CHAPTER X. Conclusion

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?

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. 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; if unprofitable leases have been entered into, these must be abolished; 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.

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. 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; 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.

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, 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:

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

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. 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.

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. 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 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. 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. 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.

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. 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. 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

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. 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, of the Norfolk & Western in 1896, 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.

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, 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. 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. 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.

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 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

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. 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

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

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:

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. 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, 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, “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

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. 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 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. 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. 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.

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

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.

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. 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. 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. 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. 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 blocked the first of the reorganization plans proposed for the Northern Pacific in 1895. An earlier decision 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, and Mr. Fink, before the Hepburn and the Cullom Committees, 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. The testimony of Gould, Adams, Ames, Holmes, and others before the United States Pacific Railroad Commission of 1887–88 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 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, 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, or in biographies like Oberholtzer’s Life of Jay Cooke and Pearson’s An American Railroad Builder which make use of private papers of men prominent in railroad finance. Perhaps White’s Book of Daniel Drew, Depew’s Retrospect of Twenty-Five Years, and the Life of Isaac Ingalls Stevens by his son, 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, articles by Simon Sterne in the Forum, and an article by A. Lansburgh in Die Bank, 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. 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, 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, von der Leyen, Bromley, Dillon, Crawford, Hazard, and White treat various phases of the company’s development up to its final reorganization, an article by Meyer describes the settlements between the Pacific railroads and the Government, and another article by Mitchell in the Quarterly Journal of Economics deals with Union Pacific finance since that time. There may also be mentioned an account by Bailey, 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. The student of the Erie has at his disposal the elaborate narrative by E. H. Mott, the chapters by Charles Francis Adams, Jr., and the sketch by Crouch. Milton Reizenstein has dealt with the progress of the Baltimore and Ohio up to 1853, and for this road there is material to be found in Smith’s Book of the Great Railway Celebrations of 1857, and in a compilation of the Laws, Ordinances, and Documents Relating to the Baltimore and Ohio Railroad, published in 1840. For the Northern Pacific the history by Smalley covers in popular style the period from 1864 to 1883, the careful History of the Northern Securities Case, by B. H. Meyer, treats of an interesting later development, chapters in von der Leyen’s book contain acute and independent discussions of Northern Pacific as well as of Union Pacific finance, and there is a fifteen-page pamphlet by Chapman entitled The Northern Pacific Railroad. Schlagintweit in 1884 described his travels on the Santa Fe and Southern Pacific. Wilson has written two volumes upon the Pennsylvania Railroad, while Worthington and Bishop have described the internal improvements undertaken by the state of Pennsylvania. Ackerman is the author of a Historical Sketch of the Illinois Central Railroad, and Hollander and Ferguson of works on the Cincinnati Southern. Potts and Briscoe have written on railroads in Texas. The Chicago & Northwestern has published a volume called Yesterday and To-day, which contains some information. Hinsdale has worked up the History of the Long Island Railroad. Bishop has sketched the history of the St. Paul & Sioux City Railroad. Bliss is the author of a Historical Memoir of the Western Railroad. Cary in 1893 described the Organization and History of the Chicago, Milwaukee & St. Paul Railroad Company. Phillips discusses in excellent fashion the early history of a number of Southern carriers. The autobiography of George Francis Train and Smyth’s biography of Henry Bradley Plant are serviceable. Works like those of Van Oss, Snyder, Carter, and Spearman, 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, Adams’ Railroads: Their Origin and Problems, Hadley’s Railroad Transportation, Kupka’s Die Verkehrsmittel in den Vereinigten Staaten von Nordamerika, Singer’s Die Amerikanischen Bahnen, Myers’ History of the Great American Fortunes, Bancroft’s History of the Pacific States, and Chronicles of the Builders, Davidson and Stuvé’s Complete History of Illinois, Hollander’s Financial History of Baltimore, Sanborn’s Congressional Grants of Land in Aid of Railways, Haney’s Congressional History of Railways, and Million’s State Aid to Railways in Missouri, 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

Milton Reizenstein, The Economic History of the Baltimore & Ohio Railroad, Johns Hopkins University Studies, July-August, 1897.

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.

6th Annual Report, 1832, p. 4.

35th Annual Report, 1861.

Testimony of Mr. Blanchard, Hepburn Committee Report, p. 3171. See also Chron. 20:547, 1875.

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.

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.

Sugar, coffee, salt, etc.

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.

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.

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.

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.

Albert Fink, Report on Adjustment of Railway Rates; also Testimony of Mr. Blanchard, Hepburn Committee Report, pp. 3171 ff.

“Additional Arguments on the Division of 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.

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.

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.

Hepburn Committee Report, vol. 3, p. 558.

Cullom Committee Report, vol. 2, p. 98.

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.

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.

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.

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).

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.

Chron. 41:393, 1885.

Cullom Committee Report, vol. 1, Appendix, pp. 237, and 240 ff.

Chron. 45:692, 1887.

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.

Chron. 40:453, 1885.

Chron. 41:555, 1885.

Chron. 43:190, 1886.

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.

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.

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.

From $34,713,696 in 1884 to $56,868,201 in 1887.

Such as connecting lines, iron bridges over the Ohio River, elevators, wharves, terminal facilities, etc.

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.

Chron. 45:304, 1887; Ibid. 45:824, 1887.

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.

Ry. Age, 12:640, 1887.

“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.

Mr. Spencer had succeeded Robert Garrett in December, 1887.

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.

Ry. Rev. 28:192, 1888.

Ry. Age, 12:728, 1887.

R. R. Gaz. 20:417, 1888.

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.

Ry. Rev. 28:163, 1888.

Ibid. 28:236, 1888.

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.

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.

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.

Known as the Presidents’ and Bankers’ Agreement.

There was, however, a shortage in the wheat crop in 1888.

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.

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.

Ry. Rev. 30:382, 1890.

Chron. 50:800, 1890; Ibid. 50:833, 1890; Ry. Rev. 30:348, 1890; R. R. Gaz. 22:448, 1890.

Application for listing of Trustee certificates, Chron. 54:369, 1892.

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.

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.

Chron. 60:42, 1895.

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.

Ry. Rev. 36:138, 1896. The receivers were appointed February 29.

Chron. 62:777, 1896.

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.

Chron. 64:999, 1897.

President J. K. Cowen, Vice-President Oscar G. Murray.

Chron. 62:907, 1896.

Ibid. 69:128, 1899.

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.

Chron. 66:1235, 1898.

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.”

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.”

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

Headed by Messrs. Speyer & Co. and Kuhn, Loeb & Co. of New York, and Messrs. Speyer Bros. of London. R. R. Gaz. 30:733, 1898.

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.

In fact they were never quite so low as this.

Chron. 69:128, 1899.

Chron. 67:27, 1898.

Ry. Rev. 38:656, 1898.

R. R. Gaz. 31:500, 1899.

Ry. Age 28:570, 1899.

The chief addition has been that of the Cleveland, Lorraine & Wheeling.

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.

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.

See statement by the Pennsylvania management in Chron. 83:563, 1906.

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.

E. H. Mott, Between the Ocean and the Lakes—the Story of Erie. N. Y. 1899.

Ibid. pp. 79–80.

Mott, p. 129. Default was also made on the first, second, third, and fifth mortgages.

See Adams’s Chapters of Erie, Boston, 1871.

The capital per mile rose from $81,068 in 1864 to $117,760 in 1872.

Chron. 12:203, 1871; Ibid. 16:489, 1873.

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.

Hepburn Committee Report, vol. 2, Exhibits, pp. 623–643.

Angell suit, R. R. Gaz. 6:269, 1874.

R. R. Gaz. 7:224, 1875.

Chron. 20:520, 1875.

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.

See R. R. Gaz. 7:423, 1875.

R. R. Gaz. 7:423, 1875.

R. R. Gaz. 7:479–80, 1875.

Chron. 21:277, 1875.

R. R. Gaz. 7:511, 1875.

R. R. Gaz. 7:533, 1875; Chron. 21:612, 1875.

R. R. Gaz. 8:818, 1876.

Chron. 22:233, 1876.

R. R. Gaz. 8:178, 1876.

Chron. 22:423, 1876.

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.

Chron. 23:233, 1876; Ibid. 26:419; Ibid. 29:358, 1879; Hepburn Committee Report, vol. 2, pp. 252–7, Exhibits.

Chron. 26:419, 1878.

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.

Mott, p. 268.

Mott, p. 269.

Annual Report, 1882.

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.

For some account of the trunk-line rate wars see the chapter on the Baltimore & Ohio.

Chron. 39:234, 1884.

Annual Report, 1884, p. 12.

R. R. Gaz. 16:421, 1884.

Chron. 39:349, 1884.

R. R. Gaz. 17:446, 1885.

For terms of reorganization see Annual Report, 1890; also R. R. Gaz. 19:188, 1887.

Annual Report, 1886.

Upon such redemption a corresponding amount of the original coupons were to be cancelled.

Annual Report, 1886.

From .662 in 1887 to .610 in 1892.

Testimony of Messrs. King and Felton, Senate Committee on Transportation Interests of the United States and Canada, pp. 44 and 121–2.

Annual Report, 1887.

Mott, p. 272.

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.

Figures for 1891 were, fixed charges, $4298 per mile; net revenue, $4897 per mile.

Chron. 57:179, 1893.

Mott, p. 273.

Chron. 57:938, 1893; Ibid. 57:1083, 1893.

Ry. Times, 65:3, 1894.

R. R. Gaz. 26:18, 1894.

Ry. Times, 65:120, 1894.

Ibid. 65:152, 1894.

Chron. 58:264, 1894.

Ibid. 58:383, 1894.

Ibid. 58:430, 1894.

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.

Ry. Rev. 34:181, 1894.

R. R. Gaz. 26:472, 1894.

Ibid. 27:554, 1895.

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.

Chron. 61:368, 1895; R. R. Gaz. 27:583–4, 1895.

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

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

This real rental was increased somewhat by the assumption of New York, Pennsylvania & Ohio prior liens.

Chron. 61:831, 1895.

Capital— Stock Bonds

1896 $146,000,000 $137,704,100 1907 176,271,300 209,633,900

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.

Annual Report, 1881, p. 63.

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.

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

Annual Report, 1881.

Part of the difference was due to the inflation of the currency before 1879.

R. R. Gaz. 9:225, 1877; Ibid. 9:146, 1877.

Ibid. 9:284, 1877.

Annual Report, 1881, p. 28.

Chron. 31:46, 1880, Report of the English Bondholders’ Committee, June 18, 1880. This committee was in the interests of the Messrs. McCalmont.

Ry. Age, 5:365, 1880.

R. R. Gaz. 12:363, 1880.

Ry. Age, 5:351, 1880; R. R. Gaz. 12:350, 1880.

R. R. Gaz. 12:542, 1880.

R. R. Gaz. 12:564, 1880.

Chron. 31:536, 1880.

Chron. 31:607, 1880.

R. R. Gaz. 12:609, 1880.

Ibid.

Ibid. 13:11, 1881.

Ibid. 12:704, 1880.

R. R. Gaz. 12:652, 1880.

Ibid. 12:704, 1880.

Ibid. 13:11, 1881.

R. R. Gaz. 13:25, 1881.

Chron. 32:206, 1881.

R. R. Gaz. 13:43, 1881.

R. R. Gaz. 13:132, 1881.

Chron. 32:313, 1881.

Chron. 32:445, 1881.

Chron. 32:469, 1881.

R. R. Gaz. 13:446, 1881.

Ry. Age, 6:528, 1881.

Annual Report, 1881, p. 52.

Annual Report, 1881, pp. 50 ff.

Annual Report, 1881, pp. 50 ff.; see also Chron. 33:177, 1881.

Ry. Age, 6:486, 1881.

Chron. 33:256, 1881.

Ry. Age, 6:628, 1881.

R. R. Gaz. 13:624, 1881.

R. R. Gaz. 13:672, 1881.

Chron. 34:265, 1882; R. R. Gaz. 26:156, 1882.

Chron. 34:409, 1882.

R. R. Gaz. 14:354, 1882.

Industrial Commission, vol. 9, p. 607.

Ry. Age, 10:218, 1885.

Annual Report, 1883, pp. 111 ff.

Annual Report, 1883, pp. 139 ff.

Chron. 37:563, 1883.

Annual Report, 1883, pp. 25–7.

Annual Report, 1883. The proposition was made by Mr. Gowen.

From November 30, 1883, to January 2, 1884, reliable figures subsequently showed a deficit of $2,000,000.

Chron. 38:679, 1884.

Ibid. 39:461, 1884.

Annual Report, 1884, pp. 21–8.

R. R. Gaz. 17:80, 1885.

R. R. Gaz. 17:144, 1885.

Ibid. 17:160, 1885.

Ibid. 17:224, 1885.

Collateral bonds were to be given for the assessment.

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.

Ry. Age, 10:314, 1885.

R. R. Gaz. 17:607, 1885.

Chron. 41:307, 1885.

Chron. 41:654, 1885.

Preferred from $846,950 to $36,381,820; common from $36,822,975 to $60,134,462.

R. R. Gaz. 18:138, 1886.

Chron. 42:216, 1886.

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.

R. R. Gaz. 18:271, 1886.

Ibid. 18:138, 1886.

Ry. Age, 11:376, 1886.

R. R. Gaz. 18:502, 1886.

Chron. 43:368, 1886; Ibid. 43:747, 1886; Annual Report, 1887.

R. R. Gaz. 18:897, 1886.

Ry. Age, 12:692, 1887. These bondholders even proposed a plan of reorganization of their own, which it is not worth while going into.

Ry. Age, 12:746, 1887; Chron. 45:539, 1887.

R. R. Gaz. 22:370, 1890.

Chron. 50:37, 1890.

Chron. 53:408, 1891.

Chron. 54:288, 1892; Industrial Commission, vol. 19, pp. 455–7.

R. R. Gaz. 24:138, 1892.

Industrial Commission, vol. 9, p. 738.

Annual Report, 1892.

R. R. Gaz. 24:420, 1892.

Chron. 55:680, 1892.

Chron. 56:82, 1893.

R. R. Gaz. 25:102, 1893.

Industrial Commission, vol. 9, p. 567, testimony of A. A. McLeod.

Ibid. vol. 9, p. 574.

Ry. Age, 17:109, 1892.

Ry. Rev. 32:507, 1892.

Chron. 55:723, 1892.

R. R. Gaz. 25:386, 1893.

Ry. Age, 18:314, 1893.

Ibid. 18:164, 1893.

Industrial Commission, vol. 9, p. 573.

Ibid.

Ry. Times, 63:265, 1893.

Ry. Age, 18:314, 1893.

Industrial Commission, vol. 9, p. 739, testimony of I. L. Rice.

Chron. 57:105, 1893; Ibid. 57:423, 1893.

New York Herald, May 29, 1893.

Ry. Times, 63:783, 1893.

Ry. Age, 18:501, 1893.

Chron. 56:905, 1893.

Ry. Times, 63:751, 1893.

Ry. Times, 63:783, 1893.

R. R. Gaz. 25:496, 1893. The deposits required were: general mortgage, $41,828,000; stock, 480,424 shares.

Industrial Commission, vol. 9, p. 737, testimony of I. L. Rice.

Ry. Times, 64:369, 1893.

Ry. Age, 18:897, 1893.

Ry. Age, 18:735, 1893.

Ry. Rev. 34:55, 1894; Ry. Times, 65:87, 1894.

Chron. 58:774, 1894.

Ry. Times, 65:623, 1894. See also the report of the company’s comptroller to the receivers in Annual Report, 1893.

Ry. Rev. 34:307, 1894.

Chron. 59:515, 1894; Ry. Age, 19:557, 1894; Ry. Rev. 34:561, 1894; Ry. Times, 66:571, 1894.

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

Chron. 60:43, 1895.

Ry. Times, 68:802, 1895; Chron. 61:1109, 1895.

Ry. Age, 20:625, 1895.

Chron. 63:560, 1896.

Chron. 64:84, 1897.

Chron. 63:923, 1896.

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.

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.

Chron. 64:84, 1897.

There are certain duplications in both of these figures, but the same duplications appear in each.

Chron. 79:2087, 1904.

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.

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.

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.

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.

Annual Report, 1878.

Ibid. 1874.

Ulrich B. Phillips, A History of Transportation in the Eastern Cotton Belt to 1860. New York: The Columbia University Press, 1908, pp. 372 ff.

Including 37 miles of running rights over the N., C. & St. L.

R. R. Gaz. 5:475, 1873.

Ibid. 6:178, 1874.

Ibid. 8:540, 1876.

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.

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.

This line was completed in 1882. Chron. 35:430, 1882; R. R. Gaz. 13:420, 1881.

Chron. 33:357, 1881.

R. R. Gaz. 13:420, 1881.

Prominent among them were Messrs. Clyde, of the Coast Line railroads, Wilson and McGhee of the East Tennessee, Stewart, Plant, Logan, and others.

This had been the Atlanta & Richmond Air Line.

Chron. 37:128, 1883.

Chron. 39:733, 1884.

Chron. 40:29, 1885.

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.

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.

Son-in-law of George Seney.

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.

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.

Chron. 42:186–7, 1886. See also Poor’s Manual for 1886.

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.

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.

Chron. 42:364, 1886.

Ibid. 42:575, 1886.

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.”

Annual Report, East Tennessee, Virginia & Georgia, 1887.

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.

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.

Chron. 36:56, 1883.

R. R. Gaz. 18:138, 1886.

Chron. 42:575, 1886.

The Richmond & Danville guaranteed interest on some $12,500,000 of Virginia Midland bonds.

Cf. Poor’s Manual for 1887.

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.

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.

It was reported that the East Tennessee first preferred stock had been offered to the Norfolk & Western before the Richmond Terminal acquired it.

Chron. 47:410, 1888.

Chron. 47:532, 1888.

Chron. 47:532, 1888; Ry. Rev. 28:663, 1888; R. R. Gaz. 20:778, 1888.

Chron. 47:625, 1888.

Chron. 47:663, 1888.

Ry. Rev. 28:679, 1888.

Ry. Age, 13:788, 1888.

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.

Including 67 per cent paid in Confederate notes during the war.

See Ulrich B. Phillips, op. cit., chap, vi, for the early history of the Central of Georgia Railroad System.

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.

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.

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.

Chron. 47:499, 1888.

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.

Chron. 46:828, 1888.

Ry. Rev. 28:386, 1888; Ibid. 397, 1888.

Ry. Age, 16:76, 1891.

Chron. 52:862, 1891.

From the reorganization plan prepared by Drexel, Morgan & Co., dated May 1, 1893. Chron. 56:874 ff., 1893.

Ry. Age, 14:78, 1889.

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.

For replies by Alexander and Inman, see New York Herald, August 10, 1891, and Chron. 53:224, 1891.

At 97½. See R. R. Gaz. 23:718, 1891.

Chron. 53:674, 1891.

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.

Chron. 53:922, 1891.

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.

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.

The plan in full is reprinted in Chron. 54:487, 1892.

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?

Chron. 54:846, 1892.

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.

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.

This committee was subsequently enlarged and became known as the “Independent Committee of Seventeen.”

Chron. 54:888, 1892.

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.

R. R. Gaz. 24:33, 1892. The deposit was made and the dividend paid.

Ibid. 24:237, 1892.

Chron. 54:965, 1892.

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.

W. P. Clyde, etc.

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.

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.

Chron. 55:938, 1892.

Chron. 55:1078, 1892. For replies of defendants see Chron. 56:414, 1893, and Ibid. 972, 1893.

This was the letter finally declining to undertake the reorganization in 1892 because of lack of assurances of support.

The correspondence appears in full in Chron. 56:207, 1893, and Ibid. 56:622, 1893.

Ry. Rev. 33:95, 1893.

These needs had already been emphasized by the Olcott plan.

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.

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

The new company reserved the right at any time to redeem its preferred stock in cash at par.

Of which $104,303,894 for stock and the rest for bonds outstanding.

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.

The plan is published in full in Chron. 56:874, 1893.

Ry. Rev. 33:388, 1893.

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.

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.

The actual charges in 1895 were $4,195,000.

“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.

R. R. Gaz. 26:613, 1894.

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.

J. P. Morgan, Charles Lanier, and George F. Baker. See Chron. 59:836, 1894, and Ibid. 880, 1894.

See statement by Receiver Comer. Chron. 55:805, 1892.

Chron. 60:1008, 1895.

With a charter from the state of Georgia.

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.

The original estimate was $19,000,000. The amount available seems to have been finally $20,000,000.

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.

Annual Report, 1906.

The narrow-gauge equipment included in these figures is as follows:

1895 1907

Locomotives 9 4 Locomotives 9 4 Freight cars 86 106

“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.”

This route followed roughly the old Santa Fe Trail.

Chron. 29:583, 1879.

Ibid. 33:23, 1881.

Chron. 34:315, 1882, Circular of Sonora Railroad Company to stockholders.

Chron. 29:630, 1879. Statement by Vice-President Baker.

Ibid. 29:630, 1879.

Chron. 34:243, 1882.

Chron. 41:444, 1885.

Annual Report, 1885, contains a discussion of the Atlantic & Pacific and of the California Southern projects.

Chron. 42:462, 1886; Annual Report, 1887.

Ibid. 42:518, 1886.

Annual Reports, 1886 and 1887.

Annual Report, 1888.

Ry. Rev. 29:511, 1889.

Ry. Age, 12:107, 1887.

Ibid. 12:325, 1887.

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.

Chron. 47:472, 1888. The use of $3,000,000 of the notes was specifically deferred.

Ry. Age, 14:644, 1889.

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

The income bond certificate is printed in full in W. A. Wood, Modern Business Corporations, pp. 237–9.

Ry. Age, 14:682, 1889.

Annual Report, 1890. Economies were secured at this time through consolidation of branch lines with the main stem and in other ways.

Annual Report, 1891.

Chron. 51:171, 1890.

Ibid. 53:474, 1891.

Annual Report, 1892.

Ry. Age, 17:413, 1892.

Annual Report, 1892.

Chron. 56:1014, 1893; Ibid. 57:1038, 1893.

Ry. Rev. 34:68, 1894.

Ry. Times, 64:533, 1893.

See Chron. 58:42, 1894, for an official statement of the reasons for the application to the courts.

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.

R. R. Gaz. 26:465, 1894.

Ry. Rev. 34:358, 1894.

Ry. Times, 65:817, 1894.

Ry. Rev. 34:379, 1894.

Report of Mr. Stephen Little to the New York, London, and Amsterdam Committees of Reorganization, 1894.

Chron. 59:233, 1894.

Ry. Times, 66:543, 1894.

Chron. 59:878, 1894; Ibid. 59:919, 1894.

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.

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.”

The plan of reorganization was published separately, but was reprinted in Chron. 60:658, 1895.

Ry. Rev. 35:208–9, 1895.

Ry. Age, 20:199, 1895.

Ry. Times, 67:482, 1895.

R. R. Gaz. 26:675, 1894.

Ry. Times, 66:506, 1894.

Ry. Rev. 34:589, 1894.

Chron. 61:1064, 1895.

Chron. 64:609, 1897.

Ibid. 67:841, 1898.

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.

Statutes at Large, 37th Congress, 2d Session, chap. 120.

Statutes at Large, 38th Congress, 1st Session, chap. 216.

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

John P. Davis, History of the Union Pacific Railroad, p. 151.

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.

Davis, pp. 163–70.

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.

Statutes at Large, 39th Congress, 1st Session, chap. 159.

United States Pacific Railway Commission Report, 1887, p. 55.

Ibid. vol. 8, p. 4975.

Records in Union Pacific Railway Foreclosure Cases, 55th Congress, 1st Session, Senate Document 10, Part 3.

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.

United States Pacific Railway Commission Report, 1887, testimony of A. H. Holmes, p. 165.

Ibid. Testimony of Jay Gould, pp. 454–6. The change to a mortgage was made between April, 1878, and May, 1879.

Records in Union Pacific Railway Foreclosure Cases, 55th Congress, 1st Session, Senate Document 10, part 3 (contains text of mortgage).

United States Pacific Railway Commission Report, 1887, testimony of A. H. Holmes, pp. 130 and 133.

Ibid. vol. 8, p. 4987, Report of William Calhoun, Accountant.

United States Pacific Railway Commission Report, 1887, testimony of Jay Gould, p. 463.

United States Pacific Railway Commission Report, 1887, p. 58.

Ibid. pp. 59 to 65.

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.

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

United States Pacific Railway Commission Report, testimony of Jay Gould.

United States Pacific Railway Commission Report, 1887, p. 100.

Except the Missouri Pacific, which Gould retained.

United States Pacific Railway Commission Report, 1887, testimony of Jay Gould, pp. 467–9, 523, 524.

United States Pacific Railway Commission Report, 1887, testimony of Charles Wheeler, pp. 1735–6. Amount, $571,000.

Ibid. Testimony of John Evans, pp. 1853–4.

Ibid. Testimony of C. F. Adams, p. 47.

United States Pacific Railway Commission Report, 1887, pp. 91 ff.

Thirty Years of American Finance, pp. 86 to 98.

Chron. 35:578, 1882.

United States Pacific Railway Commission Report, 1887, p. 67.

Annual Report, 1884, p. 5.

United States Pacific Railway Commission Report, 1887, testimony of C. F. Adams, pp. 45–6.

Chron. 53:436, 1891.

Annual Report, 1884, p. 165.

91 U. S. 72.

Statutes at Large, 45th Congress, 2d Session, chap. 96.

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.

Report of the Government Directors for 1893.

Chron. 57:684, 1893.

Ibid. 57:639, 1893.

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.

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.

Chron. 16:292, 1873.

Report of the Commissioner of Railroads, 1895, p. 14.

Ry. Rev. 34:335, 1894.

Chron. 58:775, 1894.

Ibid. 60:132, 1895.

Report of the Commissioner of Railroads, 1895, pp. 9–10.

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.

Ibid. Testimony, pp. 451–2.

Chron. 60:303, 1895.

Ry. Times, 64:732, 1893. Mr. Brice was also a member of the Senate Committee on Pacific Railroads.

Ry. Age, 18:883, 1893.

Ry. Times, 65:336, 1894.

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.

Chron. 60:132, 1895.

Ibid. 60:303, 1895.

For a summary of the foreclosure suit pending in 1895 see the Report of the Government Directors for that year.

Chron. 60:303, 1895.

Chron. 60:132, 1895.

Ry. Rev. 35:153, 1895.

Chron. 61:663, 1895.

Chron. 61:705, 1895. (Reorganization plan in full.)

See testimony of W. S. Pierce, Senate Commission, 1896, 54th Congress, 1st Session, Document 314.

Testimony, Senate Commission, 1896, p. 23.

Ibid.

Chron. 62:187, 1896.

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.

The guarantee was provided by a syndicate with the same personnel as that which had agreed to advance the money for reorganization expenses.

Chron. 65:730, 1897; Report of Commissioner of Railroads, 1897, p. 9.

Ry. Age, 24:897, 1897.

Report of the Commissioner of Railroads, 1898, p. 9.

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.

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.

Thomas Warner Mitchell, The Growth of the Union Pacific and its Financial Operations, Quarterly Journal of Economics, vol. 21, p. 569, 1907.

Besides $824,910 in Northern Securities stubs.

See B. H. Meyer, A History of the Northern Securities Case, Bulletin of the University of Wisconsin, July, 1906.

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.

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.

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.

The Union Pacific acquired a half-interest in the San Pedro, Los Angeles & Salt Lake Railroad Company in 1904.

Recent reports suggest that a holding company is to be formed, which will take over the securities now owned by the Union Pacific Railroad.

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

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.

To make possible the selection of indemnity lands.

Josiah Perham was the prime mover at first and after him certain Boston capitalists were prominent.

Ellis Paxsom Oberholtzer, Life of Jay Cooke. Philadelphia, George W. Jacobs & Company, 1907. See also Smalley, History of the Northern Pacific.

The notes were put on the market at par, though sold to the syndicate at 88.

Chron. 18:16, 1874.

R. R. Gaz. 6:135, 1874. The indebtedness of the Northern Pacific to Jay Cooke & Co. amounted to about $1,500,000.

R. R. Gaz. 6:496, 1874; Congressional Record, 43d Congress, 1st Session, May 11, 1874, pp. 3749, 3773.

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.

Annual Report, 1876; Chron. 20:522, 1875; Ibid. 21:15, 1875.

Annual Report, 1876.

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.

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.

R. R. Gaz. 7:420, 1875.

Annual Report, 1881.

Annual Report, 1882, p. 13.

Henry Villard, Memoirs, vol. 2, pp. 272–94.

Memoirs, p. 297.

For the manner in which the Northern Pacific directors attempted to keep Villard from obtaining control, see notices in the Chronicle for 1881.

See First Annual Report of the Oregon & Transcontinental Company; R. R. Gaz. 14:516, 1882 (contains statement of organization and purposes).

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.

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.

Memoirs, p. 315.

Villard was back in control by 1887 with the backing of German capital.

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.

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.

In 1890 it was reorganized as the North American Company.

Annual Report, 1888, p. 8; Chron. 44:752, 1887; Ibid. 44:782, 1887.

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.

For immigrant traffic into the Northwest see Ry. Rev. 28:163, 1888.

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.

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

Annual Report, 1889.

Annual Report, 1889; Chron. 50:279, gives text of mortgage.

Ry. Rev. 29:541, 1889. In fact the issues were all made at 5 per cent.

Annual Report, 1890. For answer of directors see R. R. Gaz. 21:759, 1889.

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.

In 1919.

Evidence of this appears in the $10,000,000 reserved for premiums.

Memoirs, vol. 2, p. 336.

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.

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.

Annual Report, 1890, p. 14; R. R. Gaz. 21:318, 1889.

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.

Ry. Rev. 32:687, 1892. Members were, Henry Clews, Brayton Ives, Frank Sturges, William Solomon, and Jay Cooke, Jr.

Ry. Times, 63:275, 1893; Chron. 56:332, 1893.

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.

Memoirs, pp. 359–60.

Among others the investigating committee protested loudly against a sale. Ry. Rev. 33:127, 1893.

Ry. Times, 65:595, 1893.

Chron. 56:1017, 1893; R. R. Gaz. 25:398, 1893.

The heaviest subscribers were the Rockefellers and Villard and his friends.

Annual Report, 1893; Ry. Times, 64:290, 1893.

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.

Except that Henry Stanton of New York was to be the Eastern receiver for all the branches.

Ry. Times, 64:337, 1893.

These officers had resigned in consequence of the non-payment of their salaries.

Ry. Rev. 33:587, 1893.

Chron. 59:697, 1894.

Ibid. 57:765, 1893.

Ry. Age, 19:40, 1894.

Ry. Age, 23:154, 1897.

Ry. Rev. 33:783, 1893; Chron. 57:1123, 1893; Ry. Age, 19:11, 1894.

Ry. Age, 19:89, 1894.

Ibid. 19:231, 1894.

R. R. Gaz. 26:294, 1894; Chron. 58:683, 1894.

R. R. Gaz. 26:642, 1894; Chron. 59:473, 1894.

Chron. 59:738, 1894; Ibid. 59:697, 1894.

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.

Ry. Times, 65:87, 1894.

Ibid. 65:38, 1884.

R. R. Gaz. 27:160, 1895.

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.

Chron. 60:930, 1895.

R. R. Gaz. 27:590, 1895.

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.

Chron. 61:325, 1895.

Pearsall vs. Great Northern Railway Company, 161 U. S. 647.

Ry. Rev. 35:461, 1895.

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.

Up to this time such accounts had been filed in the Milwaukee court.

Ry. Age, 20:442, 1895; Ry. Rev. 35:503, 1895.

Ry. Age, 20:478, 1895; R. R. Gaz. 27:648, 1895.

Chron. 61:611, 1895; Ry. Times, 68:442, 1895.

Justices Brown, Harlan, Brewer, and Field.

“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.

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.

The existing general mortgage covered only the main line, land grant, and equipment so far as owned by the company.

See Circular of the Reorganization Committee, or Chron. 62:550, 1896; Ry. Times, 69:287–8, 1896.

In addition there were $73,875 of unpaid interest on receivers’ certificates.

See R. R. Gaz. 28:219, 1896, for editorial on plan.

Ibid. 28:349, 1896.

Chron. 62:1139, 1896; Ibid. 63:155, 1896.

Chron. 62:990, 1896; Ibid. 62:1041, 1896.

Chron. 62:1088, 1896.

Ry. Times, 69:511, 1896.

Chron. 62:779, 1896.

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.

From 1898 to 1907 inclusive. This does not include advances to subsidiary companies, which have aggregated nearly $20,000,000.

The average train load in 1907 was 406.77 tons; that in 1898 was 264.59 tons.

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.

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.

Annual Report, 1901.

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 Preferred stock 5 4 4 4 1

Including August.

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.

Chron. 30:356, 1880.

Chron. 30:616, 1880.

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.

R. R. Gaz. 16:891, 1884.

R. R. Gaz. 16:709, 1884.

Annual Report, 1891.

Ibid. 1889.

Ibid. 1892.

Annual Report, 1892.

“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.

Bonded indebtedness, 1900, amounted to $18,395 per mile. Capital stock, 1900, amounted to 13,711 ------- $32,106 per mile.

Ry. Age, 33:186, 1902.

Stock quotations: June 1, 1901 156¾ July 1, 1901 155¾ July 12, 1901 132½

The par was $50 for both common and preferred.

R. R. Gaz. 34:562, 1902.

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.

See financial papers for 1897.

Annual Report, 1903.

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

Chron. 75:212, 1902.

Ry. Age, 34:301, 1902.

R. R. Gaz. 34:750, 1902.

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.

Ry. Rev. 43:408, 1903.

Chron. 76:1192, 1903.

Ry. Age, 36:1, 1903.

Ry. Age, 37:1153, 1904.

See the Annual Report of the St. Louis & San Francisco Railroad for 1904.

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.

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.

After October, 1906.

Ry. World, 51:531, 1907.

Chron. 85:468, 1907.

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.

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.

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.

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.

See Interstate Commerce Commission: In the Matter of Consolidations and Combinations of Carriers, etc., 12 I. C. C. Rep. 319.

Testimony of C. F. Adams, United States Pacific Railway Commission Report, 1887, vol. 1, p. 45.

“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.

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.

Speech at Columbus, Ohio, August 19, 1907.

Forum, September, 1890, and March, 1894.

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.

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.

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.

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.

In 1894.

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

Where stock- or bondholders are compelled to subscribe to an issue of new securities the operation becomes an assessment and not a sale.

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.

A syndicate guaranteed the assessment in each case between 1893 and 1898. The Reading assessment is calculated on a par of $100.

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.

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.

The very large increase in the Baltimore & Ohio quotations was doubtless due to the lateness of the reorganization.

Chron. Investors’ Supplement, January, 1894.

Ibid. 62:641, 1896.

Chron. 45:792, 1887 (reorganization plan). See also Chron. 49:269, 1889.

Pages 84–5, supra.

Chron. 50:141, 1890.

Ibid. 58:762, 1894.

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.

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.

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.

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.)

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.

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.

These figures do not include the comparatively small amount of bonds for which no interest rate was specified.

Income bonds sometimes, though rarely, possess the right to vote.

E. S. Meade, Annals Amer. Acad. Pol. and Soc. Sci. March, 1901.

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.

The 32 per cent paid has been included under rentals.

Government Debt.

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.

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.

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.

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.

See Annual Report for 1906.

Chron. 54:369, 1892.

Investors’ Supplement, April, 1897; Chron. 62:41.

Chron. Investors’ Supplement, April, 1897.

Chron. 79:2087, 1904.

161 U. S. 647.

138 U. S. 84.

New York, 1879.

49th Congress, 1st Session, Senate Report, No. 42.

42d Congress, 3d Session, House Reports, No. 77.

50th Congress, 1st Session, Senate Executive Document No. 51.

54th Congress, 1st Session, Senate Document No. 314.

58th Congress, 3d Session, hearings before the Committee on Interstate Commerce, United States Senate, in Special Session, 1905.

Memoirs of Henry Villard, 1835–1900. Boston, 1904.

Ellis Paxon Oberholtzer, Life of Jay Cooke. Philadelphia, 1907.

H. G. Pearson, An American Railroad Builder. John Murray Forbes. Boston and New York, 1911.

Bouck White, The Book of Daniel Drew. New York, 1910.

C. M. Depew, A Retrospect of Twenty-five Years with the New York Central Railroad and its Allied Lines. New York, 1892.

Hazard Stevens, The Life of Isaac Ingalls Stevens by his Son. Boston, 1900.

Annals of the American Academy for Political and Social Science, March, 1901.

Forum, September, 1890, and March, 1894.

Die Bank, July, 1911.

Quarterly Journal of Economics, November, 1911.

H. H. Swain, Economic Aspects of Railroad Receiverships, Economic Studies of the American Economic Association, April, 1898.

John P. Davis, History of the Union Pacific Railroad. Chicago, 1894.

Alfred von der Leyen, Die Finanz-und Verkehrspolitik der Nordamerikanischen Eisenbahnen, 2d ed., Berlin, 1895.

I. H. Bromley, Pacific Railroad Legislation. Boston, 1886.

J. F. Dillon, Pacific Railroad Laws. New York, 1890.

J. B. Crawford, The Crédit Mobilier of America. Boston, 1880.

Rowland Hazard, The Crédit Mobilier of America. Providence, 1881.

Henry Kirke White, History of the Union Pacific Railroad. Economic Studies of the University of Chicago, 1895.

Hugo R. Meyer, The Settlements with the Pacific Railways. Quarterly Journal of Economics, July, 1899.

T. W. Mitchell, The Growth of the Union Pacific and its Financial Operations. Quarterly Journal of Economics, August, 1907.

W. F. Bailey, The Story of the First Trans-Continental Railroad, its Projectors, Construction, and History. Pittsburg, 1906.

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.

E. H. Mott, Between the Ocean and the Lakes; the Story of Erie. New York, 1899.

Charles Francis and Henry Adams, Chapters of Erie and Other Essays. Boston, 1871.

George Crouch, Another Chapter of Erie. New York, 1869.

Milton Reizenstein, Economic History of the Baltimore & Ohio, 1827–53. Johns Hopkins University Studies, July-August, 1897.

W. P. Smith, The Book of the Great Railway Celebrations of 1857. New York, 1858.

Laws, Ordinances, and Documents Relating to the Baltimore & Ohio Railroad Company. Baltimore, 1840.

E. V. Smalley, History of the Northern Pacific Railroads. New York, 1883.

B. H. Meyer, A History of the Northern Securities Case. Bulletin of the University of Wisconsin, July, 1906.

Alfred von der Leyen, v. supra.

W. W. Chapman, The Northern Pacific Railroad. Washington, 1880.

Robert von Schlagintweit, Die Santa Fe und Sudpacificbahn in Nordamerika. Köln, 1884.

W. B. Wilson, History of the Pennsylvania Railroad Company. Philadelphia, 1899.

T. K. Worthington, Historical Sketch of the Finances of Pennsylvania. Publications of the American Economic Association, May, 1887.

A. L. Bishop, The State Works of Pennsylvania. Publications of Yale University, New Haven, 1907.

W. K. Ackerman, Historical Sketch of the Illinois Central Railroad. Chicago, 1890.

J. H. Hollander, The Cincinnati Southern Railway: A Study in Municipal Activity. Johns Hopkins University Studies, January-February, 1894.

E. A. Ferguson (Compiler), Founding of the Cincinnati Southern Railway; with an Autobiographical Sketch. Cincinnati, 1905.

Charles S. Potts, Railroad Transportation in Texas. Bulletin of the University of Texas, Humanistic Series, March 1, 1909.

P. Briscoe, The First Texas Railroad. Texas Historical Association Quarterly, Austin, 1904.

Chicago, 1905.

E. B. Hinsdale, History of the Long Island Railroad. New York, 1898.

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.

George Bliss, Historical Memoir of the Western Railroad. Springfield, 1863.

Cary, Organization and History of the Chicago, Milwaukee & St. Paul Railroad Company. Milwaukee, 1893.

U. B. Phillips, A History of Transportation in the Eastern Cotton Belt to 1860. New York, 1908.

George Francis Train, My Life in Many States and in Foreign Lands. New York, 1902.

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.

S. F. Van Oss, American Railroads as Investments. New York, 1893.

Carl Snyder, American Railways as Investments. New York, 1907.

Charles F. Carter, When Railroads were New. New York, 1909.

F. H. Spearman, The Strategy of Great Railroads. New York, 1904.

Philadelphia, 1888.

New York, 1887.

New York and London, 1900.

Leipzig, 1883.

Berlin, 1909.

Chicago, 1910

San Francisco, 1890.

San Francisco, 1891.

Springfield, 1874.

Baltimore, 1899.

Madison, 1899.

Madison, 1908 and 1910.

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.