an effectual check on any
schemes which he might have entertained. The immediate problem was the
floating debt, swollen to unwieldy proportions by the acquisition of
branch lines, and in particular by the purchase of the Oregon Railway
& Navigation Company. During 1890 a block of collateral bonds was
issued and sold, but the remainder of the proposed issue was kept
back in the hope of a better price. While waiting, Mr. Gould devised
a scheme for the postponement of the payment of these and of other
quick liabilities by the issue of three-year collateral notes, to be
underwritten by a syndicate composed of himself and of other gentlemen
interested in the property. These notes were to bear 6 per cent, and
were to be issued at 92½ to such holders of the floating debt as would
accept them, the syndicate taking care of the balance. The authorized
amount was to be $24,000,000, of which $5,500,000 were to be issued at
once. The plan was declared operative on September 28, 1891. If, now,
the Union Pacific had been a moderately capitalized corporation, with
fixed charges normally well below its earning capacity, and if, in
1894, when the notes were to mature, the market conditions had been
more favorable than in 1891, it is probable that this scheme, temporary
as it was, would have met the needs of the situation. Since neither
of these contingencies occurred the insufficiency of the plan may be
said to be in part the misfortune of the Union Pacific and in part its
fault. It was a particular misfortune that the severest panic since
1873 should occur when the road was staggering under a load which it
could scarcely bear; but it was altogether a fault that the railroad
should have been so burdened as to be able to lay by no reserve in good
times for the hard times which were bound to come.

In 1892, therefore, the Union Pacific was in a difficult position. Its
capitalization was high; its earnings had shown scarcely any increase
for five years; its surplus had not been sufficient to prevent the
accumulation of a large floating debt; it had to prepare to raise a
large sum of money in two years for the payment of its short time
notes; and, in addition, there was ahead a fact of which little has
been said so far,—the maturing of the government indebtedness.

Briefly sketched, the history of this indebtedness was as follows:
The Acts of 1862 and 1864 had provided for the issue of government
bonds for stated amounts per mile on the subsidized portions of the
system in aid of construction, which bonds were to mature thirty years
from date of issue, and to have a lien on the property covered second
only to the first mortgage of the company. The rate of interest was 6
per cent, payable to the bondholders by the Government; and in 1875
the Supreme Court decided that the company was not obliged to repay
to the Government the accruing interest before the maturity of the
bonds.[493] This ruling was regarded as a victory for the company, but
meant the steady piling up of arrears of interest, lessened only by the
retention by the Government of one-half the amounts due for government
transportation, and, under the Thurman Act, of such additional sum
not in excess of $850,000 as, added to the whole compensation for
government services and to the 5 per cent of net earnings set aside
under the Act of 1862, should make the annual contribution equal to
25 per cent of the net earnings of the company, unless the remaining
75 per cent should be insufficient to pay the interest on the first
mortgage bonds; in which case the Secretary of the Treasury was
authorized to remit a portion of the 25 per cent of net earnings
required.[494] The Thurman Act did not fulfil expectations. The Supreme
Court in 1891 held that expenditures for new construction and new
equipment could not be deducted from gross earnings in ascertaining
net earnings,[495] but the road met hard times and the maximum limit
of the contributions to the sinking fund was not attained, and in
investing the fund in government bonds the Secretary of the Treasury
was compelled to pay high premiums, thus reducing the net interest;
so that from the beginning to 1892 the question of indebtedness to
the Government occasioned constant dispute and litigation, introduced
uncertainty into the affairs of the railroad, and caused hard feelings
between it and the Government. In 1892 the necessity for some
settlement was near at hand. The principal of the government debt
matured as follows:

  November 1, 1895     $640,000
  January  1, 1896    1,440,000
  February 1, 1896    4,320,000
  January  1, 1897    6,640,000
  January  1, 1898   17,342,512
  January  1, 1899    3,157,000
                    -----------
                    $33,539,512

Deducting from this amount the sums paid to the Government and
the company’s credits for mail and carriage, and adding arrears
of interest, the sum due the Government at the last of 1893 was
approximately $52,000,000.[496] It was obviously highly difficult for
the company to pay this sum in 1892 or 1898 or any other time, and
for some years both the company and the Government had been earnestly
discussing schemes for refunding, and the advantages and disadvantages
of the ownership and operation of the road by the United States.
Thus in 1892 an overwhelming obligation was hanging over the Union
Pacific; and did not crush it only because the inability of the road
to pay was so evident, and the inadvisability of government ownership
was so strongly believed in, that every one felt that the necessary
concessions would be made.

In 1893 the sinking-fund 8 per cent bonds matured to the amount of
$5,176,000, and were partially extended and partially paid off through
the medium of an underwriting syndicate; but this was the last attempt
to meet indebtedness coming due. During the year both gross and net
earnings fell off enormously, owing to the general depression of
business, and particularly to the stagnation upon the Pacific coast.
Freight rates were said to be in a state of chaos; and the Union
Pacific served notice that it would withdraw from the Western Passenger
Association on October 10. As the year wore on the continued decrease
in earnings made the situation desperate. “The company for the year
ending December 31, 1892,” said Mr. John F. Dillon, counsel for the
Union Pacific, in November, “had a surplus of $2,000,000. In the month
of September (1893) there was a loss of net revenue of $1,500,000 as
compared with the preceding year, and from January 1 to August 31
there has been a falling off in net revenue of over $2,500,000. The
company is indebted for labor and materials on October 1 to the amount
of $1,500,000; and its sinking-fund and interest charges for September
would be more than $1,000,000; for October $750,000, for November
$850,000, for December $1,000,000, and for January $1,000,000. There
will be a deficit for the year 1893 of at least $3,000,000 and the
company is without money or means to meet these obligations....”[497]

Under these conditions a receivership was the only device which could
prevent the dismemberment of the system and protect the interests of
all the creditors; and accordingly, on application of parties friendly
to the company, Messrs. S. H. Clark (president of the Union Pacific),
O. W. Mink (comptroller), and E. E. Anderson (government director),
were appointed in October;[498] Mr. Clark taking charge of the
operation of the road, and Messrs. Mink and Anderson of the financial
and legal business.[499] One month later, on application of the
Attorney-General, Messrs. John W. Doane and Frederick R. Coudert were
appointed additional receivers to safeguard the government interests
and to assist the other receivers in the general administration of
the property.[500] These gentlemen remained in office until the
reorganization was complete, though various portions of the system
passed from their jurisdiction from time to time.

The appointment of receivers closed a long struggle to maintain the
solvency of the road. A reorganization was now in order, and in this
it was to be possible to do what Mr. Adams had not been able to
do,—namely, to rearrange the capitalization of the road, thereby
permanently lessening the fixed charges and securing a reserve of
earning capacity sufficient to avoid bankruptcy when receipts for any
cause should show a considerable decrease. This was the fundamental
condition of future prosperity. Besides, the debt to the Government
had to be settled, cash raised to pay the floating debt, including the
three-year notes of 1891, and the system held together so that its
earning capacity should not be destroyed.

As might be expected, it was the debt to the Government which was most
publicly and persistently discussed. There seemed to be four ways in
which this might be handled:

First, the Government might have cancelled the obligation and have
remained satisfied with the enormous economies which it had secured
in the transportation of mails and other government business. In the
seven years between 1867 and 1873 alone the Quartermaster-General
estimated that the Union Pacific had saved the Government $6,507,283
in the cost of moving troops and supplies,[501] and there was no doubt
that by 1896 the investment of the Government, with interest, had
been many times regained. But it was pointed out not only that the
Union Pacific deserved little consideration, in that its earnings had
been wrongfully diverted from the payments demanded by the Thurman
Act by the manipulations of Gould and others, but that the precedent
of renouncing a just claim would be an extremely bad one for the
Government to set.

Second, the Government might have exacted larger payments to the
sinking fund, and have extended the debt at an unchanged rate of
interest until it should be automatically discharged. This was the
proposal of Mr. Hampton, Commissioner of Railroads, who suggested
the amendment of the Thurman Act as follows: it should embrace all
the United States bond-aided Pacific railroads; it should compel the
contribution of 50 per cent of net earnings to a sinking fund instead
of 25 per cent, and should extend the indebtedness to the Government
until discharged as provided. If any company should abandon a portion
of a subsidized line or divert its business from a subsidized to an
unsubsidized line, that company should transfer the conditions which
were attached to the former to the latter, in order to protect the
interests of the United States Government.[502] The weak points in
this scheme were many. Among them may be pointed out the fact that
contributions to the sinking fund under the Thurman Act had been
necessarily invested in government bonds, which, in view of the premium
at which they were necessarily purchased, yielded a very small return.
To double the contributions would have been to double the amount of the
railroad’s funds sunk in but slightly remunerative investments; and the
Government did not seem inclined to permit the company to adopt the
only practicable alternative, that of investing its sinking fund in its
own securities. Also, Mr. Hampton’s amendment would have continued to
an enhanced degree the constant suspicious supervision of the company
by the Government which had been, perhaps, the chief evil result of the
Thurman Act.

Third, the Government might have consented to a refunding of the
indebtedness to it at a lower rate of interest. This was most urgently
pressed by representatives of the road. Mr. A. A. H. Boissevain,
representing the Dutch bondholders, proposed to redeem the first
mortgage by the securities in the sinking fund so far as possible,
and to renew the rest at a lower rate of interest;—after which
the Government was to be given a 100-year 2 per cent bond for the
principal and interest of its claim.[503] Attorney-General Olney
similarly suggested a renewal of the first mortgage bonds at a rate of
not over 5 per cent, and an exchange of 100-year 2 per cent bonds for
the government claim; though he differed somewhat from Mr. Boissevain
as to the lien which these bonds should have.[504] Congress and the
Government Directors in 1894 were inclined to insist on harder terms.
The latter, in their annual report, proposed that the first mortgage
bonds be paid off in cash, and that a 100-year 3 per cent instead of a
2 per cent bond be given to the Government, with elaborate provision
for a sinking fund; and the former had before it in the Reilly Bill
a very similar suggestion.[505] As a counter-proposition the railway
company offered to pay off the first mortgage bonds in cash if the
Government would take a 50-year 2 per cent instead of a 3 per cent
bond for its claim. “The petitioners further represent,” it said,
“that it will be utterly impossible to obtain the very large sums
referred to from the stockholders unless it be possible to offer to
them in satisfaction of their assessments reasonable security for the
moneys so advanced. At a meeting recently held, at which were present
representatives of a large amount of the stock of the said company,
the conclusion was reached that if the debt to the Government could be
funded substantially on the terms of the Reilly Bill, but at a rate
of interest of 2 per cent per annum instead of 3 per cent, the said
stockholders would endeavor to raise the funds needed for the purpose
of meeting the requirements of the Reilly Bill.”[506] Finally, Mr.
Pierce, on behalf of the Fitzgerald Reorganization Committee, proposed
that the Government either take 4 per cent bonds for the principal
of its debt, and preferred stock for the interest, carrying into
the settlement with the Government the scheme which was found best
adapted to the satisfaction of other creditors; or that it take a 3
per cent first mortgage bond for its principal, and a second mortgage
non-interest-bearing bond for its interest; or that it accept a lump
sum of money equal to the value of its lien, which he informally
estimated as 50 per cent of the total amount due.[507] The plan of
refunding was the most obvious as well as the most practicable of
all suggestions. It had, however, the disadvantage from the point of
view of the Government of surrendering some part of the government
claim, and from that of the company of continuing the relations of the
Government with the road.

Fourth and last, the Government might have demanded payment in cash.
The sum which the company would have had to obtain was extremely large,
but the accumulated sinking fund reduced it considerably, and many
thought that the balance could be raised. In March, 1896, before a
Senate committee, Mr. John Rooney, for the first mortgage bondholders,
proposed that the Government, through a commission, should buy in
the Union Pacific at foreclosure sale, should issue a new general
mortgage at a lower rate of interest than the existing prior liens,
and should pay off both the first and the government mortgage with the
proceeds;—the road to be turned over to the subscribers.[508] This
suggestion took place among many others which were in the nature of
a compromise. Thus the reorganization committee, in 1895, offered to
pay the principal of the government debt provided that the interest
were cancelled;[509] and Receiver Anderson proposed in 1896 that the
company pay the principal of the debt by adding funds raised by it to
the amount of the sinking fund, and settle the arrears of interest with
a 50-year 2 per cent bond. Full payment in cash was, of course, what
the Government desired, and everything short of that it hesitated to
accept; but equally, of course, full payment was what the bondholders
of the road were most unwilling to concede; and hearing after hearing
took place before committees of the Senate and of the House without
definite result.

Meanwhile the general reorganization of the company was going on.
In November, 1893, the various interests and factions of the road
held a conference in New York, which resulted in the choice of a
reorganization committee as follows: Senator Brice, chairman; Mr.
A. H. Boissevain, for the foreign holders; General Louis Fitzgerald,
president of the Mercantile Trust Company, for the Gould interests;
Mr. Carr, for the estate of F. L. Ames; General Dodge, for the Denver
and Gulf roads’ interests; and Colonel H. L. Higginson, for the Oregon
Railway & Navigation interests.[510] Subsequently Mr. J. P. Morgan
accepted a place.[511] This committee was the only comprehensive
one appointed until 1895; but numerous other committees sprang up
to represent special interests of one kind or another, appearing
frequently as interest on new classes of bonds was defaulted, and
having, with the main reorganization committee, to deal specifically
with the payment of the floating debt and the reduction of fixed
charges. Upon the ability of the committees to agree depended the
retention of the Union Pacific in something like its existing shape.

Aside from the question of the government debt there seemed to be a
general agreement as to what was needed to be done. Every suggestion
contemplated the payment of the first mortgage in full and the
reduction of the interest upon the junior securities; most included
with this an assessment on the stock, and one at least proposed the
cancellation of the guarantee on the stock of the Oregon Railway &
Navigation Company.[512] The principles were obvious. A large sum of
money had to be raised with which to pay the floating debt and to meet
possible demands by the Government. This had to come from the junior
securities or from the stock, and preferably from the stock, which
represented ownership in the enterprise. On the other hand, reductions
in fixed charges had to come from the junior securities as the youngest
interests which had a mortgage lien. Differences of opinion occurred
upon the details. Should there or should there not be a foreclosure?
How large an assessment was required? How great must the reduction in
interest charges be, and should bonds or stock or both be given to the
junior securities in exchange for their holdings? Should the system as
it stood be preserved, or should certain parts of it be let go?

In June, 1894, Mr. Boissevain stated that the reorganization committee
thought that they should be in a position to formulate a complete
plan of reorganization speedily after the terms of the adjustment of
the debt to the United States had been approved by Congress. “It is
our opinion that the fixed charges of the reorganized company ...
should not exceed $8,500,000 per annum. Certain classes of existing
bonds secured by mortgage on portions of the system cannot be and
should not be disturbed, as they are amply secured by property earning
the interest which is payable thereon. Other bonds, however, must be
converted in whole or in part into securities not imposing a fixed
charge upon the reorganized company. While the reorganization committee
has not approved of any definite plan, we believe that holders of bonds
which must be disturbed and creditors and stockholders interested in
the system can be provided for upon an equitable basis by the creation
of the following securities:

(_a_) An issue of general mortgage bonds (at 4 per cent), secured by a
general mortgage covering the entire system, subject to such mortgages
as cannot be disturbed, and to the lien of the United States upon the
main line and Kansas Pacific division for the adjusted debt.

(_b_) An issue of 5 per cent preferred stock.

(_c_) An issue of common stock.

The plan of reorganization would require provision to be made to
take up the trust notes secured by valuable collaterals. The funds
required for this purpose and for the other cash requirements of the
reorganization would be met in part by a reasonable assessment upon the
stockholders, and in part by the sale of new securities.”[513]

A not dissimilar suggestion was made by the Government Directors in
1894. They proposed to ascertain the minimum net earning power of
the railroad or railroads to be reorganized, and to issue a blanket
mortgage of 3 per cent 100-year bonds to an amount such that the
accruing interest would not exceed the net earning power. By sale of a
portion of these bonds, together with a $10 assessment on the stock,
and the use of the moneys and securities in the sinking fund, they
would have paid off the prior liens, and then, after exchanging the
new 3 per cent bonds for the government claim, they would have used the
balance to retire the junior securities, adding preferred stock, so
much as necessary, to compensate for the difference in yield between
the old securities and the new ones received. The amount of securities
required they estimated at $150,000,000 3 per cent bonds, $20,000,000
preferred stock, and $61,000,000 common stock; the latter exchanging
for old common stock at par.

Both of these plans contained excellent features, chief among which
were their provisions for the raising of cash and their use of
preferred stock. The cash which Mr. Boissevain proposed to raise was
to meet the floating debt, for he hoped to refund the government
indebtedness; and while he may scarcely seem to deserve commendation
for not attempting to fund the quick liabilities as well, this is not
the case, as the history of the Union Pacific itself can demonstrate.
The Government Directors intended to use the cash procured not only for
settling the floating debt, but also for partially retiring the prior
liens, so under their scheme an assessment was quite inevitable; and
having made that as large as they dared they are not to be criticised
for resorting to the sale of securities for the additional funds
required, especially since these securities were to have a first lien
on the road. As regards the preferred stock it is not clear from his
statement at the time whether Mr. Boissevain had in mind the exchange
of junior securities for bonds and stock or some for bonds and some
for stock alone, but subsequent developments show that his intention
was the former. Thus his idea was the same as that of the Government
Directors, viz., to give the junior bondholders a right to a low rate
of interest well within the earning capacity of the road, and to join
with this the right to a higher return whenever the road should earn
it. Mr. Boissevain’s estimate of the maximum fixed charges which
the road could safely stand was, however, high, and the plan of the
Government Directors, if conservatively carried out, would have been
better. Finally, the Government Directors contemplated foreclosure,
while Mr. Boissevain did not; the relative merits of the plans on this
point depending largely on the terms which the bondholders could be
induced voluntarily to accept.

During 1894 and 1895 discussion was active, both in Congress and out,
while the reorganization committee worked over the scheme which Mr.
Boissevain had put forward, without making any formal announcement of
a plan. Everything depended on the terms upon which the United States
should insist. The reorganization committee hoped for a refunding of
the government debt at 2 per cent. It had suggested that it would raise
the funds to pay off the prior liens if Congress would take a 2 per
cent 50-year bond in satisfaction of the government claim, would extend
the provisions contained in the Reilly Bill to a committee charged
with the duty of purchasing the property of the Union Pacific, and
would grant the committee the power to form a successor corporation
for the general purpose stated in the Acts of 1862 and of 1864, and
with the general powers given in those Acts, together with the same
rights, privileges, and freedom of action that were exercised and
enjoyed by other railroads.[514] Subsequently it had offered to pay the
principal of the government indebtedness in cash, providing that the
Government would relinquish all claims to interest.[515] If either of
these propositions was accepted it was willing to go ahead; while if
both were refused, and no official counter-proposition was made by the
United States, it seemed idle for the general reorganization committee
or any other committee to promulgate a plan.

But meanwhile the Union Pacific system was disintegrating; partly
from the efforts of the receivers to rid themselves of branches and
contracts which had become burdensome, and partly through the action
of bondholders of subsidiary roads who refused to wait for the slow
action of Congress, and insisted on foreclosure of their liens. As
early as August, 1893, ex-Governor Evans, a prominent stockholder of
the Union Pacific, Denver & Gulf, had petitioned for an accounting
from the Union Pacific, alleging that the branch was being bled for
the advantage of the main line. When receivers for the Union Pacific
system were appointed Mr. Evans petitioned for a separate receiver, and
was granted his request. Litigation followed, and an attempt was made
to get Mr. E. E. Anderson appointed as co-receiver; but the machinery
of foreclosure and sale were duly put in motion and the line became
separated from the parent company. In October, 1893, in view of an
impending default, the Fort Worth & Denver City Railway Company was
placed in the hands of receivers, as was the same month the Denver,
Leadville & Gunnison and the St. Joseph & Grand Island. In April, 1894,
a receiver was appointed for the Leavenworth, Topeka & Southwestern;
in June one for the Oregon Railway & Navigation Company. Foreclosure
proceedings against these and other branches were instituted, and
were attended by a very considerable measure of success.[516] On the
other hand, the receivers were anxious to get rid of onerous contracts
and unprofitable branches. On the 16th of March, 1894, they formally
abandoned the Leavenworth, Topeka & Southwestern. In July, 1894, they
petitioned to be relieved from certain guarantees and contracts, and
asked instructions concerning the operation of certain lines. Judge
Sanborn, in the United States Court at St. Paul, set November 15 for a
hearing, and appointed a special master to take testimony. The master
reported in October. He recommended the continuance of operation of
most of the lines in question, but found that the receivers were
not bound by the disputed contracts; and in November Judge Sanborn
confirmed the bulk of his report. The net result was a reduction in the
mileage of the Union Pacific from 8167 in the latter part of 1893 to
4469 in May, 1895; at which time proceedings against the Oregon Short
Line Railroad Company threatened to withdraw 1424 miles besides.

With matters in this state the reorganization committee was genuinely
discouraged by the refusal of Congress to pass the Reilly Bill,
providing for a refunding of the government debt; although this had
been reported to the House with the alternative amendment proposed
by the committee accepting the payment in cash of the principal
of the government debt in full satisfaction of claims against the
company.[517] Since Congress had earlier refused a proposition to pay
off the prior liens in full on condition that the government debt be
refunded at 2 per cent,[518] it was felt that nothing but cash payment
of principal and interest would be acceptable, and this the committee
refused to undertake. On March 8 the announcement was made that the
reorganization committee of the Union Pacific road had abandoned its
task and would return the securities deposited with it, and a few days
later the actual disbandment took place.[519]

Between March, 1895, and the following October little progress was
made. With the dissolution of the general reorganization committee
disappeared the one body capable of formulating a comprehensive scheme
and of securing its widespread acceptance. The committees which
remained represented each some one or two mortgages, and were thus
confined too narrowly in their sympathies to command much confidence
from bondholders as a whole. Late in 1895, however, new interests
undertook the reorganization of the property, and another general
committee was formed, comprising General Louis Fitzgerald; Marvin
Hughitt, president of the Chicago & Northwestern; Chauncey M. Depew,
president of the New York Central; Jacob H. Schiff of Kuhn, Loeb & Co.;
Oliver Ames, director of the Union Pacific; and T. Jefferson Coolidge,
Jr., president of the Old Colony Trust Company.[520] This committee’s
plan of action was noteworthy in three particulars. First, it
contemplated a foreclosure sale. This, it is true, was but resignation
to the inevitable, for foreclosure suits were already under way, and
an attempt to check them would have had scarcely a possibility of
success. Second, it made no definite provision for the government debt.
A certain amount of bonds and stock were reserved from the securities
proposed to be issued for the purpose of settling the government claim,
but the exact method in which that indebtedness should be treated was
left for future arrangement. Third, it did not attempt to meet the
collateral trust notes of 1891, which constituted so large a portion
of the floating debt. “The securities embraced in these trusts,” it
declared, “are largely those of companies which have already, by orders
of court made in the original general receivership, or in independent
foreclosure proceedings, lost in part or in whole their character as
parts of what has been known as the Union Pacific system. Independent
reorganization of many of these properties are pending. The purposes
which brought into existence guarantees of the obligations of many of
these auxiliary companies have been accomplished by construction or
otherwise, and considerations will not exist, upon reorganization, for
continued relations with (them) upon the basis of any assumption of
their fixed charges.”[521] Thus, at the very outset, this new committee
removed the three matters which had given its predecessors the most
trouble. The proposed foreclosure made it both easier to get assents
to a plan and more difficult to block its operation; the postponement
of the question of the government debt allowed the committee to go
ahead without waiting for Congress; and the refusal to provide for
the collateral notes relieved it of many difficulties, and threw the
holders of these notes back upon the collateral which they had exacted
as security.

The plan of the Fitzgerald Committee followed, for the rest, the
general lines earlier laid down by the Brice Committee. To retire all
existing mortgage indebtedness it proposed to issue:

  First mortgage railway land grant 50-year 4 per cent
    gold bonds                                            $100,000,000
  4 per cent preferred stock                                75,000,000
  Common stock                                              61,000,000

The reasoning by which these sums were arrived at was as follows:

  The lowest net earnings the Union Pacific Railway had
    ever recorded had been those of 1894                    $4,315,077
  The committee planned to issue $100,000,000 4 per cent
    50-year bonds, on which the interest would be            4,000,000

This would be all the company would have to pay in any one year.

  The average net earnings for the 10 years before 1894
    had been                                                $7,563,669
  To the $100,000,000 bonds the committee proposed to add
    $75,000,000 preferred stock. The annual dividend on
    this would be                                            3,000,000

Payment on bonds and preferred stock together thus equalled the average
earnings.

  Net earnings between 1885 and 1894 had gone in some years
    as high as                                              $9,000,000

To the above bonds and stock the committee wished to add $61,000,000
common stock, on which dividends might be paid if it seemed advisable.

New common stock exchanged at par for old; new bonds and preferred
stock exchanged for old bonds, with a residue which was to be set off
against the government debt and to be used for cash requirements.
The cardinal principle of the reorganization was that no new 4 per
cent bonds should be issued in exchange where the old mortgage did
not contribute the full value; or, to put it more accurately, that
no securityholders were to be given the right to claim a sum greater
than their property could earn as judged from past experience. At the
same time enough preferred stock was distributed to give bondholders
the same returns as before when the road should earn it. A $15
assessment was levied upon stockholders. This was several times the
quoted price of the stock early in 1896, but was not more than the
stock would probably soon sell for after reorganization. A syndicate
agreed to advance $10,000,000 to $15,000,000, for payment of coupons
as they fell due and for expenses, in return for which they received
$5,000,000 in preferred stock quoted at 59, or 19 per cent on a
capital of $15,000,000 at current prices. In addition the bankers who
managed the syndicate received $1,000,000 in preferred stock; making a
total expenditure of $6,000,000, a not exorbitant commission. Besides
the bonds and stock for strictly reorganization purposes, there was
reserved to dispose of equipment obligations, and for reorganization
and corporate uses, $13,000,000 in 4 per cent bonds and $7,000,000
in preferred stock. Reorganization uses, as defined by Mr. Pierce,
were those which might arise unprovided for and of an extraordinary
character, all of which could not be foreseen. Corporate uses were
those which would be proper to the corporation thereafter, such, for
instance, as the issue of securities in extension of the property.[522]

After all the securities of the old corporation had been accounted for
there remained $35,755,280 of the first mortgage bonds and $20,864,000
of preferred stock as a fund or resource for the settlement of the
government debt; or, in round numbers, an amount of 4 per cent bonds
equal to the principal of that debt and an amount of preferred stock
equal to the accrued interest. Just how this was to be used the
committee did not pretend absolutely to say. “We desire to meet
any proposition of the Government,” said Mr. Pierce, “or to suggest
any proposition which, after investigation, we believe will meet
the approval of the Government within the limits of the financial
possibilities of the property based upon this plan. In other words,
we have made no sort of a hard and fast rule.” In case the Government
should prove obstinate and should refuse settlement on reasonable
terms, it was the idea of the committee that it would be entitled on
foreclosure to its share as a second mortgage bondholder only, and that
the property would pass under the sale free from all liens, including
that of the United States. “Our view upon that point,” said Mr. Pierce,
“is that when the Government subordinated its lien to that of the first
mortgage bondholders, it did so deliberately and in terms effective for
that purpose. The Government then consented to all remedies that were
necessary for the protection of this prior lien; and an indispensable
element of such priority would be the right of foreclosure. And unless
there was a concealed purpose on the part of the Government, that right
of effective foreclosure was undoubtedly impliedly granted.”[523]

Subsequent negotiations with the bondholders brought a reduction in
the proposed issue of mortgage bonds from $100,000,000 to $75,000,000,
affecting the Kansas Pacific consols and the Union Pacific Sinking Fund
8s. Thus the former were allotted 50 per cent in first mortgage 4s and
110 per cent in preferred stock, instead of 80 per cent in 4s and 50
per cent in preferred as before; and the latter 75 per cent in 4s and
100 per cent in preferred stock, instead of 100 per cent and 50 per
cent respectively. This reduced the proposed charges $1,000,000, and
proportionately strengthened the scheme.

On the whole, the plan was a strong one. It reduced fixed charges from
over $7,000,000 to under $4,000,000, with an eventual lower limit of
$3,000,000, and this amount such good authorities as Messrs. Mink and
Clark pronounced the road safely able to earn in spite of the reduction
in its mileage.[524] During the receivership, moreover, the system had
become purged by the cancellation of onerous contracts and the lopping
off of unprofitable branches, and though some lines were lost which
it was desirable to retain, the Union Pacific was not precluded from
the repurchase of these, and did in fact regain the most important.
The bondholders were put in no worse position than before, for they
could never permanently get more than the earnings of the road, and
this the new distribution of securities generally assured them. The
position of the common stockholders was improved, for whereas between
1883 and 1893 fixed charges had only once fallen below $7,300,000, now
less than $7,000,000 were to be taken before their claims were heard,
while both the gross and the net earnings of the road promptly regained
their old level. Finally, the general principle was sound, as has been
emphasized several times before. It gave to each class of securities
a claim to interest strictly proportional to the earning capacity of
the road, and added to this a preferred stock on which no payment was
to be made unless earned; while it provided for a liberal assessment
upon stockholders, and attempted no funding of the current liabilities
incurred during the past troubled years.

The time limit for deposits under the plan was originally set at
December 31, 1895. It was then extended to January 15, 1896, and later
to January 29 of that year. By January 8 the reorganization committee
was able to announce that it had secured majorities of all of the
first mortgage bonds outstanding except an inconsiderable shortage
in one class. This was followed, in spite of some opposition among
London brokers, by the deposit of a majority of the shares of the
company, and by the assent of other securities. In January, 1896, in a
letter to the chairman of the House Committee on Pacific Railways, Mr.
Fitzgerald stated that his committee embraced a substantially single
representation of all Union Pacific mortgage bonds in circulation
except those held by the United States.[525]

Foreclosure proceedings had been long under way. In January, 1897, the
Government agreed to join in them in consideration of a guarantee of
a bid at least equal to the original amount of government bonds, less
payments made by the company to the Government, with interest at 3⅓
per cent per annum.[526] The guarantee was to be of cash, so that the
Government’s relations with the property would terminate completely
upon confirmation of the sale. This was the first affirmative action
which the Government had taken, and the reorganization committee
accepted it, despairing of better terms. The guaranteed payment was
in part offset by sinking-fund assets of $17,062,664, leaving a net
amount to be provided of $28,691,336.[527] By August, 1897, foreclosure
of the main line had been ordered by the courts in all the states
through which the Union Pacific passed, both under the first and the
government mortgages. Previous to this the plan of reorganization had
been declared operative, and articles of incorporation for the new
company had been filed; while the first instalment of the assessment
on the stock was called by the middle of the month. An unexpected
development now occurred. Although willing to join in foreclosure
proceedings, the Government found the decrees of foreclosure to some
extent unsatisfactory, and prepared the papers for an appeal. Objection
was particularly made to the fact that the Omaha Bridge mortgage,
amounting to about $1,200,000, was adjudged superior to the lien of the
Government on that part of the road between Omaha and Council Bluffs,
and that the money and assets in the hands of the receivers accruing
from the operation of the roads were ordered to be sold instead of
being reserved to meet a deficiency judgment expected to be obtained.
Learning this, the reorganization committee increased its guarantee by
over $4,000,000, making the total guaranteed bid $50,000,000 instead
of $45,754,060. “This increase,” said the Attorney-General, “removed
the objections to the decrees so far as the money contents were
concerned. In all else the decrees were just and satisfactory.”[528]
Even so, perhaps partly for political reasons, the Government was
not ready to allow a sale, and later in the year gave notice that
it would apply for a postponement to December 15, in order to give
Congress an opportunity to consider the matter. The prospect of renewed
congressional agitation stimulated the reorganization committee
to prompt action. “The Committee,” it declared, “has reached the
conclusion that the interests of the securityholders represented by it
and of the syndicate furnishing the funds to finance the reorganization
demand reorganization without any further delay. In this situation
the committee contemplates ... to oppose any adjournment of the sale
of the main line and to bid it in, if need be, for the full amount
of the Government’s claim, the additional sum involved in this being
$8,000,000.”[529] Postponement of the sale of the Kansas Pacific was to
be allowed, the committee meanwhile making up its mind on what terms to
bid it in. This proposition was telegraphed to Washington and quickly
accepted. It constituted a complete surrender on the part of the
committee, so far as the Union Pacific proper was concerned. Instead
of being refunded, the government debt was paid off in cash; instead
of compromising for the principal alone, both principal and interest
were paid in full. The result reflects credit on the sharpness of the
Attorney-General, but the method was scarcely worthy of the Government
which he represented.

November 1st and 2d, 1897, the property was sold under foreclosure of
the government and first mortgage liens, and the prices were:

  For the Union Pacific main line,                      $40,253,605
  For bonds in the government sinking fund,              13,645,250
                                                        -----------
                                                        $53,898,855
  In addition the Government received in cash in the
    sinking fund as of November 1st,                      4,549,368
                                                        -----------
                                                        $58,448,224
  In addition to this sum the committee was obliged,
    under its agreement with the Government, to buy
    up the first mortgage, amounting to                 $27,637,436
  The total of the first and second mortgages was        67,891,041
  Adding                                                 13,645,250
  Of securities purchased for cash, the total payment
    aggregated over                                      81,500,000[530]

On February 12, 1898, the reorganization committee bought in the Kansas
Pacific, guaranteeing for the Government a bid at the sale which should
equal the principal of the government debt, _i. e._ $6,303,000.[531]
Other minor roads were also bought back on foreclosure sales, and from
time to time as the mortgage committee sold the collateral back of the
trust notes of 1891 the Union Pacific Railroad Company bought portions
of the same. In 1899 the Union Pacific stock was increased $27,460,000,
and the new issue was exchanged share for share with Oregon Short
Line stock, thus regaining control of that important property. Later
the same year a further increase was effected to retire $14,000,000
Oregon Short Line bonds and $11,000,000 Oregon Railway & Navigation
Company preferred stock. The net result was to avoid any considerable
dismemberment of the system. Whereas 7673.59 miles had been reported
for 1892, 5399.01 were reported for 1899. The main line from Portland,
Oregon, to Omaha and Kansas City, via Ogden, Cheyenne, and Denver, was
kept intact, the principal losses being of branch lines in Nebraska and
Kansas.[532]

A detailed account of the later financial operations of the Union
Pacific divides the company’s recent development into three parts:[533]
First, the regaining of control of the principal auxiliary systems and
branch lines which the receivership had temporarily separated from
the parent stem; second, the purchase of large amounts of stock in
the Southern Pacific and the attempt to share in the control of the
Burlington, which latter involved the purchase of Northern Pacific
stock and the formation of the Northern Securities Company; and third,
the sale of the stock acquired in the fight over the Burlington, and
the subsequent purchase of Alton, Atchison, Baltimore & Ohio, Illinois
Central, and other stocks. The repurchase of auxiliary lines has just
been alluded to; and into the history of the Burlington struggle there
is no need to go at length.

On June 30, 1900, the Union Pacific, Oregon Short Line, and Oregon
Railroad & Navigation Companies operated 5427.89 miles of line. The
system stretched from Kansas City and Council Bluffs to Ogden, and
reached the Pacific coast in the Northwest at Portland. It had no
rails of its own in California, but was dependent on the Southern
Pacific tracks for connections both at Ogden and at Portland. The
Southern Pacific extended from New Orleans through Texas, New Mexico,
and Arizona to California, and thence up the coast to Sacramento. At
Sacramento it divided; one line continued north to Portland, and one
turned northeast through Nevada to Ogden, Utah. Now, in 1901 it so
happened that the Southern Pacific was for sale. Crocker, Stanford, and
Huntington, who had controlled it, were dead, and their successors were
not eager to retain the railroad as an independent line. Mr. Harriman
seized the opportunity. In 1901 he bought for the Union Pacific 750,000
shares out of a little less than 2,000,000, and the following year
he increased his holdings to 900,000. The Union Pacific financed the
purchase by the issue of collateral bonds. The acquisition was of vast
importance. Not only did it afford a direct connection between Ogden
and the coast, but it eliminated one of the Union Pacific’s four great
competitors in transcontinental business, and made Mr. Harriman the
dominant figure in the Southwest.

North of the Ogden-San Francisco line the conditions were less
satisfactory. The Great Northern and the Northern Pacific were
here supreme, and in 1901 were negotiating for the purchase of the
Burlington to give them an entrance into Chicago. Mr. Harriman asked
for a share in this purchase but was refused. He thereupon began to buy
Northern Pacific stock in the endeavor to secure by this a half control
in the more eastern road. It was the struggle which then ensued between
Mr. Harriman and Mr. Hill which caused the stock exchange panic of May,
1901, and which resulted in the formation of the Northern Securities
Company, in which Mr. Harriman was allotted a large though not a
controlling interest. On the breakup of the Northern Securities Company
the Union Pacific received back some $25,000,000 in Great Northern and
$32,000,000 in Northern Pacific shares,[534] worth at market prices
about $100,000,000.[535]

This Northern Securities episode had little effect on traffic
conditions in the Northwest, but it did profoundly influence the
financial policy of the Union Pacific during the following years.[536]
The dissolution of the Northern Securities Company gave to the Union
Pacific Great Northern and Northern Pacific shares, which were valuable
as investments only. And as investments these stocks soon became
undesirable. We have said that the combined value of the securities
transferred approximated $100,000,000 at the time of transfer. From
that time on the stocks appreciated in value till they were worth
from $145,000,000 to $150,000,000, and yielded an income of less
than 3 per cent on their market price. It was good policy to sell
them, and $118,000,000 worth were accordingly disposed of, leaving
some $30,000,000 worth still in the hands of the company.[537] What
should be done with the enormous resources thus secured? Some of the
cash was used to buy Chicago & Alton stock,—some of it was put out
in demand loans. But beginning with June 30, 1906, the Union Pacific
and Oregon Short Line began investment in stocks of other companies
on a great scale. $41,442,028 were put into Illinois Central stock;
$10,395,000 into Atchison preferred; $45,466,960 into Baltimore & Ohio,
common and preferred; $19,634,280 into New York Central; and lesser
amounts into Chicago, Milwaukee & St. Paul, Chicago & Northwestern,
St. Joseph & Grand Island, and other companies. In all, $131,693,271
were invested during a little over seven months.[538] This has been
the characteristic feature of recent Union Pacific finance. The large
purchases of stock in other roads have assured it favorable connections
in the Illinois Central and in the Baltimore & Ohio, and have modified
the severity of competition with the Atchison.[539] Including the
Southern Pacific, its system reaches from Chicago to Portland, San
Francisco, Los Angeles, and the Gulf, and has an influential voice
in two of the principal roads connecting Chicago with the Atlantic
seaboard. At the same time, the extensive investment of Union Pacific
funds to secure gains unconnected with increase of traffic over its
lines has provoked merited criticism. A railroad is, after all, a
machine for transporting passengers and goods, not an engine of
speculation; and both from the point of view of the community which it
serves and of the investors who hold its securities it is advisable
that its income should depend on the business which its managers
conduct and are responsible for, and not on circumstances over which
they have no control. So far as Union Pacific purchases have been
designed to open connections or to modify competition they have had a
sound foundation. So far as they have been financial operations only
they are not to be commended.[540]

From the point of view of operation the success of the Union Pacific
has been remarkable. Like most roads it came out of its receivership in
better shape than it went in, but with much lacking for the efficient
and economical handling of its traffic. Since 1900 over $52,000,000
have been invested in betterments and in new equipment, of which some
$15,000,000 have been withdrawn directly from income. Maintenance
charges have also been liberal, particularly in the last few years.
Grades and curves have been eliminated, steel bridges have been put
in place of wooden, new and heavier rails have been laid, ballast
supplied, and equipment greatly enlarged and improved. Whereas in 1896
13 per cent of all the Union Pacific system was laid with iron rails,
and only 24 per cent had rails weighing more than sixty pounds to the
yard, in 1907 there was no iron reported, and only 33 per cent of the
track did _not_ have rails weighing more than sixty pounds to the yard.
The average capacity of freight cars was a shade over twenty tons in
February, 1898; it was over thirty-four tons on June 30, 1907, and the
new freight cars added during the last-named year averaged a capacity
of sixty-seven tons apiece.

In consequence of these improvements the Union Pacific has been
able to handle a very greatly increased business. Between 1899 and
1907 the tons of revenue freight carried one mile increased from
1,393,207,990 to 5,704,061,535, and the passengers carried one mile
from 167,117,388 to 680,278,509. This fourfold increase has been
packed away in the larger cars, which in turn have been combined into
longer trains. Twenty-one tons are now put into the average freight
car, and thirty-two freight cars form an average train. In 1899
the average car held twelve tons and twenty-nine of them carried a
train-load. Sixty-six is the average number of passengers per train
to-day; thirty-three was the average number in 1899. And so the
increased business has not occasioned a proportionate growth in cost.
It takes but little more than three times the outlay in conducting
transportation to do over four times the work, and other railroad
expenses have varied even less.

This increased business and less rapidly increasing cost has meant,
finally, an increase in profits, and explains how it has been possible
in seven years to take $15,000,000 from income for improvements besides
liberally maintaining the property. The Union Pacific is prosperous as
it never has been before. In 1907 its total fixed charges, in round
numbers, were $8,600,000, and its net income was $45,000,000. Of this
income $23,500,000 were paid out in dividends, $1,960,000 appropriated
for betterments, additions, and new equipment, and $10,700,000 carried
to surplus. There were $69,000,000 in bills payable, incurred since
1906, in part for improvements and the like, but largely in the
course of the company’s financial experiments; but $75,000,000 in
convertible bonds have been authorized to cover them. Stock and bond
issues are much larger than in 1899 and will be larger still when the
new convertibles are all sold. Fixed charges, however, are less than
$5,000,000 greater than they were eight years ago. In order to imperil
bond interest net earnings will have to decline by 81 per cent; and
even were this to happen it is probable that some margin could be
retained by a decrease in the generous sums now being spent for the
maintenance of equipment and of road.[541]



CHAPTER VIII

NORTHERN PACIFIC

  Act of 1864—Failure and reorganization—Extension into the
    Northwest—Villard and the Oregon & Transcontinental Company—Lack
    of prosperity—Refunding mortgage—Lease of Wisconsin Central
    —Financial difficulties—Receivership—Legal complications—
    Reorganization—Subsequent history.


The Northern Pacific Railroad Company was chartered in 1864, and failed
in 1875 and in 1893. Besides these bankruptcies it has been in frequent
financial difficulty, and on the whole furnishes an instructive chapter
in a study of reorganizations.

The Act of July 2, 1864,[542] empowered the Northern Pacific
corporation to build a line from some point on Lake Superior, in the
state of Minnesota or Wisconsin, westerly on a line north of the
45th degree of latitude, to a point near or at Portland, Oregon. It
provided for organization on subscription for 20,000 shares out of an
authorized capital of 1,000,000 shares with 10 per cent paid in, and
granted forty alternate sections of public land per mile throughout
the territories, and twenty alternate sections throughout the states
across which the road should pass. This liberal donation was influenced
in part by the fact that the value of lands in the Northwest was then
low, and in part by the refusal of any money subsidy. The Government
was to issue patents on the completion of stretches of twenty-five
miles built in “good, substantial, and workmanlike manner,” and was to
survey lands for forty miles on each side of the line[543] as fast as
the construction of the road should require. The company was to begin
work within two years and was to finish the line within twelve years,
and it was provided that in case of non-fulfilment of these conditions
Congress could do “any and all acts and things which (might) be needful
and necessary to insure a speedy completion of the road.” A section
which gave trouble till amended forbade the issue of mortgage or
construction bonds, or the making of a mortgage or lien upon the road
in any way except by the consent of the Congress of the United States.
The company was to obtain the consent of the legislature of any state
before commencing construction through it, and finally the Act was to
be void unless bona fide subscriptions of $2,000,000 to the stock, with
10 per cent paid in, should be obtained within two years.

A project so daring as the construction of a railroad through the
unsettled Northwest not unnaturally found it difficult to obtain
financial support. The capitalists who at first undertook the work were
unable to carry it through.[544] In 1869 and 1870 two developments
occurred: the prohibition of bond issues contained in the act of
incorporation was removed, and Jay Cooke became interested in the
building of the road. Both facts were of far-reaching importance. Mr.
Cooke was one of the foremost financiers of his time. He was a man of
great personal energy, large fortune, and extensive personal following,
and was admirably adapted to the promotion of the work in hand. The
removal of the prohibition upon bond issues made it possible, with
his support, to secure some funds from a mortgage issue and to allow
construction to begin.

In 1869 Jay Cooke & Company were appointed financial agents of
the Northern Pacific Railroad Company. On July 1, 1870, issues of
$100,000,000 in 7.3 per cent first mortgage bonds and $100,000,000
in stock were authorized. The bonds were to be sold to the agents
at 88; the bulk of the stock was to go to the agents as bonus or to
the syndicate interested with them. The same parties agreed to raise
$5,000,000 in cash within thirty days, in order to commence the
building of the line. This made a fair start possible, and by May,
1873, over five hundred miles had been completed. The situation was
nevertheless a difficult one because of the reluctance of capitalists
to invest in the new first mortgage bonds. In 1870 extensive plans
were made to interest the European markets, but all in vain because
of the outbreak of the Franco-Prussian war. In America a similar
campaign was not much more successful.[545] The high price asked
for the bonds,[546] the uncertain nature of the enterprise, the not
altogether ill-founded rumors of extravagance and mismanagement of
the construction actually under way, the presidential election of
1872, all hindered rapid sales. Failure to sell bonds meant financial
stringency for the Northern Pacific. Operating expenses were high, and
the interest on outstanding indebtedness was considerable. On the other
hand, earnings were very small. No through business could be secured
till the completion of the road at least to the Snake River, and local
traffic was yet to be developed. As a result, the company borrowed more
and more from Jay Cooke & Co., and that firm soon found itself heavily
involved.

On September 18, 1873, Jay Cooke & Co. closed its doors. The shock to
the railroad was great. The quotations of first mortgage bonds dropped
from par to about 11. For a time the company struggled on. In December,
1873, a funding of interest was carried through, whereby all coupons
up to and including that of January 1, 1875, were made exchangeable
for five-year 7 per cent coupon bonds, convertible into the company’s
first mortgage bonds at par, and into the company’s lands at 25 per
cent off from the regular prices.[547] In April, 1874, settlement was
made with Jay Cooke & Co. by the transfer of the railroad’s first
mortgage bonds and other securities.[548] These measures offered only
temporary relief. Business was at a standstill throughout the country.
Gross earnings for the year ending June 30, 1874, were reported to
be $988,131, while $30,780,904 7.3 per cent bonds had been issued,
and the floating debt stood at $777,335. The Northern Pacific was not
only unable to meet its fixed charges, but was in default by a margin
which it was hopeless to attempt to overcome. The original project had
completely failed; and the only means of continuing the enterprise
seemed to lie in a government guarantee of the railroad’s bonds, or in
a reorganization so drastic as to sweep away fixed charges and to give
the company a fresh start.

In May, 1874, the first plan was tried. A bill was introduced into
Congress providing that the company should be authorized to issue
its 5 per cent thirty-year bonds for $50,000 per mile on its entire
line, complete and incomplete, and that on completed sections of
the road twenty miles long it should deliver its 7.3 per cent bonds
at a rate of $50,000 per mile, receiving in return $40,000 of the
5 per cent bonds with interest but not principal guaranteed by the
Government, which should hold the difference of $10,000 as a reserve
fund. Holders of outstanding 7.3 per cent bonds were to have the right
of exchanging their bonds for new 5s on the same terms.[549] In return
for the guarantee the railroad was to surrender to the United States
Government its entire land grant, to be sold under the direction of the
Secretary of the Interior, and to turn over semi-annually its entire
net earnings. The Government was to have the right in addition to sell
the Northern Pacific 5 per cent bonds whenever the combined yield of
the land grant and the net earnings should not equal the interest
guaranteed. Finally, Congress was to have power to fix fares, etc.,
provided that the government control did not impair the security of
the bonds. In brief, the capitalists who had involved themselves in
Northern Pacific affairs were ready to surrender their whole enterprise
to the Government if the Government would carry it through. But
Congress was so little willing to take the responsibility that the bill
never came to a vote.

Early in 1875, while the application for government aid was still
pending, the directors called a general meeting of the bondholders.
When it assembled President Cass made a statement of the financial
condition of the company. The outstanding debt, said he, was
$30,441,300. Of the 7.3 per cent bonds issued as collateral for
floating debt, mostly in 1875, there had been pledged $1,780,300 at the
rate of from twenty-five to forty cents on the dollar. The interest on
land warrants, bonds, and scrip given in funding of coupons amounted
to $732,632. The floating debt was $634,758, of which $150,000 were
arranged for settlement within a few days; and $250,000 were due to
directors for money advanced to finish the Pacific section after the
failure of Jay Cooke & Co. in 1873. The total net earnings to date had
been $124,056, and the capital stock was $25,497,600. By this report
it seems that some slight advance had been made since June, 1874, but
in no measure which afforded any hope for the continued solvency of
the company. Most instructive were the figures for the floating debt,
which in less than five years had increased to a sum more than five
times the net earnings for the whole period. After some discussion the
bondholders elected a committee of seven to report at a future meeting.
The committee recommended a receivership, the directors did not oppose,
and on April 16 General Cass was appointed receiver, resigning his
position as president to accept.

By this time hope of government aid had vanished, and no time was lost
in accepting the alternative of a drastic reorganization. Late in May
the bondholders’ committee reported a plan which was considered by the
bondholders at subsequent meetings. The principle was simple, and the
means sufficient. The company had earned .4 per cent on its funded
debt:—_ergo_, the funded debt was to be swept away. Fixed charges had
been heavy:—they were now to be completely removed. Scarcely less
would have met the needs of the situation, but the merit in refusing
to tinker and experiment was considerable. In more extended shape the
plan was as follows: Reorganization was to be carried out through
foreclosure, and a committee of six was appointed to take charge. All
outstanding bonds were to be replaced by preferred stock, and all
common stock was to be exchanged for new common stock. Floating debt
was to be likewise exchanged for preferred stock, which was to be
issued to the amount of $51,000,000 for the following purposes:

(_a_) To retire the principal of the outstanding 7.3 per cent bonds,
and the interest to and including July 1, 1878, at 8 per cent, currency.

(_b_) To retire the land warrant bonds, principal and interest, to and
including January 1, 1875.

(_c_) To pay the floating debt not protected under the existing orders
of the court.

(_d_) Generally for the purpose of carrying the plan into effect.

Preferred stock was to have all rights and privileges of common stock,
with the right to vote, and was to be entitled to 8 per cent out of
net earnings before anything should be paid on the common, and to
one-half the surplus after 8 per cent should have been declared on
both preferred and common.[550] It was to be convertible at par into
any lands belonging to the company, or thereafter to belong to it, east
of the Missouri River in the state of Minnesota or the territory of
Dakota, until default should occur in some of the provisions of the new
first mortgage bonds, and the proceeds of all sales of such land were
to be used in extinguishing the stock. Common stock was to be issued
to the amount of $49,000,000, and was to be given to old stockholders
share for share. To provide the means to complete and to equip the road
there were to be issued first mortgage bonds not to exceed an average
of $25,000 per mile of road, actually completed and accepted by the
President of the United States, to be secured by a first mortgage on
the whole line of road, constructed or to be constructed, and on the
equipment, property, lands, and franchises, including the franchise
to be a corporation, subject only to the right of the holders of the
preferred stock to convert their stock into lands. The principal was
to be payable in forty years, and the interest and sinking fund might
be made payable in gold. No other bonds were to be issued except
on a vote of at least three-quarters of the preferred stock at a
meeting specially held in reference thereto on thirty days’ notice.
Subsequently it was resolved, and the resolution incorporated in the
plan, that the holders of the common stock should have no voting power
until on and after July 1, 1878, and that no assessment should be
levied upon bondholders; but that the cost of purchase and the expense
of foreclosure and other proceedings should be paid out of the assets
and the income of the company.[551]

Applying to this plan the same tests to which all other plans have been
subjected, it appears that from the point of view of the corporation
it left little to be desired. The general depression throughout the
country and the needs of the Northern Pacific Railroad in particular
were so great that for once, in the conflict of interests between the
bondholders and the corporation, the latter had all the advantage on
its side. As a matter of fact, had any attempt been made in this case,
as so frequently in others of recent years, to unite in the exchange
of new securities for old a bond and a stock as an equivalent for an
outstanding bond, instead of giving stock only, the rate of interest
on the new bond would necessarily have been so low as to deprive the
combination of its attractiveness. That resource was not had to an
income bond was perhaps due to the absence of English investment in
the road. The wise course was the one pursued:—namely, to retire
bonds with a fixed lien on earnings by stock which represented
ownership in the enterprise, and which could claim dividends only when
earned. The floating debt was not retired by an assessment but by new
securities. This again, all things considered, was wise. The existing
stock represented so little actual investment in the property that
holders would doubtless have refused to pay an assessment, and would
have surrendered their certificates instead; while it would have been
both difficult to collect an assessment on the depreciated bonds, and
hard to convince bondholders of the justice of a demand for such a
contribution, so long as the stockholders were let off unscathed. On
the other hand, whether or not an assessment would have yielded cash,
the issue of stock for floating debt did not increase the fixed charges
of the road, and was not, therefore, fundamentally unsound. Liberal
provision was made for future capital requirements, and the only
provision to which exception could have been taken was the limitation
of bond issues to the moderate figure of $25,000 per mile except with
the consent of three-quarters of the preferred stockholders. On the
whole, the plan put the company fairly on its feet, presented it with
all the work which had been accomplished, and bade it attempt again
the project in which its failure had previously been so complete. The
danger of future bankruptcy lay in this fact only: that a large section
of the road was yet uncompleted, and through business was non-existent;
that the Northwest was still unsettled, and the local business was
small; in short, that so much was yet to be done that the company, with
all the advantages which it now possessed, might fail again for the
same reasons which had led it into bankruptcy before.

The plan was first reported on May 20,[552] and was laid before
the bondholders on the 30th of June. There was some protest that
it proposed giving away the property of the bondholders, and the
additional sections before mentioned, concerning the expenses of the
reorganization and the voting power of the common stock were added. By
August nearly two-thirds of the bondholders had assented.[553] By May
a decree of sale had been obtained, which was modified in August so
as to give bondholders priority over claims of directors for advances
made; and on August 12 all the property of the company, except the
patented and certified lands,[554] with all its rights, liberties, and
franchises, was sold at public auction and bought in by a purchasing
committee for $100,000.[555] No upset price was set by the Court; and
it was surmised that the bid was purposely made low in order to force
non-assenting bondholders to accept the new stock. The new corporation
was organized in October, 1875, by the election of Mr. Chas. B. Wright
of Philadelphia as president, and with the denial of a petition to set
aside the sale the reorganization may be said to have been concluded.

For fourteen years the company was now to be free from talk of
further reorganization, and not until 1893 was there to be another
receivership. During this time the mileage, owned or controlled, was to
be made continuous from the Pacific coast to Chicago, and the Northern
Pacific was to mount high among American railroads in its extent and in
the volume of its business. In 1875 the completed mileage was, roughly,
550 miles of line; in 1893 it was 5431.92, and reached from Ashland,
St. Paul, and Minneapolis on the east to Portland, Olympia, Tacoma,
and Seattle on the west. In the former year the gross earnings were
$414,722 and the net $97,478; in the latter the totals were $23,920,109
and $11,416,283. At the same time the fixed charges rose from nothing
to $14,311,430, and the bonds outstanding to $133,545,500, besides
$15,349,000 of bonds of subsidiary companies guaranteed. It appears,
therefore, that the promoters were successful in raising funds for the
completion of their enterprise, although their road suffered at first
from the thin population of the Northwest and the lack of a through
connection, and then from the competition of other transcontinental
lines.

From the reorganization to 1879 very little was done in the way of new
construction, owing to the general financial depression. Efforts to
get the time allowed for completing the road extended failed, however,
and it became necessary to resume in order to keep Congress contented
and to avoid a forfeiture of the land grant. In 1878 a small loan was
placed, and the following year one for a somewhat larger amount; and
with the funds so secured construction was vigorously pushed. More
liberal provision was made in 1880–1, when successful negotiations were
carried through for the sale to a syndicate of $40,000,000 general
mortgage 6 per cent railroad and land-grant bonds, to be issued at
the rate of $25,000 per mile of finished road only, and to be secured
by a mortgage on the entire property of the company except the lands
east of the Missouri River, which were pledged for the redemption
of the preferred stock. Provision was made for a reserve of these
bonds sufficient to retire the prior issues before mentioned.[556]
Under the agreement the syndicate took $10,000,000 at once and had
an option of taking $10,000,000 per year in each of the next three
years. The reported price was 90 for the first $10,000,000 and 92½ for
the rest. As a matter of fact, the whole $40,000,000 had been turned
over by the end of 1883, and though the effect on the company is seen
in the increase in its bonded indebtedness from $3,881,884 in 1880
to $39,522,200 in 1883, and in its fixed charges from $334,482 to
$2,478,939, it was meanwhile supplied with cash, and was enabled to
advance toward the completion of the 1000 miles of line which remained
unbuilt. The financial embarrassment which was felt in 1882, in spite
of the syndicate contract, was due to an unforeseen cause. According
to the statements of the company, it was felt necessary, in order
to avoid waste of time and money, to build simultaneously from both
ends of the line, and to start all the heavy work on the entire route
at once. “This involved the shipment of millions of dollars’ worth
of track material, motive power, and rolling stock to the Pacific
coast many months before their actual use on the road; and on the
line east of the Rocky Mountains very large expenditures of cash a
long time before the works resulting from them could become parts of
finished road.”[557] The expenses were immediate;—the delivery of
bonds to the syndicate could take place by the terms of the contract
only after the completion of finished sections of road, so that great
stringency easily occurred between. The trouble was only temporary,
and was tided over with the help of the syndicate and of the Oregon &
Transcontinental Company, a corporation of which we shall presently
speak.

As the Northern Pacific pushed into the Northwest, and at the same
time vigorously occupied itself in filling the gap between the ends of
its main line, it came into contact with a combination of Northwestern
companies known as the Oregon Railway & Navigation Company, of which
Henry Villard was at the time in control. This corporation owned a line
of steamboats running on the Willamette and Columbia rivers in Oregon,
together with an ocean line connecting Portland and San Francisco.[558]
In connection with the water routes a narrow-gauge road had been
built up the left bank of the Columbia River to a connection near the
mouth of the Snake River with an existing narrow-gauge road to the
town of Walla Walla in Southeastern Washington; and this narrow-gauge
was being widened, in 1880, to standard. This was the very territory
through which the Northern Pacific expected to make its connection with
the Pacific coast; and in 1880 it had passed the Rocky Mountains and
had reached the confluence of the Columbia and the Snake. On October
20, 1880, a contract was signed between the Northern Pacific and the
Oregon Railway & Navigation Companies whereby the former, among other
things, consented to a division of territory with the Snake and the
Columbia rivers as the dividing-line; in return for which the latter
agreed to complete a standard-gauge road within three years from the
western end of the Northern Pacific, at the mouth of the Snake River,
to Portland, and to grant the Northern Pacific the right, without
the obligation, to run its own trains over it at a fixed charge per
train mile. It will be remembered that the Northern Pacific was not at
this time too easy in its finances, so that it was quite willing to
secure connection with the coast without outlay of its own. Soon after
the execution of the contract, however, the $40,000,000 loan earlier
described was arranged for, and Mr. Villard feared that the road would
build its own connection with Portland now that the means seemed to be
at hand. To prevent it he conceived no less a plan than that of forming
a new company which should purchase and hold a controlling interest
in both the Northern Pacific and the Oregon Railway & Navigation
Companies.[559] This was done, and the new corporation, known as the
Oregon & Transcontinental Company, for a long time played a prominent
part in Northern Pacific affairs;[560] aiding it in the construction of
the main and branch lines, and time and again advancing money when the
road was in straits.[561]

The formation of the Oregon & Transcontinental Company put Mr. Villard
in control of the Northern Pacific. Mr. Villard’s financial strength
in later years was due mainly to the support of German interests,
notably the Deutsche Bank of Berlin; but his hold on the bank and on
his followers was partly due to his real ability and resourcefulness,
and partly to his confident predictions of results which sometimes he
was but frequently was not able to attain. One of the company’s first
acts after his appearance was the declaration of a scrip dividend upon
the preferred stock. The question had been raised in the course of
his fight for control, and he perhaps felt it incumbent upon himself
to show the sincerity of his contentions; at any rate, the annual
report for 1882 contained a statement that the surplus earnings since
1875 had been used for construction instead of being distributed as
dividends, and that the sum of $4,667,490 was therefore properly due
to the preferred stock. On the strength of this the directors resolved
that a dividend of 11.1 per cent be declared, for which there were
to be issued obligations of the company bearing 6 per cent interest,
payable at the end of five years, but redeemable after one year at the
pleasure of the company upon thirty days’ notice, in amounts of not
less than 20 per cent to each holder. The policy thus initiated was
plainly non-conservative and unsound. It may be true that as a general
principle new construction should be paid for out of capital rather
than out of income account, yet this is subject to qualifications; and
the Northern Pacific had been and was in so precarious a condition
that not a dollar of its resources could safely have been alienated.
The sequel came in 1883 when the annual report admitted that there
had been an excess of expenditures on account of construction and
equipment of $7,986,508 over the cash receipts from the proceeds of the
$40,000,000 general mortgage bonds, sales of preferred stock, and other
sources;[562] and when by October of the same year the deficit had been
increased to $9,459,921, and a circular from President Villard stated
the additional cash requirements to amount to $5,500,000.[563]

Relief had to be sought in an increase of indebtedness. On October 6,
1883, the directors authorized a second mortgage for $20,000,000 upon
the property, subject to the consent of three-fourths of the preferred
stock, and in a circular explained that they had accepted a proposition
of Drexel, Morgan & Co., Winslow, Lanier & Co., and August Belmont &
Co. to take $15,000,000 of the issue at 87½, less 5 per cent commission
in bonds, with a six months’ option to take $3,000,000 more on the
same terms. The stockholders assented,—they could do nothing else,—
a suit for an injunction was denied, and the syndicate exercised its
option. The result was an increase in bonds issued from $39,522,200 to
$61,635,400, of which the greater part was accounted for by the new
mortgage.

By August 22, 1883, the gap in the Northern Pacific main line had been
filled up, and on September 8 the formal opening occurred. The mileage
in operation was then 2365, of which 1952.5 was main line and 412.8
branches, and the rapid construction of the last 1000 miles had done
credit to most of those concerned. The total capitalization per mile
was $59,304, of which less than one-third represented bonds; and though
the following year this percentage was increased, the proportion of
mortgage to total issues remained considerably under one-half. This
showing was very favorable, and accounts for the success with which
the Northern Pacific withstood the panic of 1884. With the completion
of its through line, moreover, earnings increased so materially as to
cover the interest on the new bonds; and though the road was never to
enjoy a monopoly of transcontinental traffic, in February, 1883, it had
concluded an agreement with the Union Pacific concerning through rates
and a division of territory, and a period of prosperity was hoped for.
Meanwhile the Oregon & Transcontinental Company had been hard hit by
the decline in Northern Pacific stock, due to the publication of the
construction deficit. The straits of his company affected Mr. Villard;
and in spite of the relief afforded by the Northern Pacific second
mortgage he “became conscious that neither himself nor the Oregon &
Transcontinental Company could be saved.”[564] On January 4, 1884, the
directors accepted his resignation, and soon after Robert Harris, then
vice-president of the Erie, was elected to fill his place.[565]

The years immediately following the issue of the second mortgage and
the completion of the road were not uneventful, although it is not
necessary to describe them at length. The insolvency of the Oregon &
Transcontinental, and continued disputes between it and the Northern
Pacific over an adjustment of the two companies’ financial relations,
made some other means of binding the Oregon Railway & Navigation
with the Northern Pacific seem advisable, and a lease of the former
company to the latter was discussed. In July, 1884, an arrangement
was said to have been actually arrived at on the basis of a guarantee
by the Northern Pacific of 6 per cent on the Navigation stock for two
years, 7 per cent for three years, and 8 per cent in perpetuity; but
the interest was very high, and an injunction helped to prevent a
consummation at the time. In 1885 the idea of a joint lease by the
Northern Pacific and Union Pacific railroad companies came to the
front. The Oregon Railway & Navigation was serving as the Northwestern
outlet for both of these roads, and such a contract would have greatly
simplified the competitive situation, besides taking away from the
Navigation Company the power to exact an excessive pro-rate because of
its double connection.[566] During the next few years negotiations were
almost constantly in progress. In 1887, however, the Navigation Company
was leased to the Oregon Short Line with a Union Pacific guarantee; and
upon the failure of renewed negotiations Mr. Villard, who was again in
power, sold the Oregon & Transcontinental Company’s holdings of Oregon
Railway & Navigation Company stock at a “satisfactory” price. This
consummation was less unfavorable to the Northern Pacific because of
its completion of a line of its own to the Pacific coast.[567] From now
on the Oregon & Transcontinental Company existed only as a means of
obtaining financial assistance for the Northern Pacific, and for making
more easy the control of that company’s stock.[568]

While these operations were going on the Northern Pacific once more
found it advisable to increase its indebtedness, and added a third
mortgage of $12,000,000 to the first and second mortgages which already
have been described. Of the issue $8,000,000 were at once taken by a
syndicate, and the $4,000,000 remaining were early disposed of to the
same parties. The mortgage was said to be for the purpose of completing
new work and for paying the floating debt; it also assisted in the
redemption and refunding of the dividend scrip which had been issued to
preferred stockholders in 1883; and the payment of $3,073,321 of this
in cash, besides the extension of $1,567,500 more, now took place. The
extended scrip was to be payable in 1907, to bear 6 per cent, and to
be redeemable on thirty days’ notice on any interest day on or after
1892; and up to January 1, 1893, holders had the option of converting
it into third mortgage bonds.[569] The third mortgage itself required
the consent of three-quarters of the preferred stockholders, but this
there seems to have been little difficulty in securing.

The years 1886–9 saw also a considerable extension of branch and other
construction. It was a time of great general activity. In another
place the large additions to the Atchison system have been described;
at the same time the Union Pacific grew from a system of 5825.6
miles in 1886 to one of 6996 in 1889, adding over 1100 miles; the
Chicago, Rock Island & Pacific increased from 1384.2 to 1592.7; the
Chicago, Burlington & Quincy from 4036 to 5140.8; and the St. Paul,
Minneapolis & Manitoba from 1509.4 to 3030.1. Meanwhile the Northern
Pacific added 656.8 miles, or an average of 219 miles a year.[570] In
the far Northwest the great tunnel through the Cascade Mountains was
nearly completed by May, 1888; and by the end of the following year
a continuous line of road was in operation from Ashland, Wisconsin,
to Portland, Oregon, which was of particular service in view of the
difficulties with the Oregon Railway & Navigation Company, and was the
reason for the willingness of the Northern Pacific to surrender control
of that connection.[571] In 1888, also, negotiations were carried on
with the Canadian Government for an extension into Manitoba; and the
same year the Cœur d’Alene Railroad & Navigation Company was purchased,
comprising a steamship and narrow-gauge line in Northeastern Washington
which extended through the mining region of the same name.[572]
Generally speaking, the Northern Pacific retained its character as a
single-track transcontinental route with but few branches. Where it did
expand was on the east, where it reached Duluth, Ashland, Superior,
St. Paul, and Minneapolis, and on the west, where it joined Wallula,
Portland, and Tacoma. The principal other branches were the ones
mentioned: namely, those to Winnipeg, and to the mining districts in
Montana and Washington.

In spite of its moderation the Northern Pacific was not
over-prosperous. Its passenger earnings remained small, being scarcely
greater in 1888 than they had been in 1884; and while its freight
earnings increased from $7,867,367 in 1884 to $10,426,245 in 1888, and
to $15,600,320 in 1889, this was so far offset by increased operating
expenses that the increase in net earnings from both passengers and
freight was only $2,223,194. Construction meanwhile caused an increase
in funded indebtedness outstanding of $15,202,000, to say nothing of
$20,981,000 of branch-line bonds which the road by 1889 had guaranteed;
and the floating debt began to grow uncomfortably large.[573] At the
same time, if Mr. Villard is to be believed, officials in charge of the
operation of the road were eager for appropriations for the improvement
of the track, the replacement of wooden by metal bridges, additional
motive power and rolling stock, enlargement of terminal facilities,
and the purchase and construction of new lines. The truth was that the
problem of getting the road built had been more important than that of
how it was to be built; so that much work had been done in a hasty and
imperfect manner which it was now advisable to renew.

Since, then, there was need for additional capital, while it was unsafe
to increase the fixed charges of the road, the managers felt called
upon to devise a scheme whereby these circumstances should both, at
least in appearance, be met. Their solution was the proposal of a large
refunding mortgage to retire as soon as possible existing mortgages,
and to provide a balance which could be spent upon the line. If, they
argued, bondholders could be induced to accept new 4 per cent or even
5 per cent bonds in exchange for their 6 per cent securities, the road
would be free to issue new additional bonds until the margin of charges
so obtained should have been taken up. The plan was worthy of its
ingenious promoter, Mr. Villard, and will be criticised in the proper
place.

On September 19, 1889, the managers issued a circular to the preferred
stockholders. “In the opinion of the Directors,” said they, “the
time has come to make new financial provision on a liberal scale
for the growing needs of the Company.” Then followed a statement of
gross earnings. “A further corresponding increase may be expected
in the present fiscal year, which will bring the gross earnings up
to $23,000,000 or $24,000,000.... But the Company could not in the
past, and will not be able hereafter, to take full advantage of this
auspicious situation without further large investments of capital.
Secondly.—The prosperity of the road attracts competition.... The
Company must be prepared to build additional feeders wherever and
whenever the local developments warrant, and the danger of hostile
occupancy appears.... Another strong [motive] lies in the Company’s
ownership of a large land grant, the benefits of which cannot be fully
realized without the promotion of settlements through the construction
of branch lines. The Board is also of opinion that the time has come to
make such provision, that the Company may take advantage of its high
credit to effect a reduction of fixed charges.”[574]

It was proposed to issue a $160,000,000 one hundred-year consolidated
mortgage, bearing interest not to exceed 5 per cent, to cover the
entire Northern Pacific Railroad, together with its equipment, land
grant, branch lines, and securities of branch lines. This was to be
applied as follows:

  For the retirement of $77,430,000 outstanding
    first, second, and third mortgage bonds         $75,000,000

  For the retirement of the existing $26,000,000
    branch bonds                                     26,000,000

  For additional branches at a rate per mile not
    over $30,000                                     20,000,000

  For enlargement of terminals and stations,
    additional rolling stock, betterments and
    renewals, and other expenses not properly
    chargeable to operating expenses                 20,000,000

  For premiums on bonds exchanged                    10,000,000

  For general purposes                                9,000,000[575]

Only a portion of these securities was, therefore, to be issued at
once. The provision for enlargement of terminals, etc., was likely
to call for early issues, as might a portion of that reserved for
new branches and for general purposes. It was expected that a certain
amount of branch-line bonds could be retired without much delay. On
the whole, the bonds immediately put forth were not expected to exceed
$15,000,000; though there was nothing in the plan to prevent a greater
issue. The interest rate was “not to exceed 5 per cent.” That this
wording was deliberately adopted is shown by the terms of the mortgage,
which expressly gave to the company the power to issue the new bonds,
from time to time, bearing such a rate of interest as the managers
might think advisable up to 5 per cent. It was understood that the
issue was to be in three classes, one of $57,000,000 to bear 5 per
cent, one of $23,000,000 to bear 4½ per cent, and one of $80,000,000 to
bear 4 per cent; and on this basis it was thought that fixed charges
would be reduced $2,000,000, to which would have to be added interest
on bonds issued in excess of those previously outstanding.[576] The
reserve of $10,000,000 for premiums shows that in the opinion of the
directors the offer of substantially more than par in new bonds was
necessary in order to induce exchanges of old bonds for new. To prevent
careless use of this reserve it was provided that the $10,000,000 in
bonds could be used to pay premiums only upon the affirmative vote of
at least nine members (out of thirteen) of the board, and when in the
opinion of the trustees, expressed in writing, a saving of interest to
the company could be effected.

Not the least important part of the plan was that designed to gain
the preferred stockholders’ approval. It will be remembered that by
the terms of the reorganization of 1875 the consent of three-quarters
of these stockholders was necessary to validate any mortgage after
the first mortgage then proposed. The increase in indebtedness now
suggested threatened to postpone indefinitely dividends on the
preferred, and could not be expected to be welcome. In consequence, the
directors offered three distinct inducements: first, a promise of a
distribution to the preferred stockholders of sums which had been taken
from earnings and spent on the property to date; second, a promise
of early and regular dividends in the future; third, a preferential
right of subscription to the new bonds. By resolution of August 21,
1889, they therefore definitely declared in favor of the distribution
of a sum equal to the earnings which should be found to have been
applied in earlier years to the capital requirements of the property.
An investigation was made, the amount was officially declared to be
$2,844,430, and an equivalent amount of new bonds at 85 was set aside
to cover it. For the future Mr. Villard and his associates announced a
determination to begin dividends at the rate of 4 per cent, the first
to be paid January 1, 1890; and declared that thereafter dividends
would be paid out of the current net earnings, or, if these should
be insufficient, out of a reserve fund until the net earnings should
justify a larger distribution. Finally, it was provided that the common
and preferred stockholders should be given the privilege of subscribing
to the new bonds at 85 to the extent of 15 per cent of their holdings.
That these concessions attracted attention was shown by the action
of the preferred stockholders in calling for an actual distribution
as soon as possible of the amounts deducted from earnings in past
years. On October 17, 1889, they passed a resolution recommending
to the incoming board of directors “to take into consideration the
distribution of the whole amount due to the Preferred Stock, under the
plan of reorganization, as soon as the Company shall be financially in
a proper position to do so;”[577] and again the following year they
resolved “that the incoming Board of Directors be ... requested to set
apart the additional earnings in ... consolidated bonds ... and to
(consider) the question of either increasing the ... dividend above 4
per cent or of declaring an extra dividend to the preferred stock.”[578]

All things considered it is improbable that the refunding plan could
have been put through without the promise of dividends to the preferred
stock, but it remains unfortunate that such promises had to be made.
The money which had been put into the road had been of necessity so
invested to preserve the solvency of the company. In a sense it had
increased earning power, but not all expenditures which affect earnings
may be charged to capital. In the first place, if earnings are below
fixed charges, or are constantly tending to fall below, sums put into
the property merely assist the company to keep its head above water,
and are not a sound basis for an increase in indebtedness; and in the
second place expenditures which serve to _preserve_ earnings may not
be charged to capital account, even when the method of preservation is
the construction of branch lines, and still less when the method is
the improvement of the existing plant. If, then, as was the case, the
earnings claimed by the preferred stockholders had gone to preserve
the solvency of the company, and to defend it against competition, the
arguments of these stockholders in 1889 did not hold good.

As for the plan itself, it was simply a method for providing new
capital, and should be judged as such. Its refunding provisions were
mainly misleading. It proposed to secure a reduction in fixed charges
by the exchange of bonds bearing 5 per cent or less for bonds bearing 6
per cent, but how the reduction was to be accomplished was not clear.
The maturity of the bonds to be retired was remote, and the assured
reduction was therefore also remote. The first mortgage had been issued
in 1881, and ran for forty years; the second dated from 1882 and was
to mature after fifty years; and the third, which had been issued
only the year before, was not redeemable until 1937. The Missouri
division and Pend d’Oreille mortgages matured somewhat earlier,[579]
but had nevertheless a considerable time to run. The mortgage issues
would therefore not soon fall in of themselves. Secondly, bondholders
would evidently not consent voluntarily to surrender old unexpired
bonds without such a premium in new bonds as would make their annual
return approximately the same. Something they might concede in view
of the more remote maturity of the new issue and the somewhat more
inclusive character of its mortgage lien, but not enough to create any
considerable saving.[580] The new issues for improvement of the road,
moreover, involved an _increase_ in the annual interest payments; which
we must not, perhaps, condemn offhand, for the raising of capital
was in some measure forced upon the company, but which is important
in considering the railroad’s financial condition and prospects. The
fact was that the Northern Pacific was not self-supporting; it had
been obliged to issue $20,867,000 bonds of its own and to guarantee
$20,981,000 besides, between 1884 and 1889, in order to secure an
advance of $2,462,288 in annual net income during a period of rapidly
increasing prosperity; and it was now obliged to increase this
indebtedness in the attempt to maintain its solvency for the future.

Between 1889 and the end of 1892 business increased, and net earnings
at first gained more rapidly than did fixed charges. Mr. Villard was
again supreme in the management, and actively directed financial
operations until his departure for Europe in 1890. The most important
operation conducted was the lease of the Wisconsin Central, whereby
the eastern terminus of the Northern Pacific system was transferred
from St. Paul and Minneapolis to Chicago. The directors who were
elected with Mr. Villard in 1887 controlled the Wisconsin Central and
the Terminal Company, which had been formed to secure an entrance for
that road into the Lake city.[581] Perhaps because of this financial
interest, the conviction seems to have crept over them that the
Northern Pacific would do well to make connection with the trunk lines
at Chicago, instead of stopping further west; and they brought the
subject up in 1889, and again in 1890. On July 1, 1889, a traffic
contract went into effect, under which the Northern Pacific obtained
the use of the Wisconsin Central lines in consideration of the business
which it should turn over to them. Certain provisions imposed on both
roads a share of the operating expenses whenever the proportion of
operating expenses to gross earnings was greater than 65 per cent, and
which gave both a profit whenever the proportion fell below this level.
The Wisconsin Central retained entire and absolute control of its own
property, except that the Northern Pacific was to share in the profits
of the subsidiary Terminal Company whenever these profits should be
more than $800,000.[582] This was considered unsatisfactory, because
the Northern Pacific had no control of the Central’s operation; and
on April 1 of the following year a new contract gave to the former a
lease of all the lines owned and controlled by the Wisconsin Central
Company and the Wisconsin Central Railroad Company between St. Paul
and Chicago for 999 years; including terminal facilities at Chicago
held by the Chicago & Northern Pacific Railroad Company, a subsidiary
corporation.[583] “It was deemed by the Board,” said the annual report,
“as of the utmost importance that your road should have access to the
city of Chicago by a line in its own ownership and possessed with
terminal facilities which it could control and have possession of.
The whole subject was most carefully considered by the Board, and
the contracts and leases were adopted after deliberate and careful
consideration.”[584] The advantage of this lease to the Wisconsin
Central lay in the large volume of traffic which the arrangement
secured to it; that to the Northern Pacific was more doubtful.
Connection with Chicago was desirable, but it was to prove difficult to
operate the Wisconsin Central for 65 per cent, and the acquisition was
to arouse the hostility of all the other roads between Chicago and St.
Paul. We shall see that the lease was presently given up and that the
attempt to make Chicago the eastern terminus was for the time abandoned.

The year 1891 was a good one, but during the following twelve months
the situation changed for the worse. Most noteworthy was an increase
in fixed charges of over $2,000,000, due in part to an increase in the
funded indebtedness, but more largely to an increase in rentals paid.
This increase brought charges above total net income, and shows how
serious the position of the company had become. In fact, the company’s
repeated issues of bonds had failed so completely to put it in a stable
position that in but three of the nine years from 1884 to 1892 was a
surplus greater than $500,000 above fixed payments secured, while the
operations of two of these same years resulted in a deficit.

The first admission by directors that the road was in difficulty
consisted in the passing of the preferred stock dividend for March 31,
1892. That this action did not deprive the holders of all return was
due to the previous conversion of the consols formerly reserved into a
trust for ten years on which to draw whenever the road should be unable
to pay the usual dividends. The directors therefore added to their
declaration of suspension a resolution that the “time, manner, and
method of the distribution of so many of the $3,347,000 of consolidated
bonds set aside for the benefit of the preferred stockholders as may be
necessary to supply the deficiency, if any, in this or any subsequent
fiscal year, between the amount of net earnings and 4 per cent on
the preferred stock, be submitted to preferred stockholders at the
annual meeting in October next.”[585] Not unnaturally stockholders
were alarmed. At the annual meeting in October an investigating
committee was appointed,[586] and proceeded to a careful examination
of the property accompanied by certain officers of the road. The
committee was not friendly to the management. Its preliminary report
announced that the physical condition of the system was good, but its
later criticism of the company’s financial condition was severe. In
the words of the London _Standard_ “there has been no such scathing
arraignment of Directors since the exposures of the Erie Railway.” The
committee stated that the bad condition of the property was due to the
reckless financial methods of the directors. It alleged that officers
had held dual positions, and had subordinated the interests of the
Northern Pacific Company to those of the Wisconsin Central, relieving
themselves at the expense of the former road. It commented upon the
unprofitable character of certain of the other branches. The floating
debt, it maintained, had been financed by Mr. Villard personally at
double the current rates of interest, and it recommended litigation
in default of some assurance that the policy of the company should
be changed.[587] In reply the directors issued a lengthy statement
taking up the charges in detail. The policy of building branch lines,
said they, was imperatively necessary in order to develop business.
Although some of the branches had not earned their fixed charges, yet,
if they had been credited with 60 per cent of the gross earnings on
business which they had brought to the main line, they would have shown
a good profit. The policy of branch-line construction had met with the
unanimous approval of successive boards of directors, and had been
ratified by the stockholders in 1886; and in this connection the reply
defended specifically the acquisition of the Wisconsin Central and
other lines. The carrying of the floating debt by officials interested
in the property, instead of being subject to criticism and censure, was
entitled to the highest commendation.[588]

It is difficult to pass with justice upon the conflicting contentions
above outlined. However, writing in 1905, long after his retirement
from Northern Pacific affairs, Mr. Villard expressed himself as
follows: “In 1891 Mr. Villard ... made ... his last official tour of
inspection of the main line and principal branches of the Northern
Pacific.... The most alarming impression of all made upon him was the
revelation of the weight of the load that had been put upon the company
by the purchase and construction of the longer branch lines in Montana
and Washington, which he then discovered for the first time. There
was the Missoula branch to the Cœur d’Alene mines; the Cœur d’Alene
Railway & Navigation, a mixed system of steamboats and rail lines; the
Seattle, Lake Shore & Eastern; and the roads built into Westernmost
Washington; representing a total investment in cash and bonds of not
far from $30,000,000, which together hardly earned operating expenses.
The acquisition and building of these disappointing lines had in a
few years absorbed the large amount of consolidated bonds set aside
for construction purposes, which had been assumed to be sufficient
for all needs in that direction for a long time.”[589] No man should
have known the real profitableness of these extensions better than Mr.
Villard; and the circumstances of his account give it special weight.
The admitted fact that in several cases the managers of the Northern
Pacific voted as directors of that corporation to buy property from
themselves as whole or part owners in other enterprises also excites
distrust, and this feeling is strengthened by the unsatisfactory
financial condition in 1893 of the Northern Pacific system as a whole.

Even before the report of the investigating committee the directors
had been busy with the floating debt. This amounted to $9,918,000 late
in 1892, according to the treasurer’s statement. In February, 1893,
it was decided to cancel it by the sale of the stock of the St. Paul
& Northern Pacific held in the treasury, but this aroused violent
opposition. The St. Paul & Northern Pacific ran, it will be remembered,
from Brainerd to St. Paul and Minneapolis, and had formed the eastern
terminus of the Northern Pacific system until the acquisition of the
Wisconsin Central. It was justly considered an extremely important
section of the main line, and the possible loss of its control was
regarded as disastrous.[590] Dissuaded from their first purpose, the
directors considered the issue of a collateral mortgage sufficient in
amount to relieve all pressing necessities, and proposed to utilize
in this way treasury securities which it would have been unwise to
sell. At the same time the stockholders’ committee had much the same
idea in mind, and wrote to President Oakes in March, and again in May.
“Referring to my letter to you of March 15,” said Brayton Ives, “I beg
to say that the financial plan therein referred to contemplates the
creation of a collateral trust in which shall be placed $10,000,000
Northern Pacific consolidated 5s, $3,000,000 Chicago & Northern Pacific
firsts, and all of the St. Paul & Northern Pacific stock belonging to
the Northern Pacific Company, estimated at $7,000,000. Against these
securities it is suggested that notes to the extent of $12,000,000 be
issued, bearing 6 per cent interest, and payable in five years, or
before, at the pleasure of the company, provision being made at the
same time for the increase of the amount of the notes to $15,000,000
on the deposit of additional collateral securities satisfactory to
the underwriters. I am happy to be able to repeat the belief already
expressed, that if the board of directors will allow the underwriters
to name seven directors of the company the entire amount of notes
will be subscribed for without delay.”[591] This plan was backed by
responsible houses, including the Mercantile Trust Company, Kuhn, Loeb
& Co., the Equitable Life Assurance Company, and others, who agreed to
take $7,000,000 of the new bonds at 95, less 1½ per cent commission.
The directors paid no attention to Mr. Ives’s letter, and his offer was
subsequently withdrawn.

The directors’ own scheme was dated May 1, 1893. It provided for a
collateral five-year 6 per cent mortgage to the amount of $15,000,000,
of which $12,000,000 were to be issued at once. There was to be a
committee of five which should take charge of the issue, and which
might sell the collateral before the maturity of the notes at certain
minimum prices or over. Until all the notes should have been paid the
railroad company agreed not to undertake the construction of any new
lines without the consent of the committee, or to purchase or lease any
railroad or navigation lines, or to guarantee, endorse, or purchase the
bonds or other obligations or stocks of other companies. The committee
was to have the voting power on the underlying stocks, and might
direct the trust company to waive any default of the railroad company
in payment of interest. The railroad company might call in the notes
before maturity, after May 1, 1896, and pay them off at par and accrued
interest.[592] This, it will be seen, did not differ in essence from
the scheme proposed by Mr. Ives:—the real contest was between parties
and not between plans. In June, Mr. Villard resigned his position as
director and chairman of the board, and J. D. Rockefeller was elected
a director. Somewhat earlier, but doubtless in anticipation of this
action, a syndicate agreed to underwrite the collateral issue, subject
to the stockholders’ right of subscription;[593] and by the end of the
year $10,275,000 of the collateral notes were outstanding, of which
the bulk had been taken by the syndicate.[594] The whole device was
very similar to that employed by the Union Pacific in 1891. It was not
designed as a permanent remedy for anything, but served to postpone a
reckoning to what was hoped would be better times. As a matter of fact
its effect was very small.

Receivers for the Northern Pacific Railroad Company were appointed
August 15, 1893, on a petition alleging that the company was insolvent
and had no funds to meet payments coming due on September 1, October
1, November 1, and December 1. The company in its answer admitted the
facts, and the United States Circuit Court at Milwaukee, Wisconsin,
put Messrs. Henry C. Payne, Thomas F. Oakes, and Henry C. Rouse in
charge of its affairs.[595] Receivers were rapidly appointed for most
of the branch lines, the intent being to put all these properties in
separate hands.[596] The receivers of the main line had nothing to
do with the branches, although in November they were authorized to
enter into temporary traffic agreements with them. In regard to the
Wisconsin Central, application was early made to compel the Northern
Pacific to carry out the provisions of the lease; but Judge Jenkins of
the Milwaukee court granted the receivers until September 15 to decide
whether or not they desired to continue, and upon their negative reply
authorized a surrender. The accounts submitted, he said, showed that
since the lease had gone into effect the Chicago & Northern Pacific had
been operated at a loss to the Northern Pacific of $1,304,169 and the
Wisconsin Central at a loss of $1,142,316; although business during the
three years in question had been generally prosperous. In accordance
with the decision the property was turned over to the Wisconsin
Company on September 26, 1893, and the Northern Pacific for a time gave
up the idea of a Chicago terminus. Of the other leases those of the St.
Paul & Northern Pacific and of the Cœur d’Alene Railway & Navigation
Company were at this time approved by the court, and the receivers were
authorized to make the necessary payments.

The failure of the Northern Pacific was the signal for still more
active and bitter personal struggles between opposing factions than
had before occurred. The opposition, led by Brayton Ives and August
Belmont, endeavored to get control of the company through the annual
election on October 19, and to procure the removal of the appointed
receivers. They displayed the greatest bitterness toward Mr. Villard,
and held him responsible for the position in which the company was
placed. Villard’s “remarkable qualities,” wrote Ives, “have been of
advantage only to himself.... The syndicate composed of Villard, Colby,
Abbott, and Hoyt, and their friends made millions [by the Wisconsin
Central deal] and the Northern Pacific has suffered and is suffering a
corresponding loss.”[597] Circulars were sent out asking proxies, and
August Belmont, J. Horace Harding, Brayton Ives, Donald Mackay, and
Winthrop Smith were appointed a committee to receive proxies as they
came in. On the other side the directors appealed to the stockholders,
reminded them that though the company had failed while they were in
office it was also during their term that it had reached its greatest
prosperity, and took the cautious step of amending the by-laws so as to
shorten the term of future boards from three years to one. Conditions
were against the management, and the result of the election was a
complete victory for the Belmont-Ives party, which was followed up by
the choice of Mr. Ives for president. The real results were less than
might be supposed, for the operation of the railroad and the control of
its funds were to be in the hands of the receivers and not in those of
the officers of the road. On January 20 President Ives filed a petition
in the Milwaukee Federal Court for an order directing the receivers to
surrender the seal, books and papers and stock certificates, and to pay
over sufficient money to enable the president to rent rooms and pay the
salaries of the auditor, secretary, and treasurer.[598] The petition
was denied, and the elected officers were left in an anomalous position.

In other matters the opposition lost no time in appealing to the
courts. Previous even to the election two actions had been begun
against Henry Villard: the one in September by John Swope of
Philadelphia to compel Henry Villard and others to restore stock and
bonds obtained as a result of an illegal conspiracy:[599] the other
a petition in October by the Northern Pacific Company to force the
receivers to bring suit against Messrs. Villard, Hoyt, and Colby to
recover nearly $2,600,000 alleged to have been made unlawfully through
Northern Pacific deals.[600] The complaints were in the main the same
as those which had been made by the investigating committee, and
charged, _inter alia_, that Villard had secured a profit to himself
by bringing about the purchase of the Chicago terminal properties by
the Northern Pacific. Mr. Villard swore that his whole interest in the
transaction had been as officer and stockholder and securityholder
of the Northern Pacific Company,[601] and the receivers professed
themselves ready and willing to bring suit, provided they were
furnished with the information and evidence wherewith to prosecute
the same.[602] The Court reserved the Ives motion for further
consideration, and the following year directed the receivers to bring
suit; but the litigation was eventually dropped.[603]

In December, 1893, the Ives faction filed a petition for the removal of
the receivers. The charges were in part similar to those of the Swope
suit. It was asserted that at the time the receivers were appointed
the road had practically had no hearing; that its managers had in
less than a year burdened it with the interest of $60,000,000 for
properties which were of no value to it, but in many of which they
were personally interested and out of which they made large profits,
and that when insolvency was produced by this fraud they had put the
road in the hands of receivers nominated by them for the purpose, with
the effect of perpetuating the same control which had brought the
bankruptcy. Specific charges were made against Oakes, Villard, and
Roswell C. Rolston, president of the Farmers’ Loan & Trust Company;
no charges were made against Receivers Payne and Rouse, but their
removal was asked for because they happened to be in the company of
and presumably in the interest of Mr. Oakes. Besides this, finally, it
was alleged that separate receivers had been unnecessarily appointed
for branch lines, and that the expense of administering the affairs of
the company had been enormously increased.[604] The receivers filed
lengthy answers on February 3; Receiver Oakes in particular answering
every charge specifically, filing exhaustive documents in proof, and
maintaining in general the value of the branch properties and his
innocence of unlawful profits.[605] The court on the whole inclined
to his view. On April 14 Judge Jenkins handed down his decision,
dismissing the petition for the removal of Messrs. Payne and Rouse, and
holding Mr. Oakes’s conduct to have been above investigation except in
three instances, to examine which a master was appointed.[606] In the
course of his decision Judge Jenkins concluded that the branch lines
in question, though unprofitable for a while, were necessary to the
system; and that in particular the branches in Washington, Oregon,
Montana, and Idaho were built as feeders, and owing to the sparsely
settled district were necessarily built for the future. If Mr. Oakes
were to be removed on these charges, said he, then it would make
the entire board of directors of the company at that time liable to
impeachment.[607] Mr. Cary, the master, reported that Mr. Oakes had had
no pecuniary interest and no personal advantage or gain from any of
the matters referred to him for investigation. Mr. Villard was said to
have made unlawful gains in the acquisition of the Northern Pacific &
Manitoba Company to the extent of $363,494, but Mr. Oakes did not know
that Mr. Villard was so interested, and was not bound to take notice
to prevent such gains.[608] In consequence, Judge Jenkins in October
granted a motion to dismiss the petition for the removal of Oakes as
receiver,[609] and the incident was closed.

It thus appears that Mr. Ives and his friends obtained but little
satisfaction in the courts up to this point. They were unable to
force the receivers to turn over any share of the Northern Pacific’s
earnings, and they were equally unable to remove the receivers from
office. So long as the road should remain in the receivers’ hands their
authority seemed destined to be nominal, and they were thus spurred on
by their own private interests to make some attempt at reorganization.
At the same time their opponents, as bondholders, were not unwilling
to receive some interest on their bonds, and succeeded in this, as in
other matters, in drawing substantial control into their own hands.
The year 1894 was a bad one and made the importance of a reduction in
fixed charges loom large. Passenger earnings decreased from $5,917,054
to $3,960,772, and freight earnings from $17,017,630 to $11,418,692;
while in spite of attempted economies by the receivers, net earnings
decreased by almost the same absolute amount.[610] Cuts in wages were
inevitable, and a serious strike aggravated the situation. It became
necessary to borrow money from the Adams Reorganization Committee, of
which more will be said later, and to issue $5,000,000 in receivers’
certificates to pay off $5,000,000 already authorized in 1893. On
September 8 formal announcement was made that the receiverships of
the twenty-four branch lines of the Northern Pacific system were
to be terminated, and that the trustee was to undertake the legal
management of all the lines for a stated sum per annum; while the
general receivers, Messrs. Oakes, Rouse, and Payne, were to operate
the separated lines under a fair traffic agreement. It was figured
that $64,000 per annum would be saved; and further economies were made
in the cost of the administrative staff at New York. The relief was
insufficient. Net earnings for 1894 were $5,506,007, and fixed charges
were $12,004,985, and the need of a reorganization was impressively
shown.

The work of devising a reorganization plan was done in the various
bondholders’ committees. Late in 1893 a committee of consolidated 5
per cent bondholders had been formed, with E. D. Adams as chairman and
General Louis Fitzgerald as vice-chairman; which declared itself to be
independent, but was regarded as affiliated with the former managers
of the road. In March, 1894, this committee announced that, having
received responses from the holders of a majority of the consolidated
bonds, it had prepared an agreement and had secured its acceptance by
the German bondholders. All consolidated bondholders were requested
to deposit their securities with the Mercantile Trust Company, which
would issue engraved certificates of deposit, which the committee would
endeavor to have listed on the Stock Exchange. Mr. Ives was opposed to
any step toward reorganization of this sort, and objected particularly
to the composition of the committee; he therefore asked bondholders to
withhold their acceptance of the agreement, and gave various reasons
to lend weight to his request. In April, as a counter-move, he invited
bondholders to send in their names and addresses to him, together
with the amount of their holdings, saying that this action would not
commit the bondholders, and was desired only to enable the company to
furnish information respecting its affairs, and, when the proper time
should arise, to confer about a reorganization plan. The rapid falling
off in earnings soon imperilled the interest of the second and third
mortgage bonds, superior to the consolidated mortgage. In July the
Adams Committee appealed to the holders of these issues, and secured
a considerable number of deposits. Henceforth it planned to act as a
general reorganization committee. On the other hand a committee headed
by Johnston Livingston competed for deposits of the second mortgage,
and one headed by C. B. Van Nostrand for deposits of the third mortgage
bonds. It was urged that holders of the earlier issues should not
deposit with the consolidated committee, because its interest lay in
cutting down prior liens; whereas the Van Nostrand Committee declared
that the road could earn the interest on the third mortgage, and that
these bonds should not accept less than par and interest in cash.
Nevertheless the Deutsche Bank’s London agency announced in September
that it was prepared to receive second mortgage, third mortgage, and
consolidated bonds on behalf of the Adams Committee, and to forward the
same to New York for deposit. Various rumors were afloat at this time
concerning reorganization, and suggestions were made for converting the
third mortgage bonds into 5 per cent income bonds and the consolidated
bonds into preferred stock;[611] but the only result was to stir up
protests from the third mortgage bondholders, who still insisted in
August that earnings were more than sufficient to pay the interest on
all prior liens. Late in the year there was talk of selling the road
under foreclosure of the second mortgage, but this too came to nothing.

Meanwhile the operation of the road went on. Receiver Rouse reported
on the condition of the property in January, 1894. He estimated that
$10,000,000 would be required to bring the permanent way into the most
effective condition for economical operation. Exceptional causes,
said he, had contributed to make the earnings for the previous three
years exceptionally large, and this fact, together with the prevailing
depression, the competition of the Great Northern, and reduced rates,
would decrease the gross earnings in the immediate future at least 27
per cent. Although Mr. Rouse believed in the value of the Northern
Pacific’s branch lines, his report was not encouraging.[612] In
September, on the approach of the annual election, President Ives
issued a long circular. The serious decrease in the earnings of
the road, he said, had affected for the worse the position of the
stockholders, and these holders should understand that no one of the
reorganization committees was working for their interest. He announced
the appointment of a committee to receive proxies, and revealed the
embarrassment of the management by a request for contributions of
$12.50 per hundred shares in order to pay the expenses of the officers.
So far as the officers should have any voice in the matter, President
Ives assured the stockholders, contributions should be credited on any
assessments which might be made thereafter. On the day of the election
no opposing ticket was presented, and the Ives party were reëlected
to their positions. This is where matters stood at the beginning of
1895. The hostility of the opposing committees was in no way abated;
but the Adams Committee had secured deposits of nearly $21,000,000 of
the consolidated mortgage bonds, $1,000,000 more than a majority of the
third mortgage bonds,[613] and $3,000,000 less than a majority of the
second mortgage bonds, and with the hearty support of the Deutsche
Bank was steadily strengthening its position.[614]

In May, 1895, the Adams Committee reorganization plan came out and
marked the first serious suggestion for a rehabilitation of the
property. It proposed a sale, under foreclosure, of the old company
and the formation of a new company under special arrangements for this
purpose. The new company was to issue $100,000,000 in shares, and a
maximum of $200,000,000 in gold bonds free from taxation, secured by
a mortgage lien on the whole Northern Pacific system, including the
St. Paul & Northern Pacific Railway, and bearing interest partly at
4 per cent and partly at 3 per cent, all under the same mortgage.
A sufficient amount of these bonds was to be reserved to replace
the existing first mortgage, besides a further amount to acquire
independent branch lines or for new construction at a maximum charge
of $20,000 per mile. The principal and interest of the new bonds were
to be guaranteed unconditionally by the Great Northern Road, in return
for which the Great Northern was to receive one-half of the stock of
the new company. The new board was to consist of nine directors, of
whom four were to be nominated by the Northern Pacific Reorganization
Committee. Each $1000 Northern Pacific second mortgage bond was to
receive a $1125 new Northern Pacific guaranteed bond; each $1000 third
mortgage bond a new $1000 3 per cent guaranteed bond, and at least $250
in shares; each $1000 5 per cent consol at least $500 in new 3 per cent
guaranteed bonds and $300 in shares. Overdue coupons of the second
mortgage were to be paid in cash at the rate of 5 per cent annually,
those of the third mortgage at 4 per cent, and those of the consols to
be adjusted at the rate of 2½ per cent in new 3 per cent bonds. The
floating debt of the receivership was to be paid by an assessment of
about $11,000,000 on the old stock. The reorganization and the raising
of the necessary working capital were to be secured by a syndicate
headed by J. P. Morgan & Company and the Deutsche Bank.[615]

Briefly stated, this plan proposed to decrease somewhat the funded
debt, while reducing also the interest rate from 6 and 5 to 4 and 3
per cent. The reduction in fixed charges which would have ensued it
is impossible to estimate without further details. The amount which
bondholders were asked to give up was, however, considerable, and for
this compensation was variously given in new bonds and in new stock.
The floating debt was not to be funded, but was to be paid off by
the commendable method of an assessment; and provision was made for
working capital, although at what cost in profits to the syndicate
was not stated. But more important than the details of the plan was
the guarantee of the new issues by the Great Northern Company for
which it provided. The question of consolidation between the Northern
Pacific and the Great Northern was said, on what purported to be good
authority, to have originated on the side of the Northern Pacific among
men to whom an alliance seemed necessary to the prosperity of the
latter road.[616] Mr. Hill was said to have been at first reluctant,
and to have consented only on condition that a majority of the Northern
Pacific stock should be placed within his hands. It can scarcely be
supposed, however, that he did not welcome such a union; and the
petition of the Northern Pacific receivers for the cancellation of
contracts with the Great Northern and the Minneapolis Union railway
companies[617] made consolidation especially desirable at this time.
To the end of this consolidation the Adams Committee plan was chiefly
framed, and on its execution the adequacy of the plan depended. If
the Great Northern could have been induced to guarantee the principal
and interest of the new Northern Pacific bonds the likelihood of a
default would have been reduced to a minimum, even on the indebtedness
outstanding before the receivership; and a scheme for paying the
floating debt and for providing a certain amount of new capital would
have been all that would have been required. But it is clear that a
proposal for a consolidation of two of the principal lines serving the
Northwest brought the consuming and producing public to an interest in
the Northern Pacific reorganization which they had not felt before.
So long as a reorganization plan dealt merely with exchanges and
manipulation of securities by and among securityholders, the influence
of any settlement on outsiders was very indirect; but when it operated
to reduce competition in a large section of the country the effect
was plain and striking. Certain conservative financiers suggested a
holding company to hold the Great Northern and Northern Pacific stock,
in order to throw some sort of a veil over the proceedings, but Mr.
Hill would not consent.[618] Late in August, 1895, therefore, a bill in
equity was filed to prevent the proposed coöperation, and on September
17 Attorney-General Childs, for the state of Minnesota, brought suit
for an injunction on the ground that the combination was contrary to
the laws of the state and would prevent competition. It was said that
Mr. Childs was supported by the practically unanimous sentiment of the
people of Washington and Montana. The matter came before the Supreme
Court on suit by one Pearsall, a stockholder of the Great Northern, and
this tribunal held that the combination was contrary to the laws of
Minnesota and should, therefore, be enjoined, affirming the principle
for which Mr. Childs contended.[619] This settled the fate of the Adams
reorganization plan; and an entirely new scheme had to be devised.

But while once more progress toward reorganization seemed to have
ceased, sensational developments occurred in the factional conflicts
to which we have already referred. To Mr. Ives, barred from all
participation in the management of the road, denied a salary, and
unable to obtain the removal of the receivers by Judge Jenkins, came
the idea of appealing to another court. It will be remembered that, the
original receivership suit had been instituted in the circuit court of
Milwaukee, Wisconsin, and that that court ever since had been regarded
as possessing primary jurisdiction. Since no compulsion existed on
other courts to recognize this jurisdiction of the Milwaukee court, the
orders of which were supreme in its own district only, and the smooth
working of the receivership was due to a respect for “comity,” it was
possible, as Ives well knew, for any circuit court along the line to
throw existing arrangements into the direst confusion. Relying on this
fact, President Ives sent the General Counsel of the company to present
applications for the removal of the receivers to one court after the
other along the road.[620] In September, 1895, judges willing to take
jurisdiction were found in Seattle, in the far northwestern corner of
the United States.[621] Petition was made in two parts: first, that the
Seattle court take jurisdiction; second, that it remove Messrs. Oakes,
Rouse, and Payne. Judge Hanford of the Federal Court of the Washington
District called Judge Gilbert of the United States Circuit Court to
sit with him, and deciding on the question of jurisdiction first,
according to the request of the receivers, the two judges held that the
principle of comity did not of necessity apply in the Northern Pacific
case because no part of the railroad was within the jurisdiction of
Judge Jenkins’s court, and any court along the road could more properly
and efficiently administer the trust. The court, therefore, directed
the receivers to answer the charges of malfeasance, and to file their
answers in Seattle by October 2; also to file their accounts with
the clerk of the court at Seattle,[622] and to file each a $100,000
bond.[623]

The result was the prompt resignation of the receivers, who in a letter
to Judge Jenkins made their feelings clear. “Your receivers manifestly
cannot administer the trust,” said they, “with justice to the parties
interested, or themselves, if subject to the orders and instructions
as to the general administration from two or more independent
tribunals. We cannot abide, nor can we ask our sureties to abide, the
danger of the differences of opinion between courts, each assuming
to be controlling as to the expenditures of the receivership in the
general administration, in view of the immensity of the interests
involved.... Unless your receivers recognize, as they understand it,
that that honorable court [the Seattle court] is the court of primary
jurisdiction they will of necessity be in contumacy.... Your receivers
are not willing under any circumstances to file an additional bond
in such jurisdiction, nor are they willing to put themselves in a
position to endanger their right to challenge the jurisdiction of that
honorable court.”[624] Judge Jenkins accepted the resignations and
appointed Messrs. McHenry, chief engineer of the Northern Pacific, and
Bigelow, a Milwaukee banker, receivers.[625] The hitherto respected
principle of comity had, however, lost all force. On September 30
Judge Sanborn at St. Paul confirmed Judge Jenkins’s appointments for
the states of Minnesota and North Dakota; on October 1 Judge Hanford
at Tacoma refused to accept the resignation of the old receivers,
but removed them and appointed Andrew F. Burleigh for the district
of Washington; on October 2 Judge Billinger concurred in Burleigh’s
appointment for Oregon; on October 7 Judge Knowles at Helena, Montana,
confirmed the above for the districts of Washington and Oregon, and
appointed Captain J. H. Mills and E. L. Bonner for the district of
Montana; and in the week ending October 26 Judge Beatty appointed
Burleigh receiver for Idaho. The only conservative action was that of
Judge Lacombe in New York, who deferred his appointments as often as
the matter came before him, in the hope that the Western judges would
come to an agreement.

The situation at the end of October, 1895, was as follows: in
Wisconsin, Minnesota, and North Dakota there were two receivers,
Messrs. McHenry and Bigelow; in Montana there were three receivers,
Messrs. Mills, Bonner, and Burleigh; and in Idaho, Washington, and
Oregon there was one receiver, Andrew F. Burleigh. It was a condition
of affairs which could not be endured. In each of the Western States
orders were made compelling all agents or persons connected with the
road to deposit all money collected in that state, and it was at any
time in the power of the receivers in any state to appoint operating
officers distinct from those managing traffic over the other parts of
the line. On January 9, 1896, Judge Gilbert simplified the situation
by retiring Messrs. Mills and Bonner, and by appointing Andrew F.
Burleigh sole receiver for the district of Montana. This reduced the
number of receivers to three, and left Burleigh in control of the
road west of North Dakota, and McHenry and Bigelow in control of the
rest. Application was now made to the Supreme Court of the United
States, and on January 28, 1896, four justices of this tribunal,
acting as justices assigned to the several districts in which the
Northern Pacific Railroad Company had property,[626] decided that
Judge Jenkins’s court for the Eastern District of Wisconsin should
be considered the court of primary jurisdiction, and issued each an
order to this effect to take effect in his particular circuit.[627]
The various circuit judges hastened to conform. On February 21 Judge
Lacombe confirmed the appointment of F. G. Bigelow and E. H. McHenry
as receivers for the Second Judicial District, and similar action had
by then been taken by the judges of the other districts except that of
the state of Washington. There Judges Gilbert and Hanford refused to
discharge Burleigh, although recognizing that the general orders for
the management and control of the railroad property were henceforth to
issue from Judge Jenkins’s court.[628] The judicial strife was thus at
an end. President Ives obtained the removal of the receivers to whom
he particularly objected, but did not overthrow the authority of the
Milwaukee court, nor secure any material gain to compensate for the
great trouble which he caused.

With the receivership tangle straightened out it became possible to
proceed again with the work of reorganization, and on March 16, 1896,
the final plan was published, endorsed not only by the Adams Committee,
but by President Ives and his Stockholders’ Protective Committee, and
by other important interests as well. The feeling had become general
that some action should speedily be taken, and that it was in the
interest of all parties that the factional conflicts which had raged
so long and with so little result should cease. Reorganization was
proposed on the following basis:

(_a_) The abandonment of Chicago as the eastern terminus, and the
limitation of the railway on the east by the Mississippi River and the
Great Lakes;—the bonds and stocks of the Chicago & Northern Pacific
and of the Chicago & Calumet Companies to be sold.

(_b_) The ultimate union of the main line, branches, and terminal
properties through direct ownership by a single company.

(_c_) The reduction of the fixed annual charges to less than the
minimum earnings under probable conditions.

(_d_) Ample provision for additional capital as required in a series
of years for the development of the property and for the greater
facilities necessitated by an increased business.

There were to be issued:

$130,000,000 in prior lien 100-year 4 per cent gold bonds, to be
secured by a mortgage upon the main line, branches, terminals, land
grant, equipment, and other property embraced in the reorganization ...
and ... thereafter acquired.[629]

$190,000,000 in general lien 150-year 3 per cent gold bonds, with a
lien junior to the previous issue, but covering the same property, of
which $130,000,000 were to be reserved to retire the $130,000,000 prior
lien bonds when they should fall due.

$70,000,000 in 4 per cent non-cumulative preferred stock.

$80,000,000 in common stock.

Generally speaking, the new prior liens were to go for old first and
second mortgage bonds, receivers, certificates, equipment trusts,
collateral trust notes, St. Paul & Northern Pacific bonds, and for
new construction; the new general liens for mortgages junior to the
second mortgage; the new preferred stock as additional inducement to
the exchanges mentioned above, and in part for the retirement of old
preferred stock; and the common stock for old preferred stock (in
part) and common stock. Existing first mortgage bondholders were not,
however, to be forced to give up their old securities. “It is not
sought in any way to enforce a conversion of the present general first
mortgage bonds,” said the plan, “and this offer is made solely on the
belief that on the terms proposed such conversion, while advantageous
to the company, is also manifestly to the advantage of the bondholders
so converting.” There were reserved $4,000,000 of the general liens
for new construction, and $2,500,000 new preferred and an equal amount
of common were set aside under the general head “to provide for
reorganization purposes or available as a treasury asset.” None of the
new bonds were to be subject to drawing or to compulsory redemption
prior to their regular maturity. The proceeds from land sales to an
amount not exceeding $500,000 in any year were to be devoted to the
redemption by purchase and cancellation of the new bonds, purchases
to be made of prior liens so long as these could be secured at not
over 110, after which to continue of the securities next in rank. The
preferred stock was to have a claim for 4 per cent before anything
should be paid on the common stock, and was to participate equally
with the common after 4 per cent had been paid on each. There was to
be a voting trust until November 1, 1901, unless closed out earlier by
the voting trustees, after the expiration of which the preferred stock
was to have the right to elect a majority of the board of directors
whenever for two successive years 4 per cent dividends on their
holdings should not have been paid. No additional mortgage was to be
put upon the property, and the amount of preferred stock was not to
be increased, except, in each instance, after obtaining the consent
of a majority of the whole amount of the preferred stock, given at a
meeting of the stockholders called for that purpose, and the consent
of a majority of such common stock as should be represented at such
meeting, the holders of each class of stock voting separately. During
the existence of the voting trust the consent of holders of like
amounts of the respective classes of beneficial certificates was to
be necessary. There was to be an assessment of $10 on preferred stock
and of $15 on common. Branch lines were to be consolidated with the
main line, but each case was to be dealt with separately, and a fair
basis of adjustment arrived at, for which general lien 3 per cents and
new preferred stock were reserved. There was to be an underwriting
syndicate, formed by J. P. Morgan & Company, and the Deutsche Bank of
Berlin, to the subscribed amount of $45,000,000, to provide amounts
of cash estimated to be necessary to carry out the terms of the plan,
and to furnish the new company with some $5,000,000 working capital
for early use in betterments and enlargements of its property. The
syndicate’s compensation was not stated in the plan, but was to be
“reasonable,” and in addition to it the sum of ¼ per cent of the par
value of all securities deposited was to be paid to J. P. Morgan &
Company and the Deutsche Bank for their respective services as managers
and depositaries. Finally, at the discretion of the managers, the
various properties were to be sold under one of the several mortgages
in default, and a successor company was to be organized.[630]

An examination of this plan shows that the total capitalization
proposed, exclusive of bonds and stock reserved for new construction,
etc., amounted to $311,000,000; of which $161,000,000 were 4 per
cent and 3 per cent bonds and $150,000,000 stock. The reported
capitalization of the Northern Pacific Railroad in 1893 had been
$218,685,631, including the bonds of branch roads guaranteed; but
comparison of this figure with that given by the plan is not fair,
because in 1893 the Northern Pacific property had been owned by
fifty-four distinct corporations, which the reorganization proposed to
consolidate into one. A comparison of the total bonds and stock issued
by the fifty-four corporations with the issue under the reorganization
plan reveals an increase from $271,949,044 to $311,000,000, or 14.3 per
cent. At the same time fixed charges were to be decreased, according
to estimates, from $10,509,690 to $6,052,660; to cover which the
managers reported net earnings of $6,015,846 for the year ending June
30, 1895, and of $7,801,645 for the average of the five years ending
with that date. It will be observed, therefore, that the plan left
no margin between net earnings in 1895 and fixed charges, but relied
upon an increase in earnings for the future to preserve the solvency
of the road. It is, however, only just to say that the net earnings
in 1895 were less than they had been in any year since 1887, with the
exception of 1894, and that a considerable increase was probable.
The large reduction in fixed charges which was to take place was to
be chiefly at the expense of holders of the consolidated mortgage
bonds of 1889. These unfortunate investors received but 129 per cent
in new securities, of which nearly one-half was stock, in return for
a reduction in their fixed annual income from 5 to 2 per cent, the
reason being the inferior character of their mortgage lien. That
securityholders who had consented to exchange their prior securities
in 1889 for the consols then issued in the hope of benefiting the road
should have fared considerably worse than bondholders who had refused
to make concessions is an example of the injustice sometimes occasioned
by successive reorganizations and refundings. Of the other securities
the second mortgage received prior liens and stock sufficient to bring
its return over 6 per cent, providing the road should earn it, and the
third mortgage and dividend certificates received general liens and
stock sufficient to yield something over 5 per cent except in very
prosperous times, when their income would be larger. The underlying
principle in these cases was the union of a security with a fixed
claim on earnings with a security with a conditional claim only. The
first mortgage received no stock, and so was denied participation in
future profits, but in recompense gave up only some .6 per cent in the
annual income received. The collateral trust notes fared nearly as
badly as the consolidated mortgage, but the northwest equipment stock
was paid off in cash. In brief, all securities but the equipment stock
yielded something, and the greatest sacrifices were demanded from the
junior securities. On the other hand, the stock was far from escaping
unscathed. On January 2, 1896, the quoted prices were 3½ for common and
12⅝ for preferred. As against this the plan made assessments of $15 on
common and $10 on preferred;—sums which could obviously be demanded
only because of the probable future appreciation of the shares. A point
in favor of the stock was the fact that the reduction in fixed charges
brought it nearer a dividend; although it must be remembered that
the common stock had to divide any return above 4 per cent with the
preferred.

The other salient points of the plan were the provision for paying the
floating debt, for supplying fresh capital for future additions and
improvements, for consolidation of branch lines with the main stem, and
for a voting trust. The total floating debt in 1895 amounted to over
$20,000,000, of which $4,900,000 consisted of outstanding receivers’
certificates and $8,329,205 of interest matured and unpaid.[631] The
unpaid interest was provided for in the exchanges which have already
been described; the receivers’ certificates were cancelled by prior
lien bonds, and the balance was provided for by assessment. This method
was a sound one. The provision for new construction, betterments,
etc., was liberal, consisting of $25,000,000 prior lien bonds, of
which no more than $1,500,000 were to be issued in any year, and
$4,000,000 general lien bonds, presumably to be used as needed. One
of the great difficulties in the history of the company had been the
lack of necessary capital for needed work upon the line, and it was
well that future requirements were provided for. The consolidation of
the branch lines into the parent company was also wise. “As it [the
Northern Pacific system] now stands,” the committee said, “the system,
in its form of incorporation and capitalization, is a development
without method or adequate preparation for growth. Scarcely any
single security is complete in itself. The main line mortgages cover
neither feeders nor terminals. The terminal mortgages may be bereft
of their main line support. The branch lines are dependent on the
main line for interchange of business and the main line owes a large
part of its business to the branch lines.”[632] The plan contemplated
separate bargains with each branch. Negotiations were carried on
during 1896, and some of the arrangements arrived at were as follows:
The bondholders of the Northern Pacific & Manitoba Terminal and of
the James River Valley Railroad agreed to take 50 per cent in new
Northern Pacific 3 per cent bonds and 50 per cent in preferred stock,
and to allow the Northern Pacific to retain their property.[633]
Bondholders of the Duluth & Manitoba were given 90 per cent in
cash.[634] Bondholders of the Spokane & Palouse received 52½ per cent
cash, 52½ per cent in general 3s, and 25 per cent in Northern Pacific
preferred stock,[635] and Helena & Red Mountain bondholders agreed to
accept 100 per cent in new preferred.[636] A number of the branches
were foreclosed and bought in by the Northern Pacific reorganization
committee, and the net result was an exceedingly beneficial unification
of the system. Finally, the voting trust was designed to secure
permanence in policy during the first years of the new company’s
existence. The idea has been a common, and on the whole a wise one. In
this case the membership represented fairly the interests which had
been prominent throughout the receivership, and consisted of J. P.
Morgan, George Siemans, representing the Deutsche Bank, August Belmont,
Johnston Livingston, and Charles Lanier. The trustees were to fill
their own vacancies, except that the successors of George Siemans were
always to be nominated by the Deutsche Bank.

In the main the plan was a good one, following a sound principle,
and reducing fixed charges to a point which, if not far below the
danger-line, proved low enough in view of the subsequent development in
business. Current opinion was generally favorable, and criticised only
the amount of profits which the syndicate was to secure on the basis
of its large subscribed capital. Mr. Hill of the Great Northern said:
“I think the Northern Pacific reorganization plan will be successful.
The promoters have adopted a conservative policy, and have marked the
interest charges down. We are entirely satisfied to have the Northern
Pacific securityholders run the road, pay its debts, and be charged
with the responsibility of meeting all its proper obligations, rather
than to have it operated by the officers of two or three courts which
are continually contending as to jurisdiction.”[637] By April 23, when
the time for deposits expired, the reorganization committee was able to
announce that it held over 92½ per cent in amount of general, second,
and third mortgage bonds, dividend certificates, consolidated mortgage
bonds, collateral trust notes, preferred stock, common stock, northwest
equipment stock, and Northern Pacific and Montana first mortgage bonds,
and that the plan and agreement was therefore declared operative.[638]
By June a majority of the first mortgage bonds had been secured, and it
was announced that after June 30 the basis of conversion of this issue
would be reduced from 135 to 132 per cent in new 4 per cent prior lien
bonds. On July 24 the Northern Pacific _Railway_ filed its articles of
incorporation at St. Paul, Minnesota, and the next day the sale of the
property took place, in spite of suits by the general creditors and the
preferred stockholders. The sale was in three parcels, and the property
was bid in for $12,500,000 by Mr. Winter, the newly elected president.
After the first sale the company’s lands in Wisconsin were offered and
bid in for $575,000, and two days later the lands west of the Missouri
were bought in for sums aggregating $600,000. Finally, on August 4,
the lands in Washington and Oregon were bought in for $1,705,200 and
$558,000 respectively. The property of the company was turned over
by the receivers to the reorganization committee at midnight, August
31, and on November 7 the final step in the reorganization plan was
taken by the formal authorization by the stockholders of the issue of
$190,000,000 of bonds.[639]

From 1896 to the present time the Northern Pacific has enjoyed a
development scarcely less noteworthy than that of the Union Pacific.
Gross earnings have increased from $23,679,718 in 1898, the first
full year after the receivership, to $68,534,832 in 1907; net revenue
from $13,471,544 to $33,208,840; and mileage from 4350 to 5444. Gross
earnings per mile were $5443 in 1898; they were $12,590 in 1907. The
retirement of the eastern terminus of the system from Chicago to
St. Paul and Minneapolis was accomplished in the course of 1897 by
arrangement for connection with the Chicago & Northwestern instead
of with the Wisconsin Central, and the sale of the certificates of
proprietary interest in the Chicago Terminal Transfer Railroad received
by the Northern Pacific under the Chicago & Northern Pacific plan
of reorganization; while the improvement of the position of the new
mortgages has been vigorously prosecuted by the rapid drawing for
redemption of old first mortgage bonds at 110, and by the calling of
the entire issue of the Missouri division bonds at par and accrued
interest.

In the years following 1897 large sums have been spent for betterments
and enlargements. Some $68,500,000 have been invested from the proceeds
of the sale of prior lien bonds and of miscellaneous assets, and
over $18,000,000 have been temporarily withdrawn from income for the
same purpose.[640] Grades have been reduced, lines straightened, new
branches built, real estate acquired, track relaid and ballasted,
bridges strengthened and renewed, equipment rebuilt and increased in
amount, and other similar betterments undertaken. It is a work which
all the great American systems have carried on, but the Northern
Pacific has surpassed even the Union Pacific in the extent of its
operations. Ordinary maintenance requirements have not meanwhile
been neglected, and in 1906 and 1907 the Northern Pacific set aside
$2,000,000 for depreciation of equipment, which is over and above
the other sums which have been mentioned. The company owned 1255
locomotives on June 30, 1907, of an average weight of 174,000 pounds;
in 1898 it had owned 542 of an average weight of 104,000 pounds. It had
42,000 freight cars in 1907 with an average capacity of over 33 tons;
it had possessed 18,500 in 1898 of an average capacity of 22 tons.
Seventy-five per cent of the main line was laid with track of 72 pounds
or over in 1906, but only thirteen per cent in 1898. In consequence
heavier trains are run,[641] at a less expense per ton, and the net
revenue is correspondingly increased. Even the liberal expenditures
which have hitherto been made are insufficient, however, for present
conditions, and the stockholders have approved a proposal to issue
$93,000,000 of new common stock at par for the purpose of extending the
Northern Pacific’s mileage and facilities.[642]

The endeavor to stimulate traffic to fill the trains has led to
important developments. In order to increase the exchange of
commodities between their territory and the Middle West, to establish
stable conditions on transcontinental business and thereby to secure
back loading for their cars, the Great Northern and Northern Pacific
in 1901 arranged for the purchase of the Burlington system which
connected both their lines with Chicago. The refusal to share their
purchase with Mr. Harriman led to the competitive purchase of Northern
Pacific stock by rival interests, and to the retirement of the Northern
Pacific preferred, but did not prevent the consummation of the
deal.[643] This purchase has been a profitable one. The Burlington has
paid in dividends upon its stock almost enough to cover the interest on
the bonds issued to acquire it, and the indirect effects of its control
have satisfied expectations. Indeed, the east-bound lumber traffic has
so developed that the Great Northern has recently raised its lumber
rates in order once more to equalize east- and west-bound shipments.

The Northern Pacific has been openly dominated by the Hill-Morgan
interests for the last six years, and probably has been under their
control since its reorganization. From the financial as well as from
the traffic point of view its position is secure. The voting trust was
dissolved in 1901 “by reason,” in the words of the trustees, “of the
evidence of financial strength, conservative management, skilful and
profitable operation, superior physical condition of the property,
and the reasonable prospect of continued prosperity.”[644] In 1907,
out of a net income of $33,208,840 only $9,575,183 were paid out for
interest, rentals, and taxes, and $23,473,929 were left for dividends,
improvements, and reserve. This whole sum, which amounts to 33 per cent
of gross income, is available as a protection for the mortgage bonds;
and a considerable portion could be dispensed with without forcing a
decrease in the present rate of dividends.[645] It is likely that the
coming years will see a check in the advance of national prosperity,
but the Northern Pacific is in excellent condition to stand the strain.



CHAPTER IX

ROCK ISLAND

  Charter—Early prosperity—Reorganization of 1880—Conservative
    policy—Extension—Pays dividends throughout the nineties—Moores
    obtain control—Reorganization of 1902—Further extensions—
    Impaired credit of the company.


The original Rock Island Railroad, chartered in 1847,[646] was
completed between Chicago and Rock Island in 1854. Construction was
continued from Rock Island to Council Bluffs across the state of Iowa,
under the charter of the Mississippi & Missouri, until 1866, when this
company was merged with the original Rock Island Railroad Company,
and after 1866 under the Rock Island charter until the extension was
completed in 1869. Unlike the Atchison, the Rock Island passed through
a fairly well-settled territory, which was at the same time one of the
most fertile in the United States. In 1870, according to the census
returns, Iowa produced 28,708,312 bushels of spring wheat out of a
total for the United States of 112,549,733 bushels, more than any other
state in the Union; while Illinois in its yield of winter wheat was
surpassed by Indiana and Ohio alone. Of Indian corn Iowa and Illinois
together produced 198,856,460 bushels against 562,088,089 for all other
states combined. Manufactures were well begun, and even mining had
attained a considerable development, particularly in the extraction
of bituminous coal in Illinois. Naturally the road was prosperous;
gross earnings increased from $3,154,236 in 1866 to $5,995,226 in
1870, and to $9,409,833 in 1879; while net earnings attained the very
considerable sum of $4,548,117 in 1879, being 48 per cent of the gross
receipts. At the same time the capitalization was very moderate, due to
the relatively level character of the country through which the road
ran, and, not less important, to the absence of speculative financial
operations in the course of its construction. To build 1231 miles had
cost in 1879 but $35,664,200, of which $4,702,202 had been supplied
from earnings; leaving a total of bonds and stocks of $30,962,000, or
$25,151 per mile. Fixed charges were, therefore, low. In 1875, when
net earnings were $3,853,676, interest on bonds, taxes, and all other
necessary disbursements took but $1,065,395; and in 1879 the payments
were markedly less. Is it strange that the troubles of the road came
from too great earnings rather than from too small, and that instead
of striving to maintain solvency the directors had to seek ways and
means for concealing or getting rid of earnings without arousing the
hostility of legislators to whom 10 per cent dividends seemed high, and
anything over 10 per cent proof of extortion? Between 1866 and 1876
four cash distributions of 10 per cent were made to stockholders, five
of 8 per cent, one of 8½ per cent, and one of 7½ per cent. The dividend
for 1879 was again 10 per cent, that of 1878 8 per cent, and that for
1879 9½ per cent. Meanwhile large sums were carried to surplus. The
balance, after all disbursements, never after 1873 fell below $665,000,
and in 1879 was nearly equal to the dividend declared; that is, while
distributing $1,993,086, or 9.5 per cent, the road earned, over and
above charges, $3,947,065, or 18.8 per cent.

It was inevitable that some attempt should be made to increase the
distribution to stockholders; and the most obvious method was the one
adopted, viz., a watering of the stock. The plan devised in 1880 was
as follows: It was proposed to consolidate various branches of the
railroad company, hitherto operated as separate corporations, with
the main line; and to do this through the formation of a new company,
which should exchange its stock for the stock of the previously
existing corporations in the ratio of two to one. Practically all
the stock retired was owned by the Chicago, Rock Island & Pacific
Railroad Company, so that the only increase in stock outstanding came
through the distribution to the stockholders of the parent company. In
March the executive committee of the Rock Island passed the following
resolution: “Resolved, that the proposition to consolidate the capital
stock, property, rights, franchises, and privileges of the Chicago,
Rock Island & Pacific Railroad Company with the capital stock,
property, rights, franchises, and privileges of the Iowa Southern
& Missouri Northern Railroad Company, the Newton & Monroe Railroad
Company, the Avoca, Macedonia & Southwestern Railroad Company, and
the Atlantic & Audubon Railroad Company into a consolidated Railroad
Company, with an authorized capital of $50,000,000, and such powers as
shall be assumed in the articles of consolidation, be submitted to a
vote of the stockholders of this company at their annual meeting.”[647]
Of the roads named only the Iowa Southern & Missouri Northern was of
importance, extending 270 miles from Washington, Iowa, to Leavenworth,
with branches which raised its total to 347 miles. This company had
been organized as the Chicago & Southwestern Railroad Company, and
the main line had been completed in 1871. The Chicago, Rock Island &
Pacific Railroad Company had guaranteed its $5,000,000 main-line bonds,
with a provision that it could demand foreclosure if called upon to
pay either interest or principal, and in return had secured a lease in
perpetuity. The road had been sold under foreclosure and reorganized in
1875 as the Iowa Southern & Missouri Northern, and had issued its stock
to the Rock Island in return for money advanced by that company, the
stock to be held in trust to 1926, and then to become the property of
the lessee. The other roads did not together possess more than 80 miles
of line, so that the operation was a genuine case of stock-watering.
The opinion of the stockholders may be inferred from the quotations
of their shares. Between January 2 and June 1, 1880, the quotations
of Rock Island common rose from 149 to 189, with few sales, in
anticipation of the distribution. On June 2 the stockholders formally
gave their approval, and on June 4 the Chicago, Rock Island & Pacific
Railway started on its career.[648] The price of the new stock was of
course less than that of the old. It started at 106½, but by December
it had reached 122¼, and by June the following year had risen to over
141.

This may be called Rock Island’s first reorganization. It doubled the
stock of the road, and increased its indebtedness by the assumption
of the $5,000,000 bonds of the Iowa Southern & Missouri Northern; but
the new stock involved no increase in fixed charges, and the new bonds
a nominal increase only. Instead of being occasioned by too little
prosperity it was caused by too much; and instead of being carried
through after active opposition from many of the interests concerned,
and reluctant acquiescence from the others, it occasioned a rise in
price of the common stock of 27 per cent in six months.

Between this date and 1902 no reorganization occurred. A rapid review
of the period brings out, however, certain interesting features: First,
that the stockholders and the directors were extremely conservative;
second, that this conservatism did not keep the road from sharing in
the expansion of mileage from 1887–9, which was so general in the
Middle West; third, that this expansion decreased the average receipts
per mile, and consequently the rate of dividends, and occasioned a fall
in stock quotations from 140⅞ to 63⅜; fourth, that though weakened
the road went through the panic of 1893 and the subsequent depression
without suspending dividends; and fifth, that the year 1901 saw the
beginning of a new expansion of the system, accompanied by a change
in control and the carrying out of more ambitious plans than had ever
occurred to the men of the previous generation.

The conservatism of the stockholders is shown in the election, year
after year, of the same men to positions of authority. Rock Island
was not a speculative road; the high price of its stock forbade.
Stockholders regarded their shares as permanent investments, and,
satisfied with the returns secured, loyally supported the management
in good times and in bad. Between 1875 and 1897 there were but two
presidents, Mr. Riddle holding the position until 1883, and then giving
way to Mr. R. R. Cable, who, after directing the policy of the company
for fourteen years, served as chairman of the board of directors from
1898 to 1901. Among the five members of the executive committee, if the
reckoning is begun with the year 1881, three had been in office five
years by 1886, one 2 years, and one 1 year, or an average of 3⅗ years.
In 1891 two members had been in 10 years, one 7 years, one 6 years,
and one 1 year, or an average of 6⅘ years; and in 1901 one member had
been in 20 years, one 17 years, one 8 years, one 3 years, and one 2
years, or an average of 10 years. The board of directors showed the
same general tendency. In 1890 seven of the thirteen directors had
served for 9 years, and the average service was 6-3/13 years; in
1897 four of the directors had served for 16 years, and the average
was 9-10/13.[649] It was but natural that men working under these
conditions should have been apt to err on the side of caution rather
than on the side of recklessness; and we find them, therefore, slow
to extend their system, and slow to stretch into new territory where
traffic returns were uncertain, and where the road had to create its
business as it went. At the date of the consolidation the company had
become the owner of 1038 miles and operated under lease 273 miles more,
or a total of 1311 miles. By 1883 this had been increased to 1381; but
in 1887 the total was only 1384.2, showing a total construction of
little over three miles in four years.

This policy had to be abandoned, for other roads were extending their
lines in Iowa and Illinois, and the Rock Island’s share of Western
business tended to fall off with the construction of rival lines
west of the Missouri. As the report of 1889 expressed it, “while the
lines of this company terminated at the Missouri its competitors for
business had extended beyond, reaching in many cases the extreme
western boundaries of population and even further. Thus the volume
of traffic received by the company for carriage to and from the West
was materially affected, while in order to restore the equilibrium
overbalanced by the reduction in rates, the reverse was necessary,
a larger rather than a smaller share of the tonnage to and from
points west of the Missouri was demanded by the situation.” The
directors were forced against their will to take active measures
in self-protection. As early as 1884 a bond issue was approved for
construction from Minneapolis westward to an eventual junction with the
Northern Pacific.[650] Building was to be carried on in the name of the
Wisconsin, Minnesota & Pacific Railroad Company, and the securities
of this company were to be received by the Rock Island as collateral
for the issue which it made.[651] Two years later more extensive plans
were put on foot, and the Chicago, Kansas & Nebraska Railroad Company
was organized to carry out construction west of the Missouri. The
new company had a capital stock of $15,000,000, and then (1887) of
$30,000,000, and an indebtedness in 1889 of $25,141,000 6 per cent
first mortgage bonds; and turned over all of its bonds, and practically
all of its stock to the Chicago, Rock Island & Pacific Railway in
consideration of advances made to it. The Rock Island Company in its
turn reserved the branch-line bonds as collateral, and issued against
them its own 5 per cent collateral and extension bonds; agreeing to
supply all money needed for construction and equipment,[652] and
leasing the new railway at a rental of 30 per cent of its gross
earnings.[653] Under this arrangement 1388 miles were built by 1889
and 276 leased, making a total of 1664.4. In 1889 it was thought more
convenient to consolidate the two systems, so interest was defaulted
on the Chicago, Kansas & Nebraska bonds, and foreclosure proceedings
commenced; resulting in 1891, in spite of protests by municipalities
along the route, in a foreclosure sale and union of the two properties
in name as well as in fact. The collateral bonds of the Chicago, Rock
Island & Pacific now became a direct instead of an indirect lien upon
the Kansas & Nebraska mileage.[654]

Owing to these operations the mileage of the system increased from
1384 in 1887 to 3257 in 1889, and to 3408 in 1891. The greater part
now lay in Kansas, Nebraska, and Colorado instead of in Illinois and
Iowa, while at the same time the addition of the new mileage through
sparsely settled districts decreased the density of traffic and the
gross and net receipts per mile of line. In 1887 the Rock Island was
earning the very high return of $8899 gross per mile operated; in 1891
this had fallen to $5126; in 1887 the net return was $3478 per mile; in
1891 it had fallen to $1484; in other words, the new mileage brought
an increase in traffic, but not nearly so great a traffic per mile as
the Iowa and Illinois lines had enjoyed, while the financing of the new
construction swelled the annual charges from $1,795,351 to $4,775,601,
and even with the larger mileage increased the charges per mile from
$1295 in 1887 to $1400 in 1891. We need not, therefore, be surprised
that the rate of dividends dropped from 7 per cent to 5¾ per cent and
then to 4 per cent; nor that the price of common stock fell from its
high level of 140⅞ in May, 1887, to 63⅜ in March, 1891.

It was in this weakened condition that the Rock Island encountered the
panic of 1893 and the years of depression which followed, and yet,
in spite of the marked decrease in business in the years 1895–6–7, it
continued to pay dividends, and showed no signs of financial distress
except the lowering of its rate to 2 per cent. As a matter of fact
the road was still in these years one of the strongest in the United
States. Its lines were well located, its management was conservative,
and consequently trusted, and its credit was good; so that at a time
when some of the largest systems in the United States were being forced
to the wall, it was enabled to preserve its solvency and even to keep
up fairly liberal expenditures for maintenance of way and rolling
stock. Little new construction was of course indulged in. In 1892 an
extension was begun from Minco, the terminus of the Rock Island in the
northwest corner of the Indian Territory, southwards;[655] in 1893
the southern boundary of the Territory was reached, and the Chicago,
Rock Island & Texas Railway Company was organized to build through
Texas;[656] and in 1894 a combined line was opened to Fort Worth;
but exclusive of the Chicago, Rock Island & Texas, the total mileage
increased by but 360 miles between 1890 and 1900, being an average of
33 miles a year.

In 1901 Messrs. William H. Moore and D. G. Reid were elected directors
in place of Messrs. H. M. Flagler and H. A. Parker, and a new era
in the road’s affairs began. Mr. Moore had not long been interested
in railroad matters. Known as a daring and successful promoter of
industrial companies, he had made large profits out of the organization
of the National Biscuit and Diamond Match companies; had lost almost
equally large amounts in speculation which had followed, and had then
regained a fortune through the organization and promotion of companies
which were absorbed into the United Steel Corporation. In these last
operations he had come into contact with Mr. W. B. Leeds, who, though
originally a railroad man, had acquired wealth through a tin-plate
plant which was afterwards turned over to this same Steel Corporation.
Mr. Moore was apparently in 1901 seeking for an investment. He was too
well acquainted with industrial properties to care to sink his money
in them, while he realized that for obvious reasons good railroad
property was as safe, and might be made as profitable as anything else
to which he could turn. The Chicago, Rock Island & Pacific was at the
time the system most available for his purpose. It was not under the
control of any large New York interests; it had an excellent financial
record; its mileage was so placed as to admit of ready expansion; and,
moreover, it is probable that to a man of Mr. Moore’s speculative
disposition the very low capitalization of the road opened up vistas of
almost indefinite increase.[657] Just when Mr. Moore and his friends
began their purchases, and what price they paid is of course largely a
matter of conjecture: large blocks of stock were, however, undoubtedly
secured in the early months of 1901, during which time quotations
ranged from 116⅞ to 136; and it is probable that the larger part of
the purchases were made nearer the upper than the lower level. During
the following year the Moore party increased their holdings. It has
been said that in April, 1901, Messrs. Moore and Reid were elected
to the directorate. In November, 1901, at a special meeting of the
stockholders, the directors were authorized to elect two new members
to the executive committee, and Messrs. Moore and Wm. B. Leeds were
chosen. In February, 1902, H. R. Bishop, Tracey Dows, and F. E. Griggs
resigned, and Geo. McMurtry, F. L. Hine, and F. S. Wheeler were elected
directors in their place. Mr. McMurtry had formerly been president of
the American Sheet Steel Company, merged in the Moore Steel Combine,
and Mr. Hines, vice-president of the First National Bank of New York,
presumably brought the backing of that powerful institution.[658]
Meanwhile Mr. James H. Moore had been chosen a director, and the Moore
interest had gained control of the executive committee, so that a
majority both of that committee and of the board of directors was
in their hands. The new group of capitalists were not railroad men;
their training had been on the financial side of corporation dealings,
and the bulk of what experience they had had in actual management had
been derived from industrial and not from railroad operations. It was
natural, therefore, that the most striking results from their accession
to power should appear on the financial rather than on the operating
end, and that their ability to manipulate stocks and bonds should prove
more unquestionable than their ability to handle railroad affairs.
Results in the development of the Rock Island system were, however,
attained, and for two reasons: in the first place, the Moores were
able, and above all enterprising men, and untrammelled by traditions
of conservatism, they were quick to see and bold to execute plans made
possible by the admirable location of their 4000 miles of road; in
the second place, they soon had large blocks of securities which they
wished to sell, and were impelled to undertake large operations in the
hope of raising quotations upon the Exchange.

In June, 1901, the stockholders authorized an increase in the capital
stock from $50,000,000 to $60,000,000; stockholders of record June 28,
1901, to have the right to subscribe at par.[659] The proceeds were
to go in part for extension from Liberal, Kansas, to El Paso, Texas,
and in part for a new depot and elevation of tracks in Chicago, and
for the improvement of the physical condition of the road. This El
Paso extension plan was not new, since in December, 1900, the Chicago,
Rock Island & Mexico, and the Chicago, Rock Island & El Paso had been
incorporated to build a line from Liberal, Kansas, to Santa Rosa, New
Mexico; there to connect with the El Paso & Northeastern, and to afford
a through route to the Pacific coast and into Mexico. The other plans
were, however, new. In April, 1903, the Chicago, Rock Island & Texas
filed an amendment to its charter providing for an extension from Fort
Worth to Galveston, 295 miles. The same month the sale of the Choctaw,
Oklahoma & Gulf to the Rock Island was officially confirmed. This
road has been, with one exception, the most important acquisition of
the Moores. It stretches from Memphis, Tennessee, through the Indian
Territory, Arkansas, and Oklahoma, to the border line of Texas, and
furnishes a nearly direct line from those states to the Mississippi
River; while a projected extension to New Mexico will connect with
the Rock Island main lines to the southward, and make it a valuable
link in the through route from El Paso to Memphis and Birmingham. The
Rock Island paid $80 a share for the common stock and $60 for the
preferred,[660] and under the terms of the sale agreed to take at the
same price all stock offered. The premium was very large. Choctaw
preferred had been paying 5 per cent for some years, and the common had
received 2 per cent in 1889, 4 per cent in 1900, and 4½ per cent in
1901, plus 10 per cent in stock; but reckoned on a basis of 120 and 160
respectively, these returns sank to a very modest rate. The property
is a valuable one, but will have to show great development to justify
its purchase price. Payment was made by the issue of collateral trust
4 per cent bonds to the amount of $23,520,000, in return for which
practically all of both issues of stock were deposited. Certain smaller
roads were also bought in. In June, 1902, the stockholders voted to
increase the capital stock from $60,000,000 to $75,000,000; and in July
the directors decided to allow the stockholders to subscribe at par for
$8,235,000 of the new issue in amounts equal to 12½ per cent of their
holdings;—the new stock to take up shares of the Burlington, Cedar
Rapids & Northern, the Rock Island & Peoria, and the St. Louis, Kansas
City & Colorado.[661] The first of these roads connected the Rock
Island system with Minneapolis and St. Paul.[662] The Rock Island &
Peoria was a short line in the state of Illinois. The St. Louis, Kansas
City & Colorado was to afford, when finished, a more direct route
between the important cities of St. Louis and Kansas City.

This is where matters stood when the reorganization plan of August,
1902, was brought forward. There had been a refunding put through
in 1897 whereby some simplification of bond issues had been
secured;[663] but this scheme of 1902 was for a different purpose and
differed radically in the methods employed. Its explanation is to
be found in the character of the men in control. We have seen that
Mr. Moore had made his reputation in the speculative promotion of
industrial combinations, that he had entered Rock Island in search of
an investment, and that he had thrown himself into the extension of
the system in part because he saw the opportunity for development,
in part because he hoped to pave the way for profitable manipulation
of the stock. The time he had awaited seemed now to have arrived.
His projects had caught public attention, comment on the whole had
been favorable, and the price of his shares was at a high level;
all indications pointed to the probable success of a scheme of
stock-watering on an enormous scale. At the same time Mr. Moore was too
well pleased with the position he had attained to wish to sacrifice
it by the sale of his holdings; and his desire was, therefore, to
devise an arrangement whereby the stock of the Rock Island should be
inflated and large blocks sold to the confiding public, while the
control should remain where it had been before,—in the hands of Mr.
Moore and his followers. It is to be noticed that there was no call
for a reorganization by the creditors of the road, and no question
of a default in interest, or even of a cessation of dividends upon
the common stock; nor, on the other hand, were earnings so great that
the managers felt it unwise to distribute them. The reason for the
reorganization was entirely the financial ambition of the Moore group
and the chance which its members saw of making larger profits than the
earnings of the property would ever bring.

With these objects the following plan was put through. Instead of one
Chicago, Rock Island & Pacific Company the Moores now proposed to have
three companies, of which one was to operate the railroad, one was to
hold the stock of the operating company, and one was to hold the stock
of the company which held the stock of the operating company. That is
to say, the Chicago, Rock Island & Pacific Railway Company was left
undisturbed, while in Iowa a Chicago, Rock Island & Pacific Railroad
Company was formed to hold the stock of the Railway Company, and in New
Jersey a Rock Island Company was organized to hold the stock of the
Railroad Company, and of such acquisitions as might afterwards be made.
The retention of the Railway Company made unnecessary the consent of
creditors, for the lien and interest rate of outstanding bonds remained
the same as before; the formation of the Railroad Company served
apparently to meet legal requirements; and the organization of the Rock
Island Company seemed likely to make more easy the purchase of parallel
and competing lines. But the great advantage of the new companies lay
in the opportunities for stock inflation which they presented, together
with the lessening of the amount of capital required for control.
This appears plainly in the following: The old Railway Company had a
capital stock of $75,000,000; the new Railroad Company issued stock
to the amount of $125,000,000 and 4 per cent bonds to the amount of
$75,000,000. The Rock Island Company issued common stock to a total
of $96,000,000 and preferred stock to a total of $54,000,000; and the
aggregate, excluding the undisturbed bonds of the Railway Company,
footed up to $425,000,000 instead of to $75,000,000 as before. From
this total must be deducted $200,000,000, which represented issues of
stock by one company to another, and $21,000,000 Rock Island Company
stock and $1,500,000 Railroad Company bonds reserved for future
extension, leaving a net increase from $75,000,000 to $202,500,000.
This involved some increase in fixed charges, since 4 per cent on
$75,000,000 became obligatory; but the true significance lay in the
inflation of principal rather than in the increase of interest charges,
opening as it did an opportunity for great profit to the managers
in the sale of the new securities. An incidental result was the
transformation of the Rock Island shares from investment securities to
media for speculation. At the same time the investment required for
control was diminished. $75,000,000 of Railway stock was exchanged for
$75,000,000 Railroad bonds, $96,000,000 Rock Island Company common
stock, and $54,000,000 Rock Island Company preferred stock. Of these
the bonds obviously had no voting rights. To both the common and
preferred stock the right to vote was given, but in unequal degrees.
“Until the number thereof shall be increased,” read the certificate of
incorporation of the Rock Island Company, “the number of directors
shall be nine. There shall be five classes of directors. The first
class shall contain a majority of the whole number of the directors as
fixed at any time by the by-laws.... The holders of the preferred stock
shall have the right, to the exclusion of the holders of the common
stock, to choose directors of the first class....” In other words, to
the preferred stock, which constituted a minority of the whole, was
given the right to elect a majority of the board of directors; so that
whereas in the old Railway Company 51 per cent of $75,000,000 common
stock, selling at from 120 to 179, had been required for control, in
the new combination of companies 51 per cent of $54,000,000 Rock Island
Company preferred stock, selling at 83½, was sufficient to the same
end, in spite of a doubling of the stock outstanding.

To repeat: Two new corporations were formed, of which the Chicago,
Rock Island & Pacific Railroad Company of Iowa issued $125,000,000
stock to the Rock Island Company of New Jersey, and in return received
$127,500,000 Rock Island preferred and common stock. With this stock,
and with $75,000,000 of its own bonds, the Railroad Company purchased
the $75,000,000 stock of the Chicago, Rock Island & Pacific Railway
Company, paying for every $100 in shares

  $100 in Rock Island Company common stock;
    70 in Rock Island Company preferred stock; and
   100 in its own 4 per cent bonds.

The Railway shares acquired were pledged for the Railroad bonds, and
from them came the total income of the Railroad Company; and dividends
upon the Railroad shares, together with dividends upon shares of other
companies which it might chance to own, constituted the total income of
the Rock Island Company. After thus receiving indirectly the earnings
of the Railway Company through two sets of dividends, the Rock Island
Company paid dividends on its own shares, which were held by the
public; the preferred stock being entitled to 4 per cent from 1903 to
1909 inclusive, to 5 per cent from 1910 to 1916 inclusive, and to 6 per
cent thereafter.

Other provisions were as follows: The Rock Island common stock might
be increased from time to time according to law, but the amount of the
preferred stock could not be increased except with the assent of the
holders of two-thirds of the entire preferred stock and two-thirds of
the entire common stock at the time outstanding, given at a meeting
called for that purpose. Preferred stock was to be preferred as to
principal as well as to interest; it had the right, as has been said,
to elect a majority of the board of directors, but this right could
be surrendered by the affirmative vote of the holders of two-thirds
in amount of the preferred stock at the time outstanding at a special
meeting of the holders of the preferred stock called for that purpose.
A Finance Committee might be appointed from and by the directors which
should have such powers as the directors and stockholders should choose
to give it, and which should have all the powers of the directors when
the board was not in session. The directors might accumulate working
capital, but no reservation for working capital should be made in
any year out of the surplus or net profits of such year until after
the payments for such year of the dividends on the preferred stock
of the company. The directors might also use the working capital in
purchasing or acquiring the shares of the capital stock of the company
as they might deem expedient, but shares so purchased might be resold
unless retired for the purpose of decreasing the capital stock of the
company.[664] This last provision aroused so much criticism that the
directors gave up the right of dealing in the shares of their own
company by resolution of November 5, 1902.

The important features of this reorganization were, as has been
indicated, those in connection with the inflation of the capitalization
and with the control of the property. In this connection it may be
asked, first, whether the Moores made a profit by the deal; second, how
large an investment they have had to keep in the property in order to
retain control; and third, what cost to them this investment represents.

On January 2, 1902, Chicago, Rock Island & Pacific Railway Company
common was quoted at 154. On February 1 it was 162¼, on April 1, 179,
on July 1, 172½, on August 1, 190, on October 1, 200, and on November
1, 199½. It is safe to assume that the rise from 172½ to 200 was due
to the publication of the plan, and it may be that some of the earlier
increase in value was owing to purchases by insiders, or by people
who had obtained some inkling of what was being considered; but a
comparison of the aggregate value of the securities given for the
railway common stock on January 3, 1903, with the price of the stock
on July 1, 1902, shows that the former exceeded the latter by 22.3
points, with the error tending toward an understatement of the excess.
That is, for every $172½ invested in July, 1902, the Moores, and other
stockholders with them, held securities worth $194.8 in January of
the following year. During 1903 the Rock Island securities fell with
others upon the market, till on January 2, 1904, the aggregate value of
the stocks and bonds in question was only $132.2; but the decline was
temporary, and by January 3, 1905, recovery to $176.6 had taken place.
The operations therefore did result in a chance for large profits, and
gave renewed evidence that the public demand for stocks and bonds does
not fall off proportionately to an increase in their volume.[665]

It is obvious that neither before nor after the reorganization could
the Moores have sold all their holdings and yet have kept control.
Starting again with the price of 172½ for Chicago, Rock Island &
Pacific Railway common on July 1, 1902, it may be calculated that
the cost of a majority of the issue then footed up to $64,687,672.
If this had been carried on margin, and the brokers had demanded on
every share a deposit of $40, with $40 more instantly available if
needed, the total investment required for control would have been
$15,000,040, with as much more held in readiness for any emergency. On
January 2, 1903, Rock Island preferred stock was selling at 83½, and
the cost of a majority of the whole issue would have been $22,545,083;
which, if carried on margin with a deposit of $20 a share, would have
represented an investment of $5,400,020, with as much more in reserve.
In other words, while all went well, less than $11,000,000 sufficed
to control properties with a total mileage of 7718 miles of line,
a bonded indebtedness of $201,660,475, and an outstanding capital
stock of $118,249,007. It is of course improbable that the Moores in
1903 carried all, or even a large part of their holdings on margin;
supposing, therefore, that all of their stock was bought and paid for,
the fact still remains that with $22,545,083 they were able to control
a system capitalized at $319,909,482.

In examining the cost to the Moores it is at once to be said that these
gentlemen did not pay 172½ for their old Railway stock. What they did
pay is of course uncertain. It is known that much of their holdings
was acquired in the early months of 1901, when prices ranged from 116⅞
to 136. An average of 140 would represent a conservative estimate of
what they paid, at which price a majority of the $75,000,000 would have
cost $52,500,140. In return for this stock, at the prices of January 2,
1903, they obtained

  $18,375,049 in Rock Island Company common stock,
   21,918,808 in Rock Island Company preferred stock, and
   32,765,712 in Chicago, Rock Island & Pacific Railroad Company
     4 percent bonds.

Since the preferred stock sufficed for control, there were left
$18,375,049 of Rock Island Company common, and $32,765,712 of Railroad
Company bonds, or a total of securities with a nominal market value of
$51,140,761. Deducting this from the original investment, which has
been estimated at $52,500,140, there is left $1,359,379 to represent
the actual cost to the Moore crowd of control of the great Rock Island
property. Beneath all of these figures lies, of course, the erroneous
assumption that it would have been possible to unload large blocks
of securities upon the market without causing a break in price; and
yet, though large deductions must be made on this account, the figures
are eloquent of the skill with which the Moores have manipulated Rock
Island issues, and of the slender basis on which their control rests.
It has been truly said that the question is raised anew as to what is
legitimate in corporate finance.

All this is very different from anything described before; and so far
as motives go, the two Rock Island reorganizations stand by themselves.
In the matter of methods some similarities appear. The great increase
in capitalization resting on the Rock Island system was accomplished
mainly by an inflation of stock, not of mortgage bonds, and involved a
comparatively slight increase in fixed charges; the Rock Island Company
closely resembled other holding companies in its method of operation,
and seemed likely to offer some facilities for the consolidation of
competing lines; and though the extraordinary privileges given the
Rock Island preferred stock have perhaps never been paralleled in
degree, the practice of granting such stock preferential treatment in
other things than dividends is not unknown. On the whole, however,
this kind of reorganization stands apart, and is rather instructive as
showing what may be done in the handling of corporation securities than
in indicating any sound principles on which bankrupt roads may proceed.

The reorganization plan aroused sharp criticism both from Wall
Street[666] and from the wider public, but met no opposition sufficient
to prevent its being carried through. In September Attorney-General
C. W. Mullen, of Iowa, in an opinion filed with the Governor of that
state, held that the acts of the new Iowa corporation of the Rock
Island, _i. e._ the Chicago, Rock Island & Pacific Railroad Company,
were not outside the powers conferred by statute.[667] The Governor,
in concurring with the opinion from a legal point of view, added, “the
thing done is neither a merger nor a consolidation. Not a mile of track
nor a dollar in value is added to the Rock Island property. It is
simply a new device for watering securities; it is for the next General
Assembly to say whether it is wise to permit our laws to so remain
that such things are possible.”[668] The various corporations were,
therefore, organized, and the various issues of stocks and bonds put
forth.

During the past four years the events which require mention are four:
First, the acquisition of the St. Louis & San Francisco; second, the
connection of the Rock Island with the Gulf; third, the temporary
control of the Chicago & Alton; and fourth, the issue of a new
refunding mortgage.

In October, 1903, the Rock Island operated 7123 miles of line. Its
tracks stretched southwest from Chicago to Santa Rosa, New Mexico,
west from Memphis to Tucumcari, and northwest from Rock Island,
Illinois, to Minneapolis and St. Paul, and to Watertown, South Dakota.
This extensive mileage surrounded, however, instead of occupying, a
large territory in Missouri, Kansas, Indian Territory, and Arkansas,
and could claim no share in the vast traffic passing up and down the
Mississippi Valley. One of the first acts of the Moores was to remedy
this defect. In May, 1903, the Rock Island made a formal offer to
purchase any and all shares of the St. Louis & San Francisco Railroad
Company, providing $22,500,000 in par value should accept, at a rate
of $60 par value in the common stock of the Rock Island Company and
$60 par value in a new issue of 5 per cent gold bonds of 1913 of the
Chicago, Rock Island & Pacific Railroad Company, for each $100 par
value of Frisco common stock deposited; the new bonds to be secured by
the stock acquired. This Frisco Company, it will be remembered, was the
same that had previously been acquired and given up by the Atchison,
Topeka & Santa Fe. Since that time it had greatly extended its mileage,
had gained control of the prosperous Chicago & Eastern Illinois, with
entrance into Chicago, and was altogether more valuable than it had
been before. In relation to the Rock Island it possessed precisely
the mileage which was required. It connected the latter’s terminus at
Chicago with the terminus of the Choctaw, Oklahoma & Gulf at Memphis;
it traversed Southern Illinois, Southern Missouri, Southeastern
Kansas, and Indian Territory, to say nothing of lines in Oklahoma and
in Texas; and by means of a line from Memphis to Birmingham it gave
entrance into the heart of the South. In brief, it filled the gaps in
the southeastern part of the Rock Island system, and afforded a solid
foundation for further expansion. Good authorities consider the price
which the Rock Island gave for the Frisco to have been too high. It is
certain that the Frisco stockholders jumped at the chance. By June 1,
1903, the necessary $22,500,000 worth of stock had given their consent
and only technical details remained to be carried through.[669]

With the St. Louis & San Francisco under its control the Rock Island
could make a final advance to the Gulf. An attempt to complete a road
through Texas occurred simultaneously with the Frisco purchase in
1903. The Moores, that is, arranged with the Southern Pacific for the
purchase of a half-interest in the Houston & Texas Central, from Fort
Worth to Houston and Galveston, with a branch to Austin, Texas; the
Houston, East & West Texas, extending north from Houston to Shreveport,
Louisiana; and the Texas & New Orleans, from Dallas to Sabine Lake
on the Gulf of Mexico. As a part of the agreement the presidents of
these lines were to be selected by the Rock Island Company.[670] This
would have established a line to the coast in a very satisfactory
manner. Connection between Dallas and Fort Worth was to be completed
in December, 1903, and from this point the two lines of the Houston
& Texas Central and the Texas & New Orleans would have furnished
direct outlets to the Gulf. The scheme did not go through, because
the Texas Railroad Commissioners pronounced the contracts contrary to
the state constitution, in that they amounted to a consolidation of
the corporations concerned, and to the establishment of a community
of interest between the Rock Island and the Southern Pacific, which
would preclude competition between them in respect to their Texas
business.[671] The Rock Island was at first disposed to test part of
the decision in the courts.[672] It later decided that discretion was
the better part of valor, stopped the transaction, and cancelled the
stock which it had issued as part of the purchase price.[673]

What the company could not do in Texas it could do, however, in
Missouri, Louisiana, and Arkansas. As early as November, 1902, the St.
Louis & San Francisco had purchased the entire capital stock of the
St. Louis, Memphis & Southeastern Railroad, a line which was opened
from St. Louis in 1904 to a junction with a branch of the Frisco above
Memphis. From Memphis the Kansas City, Memphis & Birmingham stretched
southeast through Mississippi into Alabama. These roads formed a basis
for extension which was practicable though less convenient than the
western route. Accordingly, in 1904, trackage agreements were concluded
which gave to the Rock Island system:

(1) Trackage rights over the Mobile & Ohio and the New Orleans &
Northeastern between Tupelo, Mississippi (on the Kansas City, Memphis &
Birmingham), and New Orleans, Louisiana.

(2) Trackage rights over the St. Louis, Iron Mountain & Southern and
the Texas & Pacific from a point opposite Memphis, Tennessee, to a
point opposite Baton Rouge, Louisiana.

(3) Trackage rights over the Yazoo & Mississippi Valley between Baton
Rouge, Louisiana, and New Orleans, Louisiana, and over certain tracks
in the latter city.

This afforded alternative routes of considerable directness from
Memphis to the Gulf, while from the junctions of the Frisco with the
Southern roads freight could be sent north to St. Louis and Chicago
over the Rock Island system’s own rails. Arrangements were made for the
construction of terminals in New Orleans by a subsidiary company whose
stock was to be owned and whose bonds were to be guaranteed by the
Southern and the St. Louis & San Francisco companies.[674]

At the present time the Rock Island is reaching south at two points
other than those so far mentioned. Under the name of the Rock Island,
Arkansas & Louisiana Railroad Company,[675] it has built almost due
south from Little Rock, Arkansas, while from New Orleans to Houston
it has completed a line which connects at Eunice, Louisiana, with the
Rock Island, Arkansas & Louisiana, and at Houston with the Trinity &
Brazos Valley Railway.[676] This last line runs from Houston to Fort
Worth and Dallas, Texas, and is controlled by a half-interest in its
capital stock. The Rock Island is thus in fair shape to share in the
south-bound grain movement from Kansas, Nebraska, and the Dakotas,
and to take a part in the north and south business of the Mississippi
Valley. There is no question but what the company is making a bold
bid for an enormous traffic, and that failure will not be due to any
narrowness of view.

About the time that it was struggling to reach the Gulf the Rock
Island took hold of the Chicago & Alton in the north in order to have
another and a more direct line between Kansas City and Chicago. A
strong minority interest had previously been bought in the Alton by
Mr. Harriman, and a board of directors had been elected. In 1904 the
Rock Island bought within a few hundred shares of absolute control,
and since the classification of the board prevented the displacement
of its opponents for two years, arranged a compromise. Between them
the Harriman and the Rock Island interests deposited a controlling
number of Alton shares with the Central Trust Company of New York, to
be held in a voting trust. Each of the rival interests was to have five
directors, and the odd director was to be in alternate years first a
Harriman and then a Rock Island man.[677] The Rock Island was, further,
to have an option on the Harriman holdings for two years. It was an
unfortunate time to buy. Mr. Harriman had previously displayed his
splendid dividend producing ability in Alton finance, and the road was
short of money. Market conditions were unfavorable, bonds were hard
to sell, and, after all, the Alton was not of vital importance to the
Rock Island, although it opened up new territory of some considerable
importance. By 1907 it seems that the Moores had become tired of
their bargain. In June of that year they served notice on the Union
Pacific that the compromise agreement of 1904 was illegal and should
be abrogated;[678] and shortly after they sold their holdings to the
Toledo, St. Louis & Western.[679]

All in all the growth of the Rock Island has been astounding. Instead
of the limited number of 7123 miles which the system possessed in 1903,
or the 3819 of 1901, it comprises 14,270 miles of line operated in
1907. Gross earnings are $112,464,000 in 1907 as against $25,365,000
in 1901; net income $40,828,000 instead of $8,901,000; capitalization
about $525,000,000 instead of $118,081,000. In fact, the very size
of the system and the diverse nature of its interests make the
economical management of the whole almost beyond the capacity of any
one man. The Rock Island handles traffic from the West and South to
Chicago, St. Louis, and Birmingham, and connects with the trunk lines
to the Atlantic coast; it is also striving to receive and care for
the constantly increasing business from the Northwest to the Gulf.
It reaches into Mexico; it extends into Colorado, and sends branches
into the Northwest; while at the other end it connects Kansas City,
Memphis, and St. Louis by a triangle of lines. It was remarked a year
ago that a contrast between the operations of the Rock Island and of
the Atchison lines in the Southwest disclosed what might be called
demoralization on the part of the former, and it is in the multiplicity
of its operations that the cause must be sought.

It is to be expected, therefore, that the financial position of the
company should not be secure. Operating expenses, fixed charges, and
taxes absorbed 87 per cent of gross income in 1907 and 89 per cent the
year before. We must not be blinded by the magnitude of the reported
figures. Although $9,476,397 were carried to surplus in the year ending
June 30, 1907, and $5,568,092 were paid out in dividends, these two
items together comprise only about 13 per cent of gross income, and a
bad year might readily see a decrease sufficient to sweep this margin
away. Unlike the Union Pacific and the Northern Pacific, moreover, the
Rock Island has not made consistently heavy improvement expenditures
from income. Less than $40,000 was deducted by either the Frisco or
the Rock Island & Pacific Railway in 1905 or in 1907; less than half a
million in 1904; a little over two millions in 1903 and in 1906. And
this in spite of the fact that the mileage of the Rock Island system
is greater than that of any other road which this study has taken up.
The fate of the company’s refunding mortgage of 1904 probably testified
as much to the distrust of the Moore group of financiers and of the
soundness of the property which they control as it did to the general
financial uneasiness of the time. This proposition for a refunding
mortgage was first framed in July, 1903. It then comprised an issue
of $250,000,000 4 per cent bonds, to be used for the refunding of
outstanding obligations, future enlargements and construction, purchase
of bonds and stocks of other companies, and for the reimbursing of the
company for advances already made. Subscriptions were sought in New
York in vain. Whereas the project was to have come up at a meeting of
the stockholders on October 8, the managers obtained an adjournment
of this meeting until January without action, and before that month
arrived announced an indefinite postponement of operations. On March
21 the stockholders voted on and approved a modified version of the
original scheme, whereby $163,000,000 instead of $250,000,000 were
authorized, of which $15,000,000 were to be issued at once, and
$82,025,000 were to be reserved for retiring certain outstanding
obligations. It proved no easier to secure subscriptions to this than
to the previous plan, and in April $5,000,000 4½ per cent notes were
issued instead and taken by the First National Bank of New York, which
was already closely identified with the company. Not until November,
1904, after fourteen and one-half months of persistent effort, was a
firm of bankers found to take the refunding issue. $25,108,000 were
then sold to Speyer & Co. Mr. Speyer became a director of the Rock
Island and entered the finance committee, while the proceeds of the
sale went to reimburse the treasury for capital expended, and to
provide for the payment of obligations maturing in 1905. Since this
time other blocks of the bonds have been sold.

It is thus evident that the Rock Island has not regained the position
which it held prior to the operations of Mr. Moore and of his friends.
The recent developments have done two things: they have piled upon
the company a mass of excessive capitalization; and they have
transformed it from a moderate sized railroad with a clearly defined
flow of traffic into a great system sprawled over the Central West
and handling at least three different currents of business. Neither
one of these changes alone can account for the present condition of
the road. Together they have made it what it is. It is only fair to
say that large sums from capital account are being spent upon the
property and that the managers announce an intention of bringing it
up to the highest standard of physical condition. Over $4,000,000
were appropriated for additions and improvements in 1907, and nearly
$3,500,000 in 1906, besides still greater sums for construction and
equipment. Heavier rails have been laid down, bridges have been
strengthened, equipment increased and improved. Meanwhile maintenance
charges have not been unduly low, though not so high as on some other
Western roads. It is true, nevertheless, that the Rock Island has lost
its former stability and must await a period of lessened earnings with
serious apprehension.



CHAPTER X

CONCLUSION

  Definition of railroad reorganization—Causes of the financial
    difficulties of railroads—Unrestricted capitalization and
    unrestricted competition—Problem of cash requirements—Problem of
    fixed charges—Distribution of losses—Capitalization before and
    after—Value of securities before and after—Provision for future
    capital requirements—Voting trusts—Summary.


A general survey of railroad reorganizations may now be attempted.
Eighteen different ones and no less than forty-two reorganization plans
have been examined in detail. In their seemingly infinite variety
may not some guiding principles be found which will assist both in
interpreting the past and in directing the future?[680]

It is apparent that a readjustment of a railroad’s affairs is more
difficult than the readjustment of those of an individual. A railroad
is a complex financial, as well as a complex operating machine.
Especially when it has been built up by the union of numerous small
properties, each of which has been allowed to retain a certain
individuality of its own, are the relations between the different
parts intricate and involved. The obligations which have been incurred
in the course of its career, and the kinds of paper which represent
these obligations, disclose a variety which the debts of an individual
seldom or never present. This complexity in railroad capitalization
inevitably leads to clashes in interest between different classes of
securityholders. Divergencies in interest seem to appear even while a
road is solvent. If classes of securities exist upon which payment of
interest is optional, it is to the advantage of the junior issues to
prevent payment of interest or dividends upon others until earnings
are such that payment may be made upon all. If common stockholders
can reinvest in the property sums which normally would be paid in
dividends on the preferred stock, they advance the day upon which
they can secure dividends for themselves at the expense of their
seniors. The same situation may also arise as between the preferred
stock and the income bonds. Or, again, it may be to the advantage of
speculative stockholders to pay dividends to themselves by means of the
accumulation of a floating debt, and to sell out at top quotations,
leaving the floating debt to take precedence even of mortgage
bonds.[681] Both this and the preceding operation are facilitated
by the control which the least valuable portion of the capital, the
common stock, usually has over the policy of the entire company. But
it is when a reorganization becomes necessary that these conflicts
in interest become most apparent, and it is as a compromise between
contending forces that a reorganization plan must take its shape.

The term “reorganization” is used in this study to denote the exchange
of new securities for the principal of outstanding, unmatured, general
mortgage bonds, or for at least 50 per cent of the unmatured junior
mortgages of any company, or for the whole of the capital stock. These
exchanges have been the essential features of the operations which
have been described. This exchange of securities must take place upon
a considerable scale. Small readjustments may involve valuations of
specific bits of property, but they do not require that comprehensive
survey of the relations of all parts of the system to each other
which distinguishes the general reorganization. In fact, the small
adjustments are at once more simple and more difficult than the larger
kind. More simple because they involve less change; more difficult
because the same pressure cannot often be brought to bear. It is useful
to mark a dividing-line between the small and the large. No such
line can be defended as exact; but the one chosen seems to include a
tolerably homogeneous group, and will lend a convenient definiteness to
the discussion.

As thus defined, a reorganization may be, and generally is, accompanied
by other operations essential to its success. If a large floating debt
has been accumulated, provision for the cancellation of this debt must
be made;[682] if unprofitable leases have been entered into, these
must be abolished;[683] or if the system has been unduly hampered by
inability to issue new capital, appropriate relief must be afforded.
But none of these are determining features. They are means to an end,
as is the exchange of new securities for old, and they may have their
effect just as the economical management of the Union Pacific under
Charles Francis Adams had its effect in the years prior to 1890; but
they are not essential parts of that group of operations which have
been characterized as reorganizations.

The exchange of new securities for old on a large scale usually takes
place when a railroad is unable to meet maturing obligations. Of 18
reorganizations and 42 plans, 15 reorganizations and 39 plans have had
to do with the extrication of companies from financial embarrassment.
But though impending insolvency is the usual occasion it is not the
only one. Reorganization sometimes occurs when prosperity is too great
as well as when it is too little. Or a management may desire to get
rid of hampering restrictions, or it may desire to manipulate the
conditions of control. This last named cause—the desire to manipulate
conditions of control—has been fortunately an infrequent cause of
reorganization. An example is, however, afforded by the Rock Island
reorganization of 1902. It will be remembered that the Chicago, Rock
Island & Pacific Railway had long been a prosperous road in the Middle
West, and that its control had required the ownership of between 40
and 50 per cent of $75,000,000 of common stock, quoted at over 160
in the early part of 1902. By the issue of new bonds, new preferred
and new common stock to a total of $270 for every $100 of old common
stock, and by giving to the preferred stockholders the right to elect
a majority of the directors, the owners of the property were able to
part with a large portion of their holdings and yet retain absolute
control. A somewhat similar case was that of the Chicago & Alton. This
road had been a conservatively capitalized enterprise, doing a large
business between Chicago, St. Louis, and Kansas City. It had paid 7
per cent or better on its two classes of stock for eighteen years
without a break, and had accumulated in that time an uncapitalized
construction expenditure of $12,444,178. In 1899 a syndicate of Eastern
capitalists bought control, and the following year reorganized the
property by forming a holding company, which issued $22,000,000 in 3½
per cent bonds, $19,489,000 in preferred and $19,542,800 in common
stock to exchange for the $22,230,600 old common and preferred shares
outstanding. At current prices on January 3, 1899, a majority of
both the old issues would have cost $19,030,048; on January 4, 1901,
however, a majority of both of the new issues represented an investment
of $10,729,437; and this investment it would have been possible to
reduce to $2,241,377 by the sale of the new bonds received, without in
any way endangering control.[684]

It is evident that both the Rock Island and the Chicago & Alton
reorganizations were influenced by the very great prosperity of the
companies concerned. It was desired to reap a profit by the sale
of new securities as well as to lessen the investment required for
control; although it may be remarked that the advantage of retaining
control depended on the future prosperity of the roads. Reorganizations
concerned with manipulation of control are therefore closely allied
with reorganizations due to too great prosperity. These latter may,
however, take place independently, and are likely to occur whenever
profits are extraordinarily large, and a simple stock dividend is
deemed inadvisable. An example was the reorganization of the Chicago,
Rock Island & Pacific in 1880, when the formation of a new company and
the exchange of new stock for old was deemed wise, in view of the large
earnings which were to be distributed.

The desire to eliminate hampering restrictions is seldom the sole
cause for a reorganization, but frequently it is a contributing one.
When, for instance, the managers of the Union Pacific wished to
extend their system in the years following 1880, they were forced
to establish a separate organization for each branch line. By the
terms of the charter nothing could be consolidated with the main stem
except the Kansas Pacific and the Denver Pacific, the consolidation
with which was provided for in the original acts.[685] This obviously
prevented considerable economies, and could be remedied only by a
new incorporation. The Northern Pacific was hampered in yet another
way because the consent of three-fourths of the preferred stock was
required by the terms of the reorganization of 1875 to the imposition
of new mortgages;[686] and similarly the Atchison, after 1889, found
it extremely difficult to issue new bonds because of the position of
the outstanding income bonds. In this last case the restriction was the
sole cause of the reorganization which followed. It should be remarked
that the cancellation of such provisions sometimes works considerable
injustice. Restrictions on future increases in capital, for instance,
may have facilitated the issue of bonds in the past, and in this case
have formed part of the consideration given for subscriptions. The
readjustment is defended on the ground of the need of the corporation,
or is so accomplished as not to lessen the value of the creditors’
holdings.[687]

The typical railroad reorganization, as has been said, occurs when a
road ceases to be able to pay interest on its outstanding obligations.
Whether because of excessive capitalization or because of unexpectedly
low earnings, or owing to an accumulation of floating debt which ties
up all current resources, the reorganizing railroad finds itself
incapable of meeting payments falling due. For this, experience shows
that two deep-seated causes have generally been responsible. First,
there is the almost entire freedom in matters of capitalization which
railroads have enjoyed. Far from the recommendation of Secretary Taft
that no railroad company engaged in interstate commerce be permitted
to issue stock or bonds and put them on sale in the market except
after a certificate by the Interstate Commerce Commission that the
securities are issued with the approval of the Commission for a
legitimate railroad purpose,[688] American railroads have in the past
been practically unrestricted. It was open to the Erie to increase
its capitalization per mile from $81,068 in 1864 to $117,760 in 1872,
with no corresponding addition to its property; it was open to the
Union Pacific to create a capitalization of $104,561 per mile by 1870,
of which about one-quarter was in the form of government bonds; and
it was possible for the Atchison to issue $129,162,350 in new bonds
and stocks between 1884 and 1889 while its net earnings seriously
decreased. Had there been a supervision of new issues, or had even a
certain percentage of stocks to bonds in those instances been required,
failures would have been less frequent and reorganizations less common.
New construction would probably have been less rapid, but not so much
so as is often asserted. A smaller number of new enterprises might have
yielded larger profits; the chances for land speculation might have
tempted many, and liberal regulations might have allowed a generous
profit while at the same time eliminating all inflation due to fraud.
Unfortunately railroad-hungry communities seldom stopped to count
the cost. West, South, North, and East, privileges were offered to
railroads, donations of land and money were made, and exemptions from
taxation were conferred.

The second fundamental cause of railroad distress has been competition.
If unrestricted capitalization has increased the load which the
railroads have had to bear, unrestricted competition has impaired their
ability to support any load at all. The forms which this competition
has taken have been mainly two: first, the cutting of rates, either
openly or by secret concessions; second, reckless extensions of line,
generally followed by rate-cutting. The cutting of railroad rates
is now a subject familiar to all. Illustrations may be found in the
history of any great railroad system. President Hadley has made
classical the theory that roads will take business until rates fall
below the specific cost of hauling a given shipment; that is, below
the additional cost which the articles in question impose. Even this
limitation is often non-existent. Railroads which serve different
cities will take freight when a war is in progress whether or not the
rate repays the specific cost of hauling. If their rival imitates
them they hope to wear it out by their superior ability to stand the
loss. If it does not, the city which they serve will temporarily eject
all others from common market, and may obtain so firm a footing that
a permanent increase in business will result. All of the railroads
which have been studied, in fact, have suffered more or less from
rate-cutting. Repeated attempts at pooling and agreements to maintain
rates have improved conditions only during the short periods in which
the agreements have been of effect. In the South there have been
scarcely more successful attempts to secure harmony by community
of stock control. Competition by means of extensions has been also
vigorously practised. The reader will recall the growth of the Atchison
from 1884 to 1889. It was after the dissolution of the Southern Railway
Security Company that the East Tennessee entered upon its policy of
purchase and of new construction. The entrance of the Reading into New
England was the direct cause of its failure in 1893; and that of the
Baltimore & Ohio into New York largely contributed to its difficulties
in 1887. Sometimes such extension is into territory where there is no
business to justify it. Sometimes the business is there, but has to be
divided among too many rivals. Sometimes the new lines are so poorly
built as to be unduly expensive to work, and not infrequently they
are so good that the resources of the expanding road are strained in
acquiring them. In any one of these four cases new extension causes a
drain upon the parent road which may readily bring about its failure.

Other conditions may lead to railroad failure. Simon Sterne alleges the
following causes to be often responsible:[689]

1. The control of railroads by stock which represents little or no
original cash investment.

2. The development of the territory served by individual railroads at
a slower rate than is anticipated, and the influence of competition in
reducing profits when the territory has developed.

3. The undertaking of railway construction when there is considerable
activity in the money market, and when capital commands a high rate of
interest.

4. The circumstance that railways, lacking reserve capital, can never
avail themselves of a cheap market for labor or supplies, but must
always buy when everything is inflated, because then only can they
float their loans and borrow capital.

5. The necessity of complete reconstruction within a brief period of
most railroads built through new territory, and the increase in funded
and in floating debt involved.

7. The growth of railroads beyond the ability to handle them.

8. The steadily increasing expenditures required by law to accommodate
the public.

9. The abuse of their position by directors and trustees.

10. The irresponsibility of railway accounts.

And it may be added that the control of American railways by foreign
investors who apportion charges between operating and capital accounts
in a way unsuited to American conditions has been upon occasion a
cause of disaster. Unlimited freedom in matters of capitalization and
unrestricted competition have nevertheless been the fundamental causes
of bankruptcy.

It is interesting to observe that the majority of the principal
railroads which failed in the nineties had taxed their resources nearly
to the point of exhaustion before the panic of 1893 finally drove them
to the wall. For every $100 received in 1892 the Richmond & Danville
and East Tennessee systems were paying out $68.79 for operating
expenses and $31.15 for interest on bonds, rentals, etc., leaving only
6 cents for dividends, necessary improvements, and the like. For every
$100 received the Erie paid out the same year $66.46 for operating
expenses and $31.85 for interest and other fixed charges, leaving only
$1.68 as a surplus to ensure solvency in case of a decline in earnings.
In 1893 the Atchison, the Northern Pacific, the Reading, and the Union
Pacific had no surplus at all, but rather a deficit. The following
table shows similar figures for all of our reorganized roads:

                          _Percentage to Gross Income_

                       1893                           1892
          _Operating  _Fixed  _Surplus_  _Operating  _Fixed  _Surplus_
           Expenses_  Charges_            Expenses_  Charges_

  B. & O.    66.89     24.27    8.83       67.68     24.55     7.76
  Erie       64.91     32.12    2.96       66.46     31.85     1.68
  N. Pac.    59.25     43.55               53.71     36.34     9.94
  Reading    57.04     45.41               52.64     33.91    13.44
  Rich.      73.49     25.63     .12       68.79     31.15
    & Danv.
    and E.
    Tenn.
  U. Pac.    59.66     43.18               51.91     36.42    11.66
  Atchison   77.47     24.96               77.16     21.59     1.24[690]

With these figures may be compared statistics for seven roads which
went through the depression of 1893–7 without failure. These roads
had a more extensive margin which could be cut off before interest on
their bonds should be endangered. Furthermore, this margin was secured,
not by low operating expenses, but by low fixed charges, including
interest on bonds. Operating expenses averaged higher than for the
preceding group, fixed charges averaged much lower. In the first group
but one road had charges in 1893 which were less than 25 per cent of
gross income; in the second group but two roads had charges which were
greater. The condition of the roads of the second group referred to was
as follows:

             _Percentage to Gross Income_

                                  1893
                     _Operating  _Fixed
                      Expenses_  Charges_  _Surplus_

  C., B. & Q.          64.46      23.12      12.41
  C., M. & St. P.      65.95      20.78      13.26
  C., R. I. & P.       71.72      13.31      14.96
  Great No.            50.44      34.54      15.01
  Ill. Cen.            61.92      25.84      12.23
  N. Y., N. H. & H.    72.31      16.07      16.36
  N. Y. C.             68.79      20.84      10.36

                                   1892
                     _Operating  _Fixed
                      Expenses_  Charges_  _Surplus_

  C., B. & Q.           65.17     20.86      13.96
  C., M. & St. P.       64.00     22.36      13.63
  C., R. I. & P.        69.88     19.83      10.28
  Great No.             52.66     32.98      14.34
  Ill. Cen.             64.58     23.99      11.12
  N. Y., N. H. & H.     73.36      8.77      17.86
  N. Y. C.              68.46     21.53       9.96

The causes which lead to railroad failure have now been mentioned.
When bankruptcy has at last occurred, three groups of interests take
part in the reorganization which must ensue. These are the creditors,
who find interest and perhaps principal of their bonds in default;
the stockholders; and the bankers and financiers who advance ready
money and subscribe to necessary guarantees. Of these the creditors
and the stockholders are widely scattered, and are quite unable
to protect themselves by individual action. Their first impulse
is, therefore, either to elect committees to represent them, or to
authorize self-appointed committees of well-known men to look after
their interests. Stockholders in a reorganization have little voice.
They are the owners, and all that the corporation has is subject first
to the bondholders from whom it has borrowed money. Occasionally
they seem to make their influence felt. In 1880 the Reading actually
attempted to pay off its floating debt by bonds with a lien inferior to
the common stock; and in 1892 the Olcott plan for the reorganization of
the Richmond Terminal Company strongly favored the junior securities.
But as a rule stockholders must accept, and rightly, about what the
creditors desire.

The creditors, then, are the most important factors, and they, like
the stockholders, act through committees. There may be a committee for
every class of bonds, or one or more classes may join together. The
Union Pacific, in 1893, had committees for the consolidated first
mortgage, the collateral trust 5s, the Oregon Railway & Navigation
consols, the Dutch bondholders, and certain branch lines; and in 1894
for the collateral trust 4½s and the Kansas Pacific consols. As the
financial situation grew worse the interest on senior mortgages became
imperilled, and even the Union Pacific first mortgage bondholders
deemed it wise to elect a committee; while a second committee arose
for the Kansas Pacific consols, and a new committee for the Denver
Extension mortgage. By April, 1895, at least fifteen committees were
in active operation, of which fourteen represented not more than
two classes of bonds each. The Reading reorganization of 1884 to
1886 was largely shaped by two committees representing the general
mortgage bondholders; seven reorganization trustees representing
the foreign creditors, the general, income, junior securities, and
stockholders; and an opposition committee known as the Lockwood
Committee. Within four months after the failure of the Erie in 1875
the English bondholders and stockholders each had elected a committee,
and had urged all securityholders to join; a meeting of bondholders
had elected Mr. John Hooper chairman of a committee in New York;
and another meeting had elected Mr. N. B. Lord chairman of another
committee in that city.[691] The more general a committee the greater
the influence which it seems able to exert on reorganization, and
the greater the likelihood that the plan which it approves may be
accepted. The fact that a scheme has to meet the criticism of opposing
interests during its formation renders it less likely to contain
any injustice which conditions make it possible to avoid; and the
endorsement of their representatives makes all classes of bondholders
more ready to accord it temperate consideration. Among the numerous
Union Pacific committees it was the joint committee, representing
the foreign holders, the Denver & Rio Grande, the Oregon Railway &
Navigation, and other interests that took the leading part. In the
case of the Reading from 1884 to 1886 the seven reorganization trustees
outweighed any other representatives of the creditors; in that of
the Northern Pacific the Adams Committee succeeded in becoming a
general reorganization committee, and took the leading part; and the
Atchison reorganization was accomplished only by the union into a joint
executive reorganization committee of three of the previously existing
bodies.[692]

The situation which bankers and financiers occupy in relation to a
bankrupt road is almost equally important. Their aid is essential to a
reorganization while that of the officers and receivers of the company
is not. And they are not subject to the pressure of imminent financial
loss which forces creditors and stockholders to accept plans of which
they do not altogether approve. It is true that these bankers may have
money invested in the securities of the road. It may even happen that
they have been formerly in control. In this case a certain pressure
does exist. But as bankers their function is to do one or both of two
things; namely, to advance cash to keep the railroad system together
pending reorganization, and to underwrite assessments or the sale of
securities. Either one of these involves them in new risks, and in
undertaking either they will be only indirectly affected by investments
which they may previously have made. Their influence on reorganization
is strong because they are necessary, and because they are free to
participate or not to participate according to their opinion of the
precise reorganization plan proposed. For much the same reason their
influence is a wholesome one. We shall see that the primary conflict
which takes place in any reorganization is between the interests
of the corporation which needs a lessening of its burdens, and the
interests of the securityholders which is opposed to any reduction in
their claims.[693] The degree to which the former interest prevails
determines the strength of the reorganized company. In this conflict
the bankers naturally take the side of the company. As bankers, who
advance cash, and who usually receive their pay in securities, they
wish to make the corporation prosperous, and to raise the quotations
of its securities to a high figure. An important factor also is that
as reputable banking firms they wish the future career of corporations
which they have handled to reflect credit upon themselves.

An example of the influence of bankers and financiers appears in
the case of the Union Pacific. A committee comprising General Louis
Fitzgerald, Jacob Schiff, T. J. Coolidge, Oliver Ames, and two railway
presidents took the road out of receivers’ hands, cut charges per
mile by over one-half, and paid the Government’s claim in full. The
Reading reorganization of 1886 to 1887 was the work of a syndicate
which took hold after interests closely connected with the properties
had failed to produce a satisfactory plan. The result was the best plan
ever applied to the Reading Railroad. The Richmond Terminal Company
was reorganized by a single banking firm. In this case the operation
cut charges less than could have been desired, though the other
parts of the plan were well-advised. The intervention of a syndicate
has fortunately been usual of late years. And it is doubtful if the
compensation accorded has been exorbitant, even for the direct services
rendered. In 1886 the Reading agreed to pay a syndicate 5 per cent
upon $15,000,000 of subscribed capital, plus 6 per cent on all money
advanced. The Richmond Terminal paid Drexel, Morgan & Co. $100,000 in
cash to cover their office expenses and $750,000 in common stock at $15
per share[694] for their work of coöperation and supervision. The Union
Pacific paid the syndicate which financed its reorganization $5,000,000
in preferred stock quoted at 59, or 19 per cent at current prices on a
subscribed capital of $15,000,000. All three syndicates, however, ran
the risk of depreciation in the value of the stock given them, and all
three rendered great service in providing large sums of cash at a time
when capital was not readily to be obtained.

Payments to bankers or trust companies receiving deposits of bonds
and stocks and undertaking the clerical work of a reorganization,
should be sharply distinguished from those made to underwriting
syndicates above described. Depositaries assume no risk, and are paid
a definite sum for definite services performed. In 1895 the Erie set
the compensation of Messrs. J. P. Morgan & Co. and J. S. Morgan &
Co., for their services as depositaries and in carrying out the plan
of reorganization, at $500,000 in addition to all expenses incurred;
and the same year the Union Pacific allowed $1,000,000 in preferred
stock to the bankers who managed its underwriting syndicate, as
against $5,000,000 to the syndicate itself. It should be said that
the compensation to depositaries is in part payment for the use of the
name of the firms employed as well as in part payment for clerical work
performed. Bondholders are more ready to deposit their securities with
a well-known house than with an obscure one; and are to some extent
influenced by the implied approval of the reorganization plan which
acceptance of deposits by such houses involves.

At the beginning of the ordinary reorganization, then, creditors,
stockholders, syndicate, and corporation find themselves face to
face. The interests of the syndicate and of the corporation most
nearly coincide except in so far as the syndicate is an owner of
stocks or bonds. The syndicate desires a radical reorganization,—
the corporation requires it. But as between stock- and bondholders
and the corporation; between the stockholders and the bondholders;
or between the junior and the senior bondholders; there is well-nigh
complete antagonism. The corporation, to repeat, needs a reduction in
the fixed charges which it has to pay. The securityholders wish to lose
as little as possible. The stockholders hope to force sacrifices from
the bondholders, and the bondholders to levy a heavy assessment upon
the stock. The junior bondholders call upon their seniors to bear their
part; and the seniors reply that they are well secured and that the
juniors and the stock must take care of themselves.

The first question which arises is that of the cash requirements.
How much cash must be raised to pay off the floating debt, and how
much working cash capital will the new corporation require? It is
almost always true that a large floating debt has accumulated prior
to reorganization. The Northern Pacific in 1893 had a gross debt of
no less than $15,000,000; the Reading in 1895 one of $13,800,000;
the Baltimore & Ohio in 1896 one of $13,000,000; the Atchison in
1893 one of $16,000,000. In part this means simply the accumulation
of unpaid bills. In part, however, it represents promissory notes or
other short time paper which the corporation has issued, generally
to pay current indebtedness, but occasionally for financing somewhat
extensive operations. Thus Mr. McLeod carried his purchases of New
England railroad stock by means of advances from brokers, and the
Government Directors of the Union Pacific reported that $15,000,000
out of $21,400,000 of floating debt of that road in 1891 were the
result of expenditure and advances in the construction of branch or
tributary lines. The cost of carrying such indebtedness is naturally
high. Mr. McLeod is reported to have paid an average of 9 per cent
for his loans. The reorganization committee of the Atchison stated
in 1895 that during the five years preceding, the road had paid
over $1,100,000 in discounts and commissions to secure the renewal
of $9,000,000 of guarantee fund notes. And floating indebtedness is
by far the most dangerous as well as the easiest sort of obligation
to incur. It represents a possible demand for large sums of cash on
short notice which even a solvent company may find it impossible to
meet;—a demand, moreover, which is likely to be made at a moment
of stringency in the money market. For this reason, and on account
of the high interest demanded, corporations endeavor to fund their
floating debts when these reach unwieldy proportions. In 1891 the
Union Pacific authorized three-year 6 per cent notes to the amount of
$24,000,000 to be used in taking up its floating debt. In 1893 the
Northern Pacific authorized $15,000,000 collateral five-year 6 per
cent notes for the same purpose. In each case it was hoped to refund
these short time issues with bonds of longer term when the date of
their maturity should arrive. After a company has been in receivers’
hands, issues of receivers’ certificates are pretty sure to swell
the current liabilities. These, again, may be issued to pay current
bills, or to maintain or to improve the railroad when other resources
prove insufficient. For whatever reason incurred, it is plain that the
problem of the floating debt is a serious one for the creditors and
owners of a bankrupt road to meet. If the provision which they make is
insufficient their company will not regain a safe financial footing.
And if, in addition to cancelling the debt outstanding, they do not
provide a margin for working capital, the company will be forced to
incur new floating debt and their work will have to be done over again.

In general there are two ways by which cash for floating debt and
working capital can be raised:

(1) By assessment on securityholders. (2) By the sale of securities.

Sales of securities may comprise the sale of securities of the
bankrupt, or of other corporations held in that company’s treasury,
or they may be sales of part of new bond or stock issues reserved for
that purpose. In 1898 the Baltimore & Ohio sold among other things
$3,800,000 of Western Union Telegraph stock held in its treasury since
1887; while in 1889 the Atchison issued and sold $12,500,000 general
mortgage 4s and $1,250,000 income 5s. When outside securities are sold
the value of which is in no way dependent upon the prosperity of the
road which sells them; and which are such, moreover, as the selling
road can readily spare, this method of raising capital is open to few
objections. Its chief disadvantage is that the sale is apt to be made
at a time when the level of general prosperity is not high, and the
price obtained is therefore apt to be low. But the question is quite
different when the securities are those of the embarrassed or bankrupt
road itself. In this case the credit of the company and the price of
its securities are sure to be at a low ebb. The initial sacrifice
entailed is necessarily great; while if the securities sold are bonds,
as they are almost sure to be, the company increases its annual
interest charge without receiving an equivalent value in return. If, on
the other hand, the railroad endeavors to prevent a rise in charges by
the use of income bonds or stock, the gain is usually neutralized by
the extremely low price obtained.[695] In general we may say that sale
of a railroad’s securities in time of general depression is impossible
except at a ruinous sacrifice; that sales should not be resorted to at
all except when the road’s difficulties are acute rather than chronic,
as in the case of the Reading in 1896; and that when securities are to
be sold the best of the available bond issues should be used and not
the worst.

The case of an assessment is very different. Securities may be sold
to outsiders or to present securityholders. In the one event no
pressure at all can be brought to bear; in the other only that of the
indirect loss which the difficulties of the reorganizing company would
involve.[696] An assessment, on the other hand, is levied solely on
securityholders and is compulsory. Stockholders or bondholders who
refuse to pay are ordinarily debarred from all participation in the
reorganization, and lose all chance to recoup their losses from their
share in subsequent prosperity. In return for the assessment some
security is usually given, so that from one point of view an assessment
and a sale resemble each other. But the element of compulsion appears
in this: namely, that in the case of a sale the new securities are
taken at the buyers’ valuation; but in the case of an assessment the
company determines what it shall give for the cash paid in. Hence the
usual compensation for an assessment is an equal nominal amount of
preferred stock;—while that for the purchase money in a sale is a
greater nominal amount in bonds. Either an assessment or a sale of
securities may be fortified by a syndicate guarantee. In the one case
the syndicate agrees to substitute itself for all non-assenting or
defaulting stock- or junior bondholders; in the other it engages to
take and dispose of the new securities offered, or such part of them as
the company is unable to sell. The advantages of syndicate assistance
we have already discussed.

It will be recalled that both assessments and sales of securities have
been freely employed in the reorganizations which have been considered,
and that syndicate guarantees have been of ordinary occurrence. Out
of eighteen reorganizations, fourteen were forced to pay attention
to the raising of cash; the four which did not consisting of the
consolidation of the Union Pacific with the Kansas Pacific and of the
Chicago, Rock Island & Pacific with its branch lines in 1880, the
income conversion reorganization of the Atchison in 1892, and the Rock
Island reorganization of 1902,—each a reorganization of a more or
less peculiar nature. Of the fourteen remaining, four provided cash by
assessment, three by the issue of securities, and five by a combination
of both methods. Adding to this the Northern Pacific reorganization
of 1896 and that of the Erie in 1859, which combined an assessment
with funding provisions, we have eleven reorganizations which relied
on assessments in whole or in part. This preponderance is, however,
due to the extensive use of assessments from 1893 to 1898; since the
earlier reorganizations show assessments in only about one-half of
the cases. This does not mean that the value of an assessment was not
understood before 1893. For the reorganization of the Northern Pacific
in 1895 was otherwise so radical that an assessment was less necessary;
and that of the Atchison in 1889 took place at a time when business
conditions were not in general depressed. The effect of widespread
depression on the means employed for raising cash is, however,
perfectly clear.[697]

Of the reorganizations of 1893 to 1898, to repeat, there was none which
we have considered which did not make use of assessments. The following
table shows the amount and distribution thereof:

                             _Assessments, 1893–8_

              _Common      _1st         _2d
               Stock_    Preferred_   Preferred_  _Junior Securities_

  Atchison       $10                    $20       4 per cent on 2d
                                                    mortgage and income
  B. & O.         20        $2
  Erie            12         8
  N. Pac.         15        10
  Richm. Term.    10
  E. Tenn.         7.20      3            6
  Reading         20                           20 per cent on 1, 2, and
                                                    3 incomes
                                                4 per cent on deferred
                                                    incomes
  U. Pac.         15

It thus appears that the assessments varied from $7.20 on the East
Tennessee to $20 on Reading common, with less sums on the preferred
stock and the junior securities.[698] The real sacrifice demanded of
the stockholders is ascertained by deducting from the above the value
of securities given for assessments whenever such were allowed. Taking
for the purpose the market quotations of these securities six months
after actual reorganization, that is, after the sale of the road, or
the putting into effect of the plan proposed, it appears that the
common stock of the Atchison received $1.90; that of the Baltimore &
Ohio $15.20; that of the Richmond Terminal $5.02; that of the East
Tennessee $3.55; and that of the Union Pacific $8.10. The Erie, the
Northern Pacific, and the Reading gave nothing for assessments in
the nineties.[699] Preferred stock, whenever assessed, received the
same relative amount and kind of securities for assessment as did the
common stock, and the same is true of the junior securities. Since,
however, these new securities had but a prospective value at the time
of the issue of the various reorganization plans, it is advisable to
make no attempt to determine precisely the net assessment, and to call
attention to their allowance merely as a fact on which the stockholders
could rely as they could count on a future rise in the value of their
shares. With this qualification the relative height of assessments and
stock quotations one month after the publication of each reorganization
plan, and six months after the completion of each reorganization may be
given.

                            _Six Reorganizations, 1893–8_

                           _Common Stock_             _Preferred Stock_

                                   _Price                       _Price
                         _Price   6 months            _Price   6 months
                         1 month   after              1 month    after
              _Assess-    after   reorgan-  _Assess-   after   reorgan-
               ments_     plan_   ization    ments_    plan_   ization_

  Atchison      $10       $ 5¾       $13⅛
  B. & O.        20        12⅜        56¾     $20             $114
  Erie           12         8½        14⅛       8      $22      36⅛
  N. Pac.        15         1½        13¼      10       10      26¼
  Reading        20         2½        22¼
  Richm. Term.   10         2⅞        11⅜
  E. Tenn.        7.20       ½         6⅕       3       10      13¼
  U. Pac.        15        10⅛        20

                         _Four Reorganizations before 1893_

  E. Tenn., ’86   6         2½         5⅘
  Erie, ’59       2½                                      2½
  Erie, ’77       4                   18½                2      29
  Reading, ’86   10        38⅜        58                10      53¼[700]

In every case during the nineties the amount of assessment exceeded the
sum for which common shareholders could have sold their stock one month
after the publication of the reorganization plan. The difference ranged
from $3.50 for the Erie to $17⅔ for the Reading; in other words the
assessments wiped out the whole value remaining to common stockholders,
and exacted an additional contribution as the price of participation
in any future prosperity. In the case of the preferred stock, where
values were greater and assessments less heavy, the results were not
the same; but even here the proportional demand was large, and amounted
to 100 per cent of current quotations in the case of the Northern
Pacific. Before 1893 assessments were fewer in number and not so great
in amount. It is to the subsequent rise in stock quotations to which
we must turn for an explanation of the willingness of stockholders to
contribute such heavy sums. The assessments, we find, did not come
out of the stockholders’ pockets in the end; for their payment, in
connection with other features of reorganization, so enhanced the value
of shares that only six months after reorganization the price of stocks
in all cases was nearly equal to the assessment plus the previous
market quotation. In some instances, such as the Baltimore & Ohio,
the sum amounted to much more than this total.[701] Refusal to pay
would have wiped out the stockholder’s interest and have kept him from
benefiting from the rise. It is needless to add that quotations to-day
are many times the amount of the assessments. The increase in value has
occurred alike for common and preferred stock, even in times of severe
depression. On the whole, it has abundantly justified the payments
which stockholders were asked to make.

The use of assessments alone represents the most radical and the
soundest method of raising cash. It disposes of the accumulated quick
liabilities once and for all; and involves no subsequent increase
in interest charges. It was the method of the Atchison and the Union
Pacific after 1893, of the Reading from 1883–6, and of the Erie from
1875–7. It was furthermore the method of the Western, New York &
Pennsylvania in 1893,[702] of the Norfolk & Western in 1896,[703] and
of other railroads which might be named. Probably its most drastic
application was in the case of the Houston & Texas Central in 1887,
where an assessment of 73 per cent was found necessary to discharge the
floating debt and to provide cash payments for interest and bonus to
first mortgage bondholders, and to pay the charges, expenses, and other
liabilities made or incurred by the Trust Company.[704]

The sale of securities also has been relied upon for the production
of cash. The most striking example of the use of securities alone is
afforded by the Reading reorganization of 1883, which at the same
time illustrates the possible unsoundness of the method. The floating
debt of the Reading companies amounted in June, 1880, to $12,155,248,
the bulk having been incurred in attempts to maintain solvency. To
cover this Mr. Gowen proposed an issue of $34,300,000 deferred income
bonds,[705] to be sold at 30 per cent of their par value, and to be
entitled to dividends after 6 per cent had been paid on the common
stock. These securities were practically worthless, and had to be set
aside in favor, first, of new general mortgage bonds, and then of old
unissued general mortgage 7 per cent bonds which the company happened
to have in its treasury. So ineffective was even this expedient that
in October, 1884, the floating debt amounted to a sum nearly one-third
greater than that reported in 1880. Another example was the Erie scheme
of 1886, which was not, however, a reorganization, according to our
definition. The floating debt of the Erie in September, 1884, amounted
to $5,455,338, of which $1,007,922 consisted of unpaid coupons. On the
suggestion of English securityholders these coupons were funded; and
the balance was raised by a new terminal mortgage issued and disposed
of by a subsidiary terminal corporation known as the Long Dock Company.
The result was an increase in fixed charges, which contributed to the
final failure in 1893. The history of the Southern Railway affords a
third example. At the end of 1888 the Richmond & West Point Terminal
Railway & Warehouse Company found itself with a floating debt of
$5,000,000, and proceeded to authorize an issue of $24,300,000 5 per
cent 25-year collateral trust bonds, of which $5,000,000 were to be
sold to cancel this indebtedness. In subsequent years the current
liabilities again increased, and for this and other reasons a general
reorganization became necessary, in which both an assessment and a sale
of securities were required. On the whole the result of experience
bears out the statement as to the unsoundness of reliance on the
issue of securities for cash even when the sale of the securities is
guaranteed.

Yet another method of raising cash has been the combination of
assessments with the sale of bonds or stock or both. In 1898 the
Baltimore & Ohio disposed of $3,800,000 Western Union Telegraph stock.
It also provided a total of $37,900,000 prior lien and first mortgage
bonds and preferred stock, which was in part given for assessments,
and in part turned over to a syndicate in return for cash. The Erie,
in 1895, besides its assessment sold $15,000,000 in prior lien bonds;
while the Reading sold $4,000,000 in new general mortgage bonds and
$8,000,000 in new first preferred stock. In each case the success of
the sale was ensured by a syndicate agreement. In 1886, to go outside
of the reorganizations which have been particularly described, the
Texas & Pacific provided funds with which to cancel a part of its
floating debt by an assessment of $10 and an issue of $6,500,000 common
stock. Three years later, the St. Louis, Arkansas & Texas assessed its
second mortgage bondholders 5 per cent and its stock 10 per cent and
sold securities to the par value of $4,490,880 to cover $3,400,000
of cash requirements.[706] In 1894 the New York & New England issued
$4,355,000 in securities and levied $20 and $25 respectively upon its
common and preferred shares.[707] In 1896 the St. Louis & San Francisco
planned to raise $821,410 by assessment and $5,500,000 by sale of
securities. Such examples might be multiplied indefinitely.[708]

The problem of cash requirements must be met and solved before the
parties interested can consider the fixed charges. It is the reduction
in charges, nevertheless, which is usually of the more fundamental
importance. A floating debt accumulated through inability to pay
current expenses is the direct result of excessive charges, and a
settlement which did not lower these, as well as pay off the debt,
could give but temporary relief. Only when failure has been due to
special causes can a decrease in the annual burden be even a matter for
debate. The following tables show the absolute changes brought about
by those of the reorganizations earlier considered for which precise
figures are available:

                               FIXED CHARGES

                    _Seven Reorganizations, 1893–8_

                                                 _Per cent  _Per cent
    _Road_            _Before_      _After_      decrease_  increase_

  Atchison           $9,423,160   $6,486,842       31.16
  B.& O.              7,202,855    6,359,896       11.70
  Erie                8,637,700    8,126,283        5.92
  N. Pac.            13,813,945    6,761,960       51.04
  Reading            11,422,054    9,043,944[709]  20.81
  Richm. Term.        7,498,584    4,195,925       44.04
    system
  U. Pac.             7,985,921    4,502,134       43.62
                    -----------  -----------       -----
                    $65,984,219  $45,576,984       30.92

                  _Seven Reorganizations before 1893_

  Atchison, ’89     $11,157,770   $7,256,054       34.9
  Atchison, ’92       7,189,199    9,423,160                  31.0
  E. Tenn. ’86        1,742,495    1,167,000       33.0
  Erie, ’75           4,697,802    5,215,146                  11.0
  Reading, ’80        7,734,031   11,535,078                  49.1
  Reading, ’83        8,235,047    7,581,032        7.9
  Rk. I. ’80          1,508,989    1,271,836       16.3
                    -----------  -----------       ----         ---
                    $43,276,372  $43,449,306                    .53

                       _One Reorganization, 1902_

  Rk. I. ’02         $4,780,649  $10,485,882                 119.3[710]

From these tables, it appears that each of the reorganizations from
1893–8 occasioned an absolute reduction in fixed charges which varied
from 5.92 per cent in the case of the Erie to 51.04 per cent in that
of the Northern Pacific. On the other hand the reductions in the
earlier reorganizations were more irregular and were exceeded by the
increases.[711] Absolute figures, however, reveal little. Charges may
be reduced and the road be worse off than before because of more than
proportional reductions in mileage or in earnings. The preceding table
must therefore be supplemented by one showing the changes in charges
per mile of road and changes in the relations of charges to earnings.

                                    FIXED CHARGES

                           _Seven Reorganizations, 1893–8_

                 _Charges per mile_  _Per cent of charges to net income_
                 _Before_   _After_          _Before_    _After_

  Atchison         $1415     $1001             110.5       80.9
  B.& O.            3438      3107              98.2       86.3
  Erie              4116      3824             114.7       95.8
  N. Pac.           2630      1494             106.8       50.2
  Reading           9856      6611             111.3       82.1
  Southern          1553       955             105.1       81.5
  U. Pac.           4381      1859             105.7       40.6

                      _Seven Reorganizations before 1893_

  Atchison, ’89    $1603     $1064
  Atchison, ’92     1079      1415              85.8      110.5
  E. Tenn. ’86      1578      1083             134.3       79.5
  Erie, ’75         4984      5619              93.9       91.1
  Reading, ’80      9138      7287              98.1       83.0
  Reading, ’83      8760      7185              78.3       77.0
  Rk. I., ’80       1200       952              13.2       10.2

                          _One Reorganization, 1902_

  Rk. I. ’02        1231      1448              39.8       59.0[712]

A summary of the preceding tables is as follows:

  KEY: _A_: _Absolute Charges_
       _I_: _Charges to Income_
       _M_: _Charges per mile_

           FIXED CHARGES BEFORE AND AFTER REORGANIZATION

                     _Seven Reorganizations, 1893–8_

                  _Per cent Decrease_       _Per cent Increase_
                  _A_     _I_      _M_      _A_      _I_     _M_

  Atchison       31.1    26.7     29.2
  B. & O.        11.7    12.1      9.6
  Erie            5.9    16.4      7.0
  N. Pac.        51.0    53.0     43.0
  Reading        20.8    26.2     32.9
  Southern       44.0    22.4     37.7
  U. Pac.        43.6    61.5     57.5
                 ----    ----     ----
                 30.9    31.2     31.2

                         _Seven Reorganizations before 1893_

  Atchison, ’89  34.9             33.6
  Atchison, ’92                            31.0     28.5    31.1
  E. Tenn. ’86   33.0    40.8     31.3
  Erie, ’75               2.9              11.0             12.7
  Reading, ’80           15.3     20.2     49.1
  Reading, ’83    7.9     2.2     17.9
  Rk. I. ’80     16.3    22.7     20.6
                 ----    ----     ----     -----    ----    ----
                         10.3     13.1       .53

                        _One Reorganization, 1902_

  Rk. I. ’02                              119.3     48.2    17.6[713]

These tables show plainly that substantial reduction in fixed charges
was the rule in the reorganizations of 1893–8, though less universal
and less important in the reorganizations before that date. Even before
1893, however, the fact that reductions must be made was apparent.
Three reorganizations increased absolute charges instead of decreasing
them. Of these the Atchison reorganization of 1892 was not due to
lack of prosperity, and the Erie reorganization was a failure. The
Reading reorganization of 1880 increased absolute charges, increased
mileage more than correspondingly, but was also a failure. And it is
significant that only those roads which generously reduced charges
regained even a temporary prosperity.

The distribution of losses which a reduction in fixed charges requires
can best be made by a comprehensive redistribution of securities. All
the bonds and stocks which are to suffer must be called in; and varying
amounts of new securities must be given in their place. Among the
important considerations to those who fix the rates for exchanges are
these:

(1) Maximum charges under the new régime should approximate minimum net
earnings under the old.

(2) As large a proportion of the charges as possible should consist of
the one item of interest on bonds.

(3) Losses should fall most heavily on the junior securityholders.

(4) The nominal value of outstanding securities should be reduced as
little as possible.

(5) Bondholders whose claims have been cut down should be afforded some
chance to participate in future increased earnings of the property.

These rules may be considered in turn. The point to which the best
practice should reduce fixed charges is readily understood. Nothing
less than solvency under the least favorable conditions is the
goal toward which a reorganization plan should strive. It appears,
accordingly, that the minimum earnings of the Atchison property from
1891–4 had been $5,204,880; while the fixed charges proposed for it
were $4,528,547. The lowest net earnings which the Union Pacific had
ever recorded had been $4,315,077. The interest on its new bonded
indebtedness was placed at $4,000,000. The net earnings for the
Northern Pacific in 1895 were $6,052,660, which was the least that the
road had earned for eight years. The new fixed charges were estimated
at $6,015,846. The minimum net earnings of the Baltimore & Ohio from
1887 to 1898 had been $6,610,774. The fixed charges of the plan of 1898
were set at $6,252,351.

In order to simplify the charges, as well as for other reasons, it
is desirable to have the item of interest bear a large proportion to
the whole. The fixed charges of six of our seven reorganizations from
1893–8 amounted together to $54,562,165. Of this sum, interest on bonds
comprised $35,239,146 or some 64 per cent. The charges of the same
railroads after reorganization amounted to $36,533,040, of which sum
interest on bonds comprised $30,926,638 or 84 per cent.

The distribution of losses should bear most heavily on the junior
securities. The simplest readjustment would seem at first sight
to demand a proportionate concession from all creditors. But this
would be both unjust and impossible. In no sense do all bond- and
stockholders stand upon an equal footing. In the first place, the
cost at which senior bondholders have acquired their claims has much
exceeded the cost at which junior bondholders and stockholders have
acquired securities of equal nominal amount. Apparently equal claims
represent very unequal investment. In the second place this increased
cost has been due to certain legal provisions touching security which
become prominent during reorganization. All mortgage bonds possess
by law a lien upon the property pledged to secure them. Upon default
in repayment of principal, and usually also upon default in payment
of regular interest, their owners have the right to sell the pledged
property at auction and to recoup themselves from the proceeds. After
the underlying bonds have been satisfied the selling price is applied
as far as it will go to the settlement in full of mortgages in the
order of their issue; while the stock, representing the owners of the
property, takes what is left. As a rule a railroad will not sell for
anything like the sum required to pay off all its mortgages, and the
junior issues are threatened with extinction. Usually, however, it is
possible for the junior to guarantee interest on the senior bonds, or
to buy the railroad at foreclosure sale under some senior mortgage,
thus preserving to themselves the benefit of the earning power of the
corporation. When this is done earnings are distributed according to
the relative priority of the various junior issues on penalty of still
further foreclosure and readjustment. The principle of reorganization
which is followed prescribes because of this the payment in full of all
claims which can be satisfied by the purchase price of the bankrupt
railroad at foreclosure sale, and the distribution of losses among the
remainder according to the relative priority of their liens.

The consent of securityholders to a reduction in their claim to an
annual return is more easily obtained if the nominal value of their
holdings be little or not at all reduced. There is a magic in the par
value stamped upon a certificate which affords a certain consolation
to those from whom sacrifices in interest are demanded. An unimpaired
principal, moreover, constitutes a real advantage when the date of
maturity arrives. But if the low earning power of the corporation
compels it to ask sacrifices from the holders of its securities, it is
only fair that these sacrifices should cease when the earning power
improves. In other words, it is but just that old bondholders be given
securities upon which payment of interest is optional, so that they may
share in future prosperity, and obtain the same return which they once
enjoyed whenever the road earns enough to pay it.

The foregoing rules dictate the amount of reduction to be made in
charges, and also the kind and amount of new securities which are
usually offered in the exchanges. Interest and rentals must be cut down
without decreasing the nominal value of the securities outstanding. To
reduce interest without reducing nominal value, either the interest
rate on outstanding securities must be lowered, or mortgage bonds must
be replaced by income bonds or by stock. To reduce rentals annual
payments may be arbitrarily cut down, or rental contracts may be funded
into mortgage bonds. These different methods may be taken up in some
detail.

The accompanying tables (see opposite page) show for fourteen
reorganizations the number and amounts of outstanding issues before and
after reorganization at the various rates of interest designated.

Few collections of figures in railway finance deserve more careful
attention than those given in these tables. Whereas the greatest number
of the issues before the seven reorganizations prior to 1893 bore 6 per
cent, and the greatest amount outstanding was similarly at that rate;
the overwhelming preponderance in amount after the reorganizations of
1893–8 bore 4 per cent, and a total of 14.7 per cent of all the bonds
outstanding bore a lower rate of interest than had appeared at all at
the earlier date.

                                 BOND ISSUES

                       _Seven Reorganizations, 1893–8_

               _Before_                         _After_
  _Per-                        _Per-                           _Per-
  Cent_  _Number_   _Amount_   Cent_    _Number_    _Amount_   Cent_

   7        33    $56,741,222    6.1       13    $43,942,500     4.9
   6        85    300,925,695   32.7       30     82,586,000     9.3
   5        51    267,623,426   29.0       23     90,853,035    10.3
   4½       11     34,490,800    3.7        5     13,400,000     1.5
   4         9    260,055,689   28.2       16    520,709,117    59.0
   3½                                       2     76,733,350     8.7
   3                                        1     53,350,000     6.0
           ---   ------------   ----       --   ------------    ----
           189   $919,836,832   99.7       90   $881,574,002    99.7
  Not specified     5,141,238                      1,000,529
                 ------------                   ------------
                 $924,978,070                   $882,574,531

                      _Seven Reorganizations before 1893_

   7        40   $153,251,000   23.7       21    $81,327,544    10.3
   6        59    173,641,790   26.8       55    150,999,589    19.1
   5        22    174,060,032   26.9       16    180,341,768    22.8
   4½        2      4,611,000     .7        1         79,000      .01
   4         5    140,041,700   21.6        5    375,881,614    47.6
           ---   ------------   ----       --   ------------    ----
           128   $645,605,522   99.7       98   $788,629,515    99.81
  Not specified     5,712,749                      8,940,939
                 ------------                   ------------
                 $651,318,271                   $797,570,454

Graphically indicated the change was as follows:

[Illustration: Period prior to 1893]

[Illustration: Period of 1893–8.]

Comparing the total interest with the total bond issue, we find the
average rate to have decreased from 5.5 per cent to 4.9 per cent by
the reorganizations prior to 1893, and from 5.1 per cent to 4.3 per
cent by the reorganizations of 1893–8. Of some significance is a
comparison of the rates prior to the reorganizations before 1893 with
those subsequent to the reorganizations of 1893–8. The total interest
payable on the issues at the later date was $38,291,319. If the same
proportions of bonds had been issued at the same rates of interest as
before the reorganizations prior to 1893, this interest would have
amounted to $48,552,688. The total interest payable on the issues
before the reorganizations prior to 1893 was $35,658,192. If the same
proportions of bonds had been then outstanding at the same rates as
after the reorganizations of 1893–8 the interest charge would have been
$27,941,807. Thus in the first case there would have been a saving of
$10,261,369 annually, and in the second case one of $8,279,775. This
computation is inexact because it fails to take account of the normal
reduction of interest rates due to improved credit and to increased
prosperity from causes other than reorganization; but it is included
here because, in the first place, a large part of the reduction was due
to actual reorganization; and in the second place, because much of the
improved credit is attributable indirectly to reductions of charges and
other reorganization features.

It should be noticed that the new bond issues not only bore lower rates
of interest, but were of greater volume and of longer term than the
issues which they replaced. The greater volume is reflected in the
considerable reduction in the number of issues at the same time that
the total amount of bonds outstanding decreased slightly or increased.
Thus the reorganizations before 1893 increased the amount of bond
issues from $645,605,522 to $788,629,515, and decreased their number
from 128 to 98; while the reorganizations of 1893–8 decreased the
amount of bonds from $919,836,832 to $881,574,002, and decreased the
number of issues from 189 to 90, or in far greater proportion.[714]
The matter may be viewed in another way. Just before the beginning of
the later reorganizations the predominant rate of interest for the
roads concerned was 6 per cent. The number of issues at 6 per cent
outstanding was 85 and the average amount per issue was $3,540,302. The
predominant rate just after those reorganizations was 4 per cent. The
number of issues at 4 per cent outstanding was 16, and the average
amount per issue was $32,544,319. In other words, the process was to
replace numerous small issues which bore high rates of interest, by a
few comprehensive issues at lower rates; thus simplifying the financial
situation, as well as lightening the burdens which the roads had to
bear.

The lengthening of the terms for which the various mortgages were
to run is equally apparent. Before its reorganization in 1897 the
Union Pacific had no mortgage issued for more than 40 years. The
first mortgage of 1897 ran for 50 years. The Reading in 1895 had four
mortgages, all issued during the reorganization of 1888, with terms of
70 years. All its other mortgages were for shorter periods. In 1897 it
put forth a grand divisional mortgage with a term of 100 years. The
Erie in 1894 had two mortgages of 91 years each and one of 84 years,
issued during the financial scandals of 1869, but no other of over
$1,000,000 which ran for more than 43 years. Both its prior lien and
its general mortgage bonds now outstanding are to mature 101 years from
date of issue. The Atchison in 1889 could boast of only one mortgage
with a term of 51 years. Its reorganization at that time gave it two
of 100 years. The Northern Pacific issued one 100-year mortgage in the
course of its troubles in 1889, and two mortgages for 101 and 150 years
respectively in its reorganization of 1896. The reason for long terms
has been the wish to make new mortgages attractive. Reorganization
mortgages, as has just been said, tend to be large mortgages, at a
lessened rate of interest. They are also blanket mortgages with an
inferior lien. Some inducement besides the compulsion of necessity
is useful in securing the assent of old bondholders to the proposed
exchanges of these bonds for outstanding securities. The long-term bond
protects the holder against the probable steady fall in the rate of
interest on capital. It promises him advantage in the future in return
for surrender in the present.

The reduction in charges by the substitution, for mortgage bonds
with fixed interest, of securities upon which payment of interest
is optional, has been as important as the reduction in the rates of
interest just described. Such securities may be either income bonds
or stock. The income bond has a lien upon railroad property similar
in kind to the lien of an ordinary mortgage. Upon default in the
payment of its principal it can exercise foreclosure rights. But it
has no claim on earnings except in a right to receive dividends out of
net earnings before any dividend shall be paid upon the stock. Stock
certificates control the company by their right to vote,[715] but are
entitled to its profits only after expenses of every kind have been
met. When divided into preferred and common shares the former receive
preference in dividends and sometimes in voting power. Among the
reorganizations described in the text three made use of income bonds
before 1893 and one after 1893. The amounts of the issues and the
percentages of incomes to total capitalization before and after the
reorganizations were as follows:

                             _Income Bonds_

                                                  _Per cent_
                     _Before_       _After_    _Before_  _After_

  Atchison, ’95                   $51,728,000              31.8
  Atchison, ’89                    80,000,000              35.4
  Reading, ’83     $22,347,227     56,389,466     21.7     39.3
  Reading, ’80      11,678,500     18,737,709     15.0     19.3

The East Tennessee reorganization of 1886 did away with income bonds,
as did that of the Atchison in 1892. It will be noted that these bonds
were more used before 1893, owing probably to the fact that the name
of bond was considered to increase the salability of a security on the
market. Securityholders hesitated to accept stock, but received bonds
without too great a protest. The extent to which railroads catered to
this preference is seen in the case of the Reading deferred income
bonds, on which payment of interest was deferred to a 6 per cent
dividend upon the common stock. From certain points of view, however,
the income bond is inferior to preferred stock. For instance, preferred
stock almost always has voting power, while income bonds usually have
none. And although the income bondholder is sometimes protected from
the insertion of new claims upon earnings between his bond and the
underlying property, provisions in preferred stock certificates may
afford an equal guarantee. In consequence, the use of income bonds has
declined as a more accurate knowledge of their limitations has become
widespread, and the Atchison adjustment 4s represent the sole use of
this security in our reorganizations from 1893–8.

The exchange of preferred stock, with or without new bonds, for old
bonds which have borne a fixed interest rate represents the best
current practice. Six of the seven principal railways reorganized from
1893–8 retired old bonds with fixed interest by new bonds and preferred
stock or by preferred stock alone. Take for illustration the case of
the Erie, which exchanged new general lien bonds and preferred stock
for old second consolidated bonds; of the Northern Pacific, which
exchanged new prior or general lien bonds and preferred stock for its
second and third mortgages; of the Union Pacific, which gave 4 per cent
bonds and preferred stock for its old first mortgage 6s; exchanges
which are but typical of a widely extended use. Even the Reading, which
alone refused so to lighten the claims upon its earnings, employed
preferred stock in retirement of old first, second, and third income
bonds.

These issues were all protected from future introduction of new bonds
between them and their property. The preferred stock certificates of
the Atchison in 1897 contain the following words: “No mortgage, other
than its general and its adjustment mortgage, executed in December,
1895, shall be executed by the company, nor shall the amount of the
preferred stock be increased unless the execution of such mortgage and
such increase of preferred stock shall have received the consent of
the holders of a majority of the whole amount of the preferred stock
which shall at the time be outstanding, given at a meeting of the
stockholders called for that purpose, and the consent of the holders
of a majority of such part of the common stock as shall be represented
at that meeting.” Similar restrictions were imposed by the Southern
in 1893, by the Erie in 1895, by the Northern Pacific in 1896, by the
Reading in 1896, and by the Baltimore & Ohio in 1898; or in other words
by all the large corporations except the Union Pacific, whose failures
in the nineties we have described.

As for the years before 1893, in them the use of preferred stock
was known, if not so widely resorted to. The East Tennessee in 1886
offered new consols and preferred stock for old consols, divisional
and debenture bonds. In 1881 securityholders of the Reading proposed,
and in 1886 nearly secured, the adoption of plans which comprised
extensive issues of preferred stock in exchange or in partial exchange
for old mortgages. The influence of English capital, however, and the
liking for the name of bond to which we have referred seems to have
prevented large employment of the device. Where either preferred stock
or income bonds were used protection was afforded. When, in 1875, all
the outstanding bonds of the Northern Pacific were replaced by stock,
provision was made for an issue of first mortgage bonds to an average
of $25,000 per mile of road completed; but no other bonds were to be
issued except on a vote of at least three-fourths of the preferred
stock at a meeting specially held in reference thereto on thirty days’
notice. In the Reading reorganization of 1886 a clause provided that
in calculating the net earnings from which dividends on income bonds
should be paid there should be deducted from gross profits operating
expenses, taxes and existing rentals, guarantees and interest charges,
but not fixed charges of the same sort subsequently created. And in
the case of the Atchison in 1889 the provision that no bonds could
be inserted between the incomes and the general mortgage 4s was so
absolute as to prove an almost complete bar to new issues.

It is this use of preferred stock and income bonds which makes it
possible to realize the last and highly important rule which the
engineers of exchanges have in mind. Only by the combined use of
securities upon which payment of interest is optional with securities
upon which payment is obligatory can the claims which their
corporations are forced to meet be reduced, while at the same time
former bondholders are given the chance to share in future prosperity.
Such a result is deliberately sought. “The general theory of adjustment
of disturbed bonds,” said the Richmond Terminal reorganization plan of
May, 1893, “has been to substitute for them the new 5 per cent bonds
to such an extent as is warranted by the earnings and situation of the
properties covered by the present mortgages, and the new preferred
stock for the remainder of the principal.” This purpose receives,
moreover, a natural development. Justice does not demand that old
bondholders be given the unlimited chance at future surpluses which
old stockholders should enjoy. Their former holdings could expect
but a fixed amount, and the maximum to be paid on their new bonds
and preferred stock is therefore rightly restricted. But fair play
dictates that they be given opportunity to receive the _same_ income
as before. If they must surrender 6 per cent bonds in exchange for 4
per cent bonds it is equitable to allow to them as well 50 per cent
of their original holdings in new 4 per cent preferred stock. The
corporation thus announces its intention of saving them unharmed if it
can possibly do so, while it insists that its solvency be not dependent
on the success of its attempt. This idea has been realized in a number
of cases with approximate exactness. The old third mortgage 6 per cent
bonds of the Northern Pacific in 1896 received 118½ per cent in new 3
per cents, 50 per cent in 4 per cent preferred stock, and 3 per cent in
cash,—which together could yield nearly the same as the old mortgage.
The holders of Chicago Division 5s of the Baltimore & Ohio in 1898
surrendered an annual income of $50 for a chance to receive $50.30;
the Union Pacific first mortgage 6s in 1898 obtained precisely 100 per
cent in new 4 per cent bonds and 50 per cent in new 4 per cent stock.
It would be too much to expect that such exactness should generally
obtain. The variations in security between issues, the well-founded
desire to distinguish and not at the same time to swell unduly the
amount of new stock put forth lead to fluctuations both above and
below the point of equivalence of return. The important fact to
remember is in short this: that the use of bonds with a fixed rate of
interest, together with bonds or stock upon which payment of interest
is optional, provides that compromise between the interests of the old
bondholders and the interests of the corporation which alone can afford
justice to both sides and can allow the reorganization to proceed.

The matter of rentals may now be considered. “The extent of the
reduction in rentals from reorganization,” says one authority,[716] “is
seen where the reduction of this item of fixed charges for the entire
country is considered. The net reduction in lease rentals from 1892 to
1898 was $24,527,000, and of this sum $17,768,000 appears in the South
and West where the failures where most numerous and extensive. The
reductions of rentals are most conspicuous in the Northwest and Pacific
coast railroads. It is true that a part of this decrease in rentals is
to be ascribed to the steady movement in the direction of consolidation
which is constantly converting lease into purchase; but coming so
close together, the difference between the figures of 1892 and those of
1898 is sufficiently marked to warrant the conclusion that most of the
reduction is due to the numerous reorganizations which intervened.”

This conclusion is at first sight borne out by the following tables,
which show the decreases or increases in absolute rentals and interest
for thirteen reorganizations, of which six fall within the period
covered by the quotation:

  KEY: _D_: _Decrease_
       _I_: _Increase_
                                      FIXED CHARGES

                         _Six Reorganizations, 1893–8_

                  _Interest_     _Rentals, etc._    _Total Charges_
                  _D_    _I_       _D_    _I_          _D_    _I_

  Atchison       40.6                    13.7         31.1
  B. & O.               19.7      77.2                11.7
  Erie                  33.3      62.7                 5.9
  N. Pac.        14.2             88.9                51.0
  Reading                                             20.8
  U. Pac.        21.8             78.2                43.7
  Average        ----             ----                ----
  decrease        4.7             58.8                25.7

                      _Six Reorganizations before 1893_

  Atchison, ’89  39.0             17.3                34.9
  Atchison, ’92         38.7              3.9                31.0
  Erie, ’75             13.4               .5                11.0
  Reading, ’80          15.9             98.1                49.1
  Reading, ’83   13.3               .6                 7.9
  Rk. I., ’80    11.9             25.2                16.3
  Average        ----   ----      ----   ----         ----   ----
  decrease        1.0                     9.9                 5.3

                          _One Reorganization, 1902_

  Rk. I. ’02    139.0             29.0                      119.3[717]

It appears that while the decrease in rentals was of little importance
in the six reorganizations before 1893, it was of great importance
in the reorganizations from 1893 to 1898. Whereas absolute interest
charges were reduced by none of the later reorganizations by over 40
per cent, four of the railroads cut rentals by over 60 per cent, and
two others might have shown a similar result if a satisfactory division
between interest and rentals could have been made. Unfortunately, both
these statistics and Meade’s statement are open to criticism for the
reason which Meade recognized but to which he did not give sufficient
weight. The relative amounts of interest and of rental paid by a
railroad at any time represent the method by which its system is held
together. If a parent company raises money by the sale of bonds, and
purchases its branches outright, or buys a majority of their shares,
its interest charges will be large and its rentals small; if it leases
these same lines its interest payments will be small and its rentals
large. A steady movement in the direction of consolidation doubtless
existed before 1893, but this movement was certainly accelerated by,
and made a prominent feature of many of the reorganizations of the
following five years. Thus the Northern Pacific in 1893 reported a
total length of line of 5431.92 miles; of which leased lines and
lines operated under contract constituted 1912.92. In 1898, after
reorganization and surrender of the Wisconsin Central, it reported
4524.45 miles owned and operated, of which 2430.42 consisted of main
line, and 2030.82 of branch lines owned. The Erie in 1893 reported
551.12 miles leased and 598.51 operated for 32 per cent out of a total
of 1970.32.[718] Four years later it either owned outright or held a
majority of the stock of 1806.92 miles out of a total of 2162.81. The
Baltimore & Ohio operated 26.5 per cent of its mileage in 1897 under
lease or contract, but had reduced this by 1899 to .5 per cent. The
Southern Railway proportion was 38.1 per cent in 1892 and 28.4 per cent
in 1895. A reduction in rentals through reorganization has occurred,
but a reduction due nevertheless largely to consolidation of systems,
rather than to revision of rental contracts.

It was partly because of the difficulty of exact statement on the
subject that a discussion of rentals was postponed till the matter of
interest should have been considered. It now appears that the reduction
in interest payments which was so prominent took place in spite of a
reduction in rentals. If, for instance, the annual interest charges
fell $10,261,369 in the course of all reorganizations, and if in later
years the interest figures represented charges which at earlier date
appeared as rentals, then the real reduction in interest was greater
than the figures show. It is true that consolidation is not responsible
for all of that decline in rentals which has occurred. It is as open to
a reorganizing railroad to continue old leases at easier terms as it is
to absorb the leased roads into its system; and much of this has been
done. The East Tennessee, Virginia & Georgia, for instance, leased the
Memphis & Charleston in 1877 for a yearly payment of $297,750; while
the Southern Railway Security Company a few years before had agreed
to pay $318,763.50 annually for the same property. And it is a fact
that both consolidation and direct agreement have been the occasion of
considerable reductions in the payments for the control of subsidiary
lines. There is no reason why leased lines which have not earned their
rentals should not suffer as much as portions of the main system which
have not earned interest on their bonds. On the whole, then, rentals
have decreased, both by means of direct negotiation and through an
absorption of leased roads into the main system accomplished by
exchange of new securities for old. The significance of precise figures
must not be exaggerated. The losses which have occurred have been
distributed according to the same principles which have already been
detailed.

It is now clear that creditors, stockholders, and syndicate in
practically all successful reorganizations agree that cash must be
raised, fixed charges reduced, and the losses distributed according
to the seniority of existing claims; and that of all methods the
comprehensive exchange of new securities for old is best suited
to accomplish at least the last two of these necessities. To give
a comprehensive view of the operations the capitalization after
reorganization of the roads which have been studied may be compared
with the capitalization before. It will then be possible to see at
a glance the consequences of the great variety of exchanges. The
following table gives the percentages which the stock and bonds of
these companies bear before and after reorganization to the total
capitalization before.

  KEY: _B_: _Bonds_
       _P_: _Preferred Stock_
       _C_: _Common Stock_
       _T_: _Total_
                                    CAPITALIZATION

                            _Seven Reorganizations, 1893–8_

                            _Before_                     _After_
                  _B_   _P_         _C_  _T_     _B_   _P_    _C_   _T_

  Atchison       69.2              30.7  100    48.9  39.6   30.7  119.2
  B. & O.        72.9   4.5        22.5  100   121.3  35.4   31.6  188.3
  Erie           58.4   4.1        37.4  100    59.0  22.1   48.1  129.2
  N. Pac.        61.0  16.5        22.4  100    71.3  34.2   36.5  142.0
  Reading        80.3              19.6  100    61.2  33.2   33.2  127.6
  Southern       52.5   8.8        38.6  100    43.8  23.5   59.8  127.1
  U. Pac.        40.9  27.3[719]   31.7  100    50.4  45.7   39.1  135.2
                 ----  ----        ----  ---   -----  ----   ----  -----
  Average        65.8   4.6        29.5  100    59.1  33.6   39.2  132.0

                      _Seven Reorganizations before 1893_

  Atchison, ’89  67.7              31.8  100    95.6         31.8  127.4
  Atchison, ’92  68.8              31.1  100    70.2         31.1  101.3
  E. Tenn. ’86   48.2  19.2        31.9  100    22.1  34.2   31.9   88.2
  Erie, ’75      38.5              61.4  100    47.4         60.5  107.9
  Reading, ’80   69.1   1.3        29.5  100    86.3   1.3   29.6  117.2
  Reading, ’83   71.9    .4        27.6  100   100.4         27.6  137.7
  Rk. I. ’80     32.2              67.7  100    40.3        135.4  175.7
                 ----  ----        ----  ---   -----  ----   ----  -----
                 62.5   1.7        35.7  100    73.9   2.8   37.6  114.4

                          _One Reorganization, 1902_

  Rk. I. ’02     54.2              45.7  100    55.7  40.0   57.2  152.9

The most striking fact is that every reorganization but one has
occasioned an increase in total capitalization.[720] The increase
varies from 1.3 per cent for the Atchison in 1892 to 88.3 per cent for
the Baltimore & Ohio in 1898; and the average increase is 32 per cent
for the later period and 14.4 per cent for the earlier. This reflects
the exchange of new securities on which a lower rate of interest is
payable with securities on which all payments are optional, for old
securities which claim a high annual return. It is the result of the
attempt to reduce the demands upon reorganized corporations without
materially reducing the sums which old securityholders may in times of
prosperity receive. It reflects also, however, the sale of securities
for ready cash, or the exchange of these for assessments, as well as
the investment of minor sums in the improvement of the roads. A closer
examination of the table shows that the increase comes chiefly in
bonds before 1893 and in stock after that date. The average increase
in bonds of the seven reorganizations before 1893 was 11.4 per cent
and of common stock .9 per cent; whereas bonds decreased between the
reorganizations of 1893–8 from 65.8 per cent to 59.1 per cent of the
previous capitalization, although common stock increased 9.2 per cent
and there was introduced a great volume of preferred stock which is
scarcely found at all before. The less radical nature of the early
reorganizations and the use of income bonds instead of preferred
stock as a security with optional interest are here apparent. In
brief, the statement of capitalization before and after reorganization
summarizes and confirms the conclusions which we have reached. A few
fundamental principles have underlain the complicated details of the
exchanges of new securities for old. These principles appear when the
reorganizations are examined one by one, and they show not less clearly
when all the reorganizations are taken in two general groups.

Another question now naturally arises. If an increased capitalization
has been obtained without an increase in charges, owing to the lowering
of the rates of bond interest and to the liberal use of stocks or
income bonds, what has been the effect on the market value of the
securities concerned? Is the aggregate value of the new securities less
or greater than the aggregate value of the securities which they have
replaced? It has been seen that taken as a whole less annual payments
can be claimed from the railroads as of right. Has this fact decreased
aggregate quotations, or has the larger volume of securities and the
chance for dividends over and above the minimum interest, raised such
quotations higher than they were before? The following tables compare
the quotations of securities disturbed by the various reorganizations
one year before the failure of their railroads, with the quotations one
year after reorganization of the new securities issued to exchange
for them. A third column is inserted to show the effects of years of
prosperity upon quotations subsequent to reorganization.

                         _Seven Reorganizations, 1893–8_

              _Lowest quotation    _Lowest quotation
                 of month one         of month one
                  year before          year after      _Lowest quotation
                    failure_        reorganization_     December, 1906_

  Atchison       $184,857,934        $129,364,451         $342,941,683
  B. & O.          26,955,000          34,092,518           45,634,437
  Erie             67,190,748          38,895,077           82,230,457
  N. Pac.         157,555,214         135,507,699          289,557,415
  Reading          88,940,250          71,607,223          179,190,107
  Southern         45,653,414          35,231,356           71,411,937
  U. Pac.          83,241,672         103,329,339          187,596,748
                 ------------        ------------       --------------
                 $654,394,232        $548,027,663       $1,198,562,784
                                               D. 16.2 per cent I. 83.1

                      _Four Reorganizations before 1893_

  Atchison, ’89  $129,142,003       $113,993,417
  Atchison, ’92    35,100,000         42,600,000
  E. Tenn.  ’86    17,657,377         21,746,188
  Reading,  ’83    39,061,531         48,664,864
                 ------------       ------------
                 $220,860,911       $227,004,469
                                                      I. 2.7 per cent

It thus appears that the increased volume of securities of the
reorganizations of 1893–8 sold for a less aggregate price than did the
smaller volume which it replaced. Whereas the disturbed securities
of the seven roads in question, multiplied by their quotations
one year before reorganization, give a product of $654,394,232,
the new bonds and stock given for the disturbed securities,
multiplied by their quotations one year after reorganization, give
a product of $548,027,663.[721] This is not true for three of the
four reorganizations before 1893, and it is not true for the
reorganizations of the Baltimore & Ohio and of the Union Pacific in the
later period. Individual causes account for most of the difference.
The Reading reorganization of 1886–8 took place so soon after the
previous failure that our method makes it necessary to take the
quotations of securities “before reorganization” only five days after
the railroad has left receivers’ hands. These figures are therefore
unduly depressed. The Atchison reorganization of 1892 was voluntary,
and was not caused by financial difficulties. The reorganizations of
the Union Pacific and of the Reading in 1897 and 1898 respectively
occurred later than most of the other reorganizations and benefited
from the sharp increase in stock and bond quotations which began in
1897. For the seven reorganizations of 1893–8, to repeat, the aggregate
market value of old securities before reorganization was greater than
the market value after reorganization of the new securities given
in exchange for them. The smallest changes took place in the senior
securities. In the case of the Northern Pacific the aggregate value
of the three prior mortgages disturbed increased from $85,498,685 one
year before failure to $86,158,702 one year after foreclosure; while
the consolidated or blanket mortgage of the company decreased from
$36,032,360 to $29,235,111. In the case of the Reading the value of the
general mortgage 4s increased from $37,160,977 to $37,383,503, while
the first, second, and third income bonds decreased from $32,353,497 to
$22,784,700. The reason was not generally a smaller increase in volume,
but the fact that new bonds of fairly stable value were given for the
better sorts of old securities, while old junior mortgages were apt to
receive new income bonds or preferred stock, of which the value varied
within wide limits.

The wide difference in the nature of the securities of the different
roads forbids any attempt at precise classification. The following
divisions may, however, be made: Three of the reorganizations from
1893–8 retired branch-line bonds for which quotations are obtainable,
with a resultant increase in value for the issues of $3,256,127, or
14.2 per cent. Five of the reorganizations dealt with what may be
classed as general mortgage bonds, and the value of the new securities
given was to the value of the old as $182,160,406 to $196,186,382,
or a decrease of 7.1 per cent. Three of the reorganizations retired
junior bonds other than income. The value of the old securities
was $47,874,648 and that of the new $22,272,174, or a decrease of
53.6 per cent. Four of the reorganizations retired income bonds. The
value of the old securities was $40,913,662, the value of the new
was $28,177,721, and the decrease was 31.1 per cent. Three of the
reorganizations retired old preferred stock, and reduced the aggregate
market value from $36,509,662 to $13,825,138, or 62.1 per cent.
Finally, the common stock decreased 21.3 per cent from an aggregate
value of $125,160,409 to one of $98,316,060. Stated in tabular form the
result is as follows:

                       _Value one      _Value one         _Per Cent
                       year before     year after          increase
                        failure_     reorganization_     or decrease_

  Branch-line bonds    $22,840,928    $26,097,055          I. 14.2
  General mortgages    196,186,382    182,160,406          D.  7.1
  Junior mortgages      47,874,648     22,272,174          D. 53.6
  Income mortgages      40,913,662     28,177,721          D. 31.1
  Preferred stock       36,509,662     13,825,138          D. 62.1
  Common stock         125,160,409     98,316,060          D. 21.3

This makes more definite the conclusion which has been outlined in
general terms before. The burden of the reorganizations from 1893–8
fell on the junior securities and stockholders. The holders of prior
lien bonds actually had more value than before one year only after
reorganization had taken place; the general mortgage bondholders had
nearly recouped their losses; while the former position of the other
creditors and of the stockholders was far from being regained.

It may be objected that the decreases in market quotations were due to
a general decline in prices of securities and not to reorganizations
of the roads in question. This objection, however, cannot hold. It is
true that a general decline began in the United States in February,
1893, and continued through 1894, reaching its lowest point in August,
1893, and, after that, in March, 1895; and that this decline was due to
general conditions of panic and depression. In 1895, however, a revival
took place, and, proceeding with uncertain steps through 1896, became
obvious and important in 1897 and 1898. The average date of failure
from 1893–8 of the seven roads described in the text was October 1,
1893, and the average date of reorganization was September 1, 1896.
Since the market price figures quoted are taken one year before failure
and one year after reorganization, conditions in October, 1892, should
be compared with those in September, 1897. The following diagram traces
the movements of twenty-six important railroad common stocks between
those dates. Quotations for none of the seven railroads in question are
included.[722]

[Illustration]

It is evident that the prices of the above stocks were not materially
lower on September 1, 1897, than on October 1, 1892. The exact average
was 73¾ for the earlier month, and 71⅛ for the later. The comparison
may fairly, however, be carried further than this, and considerable
pains have been taken to arrive at general figures which are
conclusive. Such, it is believed, are the following. The market value
of thirty-nine different bond issues of seventeen companies, taken
at random from among those frequently bought and sold upon the New
York and Philadelphia exchanges, was in October, 1892, $388,628,968.
This differed little from the market value of the same securities in
September, 1892, which was $388,198,432, or that in November, 1892,
which was $390,170,323. The market value of these issues in 1897 was
$371,125,135 in August, $373,875,293 in September, and $372,962,239 in
October. Represented in tabular form the situation appears as follows:

                      _Market Value of Securities_

           1892                       1897              _Decrease_

 September  $388,198,432     August    $371,125,135    4.4 per cent
 October     388,628,968     September  373,875,293    3.7 per cent
 November    390,170,323     October    372,962,239    4.4 per cent

In other words, the quotations for this large mass of representative
securities were within 4½ per cent in 1897 of what they were in 1892.
If to these are now added the same proportions of stock that existed
for the disturbed securities of the seven reorganizations from 1893–8
there appears the following result:

                      _Market Value of Securities_

           1892                       1897              _Decrease_

 September  $641,105,160     August    $620,794,202    3.1 per cent
 October     644,276,634     September  631,061,329    2.0 per cent
 November    644,131,632     October    629,005,577    2.3 per cent[723]

This is, as nearly as possible, a computation comparable with figures
already cited. It is made up the same way, has too broad a basis to
give a non-typical result, and is not dependent upon the selection
of a single month for its conclusion that security prices had nearly
regained their former level by the last half of 1897. A decrease
in value of 16.2 per cent for the securities of seven reorganized
railroads has been determined. Less than one-fifth of this can be
attributed to general causes. The significance of the decrease
therefore remains.

In conclusion, two other points of interest may be mentioned. First,
the provision which sound reorganization plans should make for the
future development of their properties, and second, the creation
of voting trusts to prevent sudden changes in control. It has been
seen that restrictions on new mortgages have accompanied the issue
of income bonds and of preferred stock, in order to afford to these
latter a desirable protection. If old bondholders demand these
clauses, a certain amount of new issues is required by the interests
of the corporation. A railroad is never finished. New extensions and
improvements which shall increase earnings are generally called for
to a degree which current earnings are insufficient to meet. Some
provision for regular increments of new capital, without the need of
stockholders’ approval in each case, is highly advisable, and implies
no lack of conservatism. In fact, some such provision is often forced
upon a railroad. Take the case of the successive reorganizations of
the Atchison properties. In 1889 no new bonds were to be allowed to
be inserted between the income and the mortgage issues, but it was
left optional with the management to deduct all improvements before
estimating the earnings applicable to dividends on the former bonds.
This proved quite inadequate, and the reorganization of 1892 provided
definitely a fund of $20,000,000 second mortgage bonds, which were to
be issued to a limit of $5,000,000 each year, for specific improvements
on the Atchison, exclusive of the Colorado Midland and the St. Louis
& San Francisco. The right was reserved to the company, when all
the above should have been used up, to issue more bonds of the same
sort for the same purpose, and on the same mileage up to a limit of
$50,000,000. Finally, in 1895, there were reserved $30,000,000 general
first mortgage bonds, to be issued each year to a limit of $3,000,000,
and $20,000,000 adjustment bonds, to be issued each year to a limit
of $2,000,000, after the general mortgage fund should have been
exhausted. In each of the reorganizations in the nineties considered
in this study, in which restrictions on new bond issues were imposed,
there was concomitant provision for regular increments of mortgage
bonds to be used for improvements, betterments, and new construction.
Thus the Baltimore & Ohio in 1898 reserved $5,000,000 prior liens
and $27,000,000 general mortgage bonds, of which the latter were to
be issued at the rate of not exceeding $1,500,000 for the first four
years after the organization of the new company, and not exceeding
$1,000,000 a year thereafter; and the former were to be put forth at
the rate of not exceeding $1,000,000 a year after January 1, 1892, for
enlargements, betterments, and extensions. The Erie in 1895 provided
$5,337,208 in cash to be spent at once, and $17,000,000 in general lien
bonds to be issued during the years following the reorganization. The
Northern Pacific in 1896 set aside $25,000,000 prior lien bonds, of
which not more than $1,500,000 were to be issued in any one year, and
$4,000,000 general lien bonds, presumably to be used as needed. The
Reading in 1895 reserved $20,000,000 general mortgage bonds for new
construction, additions, and betterments, of which not over $1,500,000
were to be used in any one year. And, finally, the Richmond Terminal
reserved $20,000,000 in 5 per cent bonds to be used at the rate of
$2,000,000 per year, and has recently authorized a $200,000,000 4 per
cent mortgage which will raise the yearly limit of expenditure to
$5,000,000.[724]

Before the nineties, as after, provision for new capital accompanied
restriction on the future issue of bonds. In 1886 the Reading provided
a lump sum of $9,792,000 general mortgage bonds for future use in
the improvement of the railroad; and in 1875 the Northern Pacific
contemplated the issue of first mortgage bonds to an average of $25,000
per mile of new road actually completed. Where, as with the Atchison in
1889, some such provision did not accompany the general restrictions
placed upon new bond issues, or where, as with the Northern Pacific in
1875, the provision proved inadequate, fresh measures of relief were
compelled. The Atchison reorganization of 1892 has been mentioned; in
1889 a financial operation of the Northern Pacific, which according to
our definition was not properly a reorganization, provided $20,000,000
5 per cent consolidated mortgage bonds for additional branches at a
rate not to exceed $30,000 per mile, and a like sum for betterments,
etc.

Even where no restrictions on future bond issues are imposed, it is
highly advisable that some provision for future capital requirements
be made, and that the management have at its disposal a fund of bonds
issuable without the approval of stockholders in each case. It is
probable, therefore, that some such provision would have been a feature
of some, at least, of the reorganizations even had the restrictions
described not made the clauses an imperative necessity; but if we may
judge from the rather restricted basis on which we are here at work,
the provisions would have been far less liberal than we have found to
be the case. In 1895 the Union Pacific set aside $13,000,000 4 per
cent bonds and $7,000,000 preferred stock to dispose of equipment
obligations, and for reorganization and corporate uses. Of these,
corporate uses were stated to be those which would be proper to the
corporation thereafter, such as the issue of securities in extension
of the property. This, of course, was quite inadequate. Similarly the
Rock Island in 1902 and the Erie in 1875–7 provided for a certain issue
of stock or bonds to be applied to future capital requirements. It is
undoubtedly true that both the Erie and the Reading railroads were
hampered by the lack of adequate provision of this nature; though as
the main difficulty of each corporation was the continued existence
of heavier charges than it could bear, an automatic increase of
indebtedness would not have proved a solution of their troubles.

The essence of a voting trust is the deposit of stock in the hands
of trustees (most frequently five in number). These trustees issue
certificates in return. All dividends declared on the stock are paid
over to holders of certificates, but all the voting power is exercised
by the trustees so long as the trust endures. Of the reorganizations
which we have described, ten reorganizations with foreclosure included
five voting trusts and one proxy committee; eight reorganizations
without foreclosure included two voting trusts; ten reorganizations
before 1893 included two voting trusts (though a third was proposed
for the Atchison in 1889); seven reorganizations in 1893–8 included
five voting trusts and one proxy committee. The use of voting trusts
has therefore become more general, denoting a realization of the
dangers of fluctuating and speculative control at critical periods in a
railroad’s history. This desire to secure conditions of stable control
has been the dominant one in the cases under consideration. “In order
to establish such control of the reorganized company for a series of
years,” said the reorganization plan of the Baltimore & Ohio in 1898,
“both classes of stock of the new company shall be vested in ... five
voting trustees.” “The importance of vesting in the present creditor
class the management of the properties until their productiveness
is considerably increased ... is manifest,” said the syndicate
reorganization plan of the Reading in 1886. It is of supreme importance
that a reorganized company be well started on its way by men who have
an interest in making the reorganization plan permanently successful,
and that conservative direction be assured until danger of bankruptcy
be past. For this reason we should expect the use of voting trusts to
increase in direct relation to the seriousness of the difficulties
experienced, and to the vividness with which the need for stability is
felt. If we may generalize, and say that a railroad which cannot be
reorganized without a foreclosure sale is usually in more desperate
straits than one which can be saved by voluntary concessions, we have
an explanation of the coincidence of foreclosures and voting trusts.
The teachings of experience, which have shown both the usefulness of
voting trusts as tools, and the necessity of a solution such as they
offer, further explain the increased prominence of the trust in later
years.

It is not true that voting trusts are always used for the purposes
indicated. In 1892 certain stockholders of the Baltimore & Ohio agreed
to deposit their certificates in a trust for one year and five months.
The stock deposited amounted to $8,975,000 out of a total outstanding
of $25,000,000, and a limit of $11,000,000 was set to the amount to be
so placed, the object of the arrangement apparently being to increase
the influence of the stockholders concerned by concentration of their
holdings.[725] Again, in 1895, to take an outside example, the stock
of the Oregon Railway & Navigation Company was placed in trust with
the Central Trust Company in order better to protect the preferred
stock. It was provided that during the continuance of the trust the
Central Trust Company should vote all the stock: first, against any
increase in the preferred stock unless the holders of all the voting
trust certificates of both classes should give their unanimous consent
at general meetings; second, against all propositions relating to the
mortgaging, selling, or leasing of the railroad and telegraph lines
of the company, or to the consolidation thereof, unless a majority
of each class of certificates should consent; third, on all other
questions as directed by the holders of a majority of the aggregate
of all voting trust certificates of both classes represented at
general meetings.[726] Further provisions gave to the preferred stock
control of a majority of the board of directors. These instances are
of interest; but the principal purpose of the voting trusts in the
reorganizations which we have considered has been nevertheless the
securing of stability of control for a definite period after the
rehabilitation of the bankrupt companies.

The duration of the voting trust varies from company to company. The
most usual provision is for five years. Frequently the voting trustees
may terminate the trust earlier at their discretion, as in the case
of the Baltimore & Ohio trust of 1898, the Richmond Terminal trust of
1894, or the Northern Pacific trust of 1896. Frequently, also, certain
conditions must be fulfilled before termination. In the case of the
Erie in 1895 no stock certificates were to be due or deliverable
before December 1, 1900, nor until the expiration of such further
period, if any, as should elapse before the Erie Railroad Company
in one year should have paid 4 per cent cash dividend on the first
preferred stock.[727] In the case of the Reading in 1896 4 per cent
cash dividends on the first preferred stock were required for two
consecutive years, and this delayed dissolution three years beyond the
time originally contemplated.[728] The Richmond Terminal trust had
provisions similar to those of the Erie.

The number of trustees also varies. The scheme proposed for the
Atchison in 1889 contemplated a trust of seven; the Baltimore & Ohio
in 1898 and the Richmond Terminal in 1894 provided for five; and the
Erie in 1896 for three; but this point is not material. When the
reorganization plan requires the consent of stockholders to an increase
in the issue of securities the consent of holders of trust certificates
is apt to be required on similar occasions during the existence of the
trust. Thus the Northern Pacific agreement of 1896 forbade the trustees
to increase the preferred stock or to issue any new mortgage, except
with the consent of the holders of a majority of the whole amount of
preferred stock trust certificates, and of the holders of a majority of
the common stock trust certificates represented at the meeting.

This ends the present treatment of the subject of railroad
reorganization. The results of the discussion may be briefly summed up
as follows:

_First._ Reorganization is most frequently an attempt to extricate an
embarrassed company from its difficulties.

_Second._ These difficulties can generally be traced either to an
unrestricted freedom of capitalization, or to destructive competition.

_Third._ The shape in which trouble appears is likely to be that of a
large floating debt or of excessive fixed charges; either or both of
which may have brought the corporation to a critical condition some
time before the actual collapse.

_Fourth._ The best practice favors the retirement of floating debt
by assessments on securityholders, though sales of securities are
sometimes resorted to, or a combination of sales and assessments is
employed.

_Fifth._ Fixed charges are composed chiefly of interest and rentals.
Interest payments are reduced by the retirement of outstanding bonds by
new bonds which bear a lower rate of interest, or by income bonds or
stock, or by a combination of securities with a fixed rate of interest
with securities upon which payment of interest is optional. Rentals may
be reduced by direct negotiation, or the leased roads may be absorbed
into the main system, and their securityholders receive new stocks and
bonds as above.

_Sixth._ The new bonds are of fewer kinds and have longer terms to run
than the bonds which they displace.

_Seventh._ This reduction in fixed charges imposes a loss on the
greater part of securityholders, both in respect to the annual interest
which they can claim, and in respect to the selling price of their
holdings. A similar loss is suffered by those securityholders who pay
the required assessments.

_Eighth._ The loss falls on securityholders according to the seniority
of their holdings,—those bonds escaping which can expect to satisfy
their claims from the selling price of the railroad at foreclosure sale.

_Ninth._ The most important development in reorganization practice
has been the increasing use of new securities bearing a fixed rate
of interest with new securities bearing a conditional rate of
interest; a use which may make the losses of junior securityholders
temporary instead of permanent, and yet safeguard the interests of
the corporation. In this connection preferred stock has gained in
popularity over income bonds.

_Tenth._ This development, and the issue of new securities for floating
debt and for other purposes, have caused the capitalization after
reorganization in all but one of the cases which we have examined to
exceed the capitalization before.

_Eleventh._ In order to perfect a reorganization additional provisions
are often inserted, which protect junior securityholders against the
reckless issue of new bonds, supply the corporation with ability
to make necessary betterments from capital account, protect the
corporation from sudden changes in control, and similarly supplement
the main clauses.



BIBLIOGRAPHICAL NOTE


Information about railroad reorganization must be gathered from a wide
variety of sources. The most important are five in number. First,
there are the annual reports of the railroads themselves. Second,
there are the files of financial and railroad papers. Third, there are
contemporaneous pamphlets. Fourth, there are memoirs and biographies
containing first-hand material. And fifth, there are government
documents, which comprise (1) regular reports by and testimony before
bodies like the state and national railway commissions; (2) reports
by and testimony taken before occasional committees; (3) legislative
records; (4) state and federal court proceedings.

Of the five sources mentioned, the files of contemporary papers are the
most useful. The _Commercial and Financial Chronicle_, the _Railroad
Gazette_, the _Railway Age_, the _Railway and Engineering Review_,
the _Railway Times_ of London, the New York _Tribune_, the New York
_Journal of Commerce_, the _Wall Street Journal_, and many others are
generally accurate and trustworthy, though it should be noted as a
limitation that they seldom have inside information, and that their
comment is not always independent. These papers are supplemented by
pamphlets and circulars. Many reorganization plans are published in
pamphlet form. Opposition to them is not infrequently thrown into the
same shape. Reports of experts are printed in pamphlets. In general,
the live literature of reorganization must be put out on short notice,
and so is issued in this informal way. The official statistics of
railroads are to be found in the reports of the railroad companies
themselves, made to stockholders or to supervisory government bodies.
These statistics, like the news items in the financial and railroad
papers, must be used with care. They are sometimes incomplete, and
they are sometimes purposely misleading. Nevertheless, they are
useful, and serious inaccuracies in any of them are usually exposed
within a few years after their original publication. The material
to be found in legislative records is not abundant. Railroads
almost invariably, however, appear before the courts in the course
of their reorganizations, and in the decisions of these tribunals
some facts of interest may be found. The records of the receivership
of the Union Pacific have been published in fourteen volumes. The
decision of the United States Supreme Court in Pearsall _vs._ Great
Northern[729] blocked the first of the reorganization plans proposed
for the Northern Pacific in 1895. An earlier decision[730] enabled
the Union Pacific to postpone the payment of interest upon the public
debt until the principal should have fallen due. The Erie has been
at times almost continuously before the courts, and the same is true
of the Reading during its reorganizations, of the Northern Pacific,
and of other roads. The student is most fortunate when he can uncover
testimony before government committees, of men who have taken part
in reorganization proceedings, or who are personally acquainted with
developments which have led up to railroad failures. Mr. Blanchard,
before the Hepburn Committee,[731] and Mr. Fink, before the Hepburn
and the Cullom Committees,[732] helped their hearers to understand the
policy which finally resulted in the failure of the Baltimore & Ohio.
The report of the Poland Committee disclosed the scandal of the Crédit
Mobilier.[733] The testimony of Gould, Adams, Ames, Holmes, and others
before the United States Pacific Railroad Commission of 1887–88[734]
made clear the iniquity of the Union Pacific reorganization of 1880.
The statements of Mr. Pierce before the Senate Committee on Pacific
Railroads in 1896[735] explained the attitude of the Union Pacific
towards the repayment of that company’s debt to the Government. The
testimony of Messrs. McLeod, Rice, Harris, and others before the
Industrial Commission of 1900 threw much light upon the Reading
bankruptcy of 1893. The arguments of counsel in the matter of export
differentials, reprinted in the fifth volume of the Elkins Committee
report,[736] gave valuable information on the subject of trunk-line
competition. Many of the witnesses before these committees are frank
in criticism of the railroads with which they have been connected.
Others are forced to admissions by the keen questioning to which they
are exposed. The only similar material to be found elsewhere lies in
memoirs, such as those of Henry Villard,[737] or in biographies like
Oberholtzer’s Life of Jay Cooke[738] and Pearson’s An American Railroad
Builder[739] which make use of private papers of men prominent in
railroad finance. Perhaps White’s Book of Daniel Drew,[740] Depew’s
Retrospect of Twenty-Five Years,[741] and the Life of Isaac Ingalls
Stevens by his son,[742] should be included in this class.

This enumeration, while in no way exhaustive, indicates the principal
sources from which material may be obtained. Secondary works do not
exist which treat solely of railroad reorganization. There is an
article by E. S. Meade in the _Annals_ of the American Academy,[743]
articles by Simon Sterne in the _Forum_,[744] and an article by
A. Lansburgh in _Die Bank_,[745] but no books of which the author
is aware. Mention may be made of an intelligent discussion of an
industrial reorganization by A. S. Dewing in the _Quarterly Journal of
Economics_.[746] _Poor’s Manual_ for 1900 contains the most convenient
set of general statistics. On railroad receiverships, besides legal
works, there is a monograph by H. H. Swain,[747] which has a brief
bibliography, and articles in the _Forum_, _North American Review_, and
other periodicals.

On the history of the great American railroad systems the literature
is also quite inadequate. The Union Pacific has been written up
frequently, because of its relations with the United States
Government. Works by Davis,[748] von der Leyen,[749] Bromley,[750]
Dillon,[751] Crawford,[752] Hazard,[753] and White[754] treat various
phases of the company’s development up to its final reorganization, an
article by Meyer[755] describes the settlements between the Pacific
railroads and the Government, and another article by Mitchell in the
_Quarterly Journal of Economics_[756] deals with Union Pacific finance
since that time. There may also be mentioned an account by Bailey,[757]
which covers the whole of the road’s history, but in a superficial
way, and a vicious attack by Robinson upon all the government-aided
lines.[758] The student of the Erie has at his disposal the elaborate
narrative by E. H. Mott,[759] the chapters by Charles Francis Adams,
Jr.,[760] and the sketch by Crouch.[761] Milton Reizenstein has
dealt with the progress of the Baltimore and Ohio up to 1853,[762]
and for this road there is material to be found in Smith’s Book of
the Great Railway Celebrations of 1857,[763] and in a compilation
of the Laws, Ordinances, and Documents Relating to the Baltimore and
Ohio Railroad, published in 1840.[764] For the Northern Pacific the
history by Smalley covers in popular style the period from 1864 to
1883,[765] the careful History of the Northern Securities Case, by
B. H. Meyer, treats of an interesting later development,[766] chapters
in von der Leyen’s book contain acute and independent discussions
of Northern Pacific as well as of Union Pacific finance,[767] and
there is a fifteen-page pamphlet by Chapman entitled The Northern
Pacific Railroad.[768] Schlagintweit in 1884 described his travels
on the Santa Fe and Southern Pacific.[769] Wilson has written two
volumes upon the Pennsylvania Railroad,[770] while Worthington[771]
and Bishop[772] have described the internal improvements undertaken
by the state of Pennsylvania. Ackerman is the author of a Historical
Sketch of the Illinois Central Railroad,[773] and Hollander[774]
and Ferguson[775] of works on the Cincinnati Southern. Potts[776]
and Briscoe[777] have written on railroads in Texas. The Chicago &
Northwestern has published a volume called Yesterday and To-day,[778]
which contains some information. Hinsdale has worked up the History
of the Long Island Railroad.[779] Bishop has sketched the history
of the St. Paul & Sioux City Railroad.[780] Bliss is the author
of a Historical Memoir of the Western Railroad.[781] Cary in 1893
described the Organization and History of the Chicago, Milwaukee
& St. Paul Railroad Company.[782] Phillips discusses in excellent
fashion the early history of a number of Southern carriers.[783] The
autobiography of George Francis Train[784] and Smyth’s biography of
Henry Bradley Plant[785] are serviceable. Works like those of Van
Oss,[786] Snyder,[787] Carter,[788] and Spearman,[789] and brief
descriptions which have appeared in the columns of the _Railway
World_ and in _Moody’s Magazine_, treat of a number of railroads, but
make no attempt at a scholarly examination of any one. Some general
works like Ringwalt’s Development of Transportation Systems,[790]
Adams’ Railroads: Their Origin and Problems,[791] Hadley’s Railroad
Transportation,[792] Kupka’s Die Verkehrsmittel in den Vereinigten
Staaten von Nordamerika,[793] Singer’s Die Amerikanischen Bahnen,[794]
Myers’ History of the Great American Fortunes,[795] Bancroft’s History
of the Pacific States,[796] and Chronicles of the Builders,[797]
Davidson and Stuvé’s Complete History of Illinois,[798] Hollander’s
Financial History of Baltimore,[799] Sanborn’s Congressional Grants
of Land in Aid of Railways,[800] Haney’s Congressional History of
Railways,[801] and Million’s State Aid to Railways in Missouri,[802]
contain incidental information about individual railroads.

These books are of service. Their number is, however, small and their
scope limited. It is surprising that a field so rich as that of the
history of American railroad systems should have attracted so little
attention from competent students. It is not too much to say that the
history of the Erie by Mott is the only comprehensive work of the kind
which our literature possesses, and that is already thirteen years
old.



FOOTNOTES


[1] Milton Reizenstein, The Economic History of the Baltimore & Ohio
Railroad, Johns Hopkins University Studies, July-August, 1897.

[2] Reizenstein estimates the original cost of the first 379 miles to
have been $37,612 per mile, and, adding the cost of reconstruction and
extension to 1853, he gets a figure of $41,237 per mile. Vide infra, p.
75.

[3] 6th Annual Report, 1832, p. 4.

[4] 35th Annual Report, 1861.

[5] Testimony of Mr. Blanchard, Hepburn Committee Report, p. 3171. See
also Chron. 20:547, 1875.

[6] The Baltimore & Ohio had no line to New York. The Pennsylvania had
had one since 1873, and over it Mr. Garrett was forced to send all
his New York business. Disputes arose over the proper pro-rating of
charges. President Garrett alleged that the terminal charge of four
cents per 100 pounds which the Pennsylvania Company imposed on freight
coming to or going from New York was exorbitant, and that he was paying
for 100 miles of transportation when the real distance was only 90.
President Scott replied that the rates for terminal services in New
York were not sufficient to cover the cost of doing the business, and
that the Pennsylvania’s New York and Philadelphia line was open to the
Baltimore & Ohio on the same terms as to all others. R. R. Gaz. 7:71–2,
1875.

[7] R. R. Gaz. 6:8, 1874. The outcome was an agreement whereby the
Baltimore & Ohio restored rates and fares, and the Pennsylvania
agreed to haul two of the former’s trains daily each way between West
Philadelphia and Jersey City, to sell through tickets West over the
Baltimore & Ohio, and to give that road all necessary facilities for
the handling of through freight.

[8] Sugar, coffee, salt, etc.

[9] The traffic between Cumberland and Baltimore was mostly coal.
In an interview the last of May or first of June, 1875, President
Garrett said that as soon as the right was conceded to his road to
enter New York over the Pennsylvania Railroad as he had been doing
for thirty years, and to make such rates from Baltimore and Chicago
as he chose, he was ready for peace and not sooner.... The Saratoga
combination, which had been gotten up to ruin the Baltimore & Ohio
Railroad, had only served to establish the road and give it a standing
in the West.... It had been and was now his firm object to maintain
the freight rate on fourth class, the principal freight shipped from
the West, at 35 cents per 100. This was a reasonable rate and gave his
company a fair profit. The other lines had to submit to this rate or
there could be no peace. R. R. Gaz. 7:237, 1875.

[10] R. R. Gaz. 7:261, 1875; Ibid. 7:270, 1875; Ibid. 7:289, 1875;
Chron. 20:593, 1875. The compact was to last for ten years, the
companies to agree upon and to maintain moderate rates between all
competing points. Each board of directors was to appoint a special
committee to which was to be referred all differences which might
arise. The Pennsylvania opened its lines to the Baltimore & Ohio
between Philadelphia and New York on the same terms that it gave other
connecting roads at Philadelphia.

[11] See Interstate Commerce Commission, Railways in the United States
in 1902, part 2, entitled, “A Forty-year Review of Changes in Freight
Tariff,” p. 79.

[12] For an account of the differentials at different times see
the argument of counsel and the opinion of the Interstate Commerce
Commission, “In the Matter of Differential Rates to and from North
Atlantic Ports,” April 27, 1905, in Elkins Committee Report, vol. 5,
Appendix E. See also 7 I. C. C. Rep. 612.

[13] Albert Fink, Report on Adjustment of Railway Rates; also Testimony
of Mr. Blanchard, Hepburn Committee Report, pp. 3171 ff.

[14] “Additional Arguments on the Division of [Dead] Freight from
Cincinnati of the Atlantic & Great Western,” etc., N. Y. 1879, p.
5. Speaking from the standpoint of an impartial observer, Mr. Fink
declared that $1,840,494 had been lost between December 19, 1878, and
May 1, 1879, through the failure of the Michigan Central, Lake Shore,
Pennsylvania, and Baltimore & Ohio and their connections to observe
their published tariffs. Chron. 28:578, 1879.

[15] By agreement of March 11, 1881, the chairman of the Joint
Executive Committee, Mr. Fink, was given authority to proclaim a
general reduction in published rates when it should be shown that any
pool line had been accepting traffic at less than the regular rate.
This authority he exercised in April. Rates were restored almost
immediately by special action of the Joint Executive Committee, only to
be reduced again in June for similar reasons.

[16] The actual outbreak of the war was due to the conviction of the
New York Central that traffic was being diverted to other roads by
secret departures from the published tariff. R. R. Gaz. 13:347, 1881.

[17] Hepburn Committee Report, vol. 3, p. 558.

[18] Cullom Committee Report, vol. 2, p. 98.

[19] In January the Pennsylvania announced that it would take
provisions from Chicago to New York for ten cents per hundred pounds.
R. R. Gaz. 14:28, 1882.

[20] See Albert Fink, Report upon the Adjustment of Railroad
Transportation Rates to the Seaboard, 1882; also, Letter to a New York
Merchant, by the same, Hepburn Committee Report, vol. 2, Exhibits, pp.
106–119.

[21] For agreement see Chron. 34:116, 1882. The Commissioners’
functions were purely advisory. They reported in July that “no evidence
has been offered before us that the existing differentials are unjust,
or that they operate to the prejudice of either of the Atlantic
seaboard cities.” Senate Committee on Interstate Commerce Report
(Elkins Committee), 1905, vol. 2, pp. 1243 ff.

[22] The question was passed upon by C. F. Adams as arbitrator in
November, 1882 (Chron. 35:603, 1882), and by the Trunk-Line Board of
Arbitration in January, 1884 (Chron. 38:31, 1884).

[23] The attempt of the Pennsylvania to cut off the New York connection
of the Baltimore & Ohio caused especial bitterness between those roads.
See Chron. 39:420, 1884.

[24] Chron. 41:393, 1885.

[25] Cullom Committee Report, vol. 1, Appendix, pp. 237, and 240 ff.

[26] Chron. 45:692, 1887.

[27] The amount of issue was £2,400,000 ($11,678,400) at 4½ per cent,
maturing April 1, 1933, and placed through Brown, Shipley & Co. of
London. Chron. 36:426, 1883.

[28] Chron. 40:453, 1885.

[29] Chron. 41:555, 1885.

[30] Chron. 43:190, 1886.

[31] The Staten Island Rapid Transit possessed an extensive water front
on Staten Island, besides franchises for two ferries from Staten Island
to the Battery, New York City. Some trouble was experienced in securing
permission to bridge the Kill von Kull between Staten Island and the
New Jersey mainland. Congress passed an act permitting construction,
New Jersey protested, and the courts upheld the authority of Congress.
Stockton _v._ Baltimore & New York Railroad Co., 32 Fed. Rep. 9.

[32] R. R. Gaz. 19:170, 1887; Ibid. 19:490, 1887. For an account of
the Richmond & West Point Terminal Railway & Warehouse Company see the
chapter on the Southern Railway.

[33] R. R. Gaz. 18:49, 1886. Interview with Mr. Albert Fink. A
passenger rate war between the Pennsylvania and the Baltimore & Ohio
took place early in 1886, and resulted in the indirect cutting by the
former of the pool rate which it had agreed to maintain. Chron. 42:73,
1886.

[34] From $34,713,696 in 1884 to $56,868,201 in 1887.

[35] Such as connecting lines, iron bridges over the Ohio River,
elevators, wharves, terminal facilities, etc.

[36] The lowest average price of the common stock before announcement
of the measures taken for relief was 160, from which point the
quotations rapidly dropped to 125, and on January 5, 1889, to 85.

[37] Chron. 45:304, 1887; Ibid. 45:824, 1887.

[38] About $5,000,000 of the floating debt in March, 1888, consisted of
advances by the syndicate, for which they held 50,000 shares of Western
Union Telegraph Company stock, and 15,000 shares of United States
Express Company stock, which at current prices about covered their
loan. Statement of President Spencer, Chron. 46:344, 1888.

[39] Ry. Age, 12:640, 1887.

[40] “If it [the stock] is sold,” said a statement in the New York
_Tribune_, purporting to represent the views of Senator Gorman, a large
stockholder, “it will place the control of the road practically in
the hands of the syndicate.... It is clearly preferable to keep the
control of the stock here [Baltimore], as the road is a city and state
institution of the first importance to our business interests.” Ry.
Age, 13:44, 1888. Another objection was that an issue of additional
preferred stock would postpone indefinitely dividends upon the common.

[41] Mr. Spencer had succeeded Robert Garrett in December, 1887.

[42] Chron. 46:319, 1888. In connection with this proposition President
Spencer made the following statement: Of the $11,148,007 floating
debt, December, 1887, $7,769,314 consisted of loans and bills payable.
This is now reduced to $6,446,173. There will probably be added to
this $1,400,000 for equipment, already either under contract or to be
constructed in the company’s shops. In addition there should be, in
the near future, not less than $2,000,000 additional put into this
property for the purpose of improvement. The total requirements are
thus $10,000,000. Of this $5,000,000 will be disposed of by assets
in the hands of the syndicate as collateral, or in the hands of the
company. Of the remaining $5,000,000, $1,500,000 is floating debt. This
will be more than provided for by the $2,500,000 of consolidated bonds
remaining in the hands of the company for its future use after the sale
of the $5,000,000 to the syndicate. The remaining $3,500,000 needed for
equipment and improvements it is the desire of the company to provide
for by that portion of the $2,500,000 not required for the floating
debt, and by the $2,500,000 in the sinking-fund loan of 1890. Chron.
46:344.

[43] Ry. Rev. 28:192, 1888.

[44] Ry. Age, 12:728, 1887.

[45] R. R. Gaz. 20:417, 1888.

[46] Ry. Rev. 28:192, 1888. The amiability of the syndicate was
profitable to it. On May 21 the subscription books of the $7,500,000
mortgage were opened in London and New York, and the whole issue was
subscribed in London before the inhabitants of the American city, in
spite of their proverbial alertness, were out of bed. In September,
1888, the Baltimore & Ohio was reported as “having all the funds needed
for the present.” R. R. Gaz. 20:343, 1888.

[47] Ry. Rev. 28:163, 1888.

[48] Ibid. 28:236, 1888.

[49] Ry. Rev. 28:678, 1888; Ibid. 28:689, 1888. The coincidence was so
suggestive that it was thought necessary to “credibly inform” certain
bankers that the investigating committee was expected to continue its
investigation and to make a full report. In December the committee
was instructed by a directors’ resolution not to report till its full
statement was ready, and further notice does not appear.

[50] Ry. Age, 16:882, 1891. At the same time the directors decided to
sell $5,096,600 additional common stock to meet expenditures which
would be necessary in connection with the World’s Fair at Chicago.

[51] Chron. 47:575, 1888. It is impossible to give an adequate account
of these wars without straying too far from our subject. Some of the
methods by which rebates were granted are revealed in the case of Jacob
Shamberg _v._ Del., Lack. & W. R. R. Co. _et al._, 4 I. C. C. Rep.
630. The differential question took on a new phase in 1888 through the
demand of weaker roads for protection against stronger. This had long
been a demand of the Grand Trunk, and had been conceded to it in the
last part of 1887. In January, 1888, the Pennsylvania and the New York
Central agreed to allow besides a differential rate to the Erie, the
Lackawanna, the West Shore, and the Baltimore & Ohio, which should vary
from five cents per hundred pounds from Chicago to New York on first
class to one cent on fifth and sixth classes. R. R. Gaz. 20:26, 1888;
Chron. 46:57, 1888. This did not prevent active warfare throughout the
year.

[52] Known as the Presidents’ and Bankers’ Agreement.

[53] There was, however, a shortage in the wheat crop in 1888.

[54] The comparative peace of 1889 was due as much to the abundance
of traffic offering as to the efficacy of the agreement concluded in
February of that year. According to the Chronicle the apportionment
of traffic then contemplated proved difficult to carry out, and
considerable discontent arose. Chron. 50:892, 1890.

[55] In 1890 difficulties occurred through the competition of the
Canadian Pacific, and more particularly through the attempt of the Lake
Shore to reduce the differential formerly granted to the Grand Trunk.
Chron. 50:850, 1890. The matter was left to arbitration, Chron. 51:625,
with the result that the lines north of Lake Ontario were allowed to
charge two and one-half cents less per hundred pounds on dressed beef
to the seaboard than the lines further south. R. R. Gaz. 23:64, 1891.
This had the effect of putting the Canadian Pacific on an equality with
the Grand Trunk. Late in 1892 still another agreement between the trunk
lines was found necessary to maintain rates. Chron. 55:857, 1892.

[56] Ry. Rev. 30:382, 1890.

[57] Chron. 50:800, 1890; Ibid. 50:833, 1890; Ry. Rev. 30:348, 1890;
R. R. Gaz. 22:448, 1890.

[58] Application for listing of Trustee certificates, Chron. 54:369,
1892.

[59] Certain extensions had been made, which it is not necessary to
describe at length. The most important had been those of the Pittsburgh
& Western in 1891, Chron. 52:238, 1891, the Akron & Chicago Junction,
Chron. 53:756, 1891, and the West Virginia & Pittsburgh, Chron.
54:725, 1892. In 1893 the Baltimore & Ohio Southwestern and the Ohio
& Mississippi Railway companies consolidated, and the Baltimore &
Ohio guaranteed the principal and interest of the first consolidated
mortgage gold bonds of the consolidated company for $25,000,000. Chron.
56:332, 1893.

[60] Chron. 59:696, 1894. In October, 1893, the Baltimore & Ohio was
borrowing in London on one year 5 per cent promissory notes, and 2
per cent commission, paying, therefore, an equivalent of 7 per cent
interest. Ry. Times, 64:499, 1893.

[61] Chron. 60:42, 1895.

[62] In 1895 the directors speak of the unremunerative rates
prevailing. Chron. 60:711, 1895. At the end of the year Mr. Alexander
Shaw, chairman of the board of directors, felt called upon to say,
“The two subjects which are giving the new board of directors the most
to think about are the floating debt and the future management of the
property. We have to fund the former, and as to the latter there is
a difference of opinion among the directors.... I deny specifically
that the January interest on the bonds of the company will be passed;
that a receivership, either friendly or otherwise, is contemplated;
that the Baltimore & Ohio and the Southern Railway systems are to be
consolidated; and the statements that there has been an irregularity in
the manner of keeping the books of the company.” Chron. 61:1153, 1895.

[63] Ry. Rev. 36:138, 1896. The receivers were appointed February 29.

[64] Chron. 62:777, 1896.

[65] The period covered was from September 30, 1888, to November
30, 1895. Report of Mr. Stephen Little to General Louis Fitzgerald,
chairman of the reorganization committee.

[66] Chron. 64:999, 1897.

[67] President J. K. Cowen, Vice-President Oscar G. Murray.

[68] Chron. 62:907, 1896.

[69] Ibid. 69:128, 1899.

[70] R. R. Gaz. 28:781, 1896; Ibid. 29:563, 1897; Chron. 65:110, 1897;
Ry. Rev. 38:628, 1898. The status of the Baltimore & Ohio stock was
somewhat peculiar, in that when first issued to the state of Maryland
it had been accompanied by a guarantee, or conditional guarantee, of
dividend payments; and Johns Hopkins University, to which the stock
had been transferred, maintained that this contract, added to the
continuous payment of dividends for over fifty years, gave them rights
even against the bondholders.

[71] Chron. 66:1235, 1898.

[72] The prior lien bonds were “to be secured by a mortgage upon the
main line and branches, Parkersburg Branch and Pittsburg Division when
acquired by the new company, covering about 1017 miles of first track,
and about 964 miles of second, third, and fourth track and sidings, and
also all the equipment now owned by the company of the value of upward
of $20,000,000, or hereafter acquired in any manner by the use of the
$34,000,000 reserved first mortgage bonds, as hereinafter stated.”

[73] The first mortgage 4s were to be a first lien “upon the
Philadelphia, Chicago, and Akron divisions and branches and the
Fairmount, Morgantown & Pittsburg Railroad, covering about 570 miles
of first track, and about 332 miles of second, third, and fourth track
and sidings, and also on the properties now included in the present
Baltimore & Ohio Terminal mortgages of 1894, when said lines and
properties are acquired by the new company; also on the Baltimore Belt
Railroad, if and when the same shall be acquired by the new company.
They will also be a lien subject to the prior lien mortgage upon the
lines, properties, and equipment covered by the latter.”

[74] Annual Yield of Old and New Securities:

                                                        _Annual return
                           _Previous   _Annual return     from new
                             annual       from new        bonds and
          _Loan_             return_     bonds given_    stock given_

  B. & O. Loan, 1853          $40          $40.87          $46.47
  Consol. Mtg. 5s, 1887        50           41.75           44.35
  Loan of 1872                 60           40.41           42.01
  Loan of 1874                 60           40.41           46.81
  Parkersburg Br. 6s           60           41.75           41.75
  P. & C. 1st Ex. 4s           40           40.87           42.70
  P. & C. 1st 7s               70           40.00           40.00
  B. & O. 5s, Loan of 1885     50           40.00           44.00
  P. & C. Consol. 6s           60           40.67           48.67
  Chicago Div. 5s              50           46.30           50.30
  Phila. Div. 4½s              45           40.00           50.60
  B. & O. 4½ Term. Bs          45           40.00           40.00
  Akron & Chicago Junc. 5s     50           40.00           42.00


[75] Headed by Messrs. Speyer & Co. and Kuhn, Loeb & Co. of New York,
and Messrs. Speyer Bros. of London. R. R. Gaz. 30:733, 1898.

[76] The Western Union stock was sold to the same syndicate which took
the Baltimore & Ohio’s securities, at a price said to be about 90. At
this price the yield would have been $3,420,000; so evidently very
little other stock was sold.

[77] In fact they were never quite so low as this.

[78] Chron. 69:128, 1899.

[79] Chron. 67:27, 1898.

[80] Ry. Rev. 38:656, 1898.

[81] R. R. Gaz. 31:500, 1899.

[82] Ry. Age 28:570, 1899.

[83] The chief addition has been that of the Cleveland, Lorraine &
Wheeling.

[84] Chron. 72:1079, 1901. In February, 1906, the Pennsylvania Railroad
and three other companies which it controlled owned $28,480,000 of
Baltimore & Ohio preferred and $42,900,000 of Baltimore & Ohio common
stock out of an authorized capital of $60,000,000 preferred and
$125,000,000 common. Report of the Interstate Commerce Commission on
the Pennsylvania community of interest, February 6, 1906.

[85] See Chron. 76:102, 1903; and Interstate Commerce Commission,
Report on Discriminations and Monopolies in Coal and Oil, January
25, 1907. The interest of the Baltimore & Ohio in the Reading dated
from 1902, and was influenced in turn by the ability of the Reading
to control the Central of New Jersey, over which the Baltimore & Ohio
reached New York. The latter’s holdings of Reading stock were shared
with the Vanderbilts. Both the Baltimore & Ohio and the Lake Shore sold
a block of their Reading stock in 1904.

[86] See statement by the Pennsylvania management in Chron. 83:563,
1906.

[87] It is not necessary to do more than to mention the recent contest
between the Baltimore & Ohio and the Hill-Morgan people over the
Chicago Terminal Transfer Railway. By arrangement with this company
the Baltimore & Ohio had enjoyed terminal facilities at Chicago on
favorable terms. When the Terminal Railway went bankrupt the Baltimore
& Ohio paid off the first mortgage bonds in order to prevent the loss
of its privileges. Litigation followed, to end finally in an agreement
between the Hill and Baltimore & Ohio interests for joint ownership
of the Chicago Terminal by the Burlington and the latter, and for the
use of its facilities in accordance with an equitable division of its
trackage. The Pere Marquette and the Chicago Great Western, which had
shared in the use of the property to that time, were left to shift for
themselves. Ry. World, August 23, 1907.

[88] E. H. Mott, Between the Ocean and the Lakes—the Story of Erie.
N. Y. 1899.

[89] Ibid. pp. 79–80.

[90] Mott, p. 129. Default was also made on the first, second, third,
and fifth mortgages.

[91] See Adams’s Chapters of Erie, Boston, 1871.

[92] The capital per mile rose from $81,068 in 1864 to $117,760 in 1872.

[93] Chron. 12:203, 1871; Ibid. 16:489, 1873.

[94] R. R. Gaz. 6:100, 1874. See affidavit of S. H. Dunan in the
suit of John C. Angell against the Erie Railway Company and others,
reprinted in Hepburn Committee Report, vol. 2, Exhibits, pp. 591–610.

[95] Hepburn Committee Report, vol. 2, Exhibits, pp. 623–643.

[96] Angell suit, R. R. Gaz. 6:269, 1874.

[97] R. R. Gaz. 7:224, 1875.

[98] Chron. 20:520, 1875.

[99] From a loan of £3,000,000 placed in London, the company had
received but £1,232,029 in cash; £508,431 being retained by the London
Banking Association and by James McHenry for claims and commissions on
which the critical condition of the company enabled them to insist.
Chron. 20:500, 1875. For statement of the physical condition of the
property, May 26, 1875, see Extracts from joint letter to Hon. H. J.
Jewett, Hepburn Committee Report, vol. 2, pp. 517–518, Exhibits.

[100] See R. R. Gaz. 7:423, 1875.

[101] R. R. Gaz. 7:423, 1875.

[102] R. R. Gaz. 7:479–80, 1875.

[103] Chron. 21:277, 1875.

[104] R. R. Gaz. 7:511, 1875.

[105] R. R. Gaz. 7:533, 1875; Chron. 21:612, 1875.

[106] R. R. Gaz. 8:818, 1876.

[107] Chron. 22:233, 1876.

[108] R. R. Gaz. 8:178, 1876.

[109] Chron. 22:423, 1876.

[110] Amounts received from assessments to January 18, 1878, were:

          $3 per share on     23,372 Preferred,    $70,116
          $2                  58,095               116,190
          $6                  72,982 Common,       437,892
          $4                 698,095             2,792,380
                                                ----------
               Total,                           $3,416,578

  Shares forfeited for non-payment,—Preferred,       3902
  Shares forfeited for non-payment,—Common,          8923

R. R. Gaz. 11:30, 1879. Report of Pres. Jewett, Chron. 28:67–8, 1879.
Shares with assessment paid sold in October, 1878, at $15 for common
and $30 for preferred. R. R. Gaz. 10:516, 1878.

[111] Chron. 23:233, 1876; Ibid. 26:419; Ibid. 29:358, 1879; Hepburn
Committee Report, vol. 2, pp. 252–7, Exhibits.

[112] Chron. 26:419, 1878.

[113] Ibid. 26:469, 1878. For indenture executed by the new corporation
and for text of the first and second consolidated mortgage and of the
second consolidated funded coupon mortgage, see Hepburn Committee
Report, vol. 2, Exhibits, pp. 315–50.

[114] Mott, p. 268.

[115] Mott, p. 269.

[116] Annual Report, 1882.

[117] Chron. 36:427, 1883. For the necessity of Erie’s extension
westward see testimony of First Vice-President Felton before the Senate
Committee on Transportation Interests of the United States and Canada,
51st Congress, 1st Session, Report no. 847, pp. 130–1.

[118] For some account of the trunk-line rate wars see the chapter on
the Baltimore & Ohio.

[119] Chron. 39:234, 1884.

[120] Annual Report, 1884, p. 12.

[121] R. R. Gaz. 16:421, 1884.

[122] Chron. 39:349, 1884.

[123] R. R. Gaz. 17:446, 1885.

[124] For terms of reorganization see Annual Report, 1890; also R. R.
Gaz. 19:188, 1887.

[125] Annual Report, 1886.

[126] Upon such redemption a corresponding amount of the original
coupons were to be cancelled.

[127] Annual Report, 1886.

[128] From .662 in 1887 to .610 in 1892.

[129] Testimony of Messrs. King and Felton, Senate Committee on
Transportation Interests of the United States and Canada, pp. 44 and
121–2.

[130] Annual Report, 1887.

[131] Mott, p. 272.

[132] In 1890 a traffic agreement was made with the Cincinnati,
Hamilton & Dayton, to take the place of that with the Big Four. R. R.
Gaz. 22:314, 1890.

[133] Figures for 1891 were, fixed charges, $4298 per mile; net
revenue, $4897 per mile.

[134] Chron. 57:179, 1893.

[135] Mott, p. 273.

[136] Chron. 57:938, 1893; Ibid. 57:1083, 1893.

[137] Ry. Times, 65:3, 1894.

[138] R. R. Gaz. 26:18, 1894.

[139] Ry. Times, 65:120, 1894.

[140] Ibid. 65:152, 1894.

[141] Chron. 58:264, 1894.

[142] Ibid. 58:383, 1894.

[143] Ibid. 58:430, 1894.

[144] According to the law of 1892 the bonded indebtedness, including
mortgages given as consideration for the purchase of real estate and
mortgages authorized by contract prior to May, 1891, could not exceed
the amount of the paid up capital stock.

[145] Ry. Rev. 34:181, 1894.

[146] R. R. Gaz. 26:472, 1894.

[147] Ibid. 27:554, 1895.

[148] New York, Pennsylvania & Ohio voting trustees agreed to foreclose
and deliver the New York, Pennsylvania & Ohio property, subject only
to the prior lien, equipment, and leased-line securities for which
reservation was made.

[149] Chron. 61:368, 1895; R. R. Gaz. 27:583–4, 1895.

[150] The following was the rate of exchange of Erie securities for New
York, Pennsylvania & Ohio securities on payment by the latter of $12
per new share:

  _Old securities                _To be exchanged for_
   in amounts of_         _Prior Lien   _1st     _2d      _Com.
                             Bonds_    Pref._   Pref._    Stock_

  1st mortgage,  $5,000      $1000      $500     $100      $750
  2d mortgage,      500                                     100
  3d mortgage,    1,000                                     100
  Pref. Stock,    6,000                                     100
  Com. Stock,    10,000                                     100


[151]

  Capital Stock—
                                   _Common_       _Preferred_
      _Before reorganization_
      Erie,                      $77,837,000       $8,536,600
      N. Y., P. & O.,             34,999,350       10,000,000
                                ------------      -----------
                                $112,836,350      $18,536,600

      _After reorganization_
      Erie,                     $100,000,000      $46,000,000
      Nypano,                     20,000,000
                                ------------      -----------
                                $120,000,000      $46,000,000


[152] This real rental was increased somewhat by the assumption of New
York, Pennsylvania & Ohio prior liens.

[153] Chron. 61:831, 1895.

[154]

  Capital—               _Stock_           _Bonds_

            1896      $146,000,000      $137,704,100
            1907       176,271,300       209,633,900


[155] Calculated. Poor gives the figure of 340.3 miles of _track_. In
1867 the miles of track were reported as 418.1, and the miles of line
as 147, the latter being 35.1 per cent of the former. Supposing the
proportion to have been the same in 1862, to 340.3 miles of track there
would have been 119.4 miles of line, which, divided into a capital of
$23,094,829, gives $193,417.

[156] Annual Report, 1881, p. 63.

[157] Industrial Commission, vol. 19, p. 445. Area of fields as given
in Annual Report for 1881 was: Schuylkill, 146 sq. miles; Western
Middle, 91 sq. miles; Lehigh, 37 sq. miles; Wyoming, 198 sq. miles.

[158] An analysis of the Coal & Iron Company’s operations in 1881
(Annual Report, 1881) showed that there had been expended:

  For coal and timber lands and leasehold collieries, and
    for dead work, colliery equipments and improvements,
    real estate and miners’ houses, etc.,                  $39,385,080
  For stocks and bonds and loans to secure the control
    of tributary properties,                                 5,672,394
  For iron ore lands, iron furnaces, mills, and other
    properties,                                              1,720,566
  For profit and loss account in working properties,
    including interest payments, etc.,                      22,454,500
  For supplies and miscellaneous accounts,                   1,485,426
  For bills and accounts receivable, cash, etc.,             2,608,702
                                                           -----------
                                                           $73,326,668

  Of which amount there was furnished by the Railroad
    Company,                                                54,886,647
  And the Coal & Iron Company’s obligations held by the
    public, for which the Railroad Company became
    responsible as guarantor, amounted to                   14,929,557
  Other direct liabilities of the Coal & Iron Company
    amounted to                                              3,510,464
                                                           -----------
                                                           $73,326,668


[159] Annual Report, 1881.

[160] Part of the difference was due to the inflation of the currency
before 1879.

[161] R. R. Gaz. 9:225, 1877; Ibid. 9:146, 1877.

[162] Ibid. 9:284, 1877.

[163] Annual Report, 1881, p. 28.

[164] Chron. 31:46, 1880, Report of the English Bondholders’ Committee,
June 18, 1880. This committee was in the interests of the Messrs.
McCalmont.

[165] Ry. Age, 5:365, 1880.

[166] R. R. Gaz. 12:363, 1880.

[167] Ry. Age, 5:351, 1880; R. R. Gaz. 12:350, 1880.

[168] R. R. Gaz. 12:542, 1880.

[169] R. R. Gaz. 12:564, 1880.

[170] Chron. 31:536, 1880.

[171] Chron. 31:607, 1880.

[172] R. R. Gaz. 12:609, 1880.

[173] Ibid.

[174] Ibid. 13:11, 1881.

[175] Ibid. 12:704, 1880.

[176] R. R. Gaz. 12:652, 1880.

[177] Ibid. 12:704, 1880.

[178] Ibid. 13:11, 1881.

[179] R. R. Gaz. 13:25, 1881.

[180] Chron. 32:206, 1881.

[181] R. R. Gaz. 13:43, 1881.

[182] R. R. Gaz. 13:132, 1881.

[183] Chron. 32:313, 1881.

[184] Chron. 32:445, 1881.

[185] Chron. 32:469, 1881.

[186] R. R. Gaz. 13:446, 1881.

[187] Ry. Age, 6:528, 1881.

[188] Annual Report, 1881, p. 52.

[189] Annual Report, 1881, pp. 50 ff.

[190] Annual Report, 1881, pp. 50 ff.; see also Chron. 33:177, 1881.

[191] Ry. Age, 6:486, 1881.

[192] Chron. 33:256, 1881.

[193] Ry. Age, 6:628, 1881.

[194] R. R. Gaz. 13:624, 1881.

[195] R. R. Gaz. 13:672, 1881.

[196] Chron. 34:265, 1882; R. R. Gaz. 26:156, 1882.

[197] Chron. 34:409, 1882.

[198] R. R. Gaz. 14:354, 1882.

[199] Industrial Commission, vol. 9, p. 607.

[200] Ry. Age, 10:218, 1885.

[201] Annual Report, 1883, pp. 111 ff.

[202] Annual Report, 1883, pp. 139 ff.

[203] Chron. 37:563, 1883.

[204] Annual Report, 1883, pp. 25–7.

[205] Annual Report, 1883. The proposition was made by Mr. Gowen.

[206] From November 30, 1883, to January 2, 1884, reliable figures
subsequently showed a deficit of $2,000,000.

[207] Chron. 38:679, 1884.

[208] Ibid. 39:461, 1884.

[209] Annual Report, 1884, pp. 21–8.

[210] R. R. Gaz. 17:80, 1885.

[211] R. R. Gaz. 17:144, 1885.

[212] Ibid. 17:160, 1885.

[213] Ibid. 17:224, 1885.

[214] Collateral bonds were to be given for the assessment.

[215] Chron. 40:569, 1885. The trustees were to be appointed as
follows: One by foreign creditors, two by the general mortgage
bondholders, one by the income mortgage bondholders, one by holders of
securities junior to the income mortgage, and two by the shareholders.

[216] Ry. Age, 10:314, 1885.

[217] R. R. Gaz. 17:607, 1885.

[218] Chron. 41:307, 1885.

[219] Chron. 41:654, 1885.

[220] Preferred from $846,950 to $36,381,820; common from $36,822,975
to $60,134,462.

[221] R. R. Gaz. 18:138, 1886.

[222] Chron. 42:216, 1886.

[223] Chron. 42:365, 1896. Assessments ranged from 2½ per cent on the
deferred income bonds to 15 per cent on certain junior securities and
$10 on both classes of stock.

[224] R. R. Gaz. 18:271, 1886.

[225] Ibid. 18:138, 1886.

[226] Ry. Age, 11:376, 1886.

[227] R. R. Gaz. 18:502, 1886.

[228] Chron. 43:368, 1886; Ibid. 43:747, 1886; Annual Report, 1887.

[229] R. R. Gaz. 18:897, 1886.

[230] Ry. Age, 12:692, 1887. These bondholders even proposed a plan of
reorganization of their own, which it is not worth while going into.

[231] Ry. Age, 12:746, 1887; Chron. 45:539, 1887.

[232] R. R. Gaz. 22:370, 1890.

[233] Chron. 50:37, 1890.

[234] Chron. 53:408, 1891.

[235] Chron. 54:288, 1892; Industrial Commission, vol. 19, pp. 455–7.

[236] R. R. Gaz. 24:138, 1892.

[237] Industrial Commission, vol. 9, p. 738.

[238] Annual Report, 1892.

[239] R. R. Gaz. 24:420, 1892.

[240] Chron. 55:680, 1892.

[241] Chron. 56:82, 1893.

[242] R. R. Gaz. 25:102, 1893.

[243] Industrial Commission, vol. 9, p. 567, testimony of A. A. McLeod.

[244] Ibid. vol. 9, p. 574.

[245] Ry. Age, 17:109, 1892.

[246] Ry. Rev. 32:507, 1892.

[247] Chron. 55:723, 1892.

[248] R. R. Gaz. 25:386, 1893.

[249] Ry. Age, 18:314, 1893.

[250] Ibid. 18:164, 1893.

[251] Industrial Commission, vol. 9, p. 573.

[252] Ibid.

[253] Ry. Times, 63:265, 1893.

[254] Ry. Age, 18:314, 1893.

[255] Industrial Commission, vol. 9, p. 739, testimony of I. L. Rice.

[256] Chron. 57:105, 1893; Ibid. 57:423, 1893.

[257] New York _Herald_, May 29, 1893.

[258] Ry. Times, 63:783, 1893.

[259] Ry. Age, 18:501, 1893.

[260] Chron. 56:905, 1893.

[261] Ry. Times, 63:751, 1893.

[262] Ry. Times, 63:783, 1893.

[263] R. R. Gaz. 25:496, 1893. The deposits required were: general
mortgage, $41,828,000; stock, 480,424 shares.

[264] Industrial Commission, vol. 9, p. 737, testimony of I. L. Rice.

[265] Ry. Times, 64:369, 1893.

[266] Ry. Age, 18:897, 1893.

[267] Ry. Age, 18:735, 1893.

[268] Ry. Rev. 34:55, 1894; Ry. Times, 65:87, 1894.

[269] Chron. 58:774, 1894.

[270] Ry. Times, 65:623, 1894. See also the report of the company’s
comptroller to the receivers in Annual Report, 1893.

[271] Ry. Rev. 34:307, 1894.

[272] Chron. 59:515, 1894; Ry. Age, 19:557, 1894; Ry. Rev. 34:561,
1894; Ry. Times, 66:571, 1894.

[273] Deposits of bonds were up to the last of January (R. R. Gaz.
27:78, 1895):

                     _Total Issue_    _Deposits_

  General Mortgage    $44,663,000    $33,099,000
  1st preferred        23,948,133     12,182,300
  2d preferred         16,176,326      6,261,600
  3d preferred         18,591,099      8,631,400


[274] Chron. 60:43, 1895.

[275] Ry. Times, 68:802, 1895; Chron. 61:1109, 1895.

[276] Ry. Age, 20:625, 1895.

[277] Chron. 63:560, 1896.

[278] Chron. 64:84, 1897.

[279] Chron. 63:923, 1896.

[280] See testimony of Mr. Baer before the Interstate Commerce
Commission, 1904, “Synopsis of Stenographers’ Minutes, etc., in the
case of W. R. Hearst against the Philadelphia & Reading Railway
Company,” p. 55. The managers wished to take no chances.

[281] Organization and scope of the three Reading Companies. The
Reading Company owns practically the whole of the capital stock of
the Philadelphia & Reading Railway Company and the Philadelphia &
Reading Coal & Iron Company, and all of the other stocks and securities
which were acquired by the purchases under the sale made by the
Trustees and the Receivers. It also owns the $20,000,000 purchase
money mortgage bonds issued by the Philadelphia & Reading Railway
Company, the locomotives, cars, steam collieries, tugs, and barges
constituting the railway and marine equipment, and all the real estate
of the old Philadelphia & Reading Railroad Company which was not
appurtenant to the railroad itself. This, of course, does not include
the depots, rights of way, etc., which belong to the Railway Company.
The Philadelphia & Reading Railway Company owns all the roads formerly
belonging to the Philadelphia & Reading Railroad Company, and it
controls the roads hitherto leased to that company, either by transfer
of the old leases or by new leases made since November 30, 1896. It
leases from the Reading Company the railway and marine equipment which
it uses in the conduct of its business and a number of wharves and
warehouses on the Delaware River. Annual Report, 1898.

[282] Chron. 64:84, 1897.

[283] There are certain duplications in both of these figures, but the
same duplications appear in each.

[284] Chron. 79:2087, 1904.

[285] See the nineteenth volume of the Industrial Commission’s report
for a brief description of the renewed attempt at consolidation in the
anthracite coal fields; also testimony in the case of W. R. Hearst
against the Philadelphia & Reading Railway Company.

[286] The Virginia state bonds were redeemable in 34 years from April
8, 1853, to September 30, 1854, by the payment of an annuity of 7 per
cent. Of this rate 6 per cent covered the interest and 1 per cent,
by continuous reinvestment at 6 per cent, was expected to yield the
principal sum in the 34 years agreed upon. Annual Report, 1867. Like
most new companies, the Richmond & Danville found difficulty at first
in meeting its obligations, and was obliged to issue bonds to provide
for overdue interest to the state and to keep its floating debt within
bounds. R. R. Gaz. 5:499, 1873, and Ibid. 5:507, 1873.

[287] R. R. Gaz. 3:279, 1871. This road stretched from Goldsboro in
the eastern part of North Carolina to Charlotte in the southwestern
part, via Greensboro. It was principally owned by the state of North
Carolina. By the terms of the lease the Richmond & Danville agreed to
pay $260,000 per annum for thirty years.

[288] The whole road was opened for traffic in September, 1873. It
went into the hands of a receiver in 1874, and was sold in foreclosure
in 1876; but the Pennsylvania Railroad relieved the Richmond &
Danville from all collateral liabilities incurred on its account. The
reorganized line was leased by the Richmond & Danville in 1881. Chron.
32:367, 1881.

[289] Annual Report, 1878.

[290] Ibid. 1874.

[291] Ulrich B. Phillips, A History of Transportation in the Eastern
Cotton Belt to 1860. New York: The Columbia University Press, 1908, pp.
372 ff.

[292] Including 37 miles of running rights over the N., C. & St. L.

[293] R. R. Gaz. 5:475, 1873.

[294] Ibid. 6:178, 1874.

[295] Ibid. 8:540, 1876.

[296] The Memphis & Charleston stockholders agreed to the lease in
order to avoid bankruptcy. At a meeting in May, 1877, it was pointed
out to them that the net earnings of the road had not been enough to
pay the interest on its bonds, and that a large amount was due to the
state of Tennessee which the company had no present means of paying.
Either an assessment on the stock or a lease to the East Tennessee
was declared to be necessary. Accordingly, a lease was concluded. The
East Tennessee agreed so to discharge the principal of the company’s
indebtedness to the state as to reduce the annual interest account from
$360,000 to $310,000 as a maximum, and upon the fulfilment of this and
of certain other minor conditions took over the operation of the road.
Two years later the lease was extended for twenty years at a definite
rental amounting to 7 per cent on $4,225,000 or a yearly payment of
$295,750. See R. R. Gaz. 9:421, 1877, and Ibid. 11:672, 1879.

[297] The Selma, Rome & Dalton was bought from the purchasers at
foreclosure sale for $2,600,000. The Georgia Southern cost $367,369.
Outstanding debts were assumed. To provide for these and other outlays
$10,000,000 new 5 per cent bonds were authorized. R. R. Gaz. 12:622,
1880.

[298] This line was completed in 1882. Chron. 35:430, 1882; R. R. Gaz.
13:420, 1881.

[299] Chron. 33:357, 1881.

[300] R. R. Gaz. 13:420, 1881.

[301] Prominent among them were Messrs. Clyde, of the Coast Line
railroads, Wilson and McGhee of the East Tennessee, Stewart, Plant,
Logan, and others.

[302] This had been the Atlanta & Richmond Air Line.

[303] Chron. 37:128, 1883.

[304] Chron. 39:733, 1884.

[305] Chron. 40:29, 1885.

[306] The committee overestimated the net earnings of the next few
years. Instead of $1,400,000 each year these proved to be $1,288,343 in
1885 and $1,382,749 in 1886.

[307] Chron. 40:60, 1885. There was some dispute as to the jurisdiction
of the different courts in this connection. The Circuit Court appointed
Mr. Fink receiver for the whole line on January 7. The next day a state
court appointed R. T. Dorsey and E. P. Alexander receivers for the
lines in Georgia under another mortgage. This suit was removed to the
Federal Court and Dorsey, who had meantime been appointed sole receiver
in Georgia, was displaced. Subsequently the Georgia Supreme Court held
that the transfer was illegal, and Dorsey vainly endeavored to regain
his position. The dispute was ended by the withdrawal of the suit upon
which the Georgia application was based.

[308] Son-in-law of George Seney.

[309] This committee was chosen by the consolidated bondholders. Its
membership consisted of Robert Fleming, a representative of the foreign
holders; Charles McGhee, president of the Memphis & Charleston; G. W.
Smith, of Kountze Bros.; Frederic D. Tappan, president of the Gallatin
National Bank; E. W. Corlies, vice-president of the Bank of America;
and Frederick P. Olcott, president of the Central Trust Company, which
was trustee of the mortgages of the company. Chron. 42:155, 1886.

[310] As might have been expected, this estimate was too optimistic.
The actual reduction was to $1,167,000. Even this constituted a cut of
about one-third.

[311] Chron. 42:186–7, 1886. See also Poor’s Manual for 1886.

[312] The reader will remember that that same year the general manager
had estimated the sum required for steel rails, iron bridges, and other
improvements at $1,000,000.

[313] It is true that the severity of the treatment of the junior
securities caused sharp protest. A number of the stockholders met in
New York February 23, and appointed a committee to prepare a plan
of assessment and to oppose foreclosure. Under the auspices of this
committee, Messrs. William H. Sistare and Harold Clemens filed a suit
against the reorganization committee of the East Tennessee Company.
The capitalization of the company, said they, had been fraudulently
inflated by the members of the Thompson-Seney-Brice syndicate. By false
reports these financiers had unloaded upon the public securities which
they had previously distributed among themselves, and then had entered
upon a scheme for wrecking the property. The suits made specific
charges of irregularity, and prayed for relief. Ry. Age, 11:192, 1886.

[314] Chron. 42:364, 1886.

[315] Ibid. 42:575, 1886.

[316] Ibid. 42:663, 1886. In a circular to their constituents this
committee said: “That after a full and satisfactory presentation of
the case by very able counsel it appeared that the committee had
been misinformed as to the material facts upon which their case was
predicated. It especially appeared to the Court that there was no
ground for the charge of fraud against the directors of the Company
or the Central Trust Company. It further appeared that the litigation
must be a protracted one, without substantial benefit to either party.
Your committee were not willing to assume the responsibility of such a
contest, in view of the expressed willingness of the majority to give
to the minority the same terms which they had accepted for themselves.
It was deemed wise to harmonize all interests, and join hands to
promote the future of the property.”

[317] Annual Report, East Tennessee, Virginia & Georgia, 1887.

[318] Chron. 37:344, 1883. The debentures were cumulative income bonds
entitled to 6 per cent out of earnings after payment of interest,
rentals, and operating expenses, including expenditures made for the
repair, renewal, and improvement of existing property and equipment
necessary for the proper conduct of the business of the railroad.
Certain provisions of the mortgage protected them against the insertion
of new mortgage bonds before them. Chron. 37:373, 1883.

[319] Curiously enough the chief saving seems to have been in
maintenance of cars, an expenditure which one would expect to be least
affected by the syndicate control.

[320] Chron. 36:56, 1883.

[321] R. R. Gaz. 18:138, 1886.

[322] Chron. 42:575, 1886.

[323] The Richmond & Danville guaranteed interest on some $12,500,000
of Virginia Midland bonds.

[324] Cf. Poor’s Manual for 1887.

[325] The very high average price of $200 per share was reported to
have been paid. R. R. Gaz. 18:825, 1886; cf. R. R. Gaz. 19:162–3, 1887.
The Terminal Company issued $5,000,000 new preferred and $9,000,000
common stock. Of this it sold the preferred and $7,500,000 of the
common, giving to every holder of 100 of its shares the right to
subscribe to the extent of one-third of the par value of his stock, and
to receive for his subscription 33⅓ shares of the new preferred and 50
shares of common. Then to the $5,000,000 cash thus secured the Terminal
Company added the $1,500,000 common stock left from its $9,000,000
issue, and turned the whole over to the Richmond & Danville in payment
for the securities which it had purchased. R. R. Gaz. 18:825, 1886.

[326] The floating debt amounted to $3,161,325 when Mr. Sully assumed
the presidency, and $1,708,700 of it matured January 1. Chron. 44:401,
1887. To provide for it, and for the Richmond & Danville shares,
$5,500,000 6 per cent collateral trust bonds were issued, secured by
East Tennessee first preferred, Richmond & Danville stock, Columbia &
Greenville stock, Virginia Midland stock, and Western North Carolina
bonds; and also $16,000,000 common stock. The bonds were sold for cash
and the returns applied to the East Tennessee purchase and to the
floating debt; $5,000,000 of the stock went for East Tennessee first
preferred, and the rest for Richmond & Danville common, Washington,
Ohio & Western stock and income bonds, and for other purposes. Chron.
44:149, 1887. Also Poor’s Manual, 1890.

[327] It was reported that the East Tennessee first preferred stock
had been offered to the Norfolk & Western before the Richmond Terminal
acquired it.

[328] Chron. 47:410, 1888.

[329] Chron. 47:532, 1888.

[330] Chron. 47:532, 1888; Ry. Rev. 28:663, 1888; R. R. Gaz. 20:778,
1888.

[331] Chron. 47:625, 1888.

[332] Chron. 47:663, 1888.

[333] Ry. Rev. 28:679, 1888.

[334] Ry. Age, 13:788, 1888.

[335] Cf. Central Railroad Company _vs._ Georgia, 2 Otto, 665. The
Central Railroad was granted certain exemptions from taxation, and the
question came up in 1874 whether the right to these exemptions was
surrendered by consolidation with the Macon & Western, and whether, if
not, they extended to the Macon & Western as well as to the original
company.

[336] Including 67 per cent paid in Confederate notes during the war.

[337] See Ulrich B. Phillips, _op. cit._, chap, vi, for the early
history of the Central of Georgia Railroad System.

[338] The following is representative from a pamphlet issued by the
Rice Committee:

“The matter of the purchase of sixty-five thousand shares of the
first preferred stock of the East Tennessee Railroad Company and the
circumstances attendant thereon.

“1st. Why did the directors of the Terminal Company purchase sixty-five
thousand shares of that stock at par, when fifty-five thousand and one
shares would have been sufficient to have given the Terminal Company
a majority of that stock, the minority stock at that time selling at
about eighty?

“2d. Why was the minority stock of the Danville Railroad Company
purchased at the same time at a price which then amounted to about two
hundred dollars per share, being a premium of one hundred per cent?

“3d. Is it true that the majority of the committee appointed for the
purpose of negotiating the purchase of the stock of the East Tennessee
Company consisted of directors of the Terminal Company largely
interested in the minority stock of the Danville Company?” Chron.
46:579, 1888.

[339] Chron. 46:449, 1888. The opposition pamphlet is reprinted in
Chron. 46:579, 1888. It contained thirteen heads, each of which charged
or insinuated fraud on the part of the existing board of directors.

[340] Chron. 46:699, 1888. The vote was 298,006 to 94,645. For
resolutions condemning the action of the minority see Ry. Rev. 28:332,
1888.

[341] Chron. 47:499, 1888.

[342] The Erlanger or Queen & Crescent system comprised the following
roads: Cincinnati Southern (336 miles); Vicksburg & Meridian (142
miles); Vicksburg, Shreveport & Pacific (189 miles); New Orleans &
Northwestern (195 miles); Alabama Great Southern (295 miles). Total
mileage, 1157. The road actually acquired was that of the Cincinnati
Southern and Alabama Great Southern between Cincinnati and Meridian
(about 631 miles); a close working contract being concluded with
the rest. Ry. Age, 15:230, 1890. The East Tennessee made payment by
the issue of $6,000,000 5 per cent collateral trust bonds, put out
jointly by the East Tennessee and Richmond & Danville Companies and
secured by deposit of the shares purchased. Chron. 50:560, 1890. For a
monograph on the Cincinnati Southern Railway the reader is referred to
a study by J. H. Hollander in the Johns Hopkins University Studies for
January-February, 1894.

[343] Chron. 46:828, 1888.

[344] Ry. Rev. 28:386, 1888; Ibid. 397, 1888.

[345] Ry. Age, 16:76, 1891.

[346] Chron. 52:862, 1891.

[347] From the reorganization plan prepared by Drexel, Morgan & Co.,
dated May 1, 1893. Chron. 56:874 ff., 1893.

[348] Ry. Age, 14:78, 1889.

[349] The failure of this initial suit encouraged the Richmond Terminal
to take steps to make its position more secure. In February, 1889,
a collateral trust mortgage of $24,300,000 was announced, intended
not only to pay off the floating debt and several classes of bonds,
but also to purchase the balance of common stock of the Central of
Georgia and Richmond & Danville and of the first preferred stock of
East Tennessee outstanding. See Poor’s Manual for 1890; also Chron.
48:764, 1889. Subsequently the company issued common shares of its own
instead of bonds in exchange for the East Tennessee first preferred,
and succeeded in securing nearly $2,000,000 of the outstanding issue.
Chron. 49:374, 1889. The rate of exchange was 3¼ to 1. The Richmond
& Danville shares were retired by new collateral bonds at 85, plus
$26 per share in cash, and in connection with the operation more
stock and $5,700,000 collateral bonds were sold on favorable terms to
stockholders to provide for the floating debt.

[350] For replies by Alexander and Inman, see New York _Herald_, August
10, 1891, and Chron. 53:224, 1891.

[351] At 97½. See R. R. Gaz. 23:718, 1891.

[352] Chron. 53:674, 1891.

[353] R. R. Gaz. 23:870, 1891. The composition of this committee was
severely criticised, partly on the ground of the relations of Norton
and Schiff to the Louisville & Nashville and to the Norfolk & Western
respectively, and partly on the ground that the other members were
creditors only and had no interest other than the repayment of their
loans. It would seem, however, that the property was likely to have
fared better in the hands of reputable New York bankers than in the
hands in which it had formerly reposed.

[354] Chron. 53:922, 1891.

[355] Chron. 53:969, 1891. The members were: F. P. Olcott; Col. Oliver
H. Payne; F. D. Tappan, president of the Gallatin National Bank;
W. H. Perkins, president of the Bank of America; and Henry Budge, of
Hallgarten & Co. These gentlemen appointed Messrs. Olcott, Budge, and
Perkins a sub-committee to prepare a plan. Ry. Rev. 32:14, 1892.

[356] This excluded the Central of Georgia and the Alabama Great
Southern. The figure was based on existing bonded debt, floating debt,
and rentals. It included car trust payments, but excluded taxes, which
were included in operating expenses, and excluded also the interest on
securities owned by the system or the various corporations composing
the system.

[357] The plan in full is reprinted in Chron. 54:487, 1892.

[358] Consider for instance the treatment of the Richmond Terminal
preferred stock. This was quoted in December, 1891, as low as 45. The
plan accorded it 100 per cent in new bonds and 20 per cent in new
preferred stock. _Per contra_, the Richmond & Danville consolidated
5s were quoted the same months at 75 and received 100 per cent in new
bonds and 40 per cent in new preferred. Was it any wonder that the
holders of prior liens refused to come in?

[359] Chron. 54:846, 1892.

[360] These notes were to be secured by the same securities that were
then pledged to secure the floating debt and were to be exchanged for
$170 in new preferred stock if the plan should prove successful.

[361] Ry. Age, 17:414, 1892. It was not proposed to retain control
of the Central of Georgia, but instead certificates of aliquot parts
in the holdings of the Georgia stocks were to be issued to each
stockholder, making him the actual owner of his proportionate share.

[362] This committee was subsequently enlarged and became known as the
“Independent Committee of Seventeen.”

[363] Chron. 54:888, 1892.

[364] Ibid. 55:23, 1892. On July 6, Chairman Strong, of the Advisory
Committee of Seventeen, appointed Messrs. George F. Stone, J. C. Maben,
and W. E. Strong a sub-committee to further consider reorganization.
Chron. 55:59, 1892. Subsequently Mr. Strong appointed Messrs. Coppell,
Manson, and Plant a committee to look after the Terminal 5s, and
Messrs. Bull, Goadby, and Cyrus J. Lawrence a committee to look
after the 6s. Mr. Strong, as chairman of the Advisory Committee,
was ex-officio member of each. The first of August Messrs. Thompson
Dean, Albert B. Boardman, and Charles P. Huntington were appointed a
committee by the holders of between 50,000 and 60,000 shares of stock
and other securities of the Richmond Terminal system, “for the purpose
of removing the obstacles which now stand in the way of a fair and
equitable reorganization of the Richmond & West Point Terminal Railway
& Warehouse Company and its constituent corporations, and to this end
to employ attorneys and to take all necessary steps to secure the
appointment of permanent receivers, who will be in the interest of no
clique or faction in said companies.” Chron. 55:216, 1892. See in this
connection Ry. Rev. 32:521, 1892.

[365] R. R. Gaz. 24:33, 1892. The deposit was made and the dividend
paid.

[366] Ibid. 24:237, 1892.

[367] Chron. 54:965, 1892.

[368] It will be observed that although the minority stockholders of
the Central of Georgia objected to the Terminal’s stock control they
were not averse to having the precise terms of the lease to the Georgia
Pacific carried out: that is, to being guaranteed 7 per cent upon their
stock.

[369] W. P. Clyde, etc.

[370] Chron. 54:1010, 1892. Messrs. Huidekoper and Foster were also
appointed receivers by courts in Virginia, North Carolina, and South
Carolina. For reply by President and Receiver Comer, of the Central, to
Clyde’s statement, see Chron. 55:22, 1892.

[371] Ry. Rev. 32:549, 1892. The committee also stated that the
Terminal Company had been made to purchase $1,800,000 Georgia state
bonds at par and interest, which paid only 3½ per cent a year, although
the company was unable to borrow money at less than 6 per cent; that
the drafts of the directors to a large amount were paid by the company,
and that no vouchers were on file to show how this money was expended.

[372] Chron. 55:938, 1892.

[373] Chron. 55:1078, 1892. For replies of defendants see Chron.
56:414, 1893, and Ibid. 972, 1893.

[374] This was the letter finally declining to undertake the
reorganization in 1892 because of lack of assurances of support.

[375] The correspondence appears in full in Chron. 56:207, 1893, and
Ibid. 56:622, 1893.

[376] Ry. Rev. 33:95, 1893.

[377] These needs had already been emphasized by the Olcott plan.

[378] Lack of space forbids a full statement of the criticisms which
the Drexel plan had to make upon the physical condition and financial
practice of the Richmond Terminal properties. The following is from
the plan, section 9: “As an example of the manner in which accounts
have been kept, it may be mentioned that in the operating expenses of
the entire Richmond & Danville system only $20,000 were charged for
renewal of rails in the fiscal year ending June 30, 1890, and not a
dollar in the fiscal years ending June 30, 1891 and 1892, respectively.
In seven months under the receivership (July, 1892, to January, 1893,
inclusive) about $600 were charged. Since that date, it is understood,
about $18,000 have been charged. With these exceptions all renewals of
rails were charged to construction accounts. Renewals, properly to be
included in operating expenses, would be at least $100,000 to $150,000
per annum.” Other instances, almost as bad, could be stated.

[379]

  Total cash requirements, as estimated, were:
      Floating debt, including equipment notes           $12,900,000
      New construction and equipment during two years      8,000,000
      Expenses of reorganization and contingencies         2,350,000
                                                         -----------
                                                         $23,250,000

  To be provided from:
      Assessments on Terminal stock                       $8,750,000
      Assessments on East Tennessee stocks                 2,700,000
      Sale of $33,333,000 new common stock                 5,000,000
      Sale of $8,000,000 new bonds                         6,800,000
                                                         -----------
                                                         $23,250,000


[380] The new company reserved the right at any time to redeem its
preferred stock in cash at par.

[381] Of which $104,303,894 for stock and the rest for bonds
outstanding.

[382] The reorganization plan estimated the capitalization under its
provisions at about $20,000 per mile of road owned and controlled;
about $10,000 preferred stock per mile owned and controlled; about
$25,000 common stock per mile owned and controlled.

[383] The plan is published in full in Chron. 56:874, 1893.

[384] Ry. Rev. 33:388, 1893.

[385] Modified reorganization plan. Chron. 58:385, 1894. Some
information concerning traffic conditions in the South in 1894 is
to be found in the Eighth Annual Report of the Interstate Commerce
Commission, pp. 20–24.

[386] From $140,000,000 5 per cent bonds, $75,000,000 preferred and
$160,000,000 common stock to $120,000,000 bonds, $60,000,000 preferred
and $125,000,000 common stock. Since, however, some of the poorer
properties were cut off and the terms granted to others were made more
liberal, the smaller absolute amount of new securities represented a
greater relative increase than before.

[387] The actual charges in 1895 were $4,195,000.

[388] “The increase in car trusts is due to the existence of about
$1,200,000 of such obligations on the Richmond & Danville system,
_which, up to the date of the plan of reorganization, had not
been entered on the ledger of either the Railway Company or its
Receivers, although, as it appears, they were well known_.” Modified
reorganization plan.

[389] R. R. Gaz. 26:613, 1894.

[390] Statement compiled by the reorganization committee. Chron.
59:515, 1894. The mileage controlled by the Richmond Terminal system on
November 30, 1892, had been 9053.3.

[391] J. P. Morgan, Charles Lanier, and George F. Baker. See Chron.
59:836, 1894, and Ibid. 880, 1894.

[392] See statement by Receiver Comer. Chron. 55:805, 1892.

[393] Chron. 60:1008, 1895.

[394] With a charter from the state of Georgia.

[395] The capital stock of the Central of Georgia Railway was held
by the Richmond Terminal Reorganization Committee until the spring
of 1907. It was then sold to Oakleigh Thorne, president of the Trust
Company of America, and Marsden J. Perry. Later the same year these
gentlemen resold this stock to E. H. Harriman and his associates.

[396] The original estimate was $19,000,000. The amount available seems
to have been finally $20,000,000.

[397] The voting trust was extended in 1902, in respect to a majority
of the stock, for a period of five years. See Chron. 75:442, 1902, and
R. R. Gaz. 34:826, 1902.

[398] Annual Report, 1906.

[399] The narrow-gauge equipment included in these figures is as
follows:

                 1895  1907

  Locomotives       9     4
  Locomotives       9     4
  Freight cars     86   106


[400] “It will hardly be claimed,” said the Interstate Commerce
Commission, of the Southern Railway in 1900 (8 I. C. C. Rep. 583),
“that the cost of reproducing that property in its present state would
equal $40,000 a mile.”

[401] This route followed roughly the old Santa Fe Trail.

[402] Chron. 29:583, 1879.

[403] Ibid. 33:23, 1881.

[404] Chron. 34:315, 1882, Circular of Sonora Railroad Company to
stockholders.

[405] Chron. 29:630, 1879. Statement by Vice-President Baker.

[406] Ibid. 29:630, 1879.

[407] Chron. 34:243, 1882.

[408] Chron. 41:444, 1885.

[409] Annual Report, 1885, contains a discussion of the Atlantic &
Pacific and of the California Southern projects.

[410] Chron. 42:462, 1886; Annual Report, 1887.

[411] Ibid. 42:518, 1886.

[412] Annual Reports, 1886 and 1887.

[413] Annual Report, 1888.

[414] Ry. Rev. 29:511, 1889.

[415] Ry. Age, 12:107, 1887.

[416] Ibid. 12:325, 1887.

[417] This increase in dividend gave rise to sharp and well-merited
criticism. The directors defended their action as follows:

“In forming a just opinion of this matter,” said they, “it is necessary
to recall to the stockholders the statement made in the circular of
July 30, 1887.... It was stated in the circular referred to that for
the six months ending July 1, 1887, the net earnings exceeded by more
than $1,200,000 the net earnings for the first six months of the year
1886, that the earnings were still increasing, and what has always
been true in the past may be expected this year also; namely, that the
revenue of the second six months of the year will be considerably in
excess of that of the first six months.... It will ... be seen that
... the year 1887 formed a remarkable exception to what had hitherto
been the regular course of Atchison’s earnings; the second half of that
year showing an increase over the first half of only $278,096 gross,
and $204,144 net.... Drouths, failure of crops, excessive competition,
continually decreasing rates, unwise legislation, strikes, and other
calamities have befallen us as they have other Western roads; but your
directors could not know in advance that any of these unfavorable
conditions would have to be met, much less that they would all have to
be met at one and the same time.” Annual Report, 1888.

This defence was altogether unsatisfactory. An increase in the dividend
rate is too important to be justified by anything but earnings actually
in hand. Moreover, the conditions which the directors held responsible
for the decline in Atchison earnings were either well known at the time
when the dividend was declared, or could easily have been anticipated.
It was even alleged that the decrease in business which the annual
report for 1888 disclosed was due to lessened carriage of company
material to the West for construction of new track, and not to crop
failure or other decline in general business. See R. R. Gaz. 21:327,
1889.

[418] Chron. 47:472, 1888. The use of $3,000,000 of the notes was
specifically deferred.

[419] Ry. Age, 14:644, 1889.

[420] Cash requirements were (Circular No. 63, Oct. 15, 1889):

  To retire outstanding lease warrants                        $1,445,660
  To expend on incomplete construction of existing lines,
    and for new equipment as required                          5,000,000
  To pay floating debt                                         3,554,340
                                                             -----------
                                                             $10,000,000
  And the provision for cash subscription was
    General mortgage 4s                                      $12,500,000
    Income 5s                                                  1,250,000
                                                             -----------
                                                             $13,750,000


[421] The income bond certificate is printed in full in W. A. Wood,
Modern Business Corporations, pp. 237–9.

[422] Ry. Age, 14:682, 1889.

[423] Annual Report, 1890. Economies were secured at this time through
consolidation of branch lines with the main stem and in other ways.

[424] Annual Report, 1891.

[425] Chron. 51:171, 1890.

[426] Ibid. 53:474, 1891.

[427] Annual Report, 1892.

[428] Ry. Age, 17:413, 1892.

[429] Annual Report, 1892.

[430] Chron. 56:1014, 1893; Ibid. 57:1038, 1893.

[431] Ry. Rev. 34:68, 1894.

[432] Ry. Times, 64:533, 1893.

[433] See Chron. 58:42, 1894, for an official statement of the reasons
for the application to the courts.

[434] Ibid. 57:1121, 1893. Some information concerning subsequent
railroad competition during the Atchison receivership is to be found in
7 I. C. C. Rep. 61.

[435] R. R. Gaz. 26:465, 1894.

[436] Ry. Rev. 34:358, 1894.

[437] Ry. Times, 65:817, 1894.

[438] Ry. Rev. 34:379, 1894.

[439] Report of Mr. Stephen Little to the New York, London, and
Amsterdam Committees of Reorganization, 1894.

[440] Chron. 59:233, 1894.

[441] Ry. Times, 66:543, 1894.

[442] Chron. 59:878, 1894; Ibid. 59:919, 1894.

[443] In addition, prior lien bonds were authorized to a maximum of
$17,000,000, of which $12,000,000 might be used if desirable in place
of general mortgage bonds in the retirement of guarantee fund notes,
equipment bonds, etc., and $5,000,000 for necessary improvements within
five years.

[444] Second mortgage A bonds received 113 per cent in new preferred
stock. Second mortgage B bonds received 118 per cent. “After careful
consideration,” said the plan, “it was decided to be best for the
interest of those [the second mortgage] securities that they should now
be converted into 5 per cent preferred stock, possessing full voting
powers and preferential rights as to principal as well as interest,
rather than revert to their original form of ‘Income Bonds.’ It was not
thought that a greater assessment than $10 could be raised from the
stock, and the remainder had to come from the junior bonds.”

[445] The plan of reorganization was published separately, but was
reprinted in Chron. 60:658, 1895.

[446] Ry. Rev. 35:208–9, 1895.

[447] Ry. Age, 20:199, 1895.

[448] Ry. Times, 67:482, 1895.

[449] R. R. Gaz. 26:675, 1894.

[450] Ry. Times, 66:506, 1894.

[451] Ry. Rev. 34:589, 1894.

[452] Chron. 61:1064, 1895.

[453] Chron. 64:609, 1897.

[454] Ibid. 67:841, 1898.

[455] This was not all the Atchison stock which Union Pacific interests
acquired. President Ripley testified before the Interstate Commerce
Commission on January 8, 1907, that two years before E. H. Harriman
and his associates had secured $30,000,000 of Atchison stock, and had
caused the election of Messrs. H. C. Frick and H. H. Rogers to the
Atchison directorate to represent them.

[456] Statutes at Large, 37th Congress, 2d Session, chap. 120.

[457] Statutes at Large, 38th Congress, 1st Session, chap. 216.

[458] Aldrich Committee Report. The value of gold used is that given in
the American Almanac for 1878, and varied from year to year as follows:

  1864    155.5
  1865    216.2
  1866    140.1
  1867    134.6
  1868    138.5
  1869    135.6


[459] John P. Davis, History of the Union Pacific Railroad, p. 151.

[460] Useful accounts of the Crédit Mobilier may be found in Davis,
Union Pacific Railroad; Crawford, Crédit Mobilier of America; Hazard,
The Crédit Mobilier of America; White, History of the Union Pacific
Railroad; Poland Committee, Report and Testimony, 42d Congress, 3d
Session, House Reports, No. 77.

[461] Davis, pp. 163–70.

[462] Union Pacific Railway Commission Report, 1887, p. 52. The
Government endeavored to force the cancellation of the above mentioned
construction contracts and the restoration of unlawful profits, but
was held by the Supreme Court to have no standing in the case which
would entitle it to demand relief. U. S. _vs._ Union Pacific Railroad
Company, 98 U. S. 569.

[463] Statutes at Large, 39th Congress, 1st Session, chap. 159.

[464] United States Pacific Railway Commission Report, 1887, p. 55.

[465] Ibid. vol. 8, p. 4975.

[466] Records in Union Pacific Railway Foreclosure Cases, 55th
Congress, 1st Session, Senate Document 10, Part 3.

[467] Parties to agreement were: Sidney Dillon, Fred L. Ames, Jay
Gould, C. S. Greeley, John D. Perry, Robert E. Carr, Adolphus Meier,
B. W. Lewis, Jr., Henry Villard, John P. Usher, D. M. Edgerton, Artemas
H. Holmes.

[468] United States Pacific Railway Commission Report, 1887, testimony
of A. H. Holmes, p. 165.

[469] Ibid. Testimony of Jay Gould, pp. 454–6. The change to a mortgage
was made between April, 1878, and May, 1879.

[470] Records in Union Pacific Railway Foreclosure Cases, 55th
Congress, 1st Session, Senate Document 10, part 3 (contains text of
mortgage).

[471] United States Pacific Railway Commission Report, 1887, testimony
of A. H. Holmes, pp. 130 and 133.

[472] Ibid. vol. 8, p. 4987, Report of William Calhoun, Accountant.

[473] United States Pacific Railway Commission Report, 1887, testimony
of Jay Gould, p. 463.

[474] United States Pacific Railway Commission Report, 1887, p. 58.

[475] Ibid. pp. 59 to 65.

[476] Ibid. Testimony of F. L. Ames, p. 668. The combined capital
is given in the agreements as $51,762,300, but this is apparently a
mistake.

[477] Quotations of Kansas Pacific common during 1879 (Chron. 1880):

   January           February           March             April
  Low   High        Low   High        Low   High        Low   High
   9⅛    13         11½    22¼        17     22½        20½    60

     May              June              July              August
  Low   High        Low   High        Low   High        Low   High
  50     59¾        54     59         56     60         53⅝    59½

   September         October           November          December
  Low   High        Low   High        Low   High        Low   High
  55     73½        70     85¼        83½    92         85     92½


[478] United States Pacific Railway Commission Report, testimony of Jay
Gould.

[479] United States Pacific Railway Commission Report, 1887, p. 100.

[480] Except the Missouri Pacific, which Gould retained.

[481] United States Pacific Railway Commission Report, 1887, testimony
of Jay Gould, pp. 467–9, 523, 524.

[482] United States Pacific Railway Commission Report, 1887, testimony
of Charles Wheeler, pp. 1735–6. Amount, $571,000.

[483] Ibid. Testimony of John Evans, pp. 1853–4.

[484] Ibid. Testimony of C. F. Adams, p. 47.

[485] United States Pacific Railway Commission Report, 1887, pp. 91 ff.

[486] Thirty Years of American Finance, pp. 86 to 98.

[487] Chron. 35:578, 1882.

[488] United States Pacific Railway Commission Report, 1887, p. 67.

[489] Annual Report, 1884, p. 5.

[490] United States Pacific Railway Commission Report, 1887, testimony
of C. F. Adams, pp. 45–6.

[491] Chron. 53:436, 1891.

[492] Annual Report, 1884, p. 165.

[493] 91 U. S. 72.

[494] Statutes at Large, 45th Congress, 2d Session, chap. 96.

[495] The Court held that while up to the passage of the Thurman Act
expenditures for improvements could be deducted from gross earnings
in calculating net, the language of that Act seemed to preclude the
deduction of any charges for improvements or betterments, or increase
of permanent value of the works in any manner whatever. See 99 U. S.
402; 99 U. S. 455; 138 U. S. 84.

[496] Report of the Government Directors for 1893.

[497] Chron. 57:684, 1893.

[498] Ibid. 57:639, 1893.

[499] Sen. Com. 1896, 54th Congress, 1st Session, Doc. No. 314, p. 42,
testimony of E. E. Anderson. For bill of complaint see Report of the
Commissioner of Railroads, 1894, pp. 99–120.

[500] Ibid. pp. 391–2, testimony of O. W. Mink. This gave to the
Government three out of the five receivers. For petition of the
Attorney-General see Report of the Commissioner of Railroads for 1894.

[501] Chron. 16:292, 1873.

[502] Report of the Commissioner of Railroads, 1895, p. 14.

[503] Ry. Rev. 34:335, 1894.

[504] Chron. 58:775, 1894.

[505] Ibid. 60:132, 1895.

[506] Report of the Commissioner of Railroads, 1895, pp. 9–10.

[507] Senate Commission, 54th Congress, 1st Session, Document 314,
testimony of W. S. Pierce. See generally the report of this committee
for a discussion of alternatives from the government point of view.

[508] Ibid. Testimony, pp. 451–2.

[509] Chron. 60:303, 1895.

[510] Ry. Times, 64:732, 1893. Mr. Brice was also a member of the
Senate Committee on Pacific Railroads.

[511] Ry. Age, 18:883, 1893.

[512] Ry. Times, 65:336, 1894.

[513] Ry. Times, 65:750, 1894. The reorganization committee stated that
this plan was not final. They concurred, however, with Mr. Boissevain
in his recommendation of the above scheme.

[514] Chron. 60:132, 1895.

[515] Ibid. 60:303, 1895.

[516] For a summary of the foreclosure suit pending in 1895 see the
Report of the Government Directors for that year.

[517] Chron. 60:303, 1895.

[518] Chron. 60:132, 1895.

[519] Ry. Rev. 35:153, 1895.

[520] Chron. 61:663, 1895.

[521] Chron. 61:705, 1895. (Reorganization plan in full.)

[522] See testimony of W. S. Pierce, Senate Commission, 1896, 54th
Congress, 1st Session, Document 314.

[523] Testimony, Senate Commission, 1896, p. 23.

[524] Ibid.

[525] Chron. 62:187, 1896.

[526] Report of Commissioner of Railroads, 1897, p. 8. The Government’s
dealings with the reorganization committee followed upon the defeat in
the House of a renewed proposition for refunding the Government’s loan.

[527] The guarantee was provided by a syndicate with the same personnel
as that which had agreed to advance the money for reorganization
expenses.

[528] Chron. 65:730, 1897; Report of Commissioner of Railroads, 1897,
p. 9.

[529] Ry. Age, 24:897, 1897.

[530] Report of the Commissioner of Railroads, 1898, p. 9.

[531] The entire indebtedness of the Kansas Pacific to the Government
was $12,891,900. After the sale the Government brought suit for the
balance, but received a decree for $821,898 only.

[532] Cf. H. R. Meyer, The Settlements with the Pacific Railways,
Quarterly Journal of Economics, July, 1899. The receivership records
have been published in fourteen volumes.

At its final meeting in 1898 the reorganization committee nominated
a proxy committee of five members “to permanently represent, at the
annual and other meetings, such holders of common and preferred stock
as (should) desire to entrust their proxies to the said committee
for the purpose of maintaining the management and general policies
inaugurated by the reorganization committee.” This took the place of a
compulsory voting trust.

[533] Thomas Warner Mitchell, The Growth of the Union Pacific and its
Financial Operations, Quarterly Journal of Economics, vol. 21, p. 569,
1907.

[534] Besides $824,910 in Northern Securities stubs.

[535] See B. H. Meyer, A History of the Northern Securities Case,
Bulletin of the University of Wisconsin, July, 1906.

[536] As in the Southern Pacific purchase the acquisition of the
Northern Pacific stock was financed mainly by the issue of convertible
collateral bonds. Some $30,000,000 besides, it is supposed, were
borrowed from the banks.

[537] Testimony of Mr. Harriman before the Interstate Commerce
Commission. It is true that the Northern Securities stock held by the
Union Pacific system had been pledged as security for an equal amount
of Oregon Short Line 4 per cent and Participating 4s, and that when
these bonds were refunded there was pledged for the new issue whatever
the Union Pacific interests should receive in exchange for their
Northern Securities holdings, and any other shares or bonds at not
exceeding 80 per cent of their appraised value. But the purchase of the
Southern Pacific and of the Northern Pacific stocks had been previously
financed by an issue of convertible collateral bonds for which other
collateral had been pledged. From 1904 on, the rising price of Union
Pacific stock made conversion desirable and rapidly released the
securities back of the original issue. These released securities, with
$18,000,000 Southern Pacific preferred stock paid to the Union Pacific
in 1904 (with $2,460,960 cash), proved a sufficient pledge for the
Oregon Short Line refunding bonds, and the Great Northern and Northern
Pacific stock shares were therefore free for other purposes.

[538] Annual Report, 1907. See also Interstate Commerce Commission,
Report in the Matter of Consolidations and Combinations of Carriers,
Relations between such Carriers, and Community of Interests therein,
their Rates, Facilities, and Practices, 12 I. C. C. Rep. 319.

[539] The Union Pacific acquired a half-interest in the San Pedro, Los
Angeles & Salt Lake Railroad Company in 1904.

[540] Recent reports suggest that a holding company is to be formed,
which will take over the securities now owned by the Union Pacific
Railroad.

[541] Dividends upon Union Pacific Railroad Stock:

                               _Per Cent_
             1898   1899   1900   1901–4   1905   1906   1907

  Common                    3½     4        4½     8      10
  Preferred   1½     3½     4      4        4      4       4


[542] Entitled An Act granting Lands to aid in the Construction of a
Railroad and Telegraph Line from Lake Superior to Puget’s Sound, on the
Pacific Coast, by the Northern Route. Statutes at Large, 38th Congress,
1st Session, chap. 217.

[543] To make possible the selection of indemnity lands.

[544] Josiah Perham was the prime mover at first and after him certain
Boston capitalists were prominent.

[545] Ellis Paxsom Oberholtzer, Life of Jay Cooke. Philadelphia, George
W. Jacobs & Company, 1907. See also Smalley, History of the Northern
Pacific.

[546] The notes were put on the market at par, though sold to the
syndicate at 88.

[547] Chron. 18:16, 1874.

[548] R. R. Gaz. 6:135, 1874. The indebtedness of the Northern Pacific
to Jay Cooke & Co. amounted to about $1,500,000.

[549] R. R. Gaz. 6:496, 1874; Congressional Record, 43d Congress, 1st
Session, May 11, 1874, pp. 3749, 3773.

[550] Net earnings “shall be construed to mean such surplus earnings
of the said railroad as shall remain, after paying all expenses of
operating the said railroad and carrying on all its business, including
all taxes and assessments and payments on incumbrances, and including
the interest and sinking fund on the first mortgage bonds, the expenses
of repairing or replacing the said railroad, its appurtenances,
equipments, or other property, so that the same shall be in high
condition, and of providing such additional equipment as the said
Company shall deem necessary for the business of said railroad.” Annual
Report, 1876, p. 45.

[551] Annual Report, 1876; Chron. 20:522, 1875; Ibid. 21:15, 1875.

[552] Annual Report, 1876.

[553] R. R. Gaz. 7:330, 1875. Deposits of bonds kept coming in, until
on June 30, 1879, when the rights of conversion into preferred stock
expired, there remained outstanding but $529,000. Annual Report, 1879.

[554] These lands were reserved for the time because some of them had
not been surveyed, and others which had been surveyed had not yet been
deeded to the company owing to a dispute with the Interior Department
over the payment of the costs of the surveys. R. R. Gaz. 7:340, 1875.

[555] R. R. Gaz. 7:420, 1875.

[556] Annual Report, 1881.

[557] Annual Report, 1882, p. 13.

[558] Henry Villard, Memoirs, vol. 2, pp. 272–94.

[559] Memoirs, p. 297.

[560] For the manner in which the Northern Pacific directors attempted
to keep Villard from obtaining control, see notices in the Chronicle
for 1881.

[561] See First Annual Report of the Oregon & Transcontinental Company;
R. R. Gaz. 14:516, 1882 (contains statement of organization and
purposes).

[562] Annual Report, 1883. Arrangements had been made with the Oregon &
Transcontinental Company for necessary advances in order to avoid the
accumulation of a large floating debt.

[563] R. R. Gaz. 15:716, 1883. For attempted explanation of this
deficit, see Villard’s statement to the stockholders in 1884, just
after his retirement from the presidency.

[564] Memoirs, p. 315.

[565] Villard was back in control by 1887 with the backing of German
capital.

[566] In 1886 the Oregon Railway & Navigation was obtaining 28 cents
per 100 pounds for its haul of 213 miles from Wallula Junction to
Portland, leaving to the Northern Pacific 28 cents for its haul of 1699
miles from St. Paul to Wallula. R. R. Gaz. 18:681, 1886, Report of
Vice-President and General Manager Oakes.

[567] For the negotiations between the Union Pacific, the Oregon
Railway & Navigation, and the Northern Pacific from 1885 to 1889, see
the financial papers of that time and the reports of the railroads
concerned.

[568] In 1890 it was reorganized as the North American Company.

[569] Annual Report, 1888, p. 8; Chron. 44:752, 1887; Ibid. 44:782,
1887.

[570] The preponderance of west-bound freight prior to 1888 forced the
Northern Pacific to carry grain east-bound at very low rates in order
to fill its empty cars. See Daniel Buchanan vs. the Northern Pacific
Railroad Company, 5 I. C. C. Rep. 7.

[571] For immigrant traffic into the Northwest see Ry. Rev. 28:163,
1888.

[572] The capital stock of the Cœur d’Alene Company was $1,000,000, and
there were $360,000 in 6 per cent guaranteed bonds outstanding. Ry.
Rev. 28:551, 1888.

[573] Interest due and accrued, bills payable and accounts payable for
the following years were:

  1884  $6,941,513
  1885   4,748,235
  1886   4,959,406
  1887   6,504,274
  1888   9,287,616
  1889   7,858,261


[574] Annual Report, 1889.

[575] Annual Report, 1889; Chron. 50:279, gives text of mortgage.

[576] Ry. Rev. 29:541, 1889. In fact the issues were all made at 5 per
cent.

[577] Annual Report, 1890. For answer of directors see R. R. Gaz.
21:759, 1889.

[578] Chron. 51:539, 1890. The point of view of the stockholders is
briefly but clearly set forth in a circular issued by Mr. Robert
Harris, chairman of the board of directors. Ry. Age, 14:658, 1889.

[579] In 1919.

[580] Evidence of this appears in the $10,000,000 reserved for premiums.

[581] Memoirs, vol. 2, p. 336.

[582] Annual Report, 1889; R. R. Gaz. 21:318, 1889. The Wisconsin
Central divided its gross earnings into two parts, 65 per cent and 35
per cent; retained 35 per cent for its own use, and appropriated 65
per cent for operating expenses and for certain improvements tending
to reduce operating expenses. When operating expenses were less than
65 per cent the Wisconsin Central was to pay over one-half of the
difference to the Northern Pacific in consideration of the business
which the latter gave it. When operating expenses exceeded 65 per cent
the Wisconsin Central was to pay not exceeding 2½ per cent of this
excess out of its 35 per cent, and to divide one-half of any excess of
operating expenses above 67½ per cent equally between the Wisconsin
Central and the Northern Pacific. The Northern Pacific, however, was
not bound to pay its half of such excess except out of future profits
received under the contract.

[583] Annual Report, 1890. For a brief statement of the complicated
relations between the Wisconsin Central, the Chicago & Northern
Pacific, and the Chicago & Great Western, see R. R. Gaz. 22:350,
1890. Terms were agreed upon with the Baltimore & Ohio for the use
of the Chicago terminals of the Chicago & Northern Pacific, by that
corporation. Annual Report, 1891.

[584] Annual Report, 1890, p. 14; R. R. Gaz. 21:318, 1889.

[585] Chron. 54:845, 1892. Resolutions adopted at the stockholders’
meeting were in substance:

“_Resolved_, That the $3,347,000 of consolidated mortgage bonds now
deposited with the Farmers’ Loan & Trust Company as trustee for the
preferred stockholders ... be not sold below 90 and accrued interest.

“_Resolved_, If all the bonds be not sold as above, and smaller lots
can be disposed of at 90 and interest, then the Directors may sell
enough to make up the deficiency any year between the dividend actually
paid to preferred stockholders and the 4 per cent which should be paid.

“_Resolved_, If 4 per cent dividends or more are declared by the Board
of Directors any year, then enough bonds shall be sold to produce 1 per
cent additional dividend to be paid to preferred stockholders.” Chron.
55:679, 1892.

[586] Ry. Rev. 32:687, 1892. Members were, Henry Clews, Brayton Ives,
Frank Sturges, William Solomon, and Jay Cooke, Jr.

[587] Ry. Times, 63:275, 1893; Chron. 56:332, 1893.

[588] Ry. Rev. 33:143, 1893; Chron. 56:362, 1893; Ry. Times, 63:302,
1893; Ibid, p. 360. See also R. R. Gaz. 25:161, 1893.

[589] Memoirs, pp. 359–60.

[590] Among others the investigating committee protested loudly against
a sale. Ry. Rev. 33:127, 1893.

[591] Ry. Times, 65:595, 1893.

[592] Chron. 56:1017, 1893; R. R. Gaz. 25:398, 1893.

[593] The heaviest subscribers were the Rockefellers and Villard and
his friends.

[594] Annual Report, 1893; Ry. Times, 64:290, 1893.

[595] Criticism was aroused by the alleged fact that all three
receivers were adherents and virtually protégés of Henry Villard. Ry.
Times, 64:290, 1893. See also Smalley, p. 291.

[596] Except that Henry Stanton of New York was to be the Eastern
receiver for all the branches.

[597] Ry. Times, 64:337, 1893.

[598] These officers had resigned in consequence of the non-payment of
their salaries.

[599] Ry. Rev. 33:587, 1893.

[600] Chron. 59:697, 1894.

[601] Ibid. 57:765, 1893.

[602] Ry. Age, 19:40, 1894.

[603] Ry. Age, 23:154, 1897.

[604] Ry. Rev. 33:783, 1893; Chron. 57:1123, 1893; Ry. Age, 19:11, 1894.

[605] Ry. Age, 19:89, 1894.

[606] Ibid. 19:231, 1894.

[607] R. R. Gaz. 26:294, 1894; Chron. 58:683, 1894.

[608] R. R. Gaz. 26:642, 1894; Chron. 59:473, 1894.

[609] Chron. 59:738, 1894; Ibid. 59:697, 1894.

[610] This is not to be explained by more liberal expenditures by the
receivers on maintenance of way and equipment, for the sums applied to
both these purposes were materially less in 1894 than in 1893.

[611] Ry. Times, 65:87, 1894.

[612] Ibid. 65:38, 1884.

[613] R. R. Gaz. 27:160, 1895.

[614] For opposing circulars by the Livingston Committee and by
the directors see Ry. Rev. 35:55, 1895. On February 20, 1896, a
Stockholders’ Protective Committee was appointed, consisting of
August Belmont, Brayton Ives, and George R. Sheldon of New York, and
Charlemagne Tower, of Philadelphia. Chron. 62:365, 1896.

[615] Chron. 60:930, 1895.

[616] R. R. Gaz. 27:590, 1895.

[617] For the use of trackage and terminals at and between St. Paul and
Minneapolis. See Ry. Age, 20:161, 1895; Ibid. 20:198, 1895; Ry. Rev.
35:209, 1895.

[618] Chron. 61:325, 1895.

[619] Pearsall _vs._ Great Northern Railway Company, 161 U. S. 647.

[620] Ry. Rev. 35:461, 1895.

[621] Proceedings were begun in the Seattle court in August. See Chron.
61:241, 1895; Ry. Age, 20:394, 1895; Ibid. 20:418, 1895; Ibid. 20:430,
1895.

[622] Up to this time such accounts had been filed in the Milwaukee
court.

[623] Ry. Age, 20:442, 1895; Ry. Rev. 35:503, 1895.

[624] Ry. Age, 20:478, 1895; R. R. Gaz. 27:648, 1895.

[625] Chron. 61:611, 1895; Ry. Times, 68:442, 1895.

[626] Justices Brown, Harlan, Brewer, and Field.

[627] “We are of the opinion,” said Justices Field, Harlan, and Brewer,
“that proceedings to foreclose a mortgage upon lines extending through
more than one district should be commenced in the Circuit Court in
which the principal operating offices are situated, and in which there
is some material part of the railroad embraced by the mortgage. Such
court should be the court of primary jurisdiction. But in view of the
fact that a portion of the line of road owned by the Northern Pacific
Company is within the State of Wisconsin, and that at the time of the
filing of the creditors’ bill the Northern Pacific Railroad Company
was operating a road through the Eastern District of Wisconsin,
although such road was under lease to it for 99 years; and in view
of the further fact that the railroad company assented to the action
of the Circuit Court for the Eastern District of Wisconsin in taking
jurisdiction, and as such jurisdiction has been recognized by the
Circuit Court in every district ... for the space of about two years,
we are of the opinion that the Circuit Court for the Eastern District
of Wisconsin has jurisdiction to proceed to a decree of foreclosure
which will bind the mortgagor company and the mortgaged property, and
ought to be recognized by the Circuit Court of every district along the
line as the court of primary jurisdiction.” Chron. 62:234, 1896.

[628] Justice Field of the Supreme Court declined to exercise his
authority to remove Burleigh, intimating that the existing arrangement
was satisfactory. Ry. Age, 21:174, 1896.

[629] The existing general mortgage covered only the main line, land
grant, and equipment so far as owned by the company.

[630] See Circular of the Reorganization Committee, or Chron. 62:550,
1896; Ry. Times, 69:287–8, 1896.

[631] In addition there were $73,875 of unpaid interest on receivers’
certificates.

[632] See R. R. Gaz. 28:219, 1896, for editorial on plan.

[633] Ibid. 28:349, 1896.

[634] Chron. 62:1139, 1896; Ibid. 63:155, 1896.

[635] Chron. 62:990, 1896; Ibid. 62:1041, 1896.

[636] Chron. 62:1088, 1896.

[637] Ry. Times, 69:511, 1896.

[638] Chron. 62:779, 1896.

[639] Curiously enough the sale did not extinguish the old Northern
Pacific Railroad Company. Some 25,000 or more shares did not assent to
the reorganization plan and are still outstanding. They assert that it
is because of them that the old organization is kept up.

[640] From 1898 to 1907 inclusive. This does not include advances to
subsidiary companies, which have aggregated nearly $20,000,000.

[641] The average train load in 1907 was 406.77 tons; that in 1898 was
264.59 tons.

[642] Chron. 83:1524, 1906; Ibid. 84:103, 1907. The new issue is to go
in part for improvements previously made out of income. The directors
have adopted the questionable policy of charging all such expenditures
to capital account.

[643] For this and for an account of the Northern Securities episode
see B. H. Meyer, A History of the Northern Securities Case, Bulletin of
the University of Wisconsin, July, 1906.

[644] Annual Report, 1901.

[645] The dividends declared by the Northern Pacific Railway have been:

                   1898 1899 1900 1901 1902 1903 1904 1905 1906 1907

  Common stock           2    4    4    5½   7    6¾   7    7    5¼[A]
  Preferred stock    5   4    4    4    1

  [A] Including August.


[646] Poor’s Manual, 1878. The name was first the Rock Island & La
Salle Railroad Company, and was changed to the Chicago & Rock Island
Railroad Company in February, 1851.

[647] Chron. 30:356, 1880.

[648] Chron. 30:616, 1880.

[649] For the attempt of Vanderbilt to get representation on the board
see the pamphlet issued by the Rock Island Company at this time; also
R. R. Gaz. 16:420, 1884; Annual Report, 1884; Ry. Age, 9:428, 1884.

[650] R. R. Gaz. 16:891, 1884.

[651] R. R. Gaz. 16:709, 1884.

[652] Annual Report, 1891.

[653] Ibid. 1889.

[654] Ibid. 1892.

[655] Annual Report, 1892.

[656] “With the Chicago, Rock Island & Texas Railway Company this
company has financial and traffic agreements under which the Chicago,
Rock Island & Pacific Railway Company supplies all funds necessary to
build and equip the road in consideration of receiving all the stock
and all of the bonds of the Texas company, the latter issued at the
rate of $15,000 per mile of completed road and additional for equipment
to an amount equal to cost of the same, not exceeding $5000 per mile.”
Annual Report, 1893.

[657]

  Bonded indebtedness, 1900, amounted to $18,395 per mile.
  Capital stock, 1900, amounted to        13,711
                                         -------
                                         $32,106 per mile.


[658] Ry. Age, 33:186, 1902.

[659]

  Stock quotations: June 1, 1901    156¾
                    July 1, 1901    155¾
                    July 12, 1901   132½


[660] The par was $50 for both common and preferred.

[661] R. R. Gaz. 34:562, 1902.

[662] This line had been leased before, and the majority of its stock
and that of the Rock Island & Peoria had been owned by the Chicago,
Rock Island & Pacific.

[663] See financial papers for 1897.

[664] Annual Report, 1903.

[665] Quotations of securities:

                                            _Jan. 2,  _Jan. 2,  _Jan. 2,
                                              1903_     1904_     1905_

  Rk. I. Co. common stock                      49        22¾       36¼
  Rk. I. Co. preferred stock                   83½       61        84
  C., R. I. & P. R. R. Co. 4 per cent bonds    87⅜       66¾       81⅝


[666] Chron. 75:212, 1902.

[667] Ry. Age, 34:301, 1902.

[668] R. R. Gaz. 34:750, 1902.

[669] Previous to this the stockholders of the Chicago, Rock Island &
Pacific Railroad Company had approved the deal, had authorized the new
bonds of 1913, and had voted to increase the capital stock of their
company $20,000,000, which increase was turned into the treasury of
the Rock Island Company of New Jersey, in return for an equal amount
of this latter company’s stock. It is worth noting that the purchase
was to be made by Railroad Company and not by Rock Island Company
bonds, although the desire of the management was ultimately to see the
indebtedness of all subsidiary roads replaced by Rock Island Company
bonds.

[670] Ry. Rev. 43:408, 1903.

[671] Chron. 76:1192, 1903.

[672] Ry. Age, 36:1, 1903.

[673] Ry. Age, 37:1153, 1904.

[674] See the Annual Report of the St. Louis & San Francisco Railroad
for 1904.

[675] A consolidation in 1905 of the Arkansas Southern Railroad
Company, the Arkansas & Louisiana Railroad Company, and the Little Rock
& Southern Railroad Company. See the Annual Report of the Chicago, Rock
Island & Pacific Railroad Company for 1906.

[676] See letter from Mr. C. W. Hilliard, vice-president of the
Colorado Southern, New Orleans & Pacific Railroad, and comptroller of
the St. Louis & San Francisco Railroad Company, in Chron. 84:507, 1907.

[677] After October, 1906.

[678] Ry. World, 51:531, 1907.

[679] Chron. 85:468, 1907.

[680]

             _Number of         _Name of        _Number
  _Date_   reorganizations_  reorganization_   of plans_  _Foreclosures_

  1900-4         1           Rock Island           1            No

  1895-9         6           Atchison              2            Yes
                             Baltimore & Ohio      1            No
                             Erie                  3            Yes
                             Northern Pacific      2            Yes
                             Reading               4            Yes
                             Union Pacific         3            Yes

  1890-4         2           Atchison              1            No
                             Richmond Terminal     3            Yes

  1885-9         3           Atchison              1            No
                             Reading               6            No
                             East Tennessee        2            Yes

  1880-4         3           Reading               5            No
                             Rock Island           1            No
                             Union Pacific         1            No

  1875-9         2           Erie                  4            Yes
                             Northern Pacific      1            Yes

  1859           1           Erie                  1            Yes
                --                                --
                18                                42

Carl Snyder, American Railroads as Investments (N. Y., The Moody
Corporation, 1907), offers, _inter alia_, an analysis of the results of
operation of the railroads considered in the text.

[681] The lien of a floating debt is inferior to that of a bond when
unsecured, except as it represents arrears of wages and payment for
supplies. But it is usually very well secured.

[682] In the case of the Rock Island in 1902 there was no floating
debt to be considered, while in 1885 the Erie funded overdue coupons
and issued a 6 per cent mortgage on its Jersey City terminals to cover
accumulated liabilities, but did not disturb its outstanding mortgage
bonds, and cannot, therefore, be said to have reorganized.

[683] This was, in fact, a prominent feature of the reorganizations
between 1893 and 1898. The Atchison surrendered the St. Louis & San
Francisco; the Erie absorbed the New York, Pennsylvania & Ohio into its
system instead of continuing the lease thereof; the Northern Pacific
surrendered the lease of the Wisconsin Central and cancelled various
unprofitable traffic contracts and traffic agreements; the Reading
gave up the Lehigh Valley and its New England extensions; the Southern
reduced its mileage by over one-half; and the Union Pacific shrunk from
7674 miles in 1892 to 5399 in 1899.

[684] See Interstate Commerce Commission: In the Matter of
Consolidations and Combinations of Carriers, etc., 12 I. C. C. Rep. 319.

[685] Testimony of C. F. Adams, United States Pacific Railway
Commission Report, 1887, vol. 1, p. 45.

[686] “It is only by the fullest knowledge of the affairs of the
company that a correct judgment of the best manner of meeting its wants
can be formed, and there is no other practicable way to manage the
business of the company to its best advantage than for the stockholders
to elect directors worthy of confidence, and to leave the management to
them.” Annual Report, 1887, Robert Harris, President.

[687] In the case of the Atchison, old income bonds were retired by
new second mortgage bonds, with the result that the aggregate value of
creditors’ holdings was largely increased.

[688] Speech at Columbus, Ohio, August 19, 1907.

[689] Forum, September, 1890, and March, 1894.

[690] The percentages for the Atchison are corrected according to the
report of Mr. Little. Owing to the lack of available detail it has
been necessary to increase operating expenses by the total amount of
the errors which he discovered, and this figure is, therefore, unduly
inflated.

[691] In 1893, after the Northern Pacific failure, the consolidated
5 per cent bondholders formed a committee; Mr. Brayton Ives invited
bondholders to send in their names and addresses to him (1894); and
later in 1894 the falling off in the railroad’s earnings induced the
formation of the Livingston and Van Nostrand committees, and the
announcement of the consolidated committee that it would accept the
deposit of second and third mortgage bonds. Finally, within four months
after the Atchison failure of 1893, four important reorganization
committees were asking for deposits in the United States and one was
soliciting deposits in London.

[692] The officers of bankrupt roads have no need of committees to
make their wishes known, but only so far as they are bondholders,
or in so far as they can influence bondholders by argument do their
opinions carry weight. President Ives of the Northern Pacific in
1893 was able to use his position to fight his opponents through the
courts, and secured besides appointment on a stockholders’ protective
committee, but exercised no great influence on the reorganization;
President Jewett, of the Erie, gained the confidence of the visiting
committee of English bondholders in 1875, and had some voice accorded
him; but generally speaking officers have to rest content if they
can successfully defend themselves against charges of inefficiency
and mismanagement. They are, in fact, both the choice and the
representatives of the stockholders, and the stockholders having no
authority in the event of bankruptcy can delegate none. Officers of
the courts which are in control of bankrupt railroads enjoy sometimes
a different position from officers of the corporations themselves, in
that they do not represent or depend on stockholders, and may not be
connected with the circumstances which have caused the ruin of the
road. Thus the receivers of the Union Pacific in the nineties were
called to testify before Congressional committees, and those of the
Erie chose a committee which prepared the first reorganization plan
suggested, but in both cases the functions of the court officers were
purely advisory, and so they must always be.

[693] In 1895 the final Atchison reorganization plan announced the
following arrangement: “A contract has been made with a syndicate to
furnish an amount of money equal to the assessments of non-assenting
or defaulting stockholders, and such syndicate, by such payment, shall
take the place of the non-assenting or defaulting stockholders, and
shall be entitled to receive the new common and preferred stock, which
non-assenting or defaulting stockholders would have been entitled to
receive if they had deposited their stock and paid their assessment in
full. Syndicates may also be formed to furnish the money needed, in
case of foreclosure, to pay the non-assenting bondholders their _pro
rata_ share of the proceeds of sale, and to advance any cash which may
be required during the reorganization and for other purposes.” Chron.
60:658–62, 1895. The reorganization plan of the Baltimore & Ohio in
1898 contained the following: “A syndicate has been formed ... which
agrees: 1st, To purchase $6,975,000 of the new preferred stock, and
$30,250,000 of the new common stock, and to offer the same for sale to
depositing holders of old 1st and 2d preferred and common stock of the
Baltimore & Ohio Railroad Company.... 2d, To purchase $9,000,000 3½
per cent prior lien bonds; $12,450,000 1st mortgage 4 per cent bonds;
$16,450,000 preferred stock. 3d, To protect the new company in the
ownership and possession of the properties covered by $49,974,098 ...
of the existing mortgage bonds of the old company of different issues
by agreeing to purchase from the new company the new securities not
taken, but to which the holders of such bonds would have been entitled
if depositing under the plan, at a price equal to the principal of the
respective old securities, and also to make advances and perform other
obligations essential for the purposes of the plan.” Poor’s Manual,
1898, p. 1381. Similar provisions appear in the plans of the Erie, the
Northern Pacific, the Reading, the Southern, and the Union Pacific.

[694] In 1894.

[695] H. V. Poor (Manual, 1900) compiles the following statement for 57
selected companies reorganized between 1886 and 1898:

   _Securities provided for other corporate purposes of new companies_

  Capital stock:                Bonded Indebt.
      Preferred, $89,971,268        Int.-bearing, $538,277,638
      Common,     96,555,753        Income,         48,902,701


[696] Where stock- or bondholders are compelled to subscribe to an
issue of new securities the operation becomes an assessment and not a
sale.

[697] Among the reorganizations of the eighties, for instance, the
Denver & Rio Grande levied $8 per share in 1885 upon its $38,000,000
common stock; the Pittsburgh & Western assessed its common stock 4 per
cent in 1887; the New York, Chicago & St. Louis assessed its common
$10, and its preferred an equal sum; and the Central Iowa levied 2½ per
cent on its debt certificates, 5 per cent on its 1st preferred stock,
10 per cent on its 2d preferred, and 15 per cent on its common. See
Chron. 40:480; Ibid. 44:212, 370, 653.

[698] A syndicate guaranteed the assessment in each case between 1893
and 1898. The Reading assessment is calculated on a par of $100.

[699] The assessments before 1893 were as follows: The Erie levied
2½ per cent on its common and preferred in 1859, and a minimum of $4
on its common and $2 on its preferred in 1877, with no allowance of
new securities in either case. The East Tennessee assessed its common
stock 6 per cent and its income mortgage 5 per cent in 1886, and gave
to the one a corresponding amount of 2d preferred, and to the other
of 1st preferred stock. The Reading assessments in 1886 ranged from
2½ per cent on the deferred incomes to 15 per cent on certain junior
securities, with an assessment of $10 on both classes of stock.
Preferred stock was given for all assessments up to the full amount of
the sums taken.

[700] The quotations six months after reorganization are for the
combined securities given in exchange for the old preferred stock. In
the case of the Baltimore & Ohio _e. g._, this was 150 per cent in new
common; for the Northern Pacific it was 50 per cent new common and 50
per cent new preferred. Only $5,000,000 of Baltimore & Ohio preferred
stock were outstanding before the reorganization of 1898, and no record
of quotations can be found. Quotations are similarly unobtainable for
the Reading in 1886.

[701] The very large increase in the Baltimore & Ohio quotations was
doubtless due to the lateness of the reorganization.

[702] Chron. Investors’ Supplement, January, 1894.

[703] Ibid. 62:641, 1896.

[704] Chron. 45:792, 1887 (reorganization plan). See also Chron.
49:269, 1889.

[705] Pages 84–5, _supra_.

[706] Chron. 50:141, 1890.

[707] Ibid. 58:762, 1894.

[708] Chron. 62:829, 1896. Poor states in his Manual for 1900 that of
$96,094,960 of assessments levied on securities of fifty-seven selected
companies, $86,972,703 were on stock and $9,122,257 on bonds.

[709] The figure of $9,043,944 is the true figure for the Reading fixed
charges after reorganization, eliminating duplications. In computing
the percentage of charges to earnings in 1898, however, the unrefined
figure of $12,210,291 is used in connection with a similarly unrefined
figure of earnings.

[710] The reorganizations omitted are those of the Union Pacific in
1880, which did not alter fixed charges, and of the Erie in 1859
and the Northern Pacific in 1875, for which precise figures are not
available. In this last charges were almost entirely removed; its
exclusion, therefore, tends to lessen the percentage of reduction shown
for the reorganizations before 1893.

[711] The six reorganizations before 1893 include that of the Atchison
in 1892, which was not caused by inability to earn charges, and
consequently made no attempt to lower their figure. Excluding this
reorganization, the reductions in charges before 1893 overbalanced
the increases. H. V. Poor calculates the absolute reduction in fixed
charges for sixty-eight railroads reorganized between 1885 and 1897 at
$24,007,490. (Manual, 1900, p. cvi.)

[712] The decrease in charges per mile for the Reading in 1880 was due,
not to any reduction in charges, but to an increase in mileage through
the lease of the Central Railroad of New Jersey. In this case the
increase in absolute charges better represents the real effect of the
reorganization.

[713] It is perhaps unnecessary to warn the reader that these tables
can be taken as generally indicative only. The percentage of charges
to earnings varies not only with charges but with earnings; and an
increase or decrease in the latter may conceal a decidedly contrary
movement in the former. Since the reorganizations were accomplished at
different dates the error is not in all cases in the same direction,
and in particular the percentage of charges to earnings for one road
cannot be compared with the percentage for another. The figures
of charges per mile of line are somewhat more reliable, but are
nevertheless to be used with care. Different railroads report their
mileage differently, and it has not been possible in all cases to use
the homogeneous figure of mileage operated. Further, the significance
of high charges per mile varies with the character of the mileage.
A reorganization which lops off many unprofitable branch lines may
conceivably cause thereby an increase in the charges per mile of road
remaining, and yet place the system in a much stronger position than
before. This difficulty disappears if the figure of charges per mile be
used in connection with the percentage of charges to earnings, and in
general the three columns given correct each other.

[714] These figures do not include the comparatively small amount of
bonds for which no interest rate was specified.

[715] Income bonds sometimes, though rarely, possess the right to vote.

[716] E. S. Meade, Annals Amer. Acad. Pol. and Soc. Sci. March, 1901.

[717] The figure for the Reading in 1880 is affected by the lease
of the Central of New Jersey, which took place simultaneously with
the reorganization. Excluding the increase in rentals, the remaining
increase in fixed charges amounted to only 9.5 per cent. The East
Tennessee reported no rentals in either 1885 or in 1887. The data for
the Southern Railway are not in such shape that rentals and interest
can be compared. Its reorganization reduced rentals, however, very
greatly.

[718] The 32 per cent paid has been included under rentals.

[719] Government Debt.

[720] In considering the capitalization of the Erie before and after
the reorganization of 1895 the securities of the New York, Pennsylvania
& Ohio have been excluded.

[721] The difficulties which prevent wider extension of these tables
consist partly in the absence of quotations for certain classes of
bonds, and partly in the lack of sufficiently detailed and precise
information in some of the early reorganization plans. Thus there are
no quotations recorded in 1874–5 for the 2d consols and convertible
bonds of the Erie Railroad which were disturbed by the subsequent
reorganization; and no detailed figures of the exchange of new
bonds for old appear in the reports of the reorganization plans of
the Reading in 1881–3, and of the Northern Pacific in 1875. The
reorganization of the Union Pacific and of the Chicago, Rock Island &
Pacific in 1880 did not disturb the bonds outstanding.

[722] The twenty-six railroads are as follows: Canad. Pac.; Canad.
So.; C. & O.; C., B. & Q.; C. & E. I.; C., M. & St. P.; C. & N. W.;
C., R. I. & P.; C., C., C. & St. L.; D., L. & W.; Ill. C.; L. S. &
M. S.; L. & N.; Manh. El.; Mich. C.; M., K. & T.; Mo. Pac.; Mob. & O.;
N. Y. C. & H. R.; N. Y., O. & W.; So. Pac.; Wabash; Tex. & P.; C. of
N. J.; L. E. & W.; St. P., M. & M.

[723] The securities in the table are taken from the following
companies: St. P., M. & M.; Wabash; N. Y. C.; C., B. & Q.; C., M. & St.
P.; L. & N.; D., L. & W.; Penna.; W. U. Tel.; B., R. & P.; Can. So.;
Long I.; P. C. C. & St. L.; Tex. & P.; C. & N. W.; I. C.; C. & E. I.

[724] See Annual Report for 1906.

[725] Chron. 54:369, 1892.

[726] Investors’ Supplement, April, 1897; Chron. 62:41.

[727] Chron. Investors’ Supplement, April, 1897.

[728] Chron. 79:2087, 1904.

[729] 161 U. S. 647.

[730] 138 U. S. 84.

[731] New York, 1879.

[732] 49th Congress, 1st Session, Senate Report, No. 42.

[733] 42d Congress, 3d Session, House Reports, No. 77.

[734] 50th Congress, 1st Session, Senate Executive Document No. 51.

[735] 54th Congress, 1st Session, Senate Document No. 314.

[736] 58th Congress, 3d Session, hearings before the Committee on
Interstate Commerce, United States Senate, in Special Session, 1905.

[737] Memoirs of Henry Villard, 1835–1900. Boston, 1904.

[738] Ellis Paxon Oberholtzer, Life of Jay Cooke. Philadelphia, 1907.

[739] H. G. Pearson, An American Railroad Builder. John Murray Forbes.
Boston and New York, 1911.

[740] Bouck White, The Book of Daniel Drew. New York, 1910.

[741] C. M. Depew, A Retrospect of Twenty-five Years with the New York
Central Railroad and its Allied Lines. New York, 1892.

[742] Hazard Stevens, The Life of Isaac Ingalls Stevens by his Son.
Boston, 1900.

[743] Annals of the American Academy for Political and Social Science,
March, 1901.

[744] Forum, September, 1890, and March, 1894.

[745] Die Bank, July, 1911.

[746] Quarterly Journal of Economics, November, 1911.

[747] H. H. Swain, Economic Aspects of Railroad Receiverships, Economic
Studies of the American Economic Association, April, 1898.

[748] John P. Davis, History of the Union Pacific Railroad. Chicago,
1894.

[749] Alfred von der Leyen, Die Finanz-und Verkehrspolitik der
Nordamerikanischen Eisenbahnen, 2d ed., Berlin, 1895.

[750] I. H. Bromley, Pacific Railroad Legislation. Boston, 1886.

[751] J. F. Dillon, Pacific Railroad Laws. New York, 1890.

[752] J. B. Crawford, The Crédit Mobilier of America. Boston, 1880.

[753] Rowland Hazard, The Crédit Mobilier of America. Providence, 1881.

[754] Henry Kirke White, History of the Union Pacific Railroad.
Economic Studies of the University of Chicago, 1895.

[755] Hugo R. Meyer, The Settlements with the Pacific Railways.
Quarterly Journal of Economics, July, 1899.

[756] T. W. Mitchell, The Growth of the Union Pacific and its Financial
Operations. Quarterly Journal of Economics, August, 1907.

[757] W. F. Bailey, The Story of the First Trans-Continental Railroad,
its Projectors, Construction, and History. Pittsburg, 1906.

[758] John R. Robinson, The Octopus. A History of the Construction,
Conspiracies, Extortions, Robberies, and Villainous Acts of the Central
Pacific, the Union Pacific, and Other Subsidized Railroads. San
Francisco, 1894.

[759] E. H. Mott, Between the Ocean and the Lakes; the Story of Erie.
New York, 1899.

[760] Charles Francis and Henry Adams, Chapters of Erie and Other
Essays. Boston, 1871.

[761] George Crouch, Another Chapter of Erie. New York, 1869.

[762] Milton Reizenstein, Economic History of the Baltimore & Ohio,
1827–53. Johns Hopkins University Studies, July-August, 1897.

[763] W. P. Smith, The Book of the Great Railway Celebrations of 1857.
New York, 1858.

[764] Laws, Ordinances, and Documents Relating to the Baltimore & Ohio
Railroad Company. Baltimore, 1840.

[765] E. V. Smalley, History of the Northern Pacific Railroads. New
York, 1883.

[766] B. H. Meyer, A History of the Northern Securities Case. Bulletin
of the University of Wisconsin, July, 1906.

[767] Alfred von der Leyen, _v. supra_.

[768] W. W. Chapman, The Northern Pacific Railroad. Washington, 1880.

[769] Robert von Schlagintweit, Die Santa Fe und Sudpacificbahn in
Nordamerika. Köln, 1884.

[770] W. B. Wilson, History of the Pennsylvania Railroad Company.
Philadelphia, 1899.

[771] T. K. Worthington, Historical Sketch of the Finances of
Pennsylvania. Publications of the American Economic Association, May,
1887.

[772] A. L. Bishop, The State Works of Pennsylvania. Publications of
Yale University, New Haven, 1907.

[773] W. K. Ackerman, Historical Sketch of the Illinois Central
Railroad. Chicago, 1890.

[774] J. H. Hollander, The Cincinnati Southern Railway: A Study in
Municipal Activity. Johns Hopkins University Studies, January-February,
1894.

[775] E. A. Ferguson (Compiler), Founding of the Cincinnati Southern
Railway; with an Autobiographical Sketch. Cincinnati, 1905.

[776] Charles S. Potts, Railroad Transportation in Texas. Bulletin of
the University of Texas, Humanistic Series, March 1, 1909.

[777] P. Briscoe, The First Texas Railroad. Texas Historical
Association Quarterly, Austin, 1904.

[778] Chicago, 1905.

[779] E. B. Hinsdale, History of the Long Island Railroad. New York,
1898.

[780] Judson W. Bishop, History of the St. Paul and Sioux City
Railroad, 1864–1881. Minnesota Historical Society, Collections, vol. x,
pp. 399–415. St. Paul, 1905.

[781] George Bliss, Historical Memoir of the Western Railroad.
Springfield, 1863.

[782] Cary, Organization and History of the Chicago, Milwaukee & St.
Paul Railroad Company. Milwaukee, 1893.

[783] U. B. Phillips, A History of Transportation in the Eastern Cotton
Belt to 1860. New York, 1908.

[784] George Francis Train, My Life in Many States and in Foreign
Lands. New York, 1902.

[785] G. H. Smyth, The Life of Henry Bradley Plant, Founder and
President of the Plant System of Railroads and Steamships and also of
the Southern Express Company. New York and London, 1898.

[786] S. F. Van Oss, American Railroads as Investments. New York, 1893.

[787] Carl Snyder, American Railways as Investments. New York, 1907.

[788] Charles F. Carter, When Railroads were New. New York, 1909.

[789] F. H. Spearman, The Strategy of Great Railroads. New York, 1904.

[790] Philadelphia, 1888.

[791] New York, 1887.

[792] New York and London, 1900.

[793] Leipzig, 1883.

[794] Berlin, 1909.

[795] Chicago, 1910

[796] San Francisco, 1890.

[797] San Francisco, 1891.

[798] Springfield, 1874.

[799] Baltimore, 1899.

[800] Madison, 1899.

[801] Madison, 1908 and 1910.

[802] Chicago, 1896.



INDEX


  Abbott, E. H., 290, 291.

  Accounts, juggling with, Baltimore & Ohio, 11, 15, 21–23;
    Erie, 37;
    Reading, 127;
    Southern, 169;
    Atchison, 208–10.

  Adams, Charles Francis, Jr., 7, 232–7.

  Adams Committee, 293–5, 296–7, 302.

  Alabama Central, 149, 151.

  Alabama Great Southern, 188.

  Aldrich Committee, 221–2.

  Alexander, E. P., 154, 164, 169, note.

  Ames, Oliver, 250.

  Anderson, E. E., 40, 244, 248.

  Anthracite coal, _see_ Coal.

  Armour, P. D., 31.

  Assessments, Baltimore & Ohio, 6;
    Erie, 35, 44, 47, 68, 70;
    Reading, 107, 111, 114, 139;
    Southern, 155–6, 181–2, 185–6;
    Atchison, 212–14;
    Union Pacific, 252;
    Northern Pacific, 269, 303, 305–6;
    General, 350–4.

  Atchison, Topeka & Santa Fe, 192–219, 235, 259, 260, 277, 342.

  Atlantic & Great Western, _see_ New York, Pennsylvania & Ohio.

  Atlantic & Pacific, 194, 195, 208, 216.
    _See also_ St. Louis & San Francisco.

  Atlantic Coast Line, 148, 158, 161.


  Bacon, E. R., 18.

  Baer, George F., 111, 142.

  Baltimore & Ohio, 1–33, 38, 145, 169, 259, 260, 342.

  Baltimore Committee, 24.

  Baring Brothers & Co., 11, 215.

  Bartol Committee, 103, 104–5.

  Belen, 218.

  Belmont, August, & Co., oppose Erie reorganization plan, 63–6;
    lead opposition to Adams Committee, 290;
    members of Northern Pacific reorganization committee, 296, note;
    of Northern Pacific voting trust, 307;
    underwrite Northern Pacific mortgage, 274.

  Bigelow, F. G., 300, 301, 308.

  Blanchard, George R., 2, 3.

  Boissevain, A. H., 242–4, 245–7.

  Bond, Frank S., 89, 90, 91;
    plan of reorganization by, 92–5; 95–6.

  Boston & Maine, 122, 124, 126, 127–8.

  Boston, Hartford & Erie, 36.

  Branches, Baltimore & Ohio, 9–10;
    Erie, 51–3, 57, 59–60, 74;
    Southern, 168;
    Atchison, 196–8, 217–18;
    Union Pacific, 230–31, 232–3, 236, 248–9, 250–51, 253–4;
    Northern Pacific, 275, 276, 277–8, 286–7, 291, 292, 304, 306–7;
    Rock Island, 315–16, 319–20, 328–31;
    General, 369–71.

  Brice, Calvin S., 150, 160, 244.

  Brown, Shipley & Co., 9, 11.

  Buffalo, New York & Erie, 38.

  Burleigh, Andrew F., 300, 301.


  Cable, R. R., 314.

  Caldwell, Stephen A., 81, 82, 97.

  Capitalization, Baltimore & Ohio, 1, 9, 11;
    Erie, 34, 35, 36, 39, 44, 48, 71–2;
    Reading, 75–6, 82, 101, 115, 138, 141;
    Southern, 151, 183–4, 186;
    Atchison, 198, 200, 211, 219;
    Union Pacific, 221–4, 225, 227, 229, 232, 236, 251;
    Northern Pacific, 264, 266, 268, 271, 275, 276, 278, 279, 302, 304;
    Rock Island, 311–12, 315, 318, note, 322, 331, 332–3;
    General, 339, 363–9, 372–4, 374–9.

  Cash requirements and floating debt, Baltimore & Ohio, 11–15, 26–7;
    Erie, 34–5, 40, 54, 55–6, 61, 68;
    Reading, 79, 81–2, 101, 124–6, 127, 133, 139;
    Southern, 152, 156, 160, note, 168, 173, 182, 186;
    Atchison, 197, 199–200, 213;
    Northern Pacific, 266–7, 267–9, 272, 274, 276, 287–9, 295, 304–6;
    General, 348–56.

  Cass, George W., 266, 267.

  Central of New Jersey, 9, 10;
    leased by Reading, 97–9, 117, 120, 122;
    shares purchased on margin, 99–100.

  Central, New England & Western, 123.

  Central Railroad & Banking Company of Georgia, 162–6, 169, 175–8, 188.

  Charlotte, Columbia & Augusta, 147, 159.

  Chicago & Alton, Harriman buys stock in, 259, 331;
    Rock Island buys stock in, 330, 331;
    reorganization of, 337.

  Chicago & Atlantic, 52, 54, 57, 62.

  Chicago & Northern Pacific, 283–4, 286, 287;
    loss on operation of, 289, 291–2;
    Northern Pacific abandons lease of, 290, 302, 308.

  Chicago, Burlington & Quincy, 277, 310, 343.

  Chicago, Indianapolis & Louisville, 189.

  Chicago, Milwaukee & St. Paul, 259, 343.

  Chicago Terminal Transfer Company, 33, 283;
    Northern Pacific sells stock in, 308.

  Childs, Attorney-General, 298.

  Choctaw, Oklahoma & Gulf, 319–20, 328.

  Cincinnati, Hamilton & Dayton, 52–3, 57, 74.

  Cincinnati, New Orleans & Texas Pacific, 189.

  Clark, S. H., 240, 253.

  Clyde, W. P., 174–8.

  Coal, development of Erie’s traffic in, 38, 50–1, 73;
    interest of Reading in, 76–81, 97, 99, 118–23, 125–6, 141, 143,
          145; 311.

  Coal & Iron Company, Reading, 77, 80–83, 88, 92, 97, 101, 118–20,
          123, 127, 139, 141–4.

  Colby, Charles L., 290.

  Colorado Midland, 203, 205, 212.

  Columbia & Greenville, 159, 160, note, 168.

  Committee of Investigation, Baltimore & Ohio, 15–16, 21;
    Erie, 37, 40, 55–6;
    Reading, 84, 119;
    Southern, 152, 170, 177;
    Atchison, 199–200;
    Northern Pacific, 285–6.

  Committee of Reorganization, _see_ Reorganization Committee.

  Competition, a cause of railroad failure, 340–1.

  Consolidation, through reorganization, 370–1.

  Contracts, trackage and traffic, Baltimore & Ohio, 9;
    Erie, 52;
    Reading, 121;
    Southern, 149;
    Atchison, 193–5, 217;
    Northern Pacific, 275, 283–4, 308.

  Cooke, Jay, interested in Northern Pacific, 264;
    failure of, 79, 265.

  Cooley, Thomas M., 7.

  Coppell, George, 128, 175.

  Corbin, Austin, 117, 118, 120.

  Coudert, F. R., 241.

  Cowen, J. K., 20, 29–30.

  Crédit Mobilier, 223–4.

  Cullom Committee, Albert Fink testifies before, 7.


  Davis, J. C. Bancroft, 35.

  Davis, John P., 222–3, 224.

  Deferred income bonds, 81, 84–6, 87–8, 90, 96, 115.

  Delaware, Lackawanna & Western, 120–1.

  Denver Pacific, 227, 228–30.

  Depew, Chauncey M., 250.

  Deutsche Bank, supports Henry Villard, 273; 294;
    underwrites Northern Pacific reorganization plan, 296, 304; 307.

  Differentials, between eastern seaboard cities, 5, 7;
    between stronger and weaker roads, 17.

  Dillon, Sidney, 233, 234, 237.

  Dressed beef, rates cut on, 17.

  Doane, John W., 241.

  Drew, Daniel, 34, 36.

  Drexel, Anthony J., 125, 126, 134.

  Drexel, Morgan & Co., take part in Erie reorganization, 62, 65, 66–9;
    in Southern reorganization, 167–8, 175, 178–86;
    underwrite Northern Pacific mortgage, 274.

  Dunan, S. H., 37.

  Durant, T. C., 223.


  Earle, George H., Jr., 135.

  East Tennessee, Virginia & Georgia, _see_ Southern Railway.

  Employees, reorganization of the service, 15, 234;
    wages reduced or delayed, 37, 39, 41, 79, 81, 100, 199, 234;
    wages high, 222.

  Equipment, Baltimore & Ohio, 23, 28, 31;
    Erie, 73;
    Reading, 144;
    Southern, 168, 189, 190;
    Atchison, 218;
    Union Pacific, 261;
    Northern Pacific, 309.

  Equitable Life Assurance Company, 288.

  Erie, 2, 7, 17–18, 34–74, 342.

  Erlanger Roads, 166, 167, 185.

  Excelsior Enterprise Company, _see_ National Company.

  Express companies, 12, 14.


  Fairchild, C. S., 170.

  Fink, Albert, 6, 7, 10.

  Fink, Henry, 154.

  Fisk, Jim, 36.

  Fitzgerald, General Louis, takes part in Baltimore & Ohio
          reorganization, 24;
    in Reading reorganization, 136, 138;
    in Union Pacific reorganization, 244–5, 250, 251–4;
    in Northern Pacific reorganization, 293;
    examines Richmond Terminal properties, 170.

  Fixed charges, Baltimore & Ohio, 8, 10, 16, 20, 22, 28, 342, 357–9;
    Erie, 35, 36, 38, 39, 48, 58, 66, 69, 72, 73–4, 342, 357–9;
    Reading, 75, 82, 94, 96, 101, 115, 116, 118, 139–40, 144–5, 342,
          357–9;
    Atchison, 197–9, 203, 213, 216, 218, 342, 357–9;
    Union Pacific, 224–5, 227, 229, 235–6, 251, 253–4, 261, 342, 357–9;
    Northern Pacific, 266, 271, 275, 284, 293, 304, 310, 342, 357–9;
    Rock Island, 312, 322, 357–9;
    General, 357–61, 363–5, 369–72.

  Fleming, Robert, 45–6, 155, 216.

  Floating debt, _see_ Cash requirements and floating debt.

  Foreclosure, Baltimore & Ohio, 28–9;
    Erie, 34, 35, 49–50, 73;
    Reading, 82, 141;
    Southern, 157, 187, 188;
    Atchison, 216;
    Union Pacific, 254–7;
    Northern Pacific, 270, 308.

  Foreign investors, Erie, 36, 37, 40–50, 55–6, 63;
    Reading, 82, 83, 84, 86–9, 91, 96, 119, 126;
    Southern, 155;
    Atchison, 206, 207–8, 210, 214, 215;
    Union Pacific 244;
    Northern Pacific, 264, 273.


  Garrett, John, 4, 9.

  Garrett, John B., 106, 114.

  Garrett, Robert, 9, 16.

  Gauge, on Erie, 34, 37, 38, 45, 51.

  Georgia Central Company, 164, 165, 177–8.

  Georgia Pacific, 149, 166.

  Gorman, Senator A. H., 13.

  Gould, Jay, prominent in Erie, 36; 194;
    causes combination of Union Pacific and Kansas Pacific, 226, 228–30;
    unloads branch roads on Union Pacific, 230–31; 233, 237.

  Gowen, F. B., 76, 81, 84, 86, 87–91, 95–7, 99, 101, 112–15, 118–19,
          120.

  Grand Trunk, 2, 6, 7, 17, 18.

  Grant & Ward, 54.

  Great Northern, 258, 259, 277;
    proposes to guarantee Northern Pacific bonds, 296–8, 309–10.

  Gregory, Dudley S., 35.

  Guarantee fund, 199, 203.

  Gulf, Colorado & Santa Fe, 196, 202, 205, 218.


  Hallgarten & Co., on Reading underwriting syndicate, 139;
    on Southern reorganization committee, 171;
    oppose Erie reorganization plan, 63–6.

  Harriman, E. H., 32–3, 63–6, 188, 218, 258–60, 309–10, 331.

  Harris, Joseph S., 77–8, 83, 97, 125–8, 129, 131.

  Harris, Robert, 275.

  Hartshorne Committee, 136.

  Hepburn Committee, Albert Fink testifies before, 7.

  Higginson, H. L., 206, 245.

  Hill, J. J., buys interest in Baltimore & Ohio, 31–2;
    struggle with Harriman, 258, 310;
    proposed guarantee of Northern Pacific bonds, 296–8, 307.

  Hollins, H. B., 165, 179, 188.

  Hooper, John, 344.

  Houston & Texas Central, 328–9, 355.

  Houston East & West Texas, 329.

  Hoxie, H. M., 223.

  Huidekoper, F. W., 176, 177, note.

  Huntington, Collis P., 194, 258.


  Illinois Central, 19, 146, 259–60, 343.

  Improvements, Baltimore & Ohio, 15, 23, 28, 30–31;
    Erie, 42, 51, 60, 73;
    Reading, 80–81, 118, 144;
    Southern, 152, 168, 170, 189, 190;
    Atchison, 202, note, 204, 212, 218–19;
    Union Pacific, 234, 260–1;
    Northern Pacific, 276, 278–9, 309;
    Rock Island, 332, 333.

  Income bonds, 203–5;
    before and after reorganization, 365–6.
    _See also_ Deferred income bonds.

  Inman, John H., 164, 165.

  Iselin, A. & Co., 139.

  Ives, Brayton, 285, 287–8;
    president of Northern Pacific, 290;
    secures removal of receivers, 291–2, 298–9; 294, 295;
    endorses Northern Pacific reorganization plan, 302.


  Jenkins, Judge, 289, 292, 300, 301.

  Jewett, H. J., 39, 40, 41, 49, 50–53, 55, 57.

  Joint Executive Committee, 6.

  Joint Executive Reorganization Committee, 210–16.

  Junior Securities Protective Committee, 137.


  Kansas Pacific, poor condition of, 225;
    attempt at reorganization of, 226–7;
    consolidated with Union Pacific, 228–30;
    sale of, 256–7.

  King, Edward, 206, 210–16.

  King, John, 55, 57, 59, note, 61.

  Kuhn, Loeb & Co., take part of securities issued under Baltimore &
          Ohio reorganization plan, 26;
    oppose Erie reorganization plan, 63–6;
    represented on Richmond Terminal investigating committee, 170;
    on Union Pacific reorganization committee, 250;
    agree to take Northern Pacific collateral trust bonds, 288.


  Lacombe, Judge, 61, 300, 301.

  Lake Shore & Michigan Southern, 3, 18, 32, 145.

  Land grants, _see_ State and federal aid.

  Leases, Baltimore & Ohio, 2, 27;
    Erie, 51–3, 56, 58, 59–60, 71–2, 74;
    Reading, 97–9, 117, 120, 122, 123, 128, 130;
    Southern, 147, 148, 149, 159, 161–2, 166, 188;
    Atchison, 197;
    Northern Pacific, 276, 283–4.

  Leeds, W. B., 317–18.

  Lehigh Valley, 74, 75;
    leased to Reading, 120, 122, 123, 128–9, 130, 133.

  Lehigh Valley Terminal Railroad, 128.

  Lewis, Edwin A., 81–2, 97.

  Lewis, Howard, 119.

  Little, Stephen, report on Baltimore & Ohio, 21–3;
    on Atchison, 208–10, 213;
    set to work on the Reading, 128.

  Live stock, 17.

  Livingston, Johnston, 294, 307.

  Lockwood, E. Dunbar, 106, 112, 117.

  Logan, T. M., forms Georgia Central Company, 164;
    seeks control of Richmond Terminal, 164–6.

  Long Dock Company, 58.

  Lord, N. P., 345.

  Loree, S. F., 32.

  Louisville & Nashville, 146, 149.


  Maben, J. C, 175, note, 178.

  McCalmont Brothers, 86–91, 96.

  McCormick, Attorney-General, 143.

  McCullough, J. G., 61.

  McGill, Chancellor, 122.

  McHenry, E. H., 300, 301, 308.

  McHenry, James, 39–40, 49.

  McLeod, A. A., leases Lehigh Valley, 120;
    extends Reading into New England, 122–5;
    statement by, 125–6;
    resigns by request, 126–7; 132.

  Macon & Brunswick, 149, 151.

  Manville, Allen, 202.

  Maryland, subscribes to Baltimore & Ohio stock, 1, 18.

  Mayer, Charles F., 16, 18–20.

  Memphis & Charleston, 148, 158, 168, 185, 188.

  Mercantile Trust Company, 206, 288, 294.

  Miller, O. G., 45–6.

  Mills, Captain J. H., 300.

  Mink, O. W., 240, 253.

  Missouri Pacific, 196, 229.

  Mobile & Birmingham, 146, 167, 168, 185, 188.

  Mobile & Ohio, 189, 329.

  Moore, James H., 318.

  Moore, William H., interested in Rock Island, 317–18;
    reorganization plan by, 321–6;
    buys St. Louis & San Francisco, 327–8;
    extends Rock Island to the Gulf, 328–30;
    relations with Chicago & Alton, 330–1;
    distrusted by investors, 332.

  Morgan, J. P. & Co., organize syndicate to relieve Baltimore & Ohio,
          11–13;
    sell Cincinnati, Hamilton & Dayton to Erie, 74;
    reorganize Reading, 108–11, 139, 140, 141;
    members of Southern voting trust, 188;
    of Union Pacific reorganization committee, 245;
    take part in Northern Pacific reorganization, 296, 304, 307.

  Morgan, J. S. & Co., 11, 69.

  Morris, John, 40, 41.

  Mullen, Attorney-General C. W., 327.


  National Company, _see_ Philadelphia & Reading.

  New capital, provision for, 379–82.

  New York & Erie, 34, 35.

  New York & New England, 123, 124, 356.

  New York Central, 2–7, 17, 35, 38, 259, 343.

  New York, Lake Erie & Western, _see_ Erie.

  New York, Pennsylvania & Ohio, leased by Erie, 51–3, 59–60; 70–2.

  Norfolk & Western, 149, 151, 355.

  Northern Pacific, 18, 19, 232, 236, 258, 263–310, 315, 342.

  Northern Pacific & Manitoba, 292, 306.

  Northern Securities Company, 258, 259.

  Notes, short time, Atchison, 199, 203;
    Union Pacific, 237, 250, 251, 257;
    Northern Pacific, 287–9.


  Oakes, ——, 287, 289, 291, 292, 293, 299–300.

  Oakman, W. G., 176.

  Olcott, F. P., prominent in Reading reorganization, 135–6, 138, 140;
    in Southern reorganization, 155, note, 171–4, 179.

  Olney, Richard, 243.

  Oregon & Transcontinental Company, 272–3, 275, 276.

  Oregon Railway & Navigation Company, 236–7, 245, 249, 257, 272–3,
          275–6.

  Oregon Short Line, 232–3, 236, 249, 257, 276.


  Patterson & Corwin, criticise Mr. Little’s report on the Baltimore &
          Ohio, 23.

  Payne, Henry C, receiver of Northern Pacific, 289, 292, 293, 299.

  Payne, Oliver H., 171, note.

  Pearsall _vs._ Great Northern Railway Company, 298.

  Pennsylvania Railroad, 2–8, 10, 17, 31–3, 38, 87, 108–10, 143, 147,
          148.

  Perham, Josiah, 264, note.

  Pennsylvania Coal Company, 74.

  Pere Marquette, 74.

  Philadelphia & Reading, 9, 10, 18, 32, 75–145.

  Philadelphia, Reading & New England, 123, 128.

  Pierce, W. S., 243, 252, 253.

  Port Reading Railroad, 120, 122.

  Poughkeepsie Bridge, 123.

  Powell, T. W., 55, 56, 57–8, 84.

  Preferred stock, use of, in reorganizations, 366–8.

  Prevost, S. M., 31.


  Railroad failure, causes of, 336–42.

  Rate agreements, 4–7, 275.

  Rates, 3–5, 6–8, 17, 235.

  Rate wars, 3–5, 6–8, 17, 34–5, 38, 53, 196–7, 240.

  Ream, Norman D., 31.

  Receivers, Baltimore & Ohio, 20, 23, 28, 29;
    Erie, 35, 36, 38–9, 50, 61;
    Reading, 81–2, 97, 100–1, 117, 125–6, 127, 133–4;
    Southern, 175, 176, 187;
    Atchison, 205;
    Union Pacific, 240–1, 248–9;
    Northern Pacific, 289, 291–2, 295, 298–301.

  Receivers’ certificates, 23, 68, 127, 293.

  Reinhart, Joseph H., 202, 204, 205, 209–10.

  Reid, D. G., 317–18.

  Rentals, reduced through reorganization, 369–72.

  Reorganization, definition of, 335;
    causes of, 336–42;
    cancellation of floating debt by, 348–56;
    reduction of fixed charges by, 357–72;
    distribution of losses under, 361–2, 368–9, 376–7;
    general principles of, 384–6.

  Reorganization committees, Baltimore & Ohio, 21, 24, 29;
    Erie, 35, 40, 45–6, 55–6, 61–2, 63–5;
    Reading, 82, 84, 86, 101, 103–5, 112, 114, 117, 126, 128, 133–5,
          138;
    Southern, 152, 155, 170, 171, 174, 175, 178–9;
    Atchison, 199–200; 206–8, 210, 215, 216;
    Union Pacific, 244–5, 249–50, 257;
    Northern Pacific, 267, 293–4, 308;
    General, 343–5.

  Reorganization plans, Baltimore & Ohio, 24–8;
    Erie, 34, 35, 41, 42, 43–9, 57–8, 61–5, 66–73;
    Reading, 83–6, 91–4, 96–7, 101–3, 104–5, 106–8, 110–13, 114–16,
          129, 133–4, 135–6, 138–40;
    Southern, 152–3, 155–6, 171–4, 179–84, 185–6, 187;
    Atchison, 200–2, 204, 206–8, 211–16;
    Union Pacific, 226–7, 228–30, 241–4, 245–8, 250–4;
    Northern Pacific, 265–6, 267–70, 296–8, 302–8;
    Rock Island, 312–13, 321–4.

  Reorganization trustees, for Erie, 35, 47;
    for Reading, 104–5, 106, 107–10, 114.

  Resolutions, Baltimore & Ohio, 15, 39;
    complimentary to Mr. Gowen, 99;
    by London bondholders’ committee, 207;
    by Northern Pacific bondholders, 268;
    by Northern Pacific preferred stockholders, 281, 285, note;
    by Northern Pacific directors, 285.

  Rice, I. L., 121, 124, 127, 132, 136, 164–6.

  Richmond & Danville, _see_ Southern Railway.

  Richmond & West Point Terminal Railway & Warehouse Company, 10, 18;
    _see_ Southern Railway.

  Riddle, Hugh, 314.

  Ripley, E. P., 216.

  Roberts, George B., 109, 110.

  Rock Island, 196, 277, 311–33, 337, 343.

  Rockefeller, J. D., 288.

  Rouse, Henry C., 289, 292, 293, 295, 299.

  Ryan, Thomas F., 178.


  St. Joseph & Grand Island, 249, 259.

  St. Louis & San Francisco, controlled by Atchison, 194, 202, 216;
    by Rock Island, 327–8, 329, 330, 356.

  St. Paul & Northern Pacific, 287, 288, 290, 296.

  St. Paul, Minneapolis & Manitoba, _see_ Great Northern.

  Saratoga agreement, 4.

  Schiff, Jacob H., 170, 250.

  Securityholders, divergence in interest between, 335.

  Selma, Rome & Dalton, 149, 151.

  Sickles, General Daniel E., 86.

  Siemans, George, represents Deutsche Bank, 307.

  Simmons, J. Edward, 128, 134.

  Sonora Railroad, 194, 197, 217.

  Southern Kansas Railway Company, 196.

  Southern Pacific, 193–5, 217, 258.

  Southern Railway, 146–91, 330, 342.

  Southern Railway Security Company, 148.

  Speer, Judge, 176.

  Spencer, Samuel, 12–13;
    president of Baltimore & Ohio, 15, 16;
    of Southern Railway, 187;
    killed, 191.

  Speyer & Co., 26, 125, 333.

  Speyer Bros., _see_ Speyer & Co.

  Stanton, Henry, 289, note.

  State and federal aid, Baltimore & Ohio, 1;
    Erie, 34;
    Richmond & Danville, 146;
    East Tennessee, 147;
    Atchison, 192, 194;
    Union Pacific, 220–1, 225, 238–40, 241–4, 249, 254–7;
    Northern Pacific, 263–6, 271.

  Staten Island Rapid Transit Company, 10, 29.

  Stockholders’ Protective Committee, 215, 296, 302.

  Stockton, Attorney-General, 121–2.

  Strong, W. E., prominent in Southern reorganization, 174–5, 178;
    president of the Atchison, 194–5, 202.

  Sully, Alfred, 133, 160, 164.

  Surplus, on Baltimore & Ohio, 15, 22;
    on railroads in 1893, 342–3.

  Syndicates, Baltimore & Ohio, 11–15, 20, 26;
    Erie, 68, 69;
    Reading, 86, 108–10, 113–15, 120, 134, 139;
    Southern, 150;
    Union Pacific, 226, 237, 252;
    Northern Pacific, 264–5, 271, 274, 276, 288, 296, 304;
    General, 345–8.

  Syndicates, compensation to, Erie, 69;
    Reading, 109, 111, 112;
    General, 347–8.


  Tappan, F. D., 155, note, 171, note.

  Terminals, of Baltimore & Ohio, 3–4, 9–10, 19, 33;
    of Erie, 58;
    of East Tennessee, 152;
    of Atchison, 217;
    of Northern Pacific, 283–4, 302, 308;
    of Rock Island, 300.

  Texas & Pacific, 194, 330, 356.

  Texas Railroad Commission, 329.

  Thomas, General Samuel, 160, 174, 175.

  Thurman Act, 238–9, 242.

  Trunk lines, see Rate wars.

  Trunk-line arbitrators, letter of Mr. King to, 6.

  Tyler, Captain, report of, 37.


  Union Pacific, 32–3, 220–62, 275–6, 277, 310, 342.

  United States Government, relations with Union Pacific, 220, 221–2,
          238–40, 241–4, 249, 252–3, 254–6;
    with Northern Pacific, 263–4, 265–6.

  United States Supreme Court, decisions by, 238, 239, 298, 301.


  Valuation, of Reading coal properties, 77–8, 82–3.

  Vanderbilt, Commodore, 36, 95–6, 100, 314–15.

  Van Nostrand, 294.

  Vermilye & Co., 63–6.

  Villard, Henry, 237, 272–4, 275, 281–3, 286–7, 288, 290, 291–2.

  Virginia, subscribes to stock of Baltimore & Ohio, 1;
    aids Richmond & Danville, 146.

  Virginia Midland, 150, 159, 160, note.

  Voting trusts, Baltimore & Ohio, 18–19, 27, 32;
    Erie, 67;
    Reading, 111, 115, 119, 140;
    Southern, 183, 188;
    Atchison, 201, 212–13;
    Northern Pacific, 303, 307, 310;
    General, 382–4.


  Walker, Major Aldace F., 209, 216, 217.

  Watkin, Sir Edward, 40, 41, 43–5.

  Watson, P. H., 38, 39.

  Welsh, John Lowber, 108–10, 111, 128, 134.

  Western Union Telegraph Company, 14, 22, 27.

  Westlake, J., 55, 56, 57–8.

  Whelen, Townsend, 101–3, 104, 104–5, 108, 112.

  Wilbur, E. P., 125, 127, 128.

  Winslow, Lanier & Co., 274.

  Wisconsin Central, leased to Northern Pacific, 283–4, 286, 289,
          290–92, 302, 308.



Transcriber’s Notes


Punctuation and spelling were made consistent when a predominant
preference was found in this book; otherwise they were not changed.

Simple typographical errors were corrected; occasional unbalanced
quotation marks retained.

Ambiguous hyphens at the ends of lines were retained; occurrences of
inconsistent hyphenation have not been changed.

Index not checked for proper alphabetization or correct page references.

Volume:page references sometimes were printed as 123:456 (no space
after the colon) and other times as 123: 456 (with a space after the
colon). In this eBook, all such references omit the space (123:456).

Duplicate headings were removed by Transcriber.

In this version of this eBook, some tables were rearranged to make them
narrower.

Page 11: "J. S. Morgan" was printed that way, and there was such a
company.

Page 205: The reference to Footnote 430 was missing. Transcriber
arbitrarily added it at a likely place.

Page 244: "the interest were cancelled" was printed that way.

Page 341: Numbered list has no item #6.

Page 379: The year-headings in the original book appeared above the
dollar values, which seems to be a typographical error. In this eBook,
they have been centered above the Month-dollar values columns.





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