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Title: Railroad Reorganization

Author: Stuart Daggett

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REORGANIZATION ***

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HARVARD UNIVERSITY
Cambridge, Mass., U.S.A.

HARVARD ECONOMIC STUDIES

PUBLISHED UNDER THE DIRECTION OF
THE DEPARTMENT OF ECONOMICS

VOL. IV

RAILROAD
REORGANIZATION

BY

STUART DAGGETT, Ph.D.
INSTRUCTOR IN ECONOMICS IN HARVARD UNIVERSITY

BOSTON AND NEW YORK

HOUGHTON, MIFFLIN AND COMPANY
The Riverside Press, Cambridge
1908

COPYRIGHT 1908 BY THE PRESIDENT AND FELLOWS OF HARVARD COLLEGE

ALL RIGHTS RESERVED

Published May 1908

PREFACE
It sometimes happens that experiences long since past seem to be repeated,
and that knowledge apparently forgotten proves again of service. This is
illustrated by the subject of railroad reorganization. In the years between
1893 and 1899 an imposing group of American railroads passed into
receivers’ hands. In 1893 alone more than 27,000 miles, with an aggregate
capitalization of almost $2,000,000,000, were taken over by the courts, and
in the following years the amount was largely increased. Foreclosure sales
aggregated 10,446 miles in 1895, 12,355 in 1896, and 40,503 between 1894
and 1898. Among the more important failures were those of the Richmond
& West Point Terminal, the Reading, the Erie, the Northern Pacific, the
Atchison, and the Baltimore & Ohio;—to say nothing of the Norfolk &
Western, the Louisville, New Albany & Chicago, the Ann Arbor, the
Seattle, Lake Shore & Eastern, the Pecos Valley, and many other smaller
lines.
The railroads which failed between 1893 and 1898 were subsequently
reorganized. In order to restore the equilibrium between income and outgo
the companies turned to their creditors, and demanded the surrender of a
part of the rights of which bondholders were then possessed. This demand
the creditors were forced to concede. Some of them yielded without legal
compulsion, assenting to “voluntary reorganizations”; some insisted upon
the sale of the property securing their loans, but without escaping the loss
which fell upon their more pliant associates. Much injustice to individuals
came to light at this time. Men who had invested in good faith were obliged
to sacrifice their holdings through no fault of their own. The savings of
years were swept away. The demand of the railroads was one, nevertheless,
which the courts supported, and rightly. The companies could not be
operated unless the creditors were deprived of part of their legal rights. At
the same time, these rights no longer had a material basis on which to rest,
and their surrender meant but the recognition of a loss which had already
taken place.

Most of the reorganizations were completed by the year 1899. Since
that date the improvement in railroad earnings has been marvellous. Gross
earnings from operation were $1,300,000,000 in 1899, they were
$2,300,000,000 in 1906, the last year for which the figures of the Interstate
Commerce Commission are at present available. Total income, after the
deduction of operating expenses, was $605,000,000 in 1899, and
$1,046,000,000 in 1906. It is not to be wondered at that the distress of the
years 1893–9 has not been duplicated during the years 1900–7. On the
contrary, weak roads have had opportunity to strengthen their positions, and
strong ones have spent enormous sums for improvements, and have
declared liberal dividends besides. In no year save 1905 has the new
mileage put into receivers’ hands been greater than 800 miles, and in but
one has the mileage sold at foreclosure equalled that figure. Operating
expenses have increased because the amount of business has exceeded the
ability of the railroads to handle it. Equipment has been so inadequate as to
provoke drastic legislation by the legislatures of many states; yards and
terminals have been crowded until a prominent railroad officer has declared
the expenditure of over five billion dollars to be necessary to restore the
equilibrium between facilities and traffic.
These conditions have caused the earlier problems of failure and
reorganization to be lost to view. Nevertheless, the financial panic of
October, 1907, and the recession in activity which has become more and
more apparent since that time, have again brought these problems forward.
The Seaboard Air Line, one of the important railroad systems of the South,
failed on January 5, 1908. The Chicago Great Western followed three days
later. The Detroit, Toledo & Ironton, the Chicago, Cincinnati & Louisville,
the International & Great Northern, the Western Maryland, and the Macon
& Birmingham have since been put in receivers’ hands. In all, the operation
of 5938 miles of railroad, with a capitalization of nearly $415,000,000, and
total liabilities of $462,000,000, has been taken over by the courts during
the first ten weeks of 1908. Whether this is but the beginning of still more
extended trouble it is of course impossible to say. There are a number of
weak lines in the American railroad system, and the difficulty in obtaining
credit is bound to reveal weaknesses where they exist. At present new loans
have for some months been difficult to obtain, and even strong railroads
have resorted to the issue of short time notes. The Erie, indeed, escaped
bankruptcy on April 8, 1908, only through the timely aid of important

bankers who took up its maturing notes. This points to serious
consequences for the weaker lines. It is true, on the other hand, that
American railroads are generally in better financial and physical condition
than they were in 1893. It is not probable that any railroad collapse will be
so widespread now as it was then. Whether this be so or not, the failure of
nearly 6000 miles of railroad in ten weeks invests reorganization problems
at present with an importance which they have not had for ten years. How,
it will be asked, shall the financial operations necessary to reorganization be
performed? What methods shall be adopted, what dangers avoided, and
what results expected?
The experience of earlier years will provide answers to many of the
questions asked in 1908. In the hope, therefore, that a study of railroad
reorganization, on which the author has been intermittently engaged during
the last six years, will prove of service, the following pages have been
published. They discuss in some detail the financial history of the seven
most important railroads which failed from 1892–6, and that of one
railroad, the Rock Island, which was reorganized in 1902; and summarize in
a final chapter the characteristics of the various reorganizations in which
these roads have become involved. In some respects the history of each
road considered is peculiar unto itself. The Reading had coal to sell, the
Atchison did not. The Southern ran through a sparsely settled country, the
Baltimore & Ohio through a thickly settled one. The Erie has never
recovered from the campaigns of Gould, Drew, and Fisk from 1864–72, the
Northern Pacific was not opened until 1883. In other respects, however, the
roads have had much in common. Excepting only the Rock Island, each of
them has found itself at one time or another unable to pay its debts, and has
had to seek measures of relief. The problems of the different companies at
these times have been strikingly alike. However caused, their financial
difficulties have been expressed in high fixed charges, and, usually, in
excessive floating debts. Greater annual obligations have been assumed
than the roads could meet, and current liabilities have accumulated while
pressing demands have been satisfied. To this state of affairs the remedy has
been sought in comprehensive exchanges of old securities for new. The
exchanges, it is true, have been carried out in different ways, and the
collateral expedients employed have not been the same. To similar
problems different solutions have been applied. It is possible, for this very
reason, for a careful study of the alternative reorganization methods which

have been developed to point out some policies which have been
dangerous, and to make clear others which are both just, and likely to be
successful. Such a study also throws light upon the history of the companies
upon which it is based.
For the way in which the different roads have been handled, the reader
is referred to the text. The order of treatment is very roughly determined by
geographical location; that is, the Eastern roads are first considered, then
the Southern, and then the Western. Each chapter, except the last, should be
examined as a “case” in reorganization experience, and as part, therefore, of
a united whole. No one has been so continuously with his work as the
author himself, and no one can more keenly realize its defects. It is offered
as a contribution in a field in which very little has as yet been done, and it is
hoped that it will prove of value to those concerned with reorganization
plans, as well as to those interested in the development of corporation
finance during the last generation.
Without the unselfish and intelligent assistance of the writer’s Mother,
the preparation of this book would have been long delayed. To her, first of
all, thanks are due. To Professor William Z. Ripley, of Harvard University,
should be made warm acknowledgment of his constant interest and helpful
suggestions. To the Carnegie Institution the author is indebted for grants in
aid of research in this special field. Grateful acknowledgment should also
be made of gifts by friends of the University to cover the expenses of
publication.

CONTENTS

CHAPTER I
Baltimore & Ohio 1
Early history—Extension to Chicago—Trunk-line rate wars—Effect
on the company—Extension to New York—Sale of bonds to pay off
floating debt—Unsatisfactory traffic conditions—Receivership—Mr.
Little’s report—Reorganization—Subsequent history.

CHAPTER II
Erie 34
Early history—Reorganization—Wall Street struggles—Financial
difficulties—Second reorganization—Development of coal business
—Extension to Chicago—Grant & Ward—Financial readjustment—
New York, Pennsylvania & Ohio—Third reorganization—Later
history.

CHAPTER III
Philadelphia & Reading 75
Early history—Purchase of coal lands—Funding of floating debt—
Failure—Struggles between Gowen and his opponents—
Reorganization—Second failure and reorganization.

CHAPTER IV
Philadelphia & Reading 118
Difficulties of the Coal & Iron Company—McLeod’s policy of
extension—Collapse of this policy—Failure of company—Summary
of subsequent history.

CHAPTER V
The Southern 146
Richmond & Danville—East Tennessee, Virginia & Georgia—
Formation of the Southern Railway Security Company—Growth and
combinations—Failure and reorganization of the East Tennessee—
Reversal of position between the Richmond & Danville and the
Richmond & West Point Terminal—Acquisition of the Central of
Georgia—Failure and reorganization of the whole system—
Subsequent development.

CHAPTER VI
Atchison, Topeka & Santa Fe 192
Charter—Strategic extensions—Competitive extensions—Effect on
finances—Raise in rate of dividend—Reorganization of 1889—
Acquisition of the St. Louis & San Francisco and of the Colorado
Midland—Income bond conversion—Receivership—English
reorganization plan—Mr. Little’s report—Final reorganization plan—
Sale—Subsequent history.

CHAPTER VII
Union Pacific 220
Acts of 1862 and 1864—High cost of construction—Forced
combination with the Kansas Pacific and the Denver Pacific—
Unprofitable branches—Adams’s administration—Financial
difficulties—Debt to the Government—Receivership and
reorganization—Later history.

CHAPTER VIII
Northern Pacific 263
Act of 1864—Failure and reorganization—Extension into the
Northwest—Villard and the Oregon & Transcontinental Company—
Lack of prosperity—Refunding mortgage—Lease of Wisconsin
Central—Financial difficulties—Receivership—Legal complications
—Reorganization—Subsequent history.

CHAPTER IX

Rock Island 311
Charter—Early prosperity—Reorganization of 1880—Conservative
policy—Extension—Pays dividends throughout the nineties—
Moores obtain control—Reorganization of 1902—Further extensions
—Impaired credit of the company.

CHAPTER X
Conclusion 334
Definition of railroad reorganization—Causes of the financial
difficulties of railroads—Unrestricted capitalization and unrestricted
competition—Problem of cash requirements—Problem of fixed
charges—Distribution of losses—Capitalization before and after—
Value of securities before and after—Provision for future capital
requirements—Voting trusts—Summary.

RAILROAD REORGANIZATION

CHAPTER I

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

The Baltimore & Ohio Railroad was the first important railway company to
be incorporated in the United States. It was designed to aid the city of
Baltimore in securing the Western trade, and not only private citizens but
the city of Baltimore and the state of Maryland early subscribed to its stock.
When in the course of construction it became expedient to extend into
Virginia, the city of Wheeling and the state of Virginia likewise subscribed,
1
though the action of the latter was subsequently withdrawn. As a result the
funds required for first construction were obtained from the sale of stocks
instead of bonds. In 1844, seventeen years after the granting of the charter,
the annual report showed $7,000,000 in stock as against $985,000 in 6 per
cent bonds; while in 1849, though the loans had been increased, they yet
2
stood in the proportion of one to two.
On December 1, 1831, the first train was run over the line, then 72½
3
miles in length. The early history of the road does not much concern us. It
was one of steady growth, not through an unsettled territory, as with our
Western roads, but through a country the industries of which were already
established. Tracks led, not into prairies, but to populous cities; and the
future of the company, once the initial difficulties should have been
overcome, was at no time uncertain. Thus extension to Cumberland

increased the gross receipts from $426,492 to $575,235, and that to
Wheeling in 1853 likewise brought a great increase in traffic.
The Civil War bore upon the Baltimore & Ohio heavily because of the
peculiar location of its mileage. On May 28, 1861, possession was taken by
the Confederates of more than one hundred miles of the main stem,
4
embracing chiefly the region between the Point of Rocks and Cumberland.
Government protection was temporarily restored in 1862, but raids occurred
until the end of the war. Each time the Confederates occupied the line they
tore it up, and as soon as they retired the company hastened to make repairs.
The road did not default. A portion of the track yielded a revenue from first
to last, and presumably the Government paid generously for the
transportation of its troops.
It was after the Civil War that the real history of the road began. The
key-note was competition;—competition of the fiercest sort between
parallel lines from Chicago to the seaboard, intensified by the rivalry of the
great seaboard cities, and involving traffic in both directions. The decade
1850–60 had seen the extension of Eastern roads to Western connections. In
1851 the Erie had reached Lake Erie; in 1853 the New York Central and
Lake Shore, and in 1855 the Pennsylvania and Fort Wayne had opened
continuous routes from the Atlantic to Chicago. In 1857 the Baltimore &
Ohio had obtained connection with Cincinnati and St. Louis; and in 1858
the Grand Trunk had arrived at Sarnia on its way from Portland to Chicago.
After the Civil War there was both consolidation and extension. The New
York Central was united with the Hudson River, and the Pennsylvania
leased the Pittsburgh, Fort Wayne & Chicago in 1869. The Baltimore &
Ohio reached Chicago in 1874, and the lines which in April, 1880, were
consolidated into the Chicago & Grand Trunk were completed between Port
Huron and Chicago in February of that year. The completion of these
through routes opened the way for very bitter competition. Five
independent lines struggled for Chicago business, and all of them were
prepared to cut rates deeply in order to test their rivals’ strength. In
particular the Baltimore & Ohio was aggressive. “At the time of its
[Chicago branch] opening,” said Mr. Blanchard before the Hepburn
Committee, “it was heralded all over the Northwest as a ‘Relief for the
Farmer,’ ‘the Grangers’ Friend,’ and all other sorts of headlines were put
into the Chicago and Northwestern papers; and President Garrett’s public

utterances, and those to his Board, were filled with enough statements to
show what he intended to do.... I heard him [say] that upon the completion
of his lines, like another Samson, he could pull down the temple of rates
5
upon the heads of these other trunk lines.”
Under these circumstances a dispute between the Baltimore & Ohio
and the Pennsylvania in 1874 over the former’s connection with New York
6
had far-reaching consequences. The Pennsylvania refused to carry
Baltimore & Ohio cars over its line north from Philadelphia, and as a
retaliatory measure the Baltimore & Ohio reduced passenger fares from
7
Washington and Baltimore to Western points from 25 to 40 per cent. The
reduction in rates thus begun inaugurated the first of the great railroad wars.
The cuts soon extended to east-bound passengers and to freight, and forced
corresponding cuts on the Pennsylvania, the Lake Shore & Michigan
Southern, the Michigan Central, the New York Central, and the Erie. Rates
on fourth class and grain from Chicago to New York, which had been 60
cents per 100 pounds in December, 1873, and 40 cents in December, 1874,
8
fell to 30 cents in March, 1875. Rates on special, or sixth class, went as
low as 12 cents from Baltimore and Philadelphia to Chicago. Passenger
fares from Chicago to Baltimore and Washington were reduced from $19 to
$9, to Philadelphia from $19 to $12, to New York from $22 to $15, and to
Boston from $22 to $15. The New York Central and the Erie quoted fares
from New York to Chicago of $18 and to St. Louis of $20, and the
Baltimore & Ohio replied by a cut to $16.25 to Chicago. In April, 1875, the
Baltimore & Ohio cut freight rates from Cumberland to Baltimore over 50
per cent on the four regular classes, and the Pennsylvania at once
9
announced still greater reductions.
The effect of this warfare on railroad revenues was sufficiently serious
to cause the Baltimore & Ohio to recede somewhat from its independent
10
position and to enter into negotiations with the Pennsylvania; but the
terms of the resulting agreement proved unsatisfactory to the other trunk
lines, and no general pacification was obtained. Late in 1875 rates
nevertheless generally advanced, and in December a general agreement was
concluded, followed by a general increase. This agreement was again
hopelessly disrupted by the following April, when cuts in east-bound rates

followed each other with rapidity. The published rates on grain, which had
been 45 cents at the beginning of March, 1876, fell to 40 cents on March 7,
35 cents on April 13, 22½ cents on April 25, and 20 cents on May 5. In June
rates on west-bound freight fell to 25 cents first class to Chicago, and 16
cents fourth and fifth class, actual rates going much lower; and it was
11
possible to travel from New York to Chicago first class for $13.
Warfare between railroads became intensified by the competition
between the cities which the railroads served, and by 1876 the question of
relative rates to New York, Philadelphia, and Baltimore had grown to be of
12
primary importance. By an agreement in 1869 Baltimore had been given a
differential on east-bound freight of 10 cents per 100 pounds, which had
been reduced to 5 cents on grain in 1870. On west-bound freight Baltimore
had enjoyed a differential in 1875 which had ranged from 10 cents on first
class to 5 cents on special class freight, and Philadelphia one which had
been 2 cents less except on first class, where the Philadelphia differential
had been 3 cents less than that to Baltimore. A temporary agreement of
March, 1876, had replaced these allowances by differentials of 13 per cent
in favor of Baltimore and 10 per cent in favor of Philadelphia as against
New York. This relation was fought over in the rate war of 1876. In
December of that year another agreement was reached on the basis of equal
rates from Western points to Europe on export traffic via all four competing
seaboard cities, and reduced percentage differentials on local traffic to those
cities; but this proved temporary, the subsequent advances in rates were not
general, and final agreement was not secured until April, 1877. The contract
then executed was in the nature of a compromise. The differential to
Baltimore was reduced from 13 per cent to 3 cents, and from Philadelphia
from 10 per cent to 2 cents, to apply equally to local and to export traffic.
Rates to Boston were at no time to be less than those to New York.
Differentials on west-bound traffic were to be the same as those on east-
bound on third class, fourth class, and special freight, and on first and
second classes to be 8 cents less per hundred from Baltimore and 6 cents
13
less from Philadelphia than from New York.
The years following the agreement of 1877 were marked by low and
fluctuating rates, extensive cutting under the published schedules, and
frequent attempts at pooling and at apportionment of traffic. At a meeting at

Chicago on December 19, 1878, tariff rates were agreed upon by all lines,
but the existence of time contracts depressed receipts for months thereafter.
Another meeting on May 8 was followed by sharp competition. In June an
agreement to raise rates was made, but proved unsatisfactory owing to long
time contracts. “During the period between December 18, 1878, and July 5,
1879,” said Mr. King in a letter to the Trunk-Line Arbitrators on July 17,
1879, “the Baltimore & Ohio Company has practically been out of the
market, on account of the low rates by the Northern lines. It has not secured
enough east-bound freight to give return loads for the small west-bound
traffic sent over its lines to that city, and has repeatedly moved its cars
14
empty from Chicago to other points on its lines east of that city.”
Early in 1881 the cutting of rates became sufficiently important to force
15
official recognition by the chairman of the trunk-line pool. By June 17
quoted rates on grain were 15 cents per 100 pounds from Chicago to New
16
York, and a railroad war was in full swing. By October the grain rate had
been reduced from 15 cents to 12½ cents; by August passenger fares were
$7 from New York to Chicago, and $16 from Chicago to New York, and
there was quoted besides a $5 Boston to Chicago rate over the Grand Trunk.
The radical nature of these cuts can be appreciated from Mr. Albert Fink’s
testimony before the Hepburn and Cullom Committees. Fifteen cents, said
17
he in 1879, just covered the actual cost of hauling the grain; twenty cents,
he asserted in 1885, was the bare cost of movement, including the general
18
expenses, but without any profit to the road. Grain was therefore not
repaying the specific cost of hauling, and passengers were obviously in
similar case. Temporary relief occurred through the large increase in
business which took place at the end of 1881. In October the Pennsylvania
and the Baltimore & Ohio advanced east-bound rates because of the
abundance of traffic offering, and the New York Central, Erie, and Grand
Trunk followed to a less degree. In November further advances occurred,
though west-bound rates remained low; but throughout December and
19
January rates were low and fluctuating, and negotiations were carried on
for the settlement of the differential question which underlay the trouble.
None of the combatants were open to conviction; the only outlet was
20
therefore arbitration, and this was reluctantly resorted to. In January,
1882, the roads divided the through trunk-line business, agreed to raise

rates, and left the subject of differentials to be investigated by Messrs.
21
Thurman, Washburn, and Cooley.
This solution settled nothing. During the following three years constant
22
disputes arose over the proper division of traffic, and in 1884 the old
struggle was resumed with unabated vigor. Rates on grain to the seaboard
fell from 30 cents to 20 cents on March 14 of that year, and to 15 cents on
23
March 21; remaining low and fluctuating through the year. Immigrant
business from New York to Chicago was handled by the Pennsylvania at
one dollar a head. By February, 1885, rates for traffic in both directions
were completely demoralized. Nominal east-bound charges on grain were
25 cents, or a 10 cent advance since the preceding March, but actual rates
were as low as 8 and 10 cents. Meanwhile published rates on west-bound
freight were a third less than the standard tariff, and passenger rates in both
directions were, roughly, one-half the regular charges. The following month
still further reductions occurred. The warfare was finally terminated by an
24
agreement to maintain rates late in 1885, followed by an elaborate pooling
25
agreement between the competing lines.
From 1875 to 1885 the trunk lines to the Atlantic ports were thus
engaged in active competition. What was the effect of this upon the
Baltimore & Ohio? This road was highly prosperous in 1875. Dividends of
6 per cent and 10 per cent were being paid. The capitalization was small,
and the management conservative. During the ten years following 1875 the
rate of dividend was not materially decreased. In 1876 10 per cent was paid.
In 1877 the old 8 per cent rate was restored, and the following year the
distribution was made in stock instead of in cash. After the agreement of
1878 one-half year’s dividend was paid in cash; and in 1879 9 per cent
cash, and in 1880 10 per cent cash was declared, this rate enduring until
1886. But although dividends were maintained, the effect of the railroad
wars appeared in the slowness with which net earnings increased. A
comparison of the net returns of 1884 with those of 1874 reveals a gain of
40 per cent, on a mileage 27 per cent greater; but the figures for 1885 show
an increase of less than 2 per cent over those for 1874, while the totals for
1884 were not again equalled until 1900. Meanwhile more bonds had been
issued, and the percentage of fixed charges to net earnings had increased
from 16 in 1874 to 63 in 1884. In other words, money was borrowed to put

into the road which did little more than keep the net earnings from
declining. In that same time the stock increased $2,900,000, and according
to the profit and loss account $15,559,636 were put into the property,
making a total of $55,743,092 (of this $37,197,696 were bonds); the only
result of which was the building of 313 miles of line, and the securing of an
increase in net earnings for 1884, which was swept away the following
year.
In 1884 the elder Garrett died, and his son Robert was elected to
succeed him. The old policy of independence and competition was
continued, the objective point being now an entrance into New York.
“When in 1885 the other trunk lines harmonized their differences, ...” said
the Chronicle, “the Baltimore & Ohio ... pursued its policy of aggression....
The road must reach Philadelphia ... nay, must push ... on to New York....
Instead of seeking to avoid rivalry, its every effort seemed to encourage it.
Rates were reduced, concessions made to shippers and travellers, the one
26
idea apparently being to get traffic no matter what the cost.” The necessity
of a secure New York connection had been impressed upon the company in
the course of the rate wars. The first step was to be actual construction to
Philadelphia, the second, construction or traffic agreements from
Philadelphia to New York. Bonds were issued in April, 1883, for
construction of a so-called Philadelphia branch from Baltimore to the
27
northern boundary of Cecil County, Maryland, there to connect with the
Baltimore & Philadelphia Railroad, which was being built through
Delaware and Pennsylvania to Philadelphia. Entrance into Philadelphia was
secured over the Schuylkill River East Side Railway, a corporation
organized under the laws of Pennsylvania and doing business in the city
28
only. The distance was approximately ninety-nine miles; the cost was later
asserted to have been $20,000,000. Beyond Philadelphia the Baltimore &
Ohio relied on an agreement with the Philadelphia & Reading for trackage
29
to Bound Brook, New Jersey, and on a traffic contract with the Central of
30
New Jersey for its line from Bound Brook to Elizabeth. Terminals on
Staten Island were secured by purchase of a controlling interest in the
31
Staten Island Rapid Transit Company, and connection between Elizabeth
and the Island was obtained by new construction. The strength of this route
was in its directness and in its independence of trunk-line control; its

weakness was in its excessive cost between Baltimore and Philadelphia, and
in its reliance upon traffic contracts north of the latter city. A proposition
was advanced to unite the Baltimore & Ohio, the Philadelphia & Reading,
and the Central of New Jersey with the Richmond Terminal System. This,
32
however, fell through, and the possibility still existed that the Baltimore &
Ohio might some day construct a line of its own from Philadelphia to New
York.
Pending the completion of the preceding arrangements rate conditions
remained naturally unsatisfactory. The Pennsylvania objected to the
paralleling of its Philadelphia-New York branch, and refused to allow
temporary use of that line by the Baltimore & Ohio while the latter’s
33
independent connections were being established. Freight rates were
slowly and painfully raised after the conflict of 1884–5, and did not regain a
high level. In 1886 the Baltimore & Ohio was forced to reduce its dividends
from 10 to 8 per cent. The following year it cut to 4 per cent, and in 1888 no
dividend at all was declared. The surplus on the year’s operations, which
had not since 1878 fallen below $1,000,000, dropped to $110,819 in 1885,
and to $36,259 in 1886. As dividends decreased, the funded debt
34
increased, the percentage of fixed charges to net income rose from 63 to
89, and the floating debt attained the portentous amount of $11,148,007.
The only item which did not grow was net earnings. There was nothing
occult in the situation. Every one was well aware that the competition to
which the Baltimore & Ohio had been subjected had been severe, and that
the cost of its New York extension had been large. In 1887 the bonds
outstanding were $56,868,201, the stock $19,792,566, and the accumulated
surplus $48,083,720, or a total of $124,744,487. This stood for the sums
invested in the property. Net income on the other hand was $4,994,721; so
that on an investment of over $100,000,000 but 4 per cent was being
obtained to cover interest, improvements, and whatever dividend might be
declared.
That no general apprehension was felt by investors before 1887 was
due to the great prestige which the Baltimore & Ohio enjoyed. The long
series of dividends counted heavily in favor of the road. The enormous
accumulated surplus, said to have been invested in valuable improvements
35
and extensions; the enterprise of the company in making extensions; the

large volume of business; and the confident statements of the president, all
36
conspired to prevent a too keen analysis of the business returns. Relief of
two sorts was nevertheless required. In the first place the floating debt had
grown so large that some means of paying it off was necessary; in the
second place the road needed a sufficient reduction in fixed charges to
restore some of the margin of non-mortgaged earnings which had been so
great a safeguard in the early days. Only the first of these requirements was
met. Cash the road had to have; the existing fixed charges, it was thought, it
could endure if only some abatement of the intensity of trunk-line
competition could be obtained.
The method chosen for raising cash was the sale of bonds. In
September, 1887, J. P. Morgan & Co. announced that a preliminary contract
had been entered into between the Baltimore & Ohio Railroad Company
and J. S. Morgan & Co., Baring Bros. & Co., and Brown, Shipley & Co., of
London, and their allied houses in America, for the negotiation of
$5,000,000 Baltimore & Ohio Consolidated 5s and of $5,000,000 preferred
stock, for the purpose of paying off the entire floating debt, and of placing
37
the company upon a sound financial basis. The consolidated bonds were
to be part of an authorized issue of $29,600,000, of which $21,423,000
were to be reserved to retire the main stem mortgage indebtedness when it
should fall due, and $8,177,112 were to be exchanged for securities in the
company’s sinking fund, the freed securities to be used to pay the floating
debt in part. In case this exchange should not be made, $7,500,000 of the
issue might be sold direct, and the syndicate before mentioned agreed to
take $5,000,000 of this amount and to place $5,000,000 in preferred stock
on condition:
(a) That the statements of the company should be verified;
(b) That the management of the company should be placed in
competent hands, satisfactory to the syndicate;
(c) That satisfactory contracts should be made between the Baltimore &
Ohio and other roads for New York business, which should remove all
antagonism between them on the subject, and should ensure the permanent
working of the first-named in entire harmony with the other trunk lines,
besides avoiding the construction, or the threat of construction, of
expensive lines north and east of Philadelphia.

Annual payments to the Baltimore & Ohio sinking funds were to be
38
made in the future in consols instead of in cash.
The essence of this arrangement was a funding of the floating debt,
plus agreements with other roads in order to maintain earnings. The funding
involved, however, a certain increase of charges through the issue of bonds,
while the agreements offered but a doubtful chance of increased earnings.
Only by an effective community of interest or of ownership among the
trunk lines could a saving have been secured on which the new bond issues
could safely have relied. That this was to take place through the syndicate,
that body was emphatic in denying. “The statement,” said Vice-President
Spencer, “that the Baltimore & Ohio Railroad has passed into the hands of a
syndicate, of which J. P. Morgan is the head, is absolutely without
foundation.... The syndicate has the greatest interest now in the growth of
the Baltimore & Ohio, and to secure this growth and progress absolute
independence of other corporate predominance is essential, and the road
39
must be worked in the interest of the states and territories it reaches.” This
declaration left only informal agreements as a resort; for pooling had been
forbidden in 1887. It did more, it implied the necessity of a maintenance of
competition, for to work the Baltimore & Ohio in the interest of Baltimore
meant to work it against the interest of New York. In principle the plan was
nevertheless adopted. Bondholders saw no necessity for a radical
reorganization, and were willing to consent only to a new issue of bonds.
Certain modifications were, however, imposed. The exchange of new bonds
for securities in the sinking fund was abandoned, and the alternative of
direct sale was embraced. It was found impossible to secure the consent of
stockholders to an increase in the preferred stock, three attempts to obtain
40
the required authorization failing in the week ending January 20, 1888.
41
Furthermore, the failure of the stock issue led President Spencer to
request that the city of Baltimore extend for five years at 4 per cent a
$5,000,000 loan to the company, which was to mature in two years, and that
it return the sinking fund of $2,400,000 which had accumulated in its hands
42
for the eventual cancellation of the debt. It may be added that this
suggestion was not accepted.
While awaiting final settlement of the syndicate scheme the Baltimore
& Ohio obtained some cash from the disposal of all its free resources; that

is, from the telegraph, express, and sleeping-car businesses which it had
conducted since early in the administration of John Garrett. In August,
1887, it sold its express business to the United States Express Company for
a period of thirty years, in return for $1,500,000 of the capital stock of the
express company plus a certain percentage of the annual earnings of the
43
express lines handed over. In October of the same year its telegraph
business was turned over to the Western Union Telegraph Company in
return for $5,000,000 of the Western Union stock, and an annual payment of
44
$60,000 in cash. Finally, in June, 1888, its sleeping-car equipment and
franchises were transferred to the Pullman Company for a period of twenty-
45
five years at a reported price of $1,250,000. The company agreed to
furnish all the sleeping and parlor cars required. This brought the incidental
advantage of ending long-continued suits over patents. The terms of sale to
the telegraph and express companies brought in no ready money, but the
securities obtained were readily salable, and being independent for their
value of the commercial success of the Baltimore & Ohio were available for
times of difficulty. It was this policy which offset the refusal of the city of
Baltimore to return the sinking fund to the company, and which by March,
1888, rendered the road even to some extent independent of the syndicate.
At that date a modification of the syndicate agreement took place. The
bankers gave up all claim to the $5,000,000 of stock so long under
discussion, and took instead the balance ($2,500,000) of the $7,500,000
consolidated mortgage bonds which the company was authorized to sell.
“The syndicate acted,” said the Baltimore Sun, “in an entirely friendly
spirit, and, with a desire to continue its financial relations with the
company, took the remaining $2,500,000 ... at a better price than was paid
46
for the $5,000,000.”
With temporary financial requirements provided for, President Spencer
was enabled to achieve some much-needed reforms. At a meeting of the
directors on March 14 a complete reorganization of the service was
authorized, with changes and transfers affecting employees from the first
vice-president down. Later a committee of mechanical experts was
organized “to examine thoroughly all the shops, shop tools, etc., of the
entire Baltimore & Ohio system, and to report on all the improvements
47
needed.” The form of the annual report was improved. The much-quoted

surplus, which had proved such an unreliable support, was cut in two by the
writing off of bad investments, the marking down of the price of securities,
and the like; and, finally, a committee was appointed to make a general
48
examination of the financial as well as the physical condition of affairs.
“Great anxiety,” said a resolution of the directors, “exists in the public mind
as to the financial condition and the value and earning capacity of the road
and property ... [and] it is due to all interests that a full, frank, and complete
statement of its affairs should be made public.” So far as lay in his power
President Spencer, and through him the syndicate, tried to secure a real and
permanent improvement in the condition of the road, and to gain, through
increased efficiency in operation, the margin which the refusal to cut down
fixed charges had denied. The failure of the attempt may be ascribed to the
continuance of the Garrett family in power. Any irregularities or mistakes
which had taken place in the past reflected on the Garretts, so that it was to
their interest to stifle investigation. Moreover, any change in policy for the
future implied a criticism of their acts to which they were reluctant to
accede. In 1888 the Garrett holdings amounted to from 50,000 to 60,000
shares out of a total of 150,000 shares, or, deducting 32,500 shares held by
the city of Baltimore, which were not entitled to vote, to about one-half of a
total of 117,500 shares. This gave undisputed control. The effect was seen
in the annual election in November. Of 12 old members of the board only 5
were reëlected, and of the 7 dropped 3 formed part of the investigating
committee engaged in securing “the full, frank, and complete statement of
49
the company’s condition” promised at an earlier date. The same month
President Spencer was ousted and Mr. Charles F. Mayer was elected in his
place.
This revolution was fatal to any radical reform, so that during the next
seven years the condition of the Baltimore & Ohio improved but little. Net
income grew, it is true, up to the panic year of 1893, but fell so sharply after
that that the reported figures for 1895 exceeded those of 1888 by but
$1,283,843, and even this gain was practically wiped out during the
following year. Meanwhile fixed charges grew from $6,550,972 in 1888 to
$6,934,052 in 1895, and to $7,303,781 in 1896; an increase which
transformed the profits of the company the following year into a deficit. A
comparison of the balance-sheets of 1888 and 1895 shows an increase of
$10,207,434 in stock, of $16,261,000 in funded debt, and of $4,554,939 in

floating debt. These changes were offset mainly by increases in bonds and
stock owned, or in the hands of trustees, by advances to subsidiary lines,
and by a reduction of $11,080,000 in bonded debt secured by collateral or
by mortgage on the main line. During this time dividends were nevertheless
steadily paid on the preferred stock, and, beginning in 1891, upon the
common stock as well. The liberal tendencies of the management were also
evinced by a 20 per cent dividend upon the common stock, declared in 1891
to compensate shareholders for expenditures in betterments and
50
improvements of the physical condition of the property. It will be seen
how different this was from the policy of retrenchment and economy which
had been inaugurated by President Spencer, and which might fairly have
been expected from a corporation barely escaped from bankruptcy.
Traffic conditions from 1887 to 1893 were very far from satisfactory.
The difficulties between the Baltimore & Ohio and the Pennsylvania were
indeed patched up, and the opening of the former’s lines to New York
rendered it independent of other trunk-line connections; but frequent
charges of rate cutting were made in 1887, and a war in dressed-beef rates
was inaugurated by the Grand Trunk in November of that year. In 1888
rates were pretty much demoralized. Published rates on grain dropped from
27½ cents in January to 20 cents in October. Emigrant rates from New York
to western points became the subject of active competition; and, most
important of all, the dressed-beef controversy was pushed till it developed
into a war of the most active kind. The trouble here was started by cuts on
dressed beef by the Grand Trunk. In May other lines retaliated by cuts in
live-stock rates; by July 14 published rates on cattle from Chicago to New
York were 5½ cents per 100 pounds, and on dressed beef and hogs 7 cents.
In November the New York Central extended the contest by a general
51
reduction in west-bound rates. These struggles, though terminated for a
52
time by an agreement of February, 1889, seriously diminished railway
revenues, and prevented the rapid growth which the general prosperity of
53
the country might have occasioned. In fact, the Erie management stated in
their annual report for 1888 that their company had retired altogether from
certain classes of through business for a time during the preceding twelve
months, owing to the unremunerative level of rates. Conditions during the
54
greater part of 1889 were better, and during the following three years

constant attempts at agreement and arbitration, joined with a considerable
55
volume of business, prevented a long continuance of any difficulties
which arose.
It was perhaps traffic conditions such as we have described which led
the Garrett family to favor a community of interest scheme which should
improve the Baltimore & Ohio connections with the West. In June, 1890,
Mr. E. R. Bacon formed a syndicate to control the stock of the Baltimore &
Ohio Company. Acting in harmony with the Garrett family, the syndicate
was made up of Philadelphia, New York, Baltimore, and Pittsburg
capitalists, including the Richmond Terminal, Pittsburgh & Western,
Northern Pacific, and Reading interests. The plan was to establish a
community of interest between a vast network of lines reaching from the
Atlantic to the Pacific, and from New York to the Mississippi. “The
buyers,” it was said, “came in simply as investors without condition that
their other properties would be benefited, although it was of course
56
intimated that something was to be done.” They were required to pool
their stock for three years, and to give an irrevocable proxy for that period
to President Charles F. Mayer. The amount of the syndicate purchase was
45,000 shares, of which 32,500 were obtained from the city of Baltimore,
57
and 9686 (preferred) from the state of Maryland; and the purchase
brought the incidental advantage of removing city and state from any direct
interest in the road. The preferred state stock the syndicate later exchanged
for common stock owned by the Johns Hopkins University. The purchase
once made, the pool was formed on well-known lines. The stock was
deposited with a trust company, trust certificates were issued, and proxies
58
transferred to Charles F. Mayer. The shares to be deposited were limited
in amount to 110,000; the actual amount put in was 89,750. The results of
the agreement were less sensational than the forecasts made. It undoubtedly
did much to promote friendly feeling among the roads concerned. When, in
1891, the Baltimore & Ohio was compelled to vacate the Chicago terminals
of the Illinois Central, which it had occupied for years, it was able to make
prompt arrangements with a corporation controlled by the Northern Pacific
for the use of its facilities both for passengers and for freight. But the
influence of the Garrett family was not lessened, and inasmuch as the main

competitors of the Baltimore & Ohio were not included there was no check
to competition, and earnings showed no striking change.
59
Matters stood thus at the beginning of 1893. No progress had been
made toward restoring the Baltimore & Ohio to a permanently stable
condition, and the prosperity which its reports declared was fictitious only.
The reorganization to which bondholders had refused to submit in the
comparatively prosperous times of 1888 was compelled by the depression
following the panic of 1893. In 1894 earnings fell off. The gross earnings
for the year ending June 30, 1893, were $26,214,807, and the net income
$9,210,666; the following year the same items were $22,502,662 and
$8,719,830. The directors reduced the dividend and called attention to the
60
losses incurred through protracted strikes in the coal and coke industry.
The following January (1895) President Mayer stated that the fixed charges,
including the car trusts, sinking funds, etc., due January 1, amounting to
nearly $1,000,000, had been paid without borrowing one dollar. “I name
this fact especially,” said he, “because it is not unusual for us to make a loan
for the unusually heavy payments January 1. I doubt if the Baltimore &
Ohio has owed so small a floating debt for twelve or fifteen years, perhaps
longer, and it never had the large volume of stocks and bonds it now has,
something over $16,000,000, not put down at their face value but rather at
their market value, or far below their intrinsic value. I can safely say the
61
road has not been in so strong a position as now for at least fifteen years.”
It required more than confident statements by the managers, however,
to demonstrate the secure position of the road; and this all the more because
the acts of these gentlemen belied their public assertions. Dividends on the
common stock were passed in 1895, and again in 1896. The ratio of charges
to earnings, according to the company’s reports, rose from 75 per cent of
net earnings in 1894 to 80.2 per cent in 1895, and to 98.2 per cent in 1896;
that is, less than 2 per cent of the net earnings of $6,300,000 was admitted
62
to be available for dividends on $30,000,000 of stock. Some relief was
evidently necessary. In January, 1896, it was announced that arrangements
had been made with a strong syndicate to provide for all immediate
financial requirements; but the appointment of receivers in February could
scarcely have come as a surprise. During the two weeks just before the
failure Mr. J. K. Cowen, who had succeeded Mr. Mayer in the presidency,

spent a great deal of time in New York trying to borrow money to meet the
pressing demands. On his eventual failure and return to Baltimore the
63
directors felt that a friendly receivership was the only resource.
To the well-wishers of the road this failure may have seemed an
opportunity as well as a disaster. It was now possible to accomplish what
the management in 1888 had refused to attempt, i. e. a reduction in the fixed
charges of the company which should remove the burdens under which the
road had labored, and should open up the way for a long period of
improvement and prosperity. At least one more unpleasant experience was,
however, to be passed through. With a view to determining the Baltimore &
Ohio’s real position, an expert accountant, Mr. Stephen Little, had been set
to work upon its books, and from time to time notices had been appearing
that he was at work, that his examinations confirmed the statements of the
company, and that questions raised by hostile critics would be considered in
his report. Thus in April a reorganization committee, composed of Messrs.
Alexander Shaw, C. Morton Stuart, and six others, with whom were
deposited the Garrett shares, issued a circular referring to the large amount
of new capital, estimated by them at $30,000,000, which had been received
by the company since 1888 “without adequate or satisfactory results,” and
to the floating debt, which they asserted had been increased from about
$3,500,000 to $16,000,000. “We make no charges, or even intimations of
wrongdoing,” wrote their secretary, “but desire and require that a full
explanation of the management of the property from the year 1888, when
the road was set on its feet by Mr. Morgan, shall be given, and that the
causes which led to the wrecking of the property shall be clearly shown.”
To which another committee, which directly represented the management,
64
replied by reference to Mr. Little.
The much-heralded report came out in December, having been withheld
since the previous March for fear of the effect on the company’s securities;
and so far from sustaining the management, it contained charges of
irregularity almost as sensational as those made against the Atchison at an
earlier date. The books of the company, according to Mr. Little, were in
error to the amount of $11,204,858. During the period of seven years and
two months which his report covered he found:
An overstatement of net income of $2,721,068

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

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

American corporations, the managements of which have indulged in secret
juggling with the books.
Pending Mr. Little’s report, reorganization was of course delayed. The
67
receivers were then in control, and under their direction a vigorous policy
of improvement was carried out. The rolling stock of the system was found
to be insufficient to handle its business, and the motive power was in
similar condition. All testified to the consistent desire of the old
management to employ every device which might contribute to greater
apparent earnings. Contracts for 5000 freight cars were let as early as May,
1896, to be paid for in receivers’ certificates, and bids for 75 locomotives
68
were at the same time received. During their whole administration the
receivers purchased over 28,000 freight cars, 216 locomotives, 123,000 tons
of rails, besides ties, ballast, new steel bridges, and miscellaneous
69
improvements of various sorts. On the financial side they had to resist an
attempt to compel payment of dividends on the preferred stock. The case
dragged on through 1897 and 1898, and was finally decided in favor of the
70
company.
After the publication of Mr. Little’s report there remained no serious
bar to reorganization, while the needs to be met were more apparent than
ever before. If the proportion of charges to earnings had been too heavy on
the management’s own showing, how much more burdensome was it when
the reported earnings had been proved too high, and the reported liabilities
too low! The first step after the appointment of receivers had been the
springing up of reorganization committees. The two most prominent were
the Fitzgerald Committee, representing the directors, and the Baltimore
Committee. There were besides committees representing the 5 per cent
bonds of the loan of 1885, the consolidated mortgage 5s, the 6 per cent
bonds of 1874, the preferred stock, and others. These were all to some
extent antagonistic. It was hoped to secure a reorganization without
foreclosure, but to provide against all contingencies a bill was introduced
and passed through the Maryland legislature, permitting a new company to
succeed, after reorganization, to the property of the Baltimore & Ohio
system.
By April, 1898, a reorganization plan was ready, and was withheld only
on account, first of the threatened, and then of the actual, war with Spain.

Two months later this difficulty seemed no longer serious, and a plan was
71
formally announced. There were contemplated two great issues of bonds
and two of stock as follows:
3½ per cent prior lien gold bonds, $70,000,000
4 per cent first mortgage gold bonds, 50,000,000
4 per cent non-cumulative preferred stock, 35,000,000
Common stock, 35,000,000

These were to be parts of larger amounts authorized but not issued. Thus the
authorized amount of prior liens was $75,000,000, of which $5,000,000
were to be reserved, and to be issued after January 1, 1902, at the rate of not
exceeding $1,000,000 a year, for enlargement, betterment, or extension of
properties covered by the prior lien mortgage; or for the acquisition of
72
additions thereto. The authorized amount of first mortgage 4s was
$165,000,000. Since the prior liens matured in 1925, and this mortgage not
till 1948, $75,000,000 were reserved for retirement of the prior issue.
$7,000,000 were further put aside for the new company; $6,000,000 for the
retirement of the Baltimore Belt Line 5s, and $27,000,000 for enlargements,
betterments, or extensions, etc., at a rate not exceeding $1,500,000 a year
73
for four years, and not exceeding $1,000,000 a year thereafter. The
reserves from these two mortgages, therefore, made liberal provision for
new capital requirements. All of the common stock authorized was to be
issued at once; but besides the $35,000,000 preferred stock before
mentioned, $5,000,000 preferred were to be held in reserve for the new
company.
Of the immediate issues $60,073,090 prior liens, $36,384,535 first
mortgage 4s, $17,218,700 preferred stock, and $31,178,000 common stock
went toward the retirement of old securities; and $9,000,000 prior liens,
$12,450,000 first mortgage 4s, and $16,450,000 preferred stock were for
cash requirements. The better of the old mortgages received cash for their
overdue interest, something over par in prior liens for their principal, and
from 12½ to 32 per cent in first mortgage 4s and preferred stock to
compensate for reductions in their annual return. Inferior bonds received
new first mortgage 4s with preferred stock (except in one instance) as a
douceur. The old stock, common and preferred, and the Washington City &
Point Lookout 6s got mostly new stock for the principal of their holdings,

and preferred stock for their assessments. The fundamental principle on
which the exchanges were based was the retirement of old bonds bearing
high interest rates by an increased volume of new bonds bearing lower
rates; thus permitting a much smaller reduction in fixed charges than
occurred in other reorganizations which we shall consider. To some extent
reductions in annual yield were made up by allowance of preferred stock.
The consolidated mortgage 5s of 1887, on which interest was reduced from
$50 annually to $41.75, received $85 in 4 per cent preferred stock as a
compensation. The Baltimore & Ohio Loan of 1874 saw a reduction in
interest from $60 to $40.41, partially made up from the dividends on $160
of new preferred stock. In fact, out of thirteen cases in which new bonds
were given for old, ten included an allowance of preferred stock, thus
bringing the Baltimore & Ohio in line with other reorganizations of the
period. But the proportion of preferred stock given was small in each case,
74
and the principle was not well carried out.
The cash requirements of the system were estimated at $36,092,500;
being swelled by arrears of interest, receivers’ certificates, need for working
capital, reorganization expenditures, and the like. The plan proposed to
cancel them by assessments on stockholders and by the sale of securities
before described. On the first preferred stock, $2 a share was levied, $20 on
the second preferred, and $20 on the common stock, with a syndicate
guarantee for each. This netted $5,460,000. Stockholders received new
preferred stock for their payments. Deducting $5,460,000 preferred stock
from the securities reserved under the plan to be sold for cash, there
remained $9,000,000 prior liens, $12,450,000 first mortgage 4s, and
$10,990,000 preferred stock, or a total of $32,440,000; all of which a
75
syndicate agreed to take. In addition the company disposed of securities in
the treasury, including $3,800,000 stock of the Western Union Telegraph
76
Company, for $3,500,000.
Both classes of stock were vested in five voting trustees, for a period of
five years. The trustees might, however, deliver the stock at an earlier date
in their discretion, and in fact did so in August, 1901. No additional
mortgage was to be put upon the property, and no increase in the amount of
the preferred stock was to be made, except in each instance after obtaining
the consent of the holders of a majority of the whole amount of preferred

stock outstanding, given at a meeting of the stockholders called for that
purpose, and the consent of the holders of a majority of such part of the
common stock as should be represented at such meeting, the holders of each
class of stock voting separately. During the existence of the voting trust
similar consent of holders of like amounts of the respective classes of trust
certificates was to be necessary for the purposes indicated. Only a portion
of the leased and dependent lines were provided for in the plan, but the
various cases were left to be passed on separately. Thus the Baltimore Belt
Line was finally leased at a rental equivalent to 4 per cent on the
outstanding 5 per cent bonds; while the acquisition of the Baltimore & Ohio
Southwestern and the Central Ohio railroads involved the payment of a cash
bonus, and an increase in the preferred and common stock outstanding. The
mileage of the system suffered little change. Many of the branches were
sold at foreclosure, and bought in by the parent line; and a glance at the
balance-sheet in 1899 shows that besides the prior liens and the first 4s, an
issue of Pittsburg Junction and Middle Division bonds was the principal
tool employed. These securities, bearing 3½ per cent, and falling due in
1925, were issued; 1st, to retire branch-line securities, and to weld the
system into one united whole; and 2d, to provide new capital for
enlargement and betterment and extension.
The success of this Baltimore & Ohio reorganization plan was very
largely due to the time at which it was put through. In other words, the
reorganization was completed just when an unparalleled era of prosperity
was fairly under way. The moderate reduction in fixed charges which it
secured proved more than adequate when earnings rapidly grew. The net
earnings of the property for the year ending June 30, 1898, were estimated
77
at $7,724,758, and the new fixed charges were set at $6,252,351. Net
earnings for 1899 were $6,621,599. In 1900, on a mileage 11 per cent
greater, they were $12,359,443, and fixed charges were $6,831,463 only. In
subsequent years, with an increase both in mileage and in earnings, the
margin between charges and income further increased. In 1903 $3,500,000
were spent out of earnings for additions and improvements; $7,370,482
were declared in dividends; and $2,947,681 were carried to surplus. In 1907
$3,000,000 were spent in additions and improvements, $6,965,245 paid in
dividends, $7,480,385 carried to surplus. This situation was in no way due
to the reorganization plan, and would have restored the company to

solvency even if no reorganization had taken place. It may be said that the
receivership did much to enable the road to take advantage of the later
prosperity. The character of the receivers’ work has been mentioned. By
June 30, 1899, they had spent as much as $17,000,000 for cars alone,
$2,500,000 for locomotives, $2,100,000 for rails, and other sums for
improvements and renewals of all kinds. The maintenance of way pay-rolls
in three years amounted to nearly $12,000,000, and the total expenditure
aggregated about $35,000,000; of which $15,000,000 were secured by the
issue of receivers’ certificates, and the balance through car trusts, earnings
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from the property, and from the reorganization managers. This was an
indispensable and invaluable preliminary to a growth in earnings, but was,
however, distinct from the financial problems of reorganization. In brief, the
Baltimore & Ohio increased its nominal capitalization more, and reduced its
fixed charges less than any of the seven other reorganizations of the nineties
which we shall consider except the Erie. Its need was perhaps less crying,
but not sufficiently so to explain the difference.
It will be remembered that, while provision had early been made for
foreclosure, it had been hoped to avoid such a drastic step. Hopes in this
respect were fulfilled, and while a number of branch lines were sold the
main stem escaped. Vigorous objections to the plan came from the preferred
stock, which was in 1898 suing to compel payment of its dividends. In July,
at a meeting of shareholders it was declared to be the sense of the meeting
that the preferred stock could not justly be required to determine whether it
would accept the proposition published by the reorganization committee
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before the case in the Supreme Court should be decided. Late in July an
injunction was obtained, which, however, was dissolved in October. Still
later in that year the suits were settled by the sale of the bulk of the first
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preferred stock to the reorganization committee. The only other
considerable complaint came from the holders of the 4½ per cent Baltimore
& Ohio Terminal bonds, and was a protest against the reduction of ½ per
cent in their interest without, as they said, the smallest compensation. Suits
for the foreclosure of the mortgages of 1887, 1872, and 1874 were
instituted in October, 1898. Decrees were obtained in February. Decrees
were also given against the Philadelphia Division, the Parkersburg Branch,
the Staten Island Rapid Transit Company, and others. Separate receivers
had previously been appointed for the Sandusky, Mansfield & Newark, the

Central Ohio, the Washington Branch, and others. Decrees were not asked
for against the main line. In August, 1898, only three months after the
publication of the plan, the reorganization managers were able to pronounce
it effective.
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The receivers surrendered control July 1, 1899, and the company
started on its new career amid a buzz of satisfaction from all who had
participated in its reorganization. In an address before the Maryland Bar
Association Mr. John K. Cowen summarized the result as follows:
(1) Every bondholder of the Baltimore & Ohio Railroad has received
new securities which substantially pay his full debt. In other words, the
bondholders have been paid in full.
(2) The floating debt creditors have received every cent of their
indebtedness.
(3) The first preferred stockholders have received in cash 75 per cent of
the par value of their stock, the court overruling their claim of preference
over the bondholders and creditors. The second preferred stockholders have
received securities which, after payment of the assessment, net about $70
per share, at the market price, and at times over $80 net could have been
realized.
(4) The common stockholders, instead of being wiped out, have
received their common stock in the new company upon paying an
assessment, the net amount of which (because of the value of the securities
received for such assessment) would not exceed $5 or $6.
(5) The company saves its old charter for whatever value may be
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attached to it.
This statement presents the favorable side of the picture. On the whole,
securityholders were tenderly handled, though the bondholders were by no
means paid off in full. And on the other hand, this very tenderness made a
voluntary reorganization possible, whereby the charter of the company was
saved. The pertinent objections were from the point of view of the company
itself, and these were silenced by the increase in earnings.
Since reorganization the Baltimore & Ohio has been enjoying great
prosperity. On a mileage operated, which was some 1800 miles greater in

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1907 than in 1900, it earned a return increased by over $40,000,000;
while its income from dividends and interest mounted from less than half a
million to over $3,000,000. Ton mileage figures were about 11,300,000,000
in 1907 as against 6,800,000,000 in 1900; passenger mileage had grown
from 459,000,000 to 723,000,000. This prosperity has but reflected the
condition of the country at large, but the Baltimore & Ohio has taken
advantage of it in far-sighted fashion. No less than $17,000,000 have been
spent from earnings for additions and improvements between June 30,
1899, and June 30, 1907, not to mention maintenance of way expenditures
which have ranged from about $1500 to over $2500 per mile of road
operated. Besides the provision made by the reorganization plan,
$15,000,000 convertible debentures were issued under date of March 1,
1901, for new construction and improvements. There were authorized
$40,000,000 of common stock in November, 1901, to go in part for
improvements, and the bulk of $27,750,000 new common stock of 1906
will be applied to similar ends. As a result the company’s equipment has
largely increased, grades have been reduced, curves straightened, light rails
replaced by heavy, and subsidiary track increased. There were two miles of
second, third, and fourth track and sidings for every three miles of main
track in 1900; there were three miles to every four in 1907. A considerable
increase in average freight train load has accordingly occurred. In 1900 the
average load was 366 tons; in 1907 it was 433.02. That this figure has not
still more greatly increased from the 406.53 tons of 1901 is probably due to
the somewhat greater proportion of manufactures handled and to a
considerable decrease in average distance hauled, and is compensated for
by an increase of over one cent in the average rate received.
The events of most vital importance in the Baltimore & Ohio’s recent
history have been connected with its control. In September, 1898, Philip D.
Armour, Marshall Field, and Norman D. Ream, executors of the Pullman
estate, together with James J. Hill of the Great Northern, bought a large
interest in the stock, though whether or not sufficient to control no one
knew. From statements by Mr. Cowen it would appear that the deal was
somewhat similar to the earlier one in which the Northern Pacific had been
interested: that is, it involved the sale of Baltimore & Ohio stock to secure
the good will of men strong enough to support the road in case of difficulty,
and influential enough to open desirable connections or to modify the

stringency of competition. “The recent transaction,” said Mr. Cowen, “has
been the realization of my hopes about the future of the road.” It was not
Mr. Hill’s influence, however, that was destined to be dominant. By the end
of the year rumors connected the Pennsylvania with the purchase of an
interest in the property, and the election of Mr. S. M. Prevost, third vice-
president of that company, to a directorship, gave assurance of the truth of
the reports. It was, of course, impossible to purchase actual control so long
as the Baltimore & Ohio stock remained in trust; but the trustees seemed
very ready to accord to new buyers that representation and influence to
which their stock might give them claim. At the annual election in
November, 1900, an additional representative of the Pennsylvania was
elected to the board, showing the probable increase of the Pennsylvania
holdings, and the following year an absolute majority was said to have been
passed, the shares held by Mr. Hill and his associates, and apparently sold
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to the Pennsylvania, being thought to contribute powerfully to that result.
In May, Mr. Hill and Mr. Charles H. Tweed, chairman of the Southern
Pacific, resigned from the directorate, to be replaced by two further
representatives of the Pennsylvania. In June, President Cowen was replaced
by Mr. S. F. Loree, fourth vice-president of the Pennsylvania lines west of
Pittsburg, and in August the voting trust was dissolved.
The last step has been the sale of part of the Pennsylvania holdings to
the Union Pacific system. It appears that the former’s interest in the
company was largely due to anxiety over the coal situation. Before 1895
rates on bituminous coal had been depressed and demoralized. Rebates had
been freely given in spite of any agreements which could be arranged.
Under these circumstances the Pennsylvania had determined to buy enough
stock of the Chesapeake & Ohio, the Baltimore & Ohio, and the Norfolk &
Western companies to control the policies of these roads, and, through stock
ownership in the Reading by the Baltimore & Ohio, to influence that
85
company also. Unfortunately for the project public attention became
concentrated on the coal industry at this time because of the discovery of
certain flagrant abuses, and it seemed wise for the Pennsylvania to
86
dispossess itself of a part of its stock. The Union Pacific was in the market
with large resources derived from its sale of Great Northern and Northern
Pacific stock. It was out of the question for the Pennsylvania to sell its
shares to a competitor, but there was less objection to a sale to Mr.

Harriman, providing a reasonable portion should be retained. Accordingly,
the Pennsylvania sold and the Union Pacific interests bought, in October,
1906, some $39,540,600 in Baltimore & Ohio common and preferred stock,
being in the neighborhood of half of the former’s holdings. This is the
present situation of the property. The Baltimore & Ohio is independent, in
the sense that it is not controlled by any single interest, but large amounts of
its stock are owned by its competitor, the Pennsylvania, and by its
connection, the Harriman system. On the whole the alliance with these
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interests augurs well for the future of the company.

CHAPTER II

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

The New York & Erie Railroad was organized in 1833 in the hope of
bringing to the southern tier of counties in New York State a prosperity
equal to that which the Erie Canal had secured for the northern tier. It was
to run from New York or some suitable point in its vicinity to Lake Erie. A
six foot gauge was adopted, partly because the grades encountered were
thought to require locomotives with more power than a narrower gauge
could accommodate, and partly because it was wished to make the road
independent of any connection which might lead trade away from the city
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of New York.
The events of the early years may be briefly dealt with. Difficulty was
experienced in getting subscriptions, and in 1836 the legislature granted a
loan of $3,000,000. An assignment was made in 1842, due to the difficulty
of getting the enterprise under way, which resulted in the release of the
company from liability to the state on condition that it complete its line
from the Hudson to Lake Erie by 1851. Stockholders were to exchange two
shares of old for one share of new stock, and a first mortgage of $3,000,000
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was authorized. In 1851 the line was completed to Dunkirk on Lake Erie,
and the following year it reported a bonded indebtedness of $14,000,000,
capital stock of $6,000,000, and floating debt to the amount of $3,080,000,
or a total of $43,961 per mile of line; a high figure, but probably necessarily

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

With 1864 began the career of the Erie as a speculative Wall Street
stock. Its large capitalization and the painful slowness with which its
earnings grew kept the quotations of its shares normally at a low figure and
invited speculation; while the location of its lines tempted more serious
efforts to obtain control. Up to 1867 Daniel Drew was in power, while
Commodore Vanderbilt spent his best efforts to drive him out; after that
date Jay Gould and Jim Fisk became more and more prominent, and
manipulated the Erie securities with enthusiastic regard to profits which
they might derive both from the Erie Company itself and from operators
who wished to speculate in its stock. In the course of the abundant litigation
to which Gould’s methods gave rise, various receivers were appointed; but
the orders of appointment were subsequently vacated, and the receiverships
were nominal only. The details of the Wall Street struggles have little
91
interest for us here. But the result is of importance. In the eight years from
1864 to 1872, when Gould was turned out of Erie by General Sickles and
his English backers, the bonded indebtedness of the company increased
from $17,822,900 to $26,395,000, and the common stock from $24,228,800
to $78,000,000; in the one case a growth of 48 per cent and in the other of
221 per cent, at a time when the mileage increased 53 per cent and the net
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earnings but 22 per cent. No more disgraceful record exists for any
American railroad. The stock was not issued for the sake of improving the
road, and it was subsequently shown that the road was not improved; but it
was thrown upon the market at critical times in support of bear operations
by the Erie managers, while portions of it, on at least one occasion, were
bought back with the funds of the company to aid speculation for a rise. The
result was to ruin the credit of the Erie, and to make it the favorite tool of
cliques of gamblers. The increase in bonds occasioned an unmistakable
increase in fixed charges, which rose from 20 per cent of gross earnings in
1864 to 25 per cent in 1871, 21 per cent in 1872, and 30 per cent in 1873,
while the purchase of worthless bonds of subsidiary roads, such as the
Boston, Hartford & Erie, lessened the assets without disclosing the real
position to the casual observer.
In 1872 the control of Erie was taken from Gould through a vigorous
campaign managed by General Daniel E. Sickles, and an “eminently
respectable” board of directors was elected. Temporary relief was obtained
from the use of $6,000,000, available from an issue of bonds previously

93
approved, and dividends, first on the preferred and then on both preferred
and common stock were declared. Unfortunately the dividends were not
earned; and this fact, which was suspected from the previous record of the
company and the marvel of its so early restoration to a dividend basis, was
shown in the statements of ex-Auditor S. H. Dunan, who resigned in March,
1874, alleging that the accounts had been falsified to suit the company’s
94
purposes, and that he was unwilling any longer to be a party thereto.
Investigations conducted by representatives of English bondholders showed
that in the three years ending in September, 1875, the profits of the road had
been $1,008,775 instead of $5,352,673 as stated in the company’s accounts;
and the severity of this finding was scarcely mitigated by the conclusion
that in the opinion of the committee the dividends on the preferred stock at
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least were justified by the books. At the same time the report of Captain
Tyler, another English representative, laid emphasis on the necessity for a
change of gauge, a double track, improvements in gradient, fresh extensions
and connections, and other similar matters.
The real position of the company at the time was shown but too well by
the frequency of strikes upon its road. Thus in February, 1874, a strike of
freight brakemen on the Susquehanna division broke out, caused principally
by an order to discharge one of the brakemen from each freight crew,
leaving only three on a train; and at the same time there was a strike of the
switchmen on some of the divisions owing to a decrease in pay. In March
occurred a serious strike among the employees of the road in Buffalo,
mainly on account of irregularity and delay in payment of wages, and,
finally, in April, there was trouble both in the Susquehanna shops and in the
Jersey City freight yard over this same cause. The indications afforded by
these troubles were borne out by the figures of the annual reports. The gross
earnings of 1874 were $1,413,708 less than those of 1873, while the
decrease in operating expenses was so slight as to reduce net earnings by
nearly the same amount. If, now, there is deducted from the net earnings of
the years 1871–3, inclusive, the sum which the London accountants
declared to have been improperly reported as profits, there results an
average of $4,175,699 net; or less than the net earnings for either 1864,
1865, or 1866, although the average charges for the years mentioned
exceeded the average of the earlier period by $1,769,060 each year. These
figures exclude the influence of the panic of 1873, which, as has been seen,

caused a still further falling off in the earnings of the company. It was a
time, moreover, when the Erie could not be content to sit still and wait, for
competition was daily becoming more severe. By 1874 the Baltimore &
Ohio, the New York Central, and the Pennsylvania had connections with
Chicago, and the Erie was competing with them for business by means of
traffic agreements with connecting lines. The next decade was to see the
bitterest rate wars that the country has ever known; and the Erie, with its
exceptional gauge and single track, was to compete with rivals of normal
gauge, who were adding third and fourth tracks to the two which they
already possessed. The one bright spot was the development of the coal
traffic, which in 1874 formed the greatest item of the Erie’s tonnage, and
was in a measure apart from the competition of other lines.
Suit was brought in July, 1874, for the appointment of a receiver. The
complaint reviewed alleged improper acts of the management in declaring
dividends, in buying Buffalo, New York & Erie stock and sundry coal lands,
96
and in issuing the new $30,000,000 mortgage before mentioned. In
October the Attorney-General of New York instituted suit on nominally the
same grounds; not, as he explained, in the expectation that the appointment
of a receiver would be required, but in order that this action might be taken
if the conduct of the directors should make it necessary. Still other suits
were begun before the year was out.
Meanwhile the management was changed. Whether or not Mr. Watson,
who had been president since 1872, had done all humanly possible to set
the Erie on its feet, his administration was not unnaturally in bad odor after
the charges of Dunan and the report of the London accountants, to say
nothing of the admittedly low earnings for the year 1874. An attempt was
made to secure the very best man possible for the presidency, and to support
him in necessary reforms, in the hope of some different results from those
with which securityholders had become familiar. The man for the place was
thought to be Mr. H. J. Jewett, a railroad man then in Congress from Ohio;
and this gentleman was accordingly secured at an extremely liberal salary.
Soon after his election a ten per cent cut in salaries was decreed, and an
examination of the accounts of the stations along the line in behalf of the
company was begun. It was too late, however, for the company. The
business of the last of 1874 and first of 1875 was poor; floods in the spring
damaged the property of the road, and rumors of a receivership were rife.

On May 22 a private meeting of stockholders in New York passed
resolutions to the effect that the borrowing of money by the sale of 7 per
cent bonds at 40 cents on the dollar, and other means adopted by the Watson
administration, would inevitably result in bankruptcy; that sound interest
required that the money needed to pay interest should be raised by an
assessment on the stockholders, and that the directors should be thereby
requested to open books to examination, and to invite stockholders to
contribute voluntarily a sum sufficient to keep the company from immediate
97
failure. The proposal showed a proper spirit, but was impracticable. Four
days later Mr. Jewett was appointed receiver on application of
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representatives of the Attorney-General and of the Railroad.
This was the second receivership which the Erie had had to face, and
the situation was materially worse than at the previous failure. According to
the statement of President Jewett the funded indebtedness in May, 1875,
amounted to $54,394,100, and the fixed charges to $5,059,828; while the
net earnings for the previous nine months had decreased 13.4 per cent from
the corresponding period for the previous year, and a serious deficit was in
view. Temporary measures of relief had served but to drag the company
99
further into the mire; and, most important of all, the causes for the
existing difficulties were of a permanent nature, so that the future gave
promise of still harder conditions than had existed in the past. What was
needed was a reorganization which should undo the evil work of Gould,
Fisk, Drew, and their associates, and which should secure the margin of
surplus earnings which the reorganization of 1859–62 had failed to provide.
Perhaps the chief difficulty lay in the fact that the men who were
responsible for the increased capitalization were not at all those on whom
the brunt of reconstruction would fall; for while the managers of the road
had been Americans, the gullible investors had been Englishmen; and it was
reported that much of the watered stock of the Gould régime had been
unloaded on the English market.
Committees sprang up promptly. The most important of them were the
English committees of bond- and stockholders, soon consolidated under the
chairmanship of Sir Edward Watkin. On August 7, Sir Edward left England
on a visit of inspection, accompanied by Mr. Morris, counsel for the
bondholders. Conference with the board of directors and with President

Jewett followed, and a provisional scheme of adjustment was decided upon.
In his report to his English constituents Sir Edward outlined the results.
Current indebtedness, said he, was $42,180,075; estimated net revenues for
the year ending in June last were $3,715,609; operating expenses had been
for that year 79 per cent, due largely to the cost imposed by exceptional
gauge, while the chief lines with which the Erie competed showed
proportions of only from 60 to 66 per cent. Out of fourteen branches only
three showed a profit above rentals, and pay-rolls had ordinarily been
months in arrears. These facts were familiar; the remedy proposed was
unfortunately familiar as well. “Let it be hoped,” said this English financier,
“that the bond- and stockholders will have the courage now to submit to a
period of self-denial, and will consent to pay their debts and complete
essential obligations out of available net profits, the bondholders receiving
in place of cash such equitable obligations, realized out of surplus revenue
100
in the future, as each, according to right of priority, may justly expect.”
What could this have meant save an issue of stock or income bonds for
coupons falling due, with the result of adding to the unwieldy capitalization
of the road instead of reducing it as should have been done! For the rest, Sir
Edward Watkin concluded with Mr. Jewett the following arrangement:
(1) Three nominees of the bond- and stockholders’ committee proposed
by Watkin were to take seats in the Erie board;
(2) Mr. Morris was to be associated with counsel for the receiver and
for the company, and was to be regarded and treated as one of the
professional agents and officers of the undertaking;
(3) Mr. Jewett was to transmit a memorandum of his views on
reorganization;
(4) Net earnings were to be retained for a while, and bondholders were
to have a voice in their expenditure. Thus a vote was to be taken under the
charge of the stock- and bondholders’ committee in London on the
constitution of a committee of consultation, consisting of representatives of
each class of bondholders and of preferred and ordinary stock, and that
committee was to designate a special representative whose consent and
approval were to be taken by Mr. Jewett in the expenditure of net earnings;
(5) Monthly reports of actual earnings and expenditures, together with
reports from the president and receiver, were to be regularly transmitted to

the office of the committee in London;
(6) Bond- and stockholders were to be urged to give power of attorney
and proxies to Watkin, or to such other person or persons as the above
representatives of the bond- and stockholders should designate;
(7) Any scheme of reorganization was to include a provision giving
bondholders a voting power.
On the above resolutions Jewett, with his board, and Watkin, with his
101
committee, agreed to coöperate. Under the circumstances the increased
power given the bondholders was both a natural and a just demand, and it is
probable that Mr. Jewett’s prompt acquiescence in it had something to do
with Sir Edward’s advice to the securityholders “to rely on the honor, as I
feel you may also upon the anxious labors and full experience of the
President and Receiver.”
The report did not go uncriticised. It was pointed out, first, that a
majority of English proprietors could not unhesitatingly share the
confidence expressed in Mr. Jewett; second, that the first mortgage
bondholders were well secured, and would surely refuse to fund their
indebtedness; and third, that the payment of the floating debt, according to
the Watkin plan, would simply create another debt of equal or greater
amount due to the bondholders whose coupons were not paid. The only
sound way, said a committee of bondholders in Dundee in a letter to the
Watkin Committee, is resolutely to shun an accumulation of mortgage
liabilities on the one hand, and on the other to give increased reality to the
bonds and stocks of the company already existing as items in capital
account, i. e. an assessment on the stock and a sweeping reduction in the
interest on the bonds secured by the second mortgage:—the first mortgage
bonds are in different case—they represent investment of cash instead of
mere water, and even if foreclosure is difficult, they have beyond question
an absolutely good security for the ultimate payment of both principal and
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interest.
In September, 1875, a plan of reorganization was anonymously put
forward as follows: Instead of assessment on the shareholders, it suggested
the issue of 50 per cent more common stock; one new share for every two
shares then existing. If a price of $25 per share could be obtained a total of

$10,000,000 cash would be thereby secured. Besides the new stock issued
bond- and preference-holders were to capitalize their interest for two years
in bonds or shares bearing their present priorities. This funding should yield
$8,000,000; and the $18,000,000 in all obtained was to be expended on the
road over the next two years, during which period the new shares were to be
paid up by half-yearly instalments. With the line furnished and equipped as
proposed, continued this optimistic plan, the working expenses could be
reduced from 79 per cent to 60 per cent, and the traffic within three years
would be at least $24,000,000 per year, affording a net revenue of
$9,600,000 per annum, sufficient to meet all bond and preference liabilities
103
and to leave 3 per cent for the ordinary charges. The all sufficient
criticism to this plan was that it required too great a combination of
favorable circumstances to ensure its success. In some respects, however, it
was not unlike the plan ultimately adopted.
Two months later appeared a plan by Mr. John C. Conybeare, an
English bondholder, which was superior to the foregoing in that it proposed
an assessment, and made some slight provision for an ultimate reduction in
fixed charges. Mr. Conybeare proposed to assess preferred stock $11 and
common stock $9. Payment of the assessment was not to be compulsory,
but was to have the effect of giving to the stock which did pay a right to
dividends before anything should be received by that which did not pay.
Shares of the company by the plan would thus have ranked as follows:
(1) Preferred shares on which assessment had been paid, entitled to 7
per cent dividends before any other dividends were paid.
(2) Preferred shares on which no assessment had been paid, with rights
inferior to the preferred A shares, but superior to the common shares.
(3) Common stock on which assessment had been paid, entitled to 4 per
cent before further dividend on the common.
(4) Unprivileged, unassessed common stock which was to take what
there was left.
In addition there was to be a pre-preference 8 per cent stock, ranking
before all the above, which was to be issued to exchange in part for second
preferred and convertible bonds. First consolidated bonds and sterling
bonds of 1865 were to accept one or two per cent of their 7 per cent interest

in bonds, secured perhaps by the coal property of the company, while the
second consolidated and the convertible gold bonds were to receive 4 per
cent in gold and 3 per cent in the new pre-preference stock as above. To the
obvious possibility that the stockholders would refuse to pay an assessment
the plan opposed no remedy. In this case the very moderate amount of
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interest funded would have been the only relief secured.
These plans were, however, but preliminary to the elaborate Watkin
scheme which appeared in December. The most prominent feature herein
was, as previously indicated, the funding of coupons, both those past due
and those to become due for a time into the future. Given net earnings
sufficient to meet fixed charges, the postponement of interest by this plan
would obviously have released revenue with which to make needed
improvements on the road. This funding was to be, however, limited to the
first consolidated 7s, convertible sterling 6s, second consolidated 7s, and
convertible gold 7s; the six earlier issues were to be left untouched. One
permanent reduction was also to be made, in that for the second mortgage
and convertible 7s were to be given two classes of ninety-year gold bonds:
the first for 60 per cent of the principal, with interest at 6 per cent, and
payable in bonds of the same class from the dates of default until March,
1877, and thereafter in gold; the second for 40 per cent of the principal,
carrying 4 per cent until 1881 and thereafter 5 per cent, payable only out of
net earnings. To start the company on its way and to meet present
obligations an assessment was proposed of three dollars on the preferred
and six dollars on the common stock, in return for which 5 per cent income
bonds were to be given; while finally the dividends on the preferred stock
were to be reduced from 7 to 6 per cent, and foreclosure was contemplated,
so that the opposition of an irreconcilable minority might be more easily
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overcome. According to the figures in the Watkin plan, the old and new
capitalization and interest compared as follows:
The amount of capital stock was unchanged.
Total bonded indebtedness Principal Interest
Before reorganization, $54,394,100 $4,073,106
After reorganization, 61,330,241 4,139,240
Increase $6,936,141 $66,134

Indebtedness on which interest was obligatory:

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

The net earnings for 1874–5 had been $3,715,609, and those from
1871–3 inclusive, with the deductions declared proper in the report of the
London accountants, had averaged $4,175,699 each year, so that a safe
margin seemed to intervene. The extent of the margin depended, however,
on the fixed charges, such as rentals, over and above interest on the funded
debt; and although it was proposed to cancel burdensome leases and
contracts the actual leeway after 1880 was to be very small indeed. To
speak briefly, the plan was definite but not sufficiently radical to meet
conditions which were likely to arise. In counting upon the ability of the
company to spare considerable sums from revenue for improvements during
the next few years, it was leaning on a broken reed; in increasing the
nominal amount of bonded indebtedness, it was making a step in the wrong
direction; and by interposing additional claims on earnings while leaving
the volume of stock the same, it took from the stockholders any very lively
interest in the road’s future welfare. The plan was nevertheless accepted by
the English securityholders, subject to such modifications as might
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afterwards be found desirable.
The next step was to obtain the unanimous acceptance of this Watkin
scheme. Messrs. Robert Fleming and O. G. Miller were accordingly sent to
New York in February, 1876, to consult with the officers of the company
and the securityholders in America. No very vigorous interest was taken on
this side, but the Erie directors appointed a committee to confer with the
English representatives, and discussions took place for something over a
month. The committee criticised the plan proposed from the point of view
of the stockholders; they maintained that it would destroy all their interest
in the property unless they made further sacrifices, which they were unable
to do, and suggested that the funding of from four to eight coupons by the
first consolidated, gold convertible, and second consolidated bonds was all
that would be needed to put the road in a prosperous condition, provide for
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steel rails, and for the narrowing of the gauge. This was so plainly
inadequate that it is a matter of surprise that it was entertained by the
English committee; and even they insisted that the stockholders agree to put

a majority of the $86,000,000 of stock in the hands of the bondholders as a
preliminary, and would do no more than lay the proposal before their
constituents.
On their return home in April Messrs. Miller and Fleming stated that
the essential conditions to a successful reorganization were:
(1) An effective control of the management by the real owners,—the
bondholders;
(2) The restoration of the equilibrium between the compulsory interest
charge on the mortgage debt and the minimum net earnings;
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(3) A change of gauge from 6 ft. to 4 ft. 8½ in.
“The foreclosure scheme of the committee” (Watkin plan), said they,
“is certainly the soundest plan and would doubtless be preferred by those
shareholders who really care for the welfare of their property.” Then
referring to the directors’ plan, “If it were possible to present to the
bondholders the scheme of proceeding by amicable arrangement as
practicable, and therefore as presenting a real alternative for their
acceptance, we should suggest to you at the same time to lay the option
before them. We feel, however, that that scheme can only be regarded as
such an alternative when stockholders enough have signified their
willingness to vest their shares in trustees on the footing of it, and so secure
an effectual control to the bondholders for a certain period. We must,
therefore, content ourselves for the present with suggesting that the
committee should proceed with vigor in the direction of foreclosure, at the
same time inviting the stockholders to signify their willingness to vest their
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stock in trustees as above mentioned.”
The suggestion of the directors was the last alternative plan proposed,
and from April, 1876, the only question was how to perfect and carry
through the Watkin plan. As eventually put forward, this differed in a few
points from its form as earlier announced. The fundamental principle was
still the funding of coupons of the first and second consolidated and the
convertible bonds. Of these the first consolidated mortgage and sterling 6
per cents were now to fund alternate coupons from September 1, 1875, to
September 1, 1879, instead of funding all coupons to March 1, 1876, and
receiving cash thereafter: and whereas in the earlier plan mortgage bonds of

the same class had been given for funded interest, the later plan created
special issues of funded coupon bonds, secured by deposit of the funded
coupons, and bearing the same interest as the first consolidated bonds
themselves. A more serious difference appeared in the treatment of the
second mortgage and the gold convertibles. It will be remembered that it
had been proposed in December, 1875, to exchange these for two classes of
new bonds, of which 60 per cent were to bear interest at the rate of 6 per
cent and 40 per cent were to consist of 4 per cent income bonds. The new
plan did away with this permanent reduction in fixed charges. Instead, the
second consolidated and convertible gold bonds funded alternate coupons
from June 1, 1875, to December 1, 1879, and received a new 6 per cent
bond for the principal of their holdings, and funded coupon 6 per cent
bonds for the interest thus postponed; the new mortgage bonds not having
the right of foreclosure until after default for six successive interest periods
(3 years). The funded coupon bonds were to be funded at the existing rate
of interest on the second consolidated and convertible bonds, i. e. 7 per
cent, so that the reduction in interest was compensated for by the greater
volume of securities given; and both classes of these coupon bonds were to
bear lower interest at first than that to which they would ultimately attain.
The assessment proposed in 1875 was retained in 1876, except that
stockholders were given the choice of paying $6 on common and $3 on
preferred stock and obtaining therefor income bonds, or of paying $4 on
common and $2 on preferred and receiving nothing but new stock, dollar
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for dollar for their old. One-half of the shares of the new company (after
foreclosure) were to be issued in the name of one or more sets of trustees,
who were to hold them to vote on until a dividend had been paid on the
preferred stock for three consecutive years. Provision was made for an issue
of $2,500,000 in prior lien bonds, to take precedence of the remainder of
the second consols, the proceeds to be applied to capital requirements.
Voting power was conferred on the first and second consols, funded income
bonds, prior lien bonds, and income bonds, in all about $57,000,000; one
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vote to every $100 of bonds. The property of the company was to be
foreclosed by or under the direction of certain reconstruction trustees, for
the choice of whom careful provisions were inserted.
Divested of all complications, what this reorganization plan proposed
for the salvation of the property was the funding of the coupons on four

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

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

After December 1, 1883 Principal Interest
Consolidated 7s, $20,005,794 $1,400,405
Consolidated 6s, 33,516,666 2,011,000
$53,522,460 $3,411,405
Old bonds, 13,155,500 921,062
Guaranteed bonds, etc., 6,003,360 449,411
Rentals, 742,226
$72,681,320 $5,524,104
Total before reorganization 60,692,574 4,975,482
Increase, $11,988,746 $548,622

It thus appears that this reorganization plan contemplated an immediate
increase in the cumbrous capitalization of the company to the amount of

nearly $12,000,000, and an eventual increase in fixed charges of over
$500,000. It offered no reasonable assurance that the solvency of the
company could be maintained under the average conditions existing in the
past, and left no margin for contingencies of any kind. The trouble lay in the
unwillingness of bondholders to sacrifice any part of their holdings to meet
difficulties caused largely by inflation over which they had had no control.
This reluctance was natural,—it should have been met, however, by the
realization that the question was now of the future and not of the past, and
that the best interests of the bondholders themselves demanded a
reconstruction sufficiently radical to leave no doubt of the ability of the new
company to pay its debts.
The plan adopted, foreclosure was in order, and suits which had been
begun as early as 1875 were taken up and pushed. In November, 1877, a
decree of foreclosure under the second consolidated mortgage was
obtained, appointing a referee to conduct the sale, and providing for the sale
of the road to representatives of the bondholders in case they made the
highest bid. The opposition, which had not been able to prevent the
approval of the plan, now appeared with a multiplicity of suits to prevent its
consummation. In January, 1878, demands were made to secure a re-
accounting from the receiver, and the reopening of an earlier suit of the
people against the Erie which had been previously discontinued. On
January 18 the postponement of the sale to March 25 was obtained. On
January 19 a suit demanded the removal of Receiver Jewett, making
sweeping charges of fraud; and on January 30, in still other proceedings,
Mr. Jewett was arrested on a charge of perjury for swearing to incorrect
statements in the annual report to the state engineer;—a culmination as
disgraceful as it was absurd. In February a suit in Orange County, New
York, demanded the removal of the receiver, and the appointment of a
special receiver during the pendency of the action, with an injunction to
prevent the sale of the road. In March a petition of one Isaac Fowler, a
stockholder, for permission to examine the company’s books, was granted;
argument was heard on the petition of James McHenry to intervene in the
foreclosure suits and further to postpone the sale; the application of Albert
Betz and others to be made parties was granted; and postponement of sale
to April 24 obtained. Last of all, on April 23 and 24, arguments in behalf of
John F. Brown and F. W. Isaacson were heard, asking for postponement to a
still later date. The litigation availed nothing. Judge Potter in the Brown suit

held that the courts could relieve against any injustice occasioned by the
sale, and on April 24 the property of the Erie Railway was sold for
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$6,000,000 under foreclosure of the second consolidated mortgage. The
new corporation formed to take over the railroad was called the New York,
Lake Erie & Western Railroad Company, and had its articles of
incorporation regularly filed at the office of the Secretary of State. Mr.
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Jewett was elected president. In May the receiver was discharged, and a
new stage in the history of the road began.
For about seven years the Erie was to be free from the necessity for
further reorganization. This result, unexpected from the nature of the
adjustment of 1878, was due to the vigorous policy of Mr. Jewett, first, in
developing the coal traffic for which the Erie was well located; second, in
improving the condition of the road; and third, in securing connections with
Chicago.
For some time the Erie had been a considerable carrier of coal and a
large owner of coal lands as well. In 1877, the first year in which the figures
were separated in the annual report, roughly 273,000,000 out of
1,113,000,000 ton miles reported, or something over one-quarter, were due
to the carriage of coal; and $2,697,776 out of a total of $10,647,807 of the
freight earnings came from that business. The lands owned by the company
consisted of 8000 acres in fee, and large tracts in leasehold and mining
rights in the anthracite territory in the northeast corner of Pennsylvania;
together with 14,000 acres in fee and 13,000 acres of mining rights in the
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bituminous territory in the northwest portion of the state. Mr. Jewett felt
that this property could be made of great value to the road, and it was under
his administration as receiver that steps were taken to extend the holdings
of bituminous land, and to control branch roads leading into the district. The
result appeared in a remarkable extension of the company’s business. While
the total freight ton mileage from 1878 to 1884 increased 103 per cent, the
ton mileage of coal increased 190 per cent, or nearly tripled; and while the
gross earnings on ordinary freight grew from $7,950,031 to $11,687,520,
those on coal increased from $2,697,776 to $5,437,000. At the same time
McKean County, directly north of the coal lands, and containing large tracts
purchased by the Erie in the course of its other negotiations, turned out to

be an abundant oil-producing district, and made the Bradford branch, which
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tapped it, Erie’s most valuable collateral property.
It was partly because of the success of the policy in respect to coal
lands that the Erie was enabled to spend large sums in the improvement of
its road. In the six years from 1878 to 1883 the company put nearly
$14,000,000 into improvements of the road, property and equipment, and of
this about one-half was paid out of surplus earnings. In December, 1883,
alone, $304,565 were spent, and in the three succeeding months nearly
double that amount; making a total of nearly $1,000,000 in the four months
previous to April, 1884. The money went toward reducing grades,
straightening curves, increasing weight of rails, etc., including the
completion of a third rail to Buffalo by which the serious disadvantage of
an exceptional gauge was removed. Its result was seen in the decrease in the
ratio of operating expenses from 75.13 in 1875 and 77.16 in 1876 to 64.78
in 1883; and in the rise of net earnings per ton mile from .251 cents to .261
cents, while the gross earnings per ton mile decreased from 1.209 cents to
.780 cents. No policy which the Erie managers pursued met a more crying
need, and none did so much toward maintaining the solvency of the
company.
The project of controlling a line of their own to Chicago was brought
actively to the attention of the Erie managers by the danger of being cut off
from a connection with that city. The original line of the Erie had run to
Dunkirk on Lake Erie, from which a branch to Buffalo had soon been built.
For western traffic the Erie had had to rely largely on the Atlantic & Great
Western (later the New York, Pennsylvania & Ohio), which connected with
the main line at Salamanca, New York, and extended by 1884 west to
Dayton, Ohio. In 1857 the Erie first leased this property. Placed in
receivers’ hands in 1869, the Atlantic & Great Western was re-leased to the
Erie on January 1, 1870; sold July 1, 1871, it was again leased to the Erie in
May, 1874, only to enter upon a new receivership on December 9 of that
year. The persistent attempt to control the road showed the value which the
Erie placed upon it, and in fact it was invaluable as a link in a prospective
line to the West. Even while the leases were in force, however, the Erie
lacked that connection of its own with Chicago which seemed necessary to
make it a successful competitor for trunk-line business. In 1882 it was
forwarding passengers over not less than five different routes, over no one

of which could it feel assured of the continuance of contracts of a favorable
nature. In 1881 Mr. Jewett relieved the situation by acquiring control of the
franchise of the Chicago & Atlantic Railway, extending from Marion, Ohio,
on the line of the New York, Pennsylvania & Ohio towards Chicago, and
soon after he entered into a contract with certain private parties for
construction of the road. In 1883 he executed a new lease of the New York,
Pennsylvania & Ohio, which he hoped would secure for the Erie permanent
control of the property, and about the same time (1882) he purchased a
controlling interest in the stock of the Cincinnati, Hamilton & Dayton,
which extended the Erie system to the important city of Cincinnati. These
operations put the Erie upon a footing which was secure so long as the
obligations which they entailed could be met, and showed a broad-minded
appreciation of strategic necessities. The terms of the arrangement with the
Chicago & Atlantic were as follows: For the construction of the road the
Erie agreed to give to the directors the entire proceeds of the mortgage
bonds of that branch ($6,500,000), and its entire capital stock
($10,000,000); making an aggregate of $61,710 per mile of line. The
proceeds were, however, to be deposited with the president of the New
York, Lake Erie & Western in trust, together with certain subsidies which
had been voted by the counties and townships along the line, and upon him
was to devolve the duty of seeing to the proper application thereof; and
besides this, 90 per cent of the stock was to be deposited and an irrevocable
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proxy given thereon for the thirty years’ life of the bonds. The obligation
which the Erie assumed amounted in practice to guaranteeing that the road
should be constructed for the sum provided, and that interest on the bonds
should be paid. In leasing the New York, Pennsylvania & Ohio the Erie
involved itself more heavily. As lessee it agreed to pay the minimum sum of
$1,757,055 yearly (the net earnings of 1882); the actual rental to be 32 per
cent of all gross earnings up to $6,000,000 and 50 per cent of all gross
earnings above $6,000,000, until the average of the whole rental should be
raised to 35 per cent, or until the gross earnings should be $7,200,000. If 32
per cent of the gross earnings should ever be less than the $1,757,055 to be
paid yearly, then the deficiency was to be made up, without interest, out of
the excess in any subsequent year. Out of the rental the New York,
Pennsylvania & Ohio was to pay the interest on its prior lien bonds, the
rentals of its leased lines, the expenses of maintaining its organization in
Europe and America, and for five years a sum of $260,000 each year to the

117
car trust. Finally, in purchasing the Cincinnati, Hamilton & Dayton, the
Erie gave to the holders of the $2,000,000 of stock which it bought
beneficial certificates to the amount of $1,500,000, on which it agreed to
make good any failure of the Cincinnati company to pay 6 per cent per
annum.
But though the Erie managers did their best with the conditions which
they were called upon to face, they were unable to hold the company up
under the enormous capitalization and heavy charges left by the
reorganization of 1874–8, at a time when rate wars were sapping its
resources, and when contracts which it was being forced to make were
118
entailing an annual loss. In spite of the declaration of sufficient dividends
on the comparatively small amount of preferred stock to terminate the
voting trust, it is certain that for most of the years from 1874 to 1884 the
solvency of the road was a precarious matter, and that there never was a
time when any considerable falling off in earnings or any severe shock to its
credit would not have driven it to the wall.
Such a shock was preparing in the early months of 1884. For some
weeks before the last of April there had been a tendency for the quotations
of Erie securities to fall; no reason was assigned, but it was hinted that
default might be made in the payment of the June interest on the second
consols, and that a receivership was not unlikely. This weakness was
accompanied, and perhaps accentuated, by a strike of the brakemen on the
New York, Pennsylvania & Ohio in consequence of an order reducing the
number of brakemen on each train from three to two. The truth of the matter
came out in May, when the failure of the Wall Street firm of Grant & Ward
both precipitated a stock exchange panic and laid bare the straits to which
the company had been reduced. Investigation showed that a large floating
debt had been piling up for four principal purposes: First, advances to the
Chicago & Atlantic Railroad; second, advances for coal mines; third,
advances for improvements on the Hudson River at Weehawken; fourth,
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equipment instalments. Attempts to raise funds to cover the debt had
resulted in the negotiation of promissory short time notes with the firm of
Grant & Ward, for which $2,500,000 of Chicago & Atlantic second
mortgage bonds had been deposited as security. The company had been
attracted to Grant & Ward by their offer to purchase and dispose of Chicago

& Atlantic bonds at a price 15 per cent above that offered by any other
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parties; and had trusted so implicitly in their integrity as to deposit notes
and collateral for its short time loans detached and independent, one from
the other, so that Grant & Ward were able to, and did, fraudulently raise
money upon them to an amount much larger than the advances they had
made. The losses entailed by the transaction were serious, and the blow to
Erie’s credit was even more severe. The floating debt which had been so
hard to carry became doubly menacing now that the possibility of further
short time loans was practically cut off; and to cap the climax, the earnings
for the first half of the year 1884 showed an unusually large decrease with
the cessation of the fall business. Under these circumstances it was the part
of wisdom to take advantage of every loophole of escape, and the peculiar
provisions of the second consolidated mortgage, denying to these bonds the
right of immediate foreclosure in case of default, were turned to for relief. It
will be remembered that by the terms of the reorganization of 1878 no right
of action was to accrue to the second mortgage bondholders until on each of
six successive due dates of coupons (three years) some interest secured by
the second indenture should be in default. This being the case the Erie
directors decided to pass the June interest on these bonds. “As a general
rule,” said they in a circular, “the business and earnings of the company are
much less for the first half than for the last half of the year. The falling off
in earnings for the first six months of the previous year has been unusually
large. The coupons of the second consolidated mortgage bonds are due and
payable on the first of June prox.... Under ordinary circumstances the board
might at the present as on the former occasions provide to some extent for
the deficit of the first six months, relying on the usual increase in earnings
of the last half of the year, but in the present depressed condition of the
business of the country and of the earnings of this company, as well as of
others, the board does not feel at liberty to deal with anything but the
business and earnings as now ascertained, and therefore deems it wise to
accept the provisions of the mortgage as the lawful rule for their
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government in the existing emergency....”
However necessary the action, the bondholders of the company could
not have been expected to receive it quietly; and naturally again, the
indignation was intense among the English securityholders, to whom, more
than to any one else, the existing situation was due. In June, 1884, a

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

Unpaid coupons, June 1, 1884, $1,007,922
Balance of actual and early maturing liabilities other than the
June 1 coupons over and above cash in hand and money
assets considered good and available, $4,447,316

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

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

Hamilton & Dayton President King was less successful; and Mr. Jewett was
sustained in his refusal to deliver proxies for the stock held to the larger
company. The result was to turn the Erie to the Big Four, upon which,
instead of upon the Dayton road, the management was for some time to rely
for an entrance into Cincinnati.
During these various contests the suggestions of the English committee
were not lost to view, and in the latter part of 1885 they crystallized into
definite propositions. The floating debt then consisted of two parts: first, the
defaulted coupons on the second consolidated bonds; and second, the
current liabilities accumulated for the purposes before described. The relief
proposed was likewise in two parts, and involved the issue of a 5 per cent
mortgage, secured by deposit of the second consolidated coupons maturing
and to mature in June and December, 1884, June, 1885, and June, 1886, and
a 6 per cent mortgage upon the property of the Long Dock Company,
125
comprising the valuable terminals of the Erie at Jersey City. The funding
of the coupon issue proved simplicity itself; the funded coupons were
exchanged for bonds of the new gold mortgage, which were to be
126
redeemable at 105 at the pleasure of the company. By the end of 1886
these bonds had been accepted by the holders of $32,982,500 of the
outstanding $33,597,400 of the second consols, and $3,957,900 of them had
been issued. Dealing with the Long Dock Company was slightly
complicated by the fact that 8000 shares of that company were pledged as
part security for the issue of Erie collateral bonds. To free them $800,000 in
cash were deposited with the trustee of the mortgage, which were in turn
employed by him to pay off $727,000 of the 6 per cent collateral bonds,
thus reducing the interest charge on that issue $43,620 per annum. This
done, the Long Dock Company extended the lease of its property and
franchises to the Erie to 1935 at a rental of $480,000 per annum, and
contemporaneously therewith placed a consolidated mortgage upon its
property to secure $7,500,000 of 50-year 6 per cent gold bonds; of which
$3,000,000 were reserved to retire existing indebtedness, and the proceeds
of $4,500,000 were paid to the Erie for the cancellation of its floating debt.
The total result was to increase fixed charges by $270,000 of interest at 6
per cent on the Long Dock bonds, and by $197,895 on $3,957,900 of the
new funded 5s, less the reduction of $43,620 on cancelled collateral bonds;
127
leaving a net increase of $424,275. For its ingenuity the scheme was to

be admired; from any other point of view it was to be condemned as
another example of that borrowing to pay interest which had brought the
Erie to its existing straits. The incapacity of the creditors of the company to
realize that continued borrowing of money to pay current obligations was
only to ensure repeated bankruptcy seemed complete.
After this new “salvation,” the Erie started once more on its laborious
attempt to pay interest on its outstanding bonds. From 1887 to 1892 the
business increased somewhat, and despite a decrease in the average receipts
128
per ton mile a gain of about $4,700,000 in gross earnings was secured;
from which is to be deducted an increase of $310,996 in fixed charges, and
of $4,076,111 in operating expenses.
The prohibition of pooling in 1887 affected the company unfavorably.
Previous to the passage of the Interstate Commerce Act the other lines had
been paying it an annual average of $42,500 on west-bound business from
New York for shortages under the operation of the trunk-line pool, besides
about $88,000 annually on east-bound dead freight and $19,770 on live
stock. These payments ceased when the Act was passed, although a
129
differential on west-bound traffic was subsequently allowed. But the
leakage which was most apparent lay in the large rental and heavy operating
cost of the New York, Pennsylvania & Ohio. It will be remembered that the
Erie had leased that road for 32 per cent of the gross earnings when
earnings were $6,000,000 or under, and 50 per cent when they should be
above that figure. In 1887 this was amended so as to provide that for every
increase of $100,000 over $6,000,000 in the gross earnings the Erie should
pay to the lessor an additional one-tenth of one per cent of such gross
earnings until the gross earnings should be $7,250,000, and the rental 33½
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per cent, after which the percentage was not to increase. Under the old
lease the Erie had guaranteed to carry over the line 50 per cent of all its
east-bound and 65 per cent of all its west-bound through traffic—under the
new lease, these maxima were increased to 55 per cent and 70 per cent; but
even this failed to make the branch road pay. Its grades were high, its
equipment and sidings were limited, its cost of operation was well above 68
per cent; and the increase in tonnage provided for emphasized each and
every disadvantage. Up to 1893 the results of operations were as follows:

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

It thus appears that the terms of the amended lease were in reality more
onerous than the contract which they succeeded, and that whatever the
value of the branch as a feeder, its operation involved large and fairly
regular deductions from the net income of the parent line. Emphasis on
these facts was laid in the annual reports, and frequent demands were made
that the New York, Pennsylvania & Ohio bring its road up to the standard of
like connections of through trunk lines. Meanwhile improvements were
imperative on the Erie’s own lines: new equipment was needed, new rails
and new motive power, and at the same time surplus earnings were
somewhat less. The directors adopted the expedient of allowing current
liabilities to accumulate, and put $8,496,572 into the road from October 1,
1884, to September 30, 1892, of which $3,351,977 represented surplus
earnings, $2,375,400 increase in bonded indebtedness, and the balance
floating debt. In the matter of traffic policy they paid particular attention to
the coal business, which, however, lost ground as compared with other
freight, and to the local business, which it was the policy of the
management to encourage. In 1890 the board declared that “the time had
arrived when extraordinary expenditure for improvements and the
131
necessities of the property were no longer necessary.” In 1891 3 per cent
132
on the preferred stock was paid, the first dividend since 1884.
From 1887 to 1893, with all its struggles, the Erie was continually on
the verge of failure. The capitalization in 1892 was at the enormous total of
$163,607,485 on an operated mileage of 1698 miles, while fixed charges

133
were $4993 per mile, and the available net revenue but $4830. Given,
with this condition, a gross floating debt which amounted in 1892 to
$9,163,166, and represented in a large measure the inability of the company
to make necessary repairs, no further explanation is needed for the
bankruptcy which soon took place.
Early in 1893 rumors were current that the Erie might be thrown into
the hands of a receiver. The reports were vigorously denied, but on July 25,
nevertheless, on application of the company itself, Judge Lacombe
appointed President John King and Mr. J. G. McCullough as receivers of
the property. The measure was taken to avoid the sacrifice of collaterals
deposited. “Within the last few weeks,” said President King, “during the
severe money stringency the floating debt of the Erie ... became impossible
of renewal, and in order not to sacrifice the best interests of the company it
was decided to place the road in receivers’ hands, and preserve the system
intact, and preserve and develop the transportation business for the
134
company.” The action occasioned no surprise, and there was even a
disposition to praise the management for having preserved the solvency of
the company. “The company was bankrupt de facto when it passed to its
new control,” says Mott, and “that the time when it must become bankrupt
de jure was held off so long was a striking demonstration of the tact and
resourcefulness which the new régime had been able to bring to bear in the
management of the company’s unpromising affairs, and in judicious shifting
and manipulating of the heavy burdens Erie bore upon its chafed and weary
135
shoulders.” What a receivership meant was a new opportunity to put the
company upon a genuinely sound foundation, by providing new capital to
pay off the floating debt and to allow for future additions and
improvements, and by getting fixed charges to a point well within the road’s
capacity to earn. We shall see what use was made of the chance.
The matter of reorganization was set about at once. On January 1 a plan
appeared, prepared, at least nominally, by a special committee chosen by
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the directors, and backed by the well-known firms of Drexel, Morgan &
137
Co. of New York and J. S. Morgan & Co. of London. By its terms no
mortgage senior to the second consolidated mortgage was to be disturbed
save the first mortgage, which matured in 1897. The bonds to be dealt with
were thus reduced to $41,481,048, besides which provision had to be made

for the floating debt and for future capital requirements. The plan proposed
to authorize a blanket mortgage of $70,000,000 at 5 per cent, of which
$33,597,000 were to exchange at par for the 6 per cent second consolidated
bonds and funded coupons thereof, $4,031,400 to exchange for the funded
coupon bonds of 1885, and $508,008 for the income bonds. Of the balance,
$6,512,800 were to be reserved to settle with the old first lien and collateral
trust bonds, $15,915,208 to supply capital requirements in the future, and
$9,915,208 to be offered for subscription in order to pay the floating debt.
The new management did not conceive that these last bonds could be sold
to advantage in the general market, but imposed as a condition of the
exchanges as above that second consols, funded coupon, and income bonds
should subscribe at 90 to the extent of 25 per cent of their holdings; hoping
that the grant of the right of immediate foreclosure upon default would
induce the second consols to come in. Both these consols and the funded
coupon bonds of 1885, it may be remarked, were to be kept alive and
deposited with the trustee for the protection of the new bonds. Stated in
tabular form the distribution of securities was to be as follows:

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

The new mortgage was to cover the property of the New York, Lake
Erie & Western, including its leasehold of the New York, Pennsylvania &
138
Ohio, and the capital stock of the Chicago & Erie Railroad. There was to
be no assessment, no syndicate to raise money, and no voting trust.
This plan was advanced as adequate to restore the prosperity of the
company. Examination will show its weakness. It comprised two measures
of relief: first, reduction of interest by one per cent on the second
consolidated bonds; second, the settlement of the floating debt. The first
might be thought to have been the kernel of the plan, and the reduction in
fixed charges the principal thing aimed at. That it was not is shown by the

fact that so liberal were the new bond issues that the total fixed charges
after reorganization were to be greater than those before. The floating debt
which remained had arisen from lack of funds with which to make current
and necessary improvements and repairs. This debt was the immediate
cause of the failure of the company, and its cancellation was the real
purpose of the plan. The method proposed was a forced levy upon
bondholders, but the levy took, not the form of an assessment, but that of a
subscription to new bonds on which payment of interest was to be as
obligatory as any other charge. The operation differed, therefore, from an
ordinary sale of securities in the more favorable selling price which it
assured. It did little, however, to lighten the burden which had crushed the
company. The only bright spot in the plan was the provision for future
construction and improvement, which, though involving a still further
increase in indebtedness, was justified because these improvements would
serve not only to maintain but to make greater the earning powers of the
company. Finally, it was the peculiar effect of this plan that it put the
pressure imposed upon the wrong parties: the second consolidated and other
junior bondholders were to be forced to subscribe to the new issue, when in
fact it was the stockholders who should have been turned to, and whom it
was consonant with no sound principle of finance to spare. Other matters
come out in the objections raised by bondholders.
Opposition to the plan was vigorously headed by men like Kuhn, Loeb
& Co., E. H. Harriman, August Belmont, Hallgarten, Peabody, Vermilye,
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and others. In England a meeting of dissentients was held and a
140
committee was elected; in America the first formal action was the
dispatch of a letter to the Erie managers by opposing bankers which is
important enough to be quoted in full.
“Consultations and comparisons of views have recently taken place,”
said these gentlemen, “between the owners and representatives of the
second consolidated mortgage bonds and other bonds of your company, to
whom the proposition as detailed in your circular of January 2 is not
satisfactory.... Your plan seems unjust, inasmuch as it demands a permanent
reduction of interest on the bonded indebtedness for which no adequate
equivalent is offered, and it levies a forced contribution upon the
bondholders through the demand for a subscription to new bonds at a price
considerably over and above the market value these new bonds are likely to

command, while the fixed charges proposed to be created appear to be
considerably larger than, in the light of past earnings and experience, the
property of the company can carry with safety.
“Instead of 5 per cent bonds, as provided in the published plan, 4 per
cent bonds, in our opinion, should be issued, while for the interest to be
surrendered the bondholders should receive an equivalent in interminable
non-cumulative 4 per cent debentures, interest payable if earned; the
holders of the debentures to have sufficient representation in the
management to protect them.
“The floating debt should be liquidated from the proceeds of an
adequate amount of new 4 per cent bonds (and debentures if desirable),
which shall be offered to the shareholders and bondholders at a price rather
below than above the probable market value of the new securities, and
under the guarantee of an underwriting syndicate.
“Provision should also be made to obtain the conversion on fair terms
of the reorganization prior lien bonds into the new bonds, so that it shall
become practicable to secure the new 4 per cent bonds at once by a lien
second only to the ‘Erie first consolidated 7 per cent bonds’; the new 4 per
cent bonds to be issued under a general mortgage to an amount sufficient to
provide for future additions and improvements, and with adequate provision
for the taking up of the underlying bonds, and the issue of 4 per cent bonds
in their stead.... Any plan now adopted for the readjustment of the finances
of your company should seek, as its first object, to reduce the permanent
charges so well within the earning capacity of the property as to make
another default in the future an improbability.... We trust this
141
communication will be received in the spirit in which it is submitted.”
The directors refused to modify their plan, and the bankers, therefore,
142
notified them of the election of a protective committee. On March 6 a
meeting of stockholders approved the plan, and the same week Messrs.
Drexel, Morgan & Co. gave notice that, having received deposits of a
majority of each class of bonds, they had declared the plan operative as
143
announced.
Defeated in their appeal to the securityholders, the opposition turned to
the courts. As a preliminary, they obtained an opinion from the well-known

firm of Messrs. Evarts, Choate & Beaman, which held, first, that the Erie
could not legally pay interest on the new bonds proposed until it had paid
the interest on every one of the old second mortgage bonds, regardless of
whether the latter was deposited with the reorganization committee; second,
that if the old second mortgage bonds which were deposited as security for
the new issue should be kept alive as proposed, the company would be
144
increasing its obligations beyond the legal limit; and third, that much of
the stock voted at the special meeting at which the new mortgage had been
authorized was not really owned by the persons who had issued the proxies
145
thereon as the law provided. Following the opinion, suit was commenced
by Mr. Harriman in April for an injunction against the recording of the new
mortgage, on the ground that the Drexel & Morgan proxies did not
represent the actual stockholders, and in June by one John J. Emery to
prevent the execution of the mortgage. Judge Ingraham in the Supreme
Court Chambers denied an injunction, using in his opinion the following
language: “While it is clear,” said he, “that there are certain obligations
resting upon the majority to refrain from infringing the legal right of the
minority, and that a court of equity will enforce and protect the rights of the
minority, still, when the holder of a very small number of bonds or shares of
stock seeks to enjoin a very large majority from carrying out a plan such
majority deem to be for their benefit, I think the court should not interfere
unless it plainly appears that some legal right of the minority is
146
endangered.”
What could not be accomplished by the hostile bankers was
nevertheless to happen from the inherent weakness of the plan itself. It has
been said that the new scheme involved an increase instead of a decrease in
fixed charges. How this was to be met was not demonstrated; and already in
June, 1894, it was necessary to announce that the coupons then due would
not be paid for the present. In December matters were even worse, and a
circular from Drexel, Morgan & Co. confessed the company’s inability to
meet the coupons maturing. “Nevertheless,” the firm continued, “it seems to
us inexpedient to treat the inability of the company to pay interest as an
occasion for present foreclosure without giving a further chance to the
company, especially as payment of bondholders’ subscriptions to the new
bonds has not yet been called to provide the company with money
necessary to pay the floating debt. It is, therefore, now proposed that the

new bonds be issued with the coupons of June 1, 1894, and December,
1894, attached, but stamped as subject to a contract with the company
which shall provide that they shall be paid as soon as practical out of the
first net earnings over and above the railroad company’s requirements to
meet interest and rentals accruing after December 1, 1894, except in case a
default on later coupons shall give power of foreclosure, in which event the
stamped coupons shall retain all their original rights.” The modification was
147
assented to, but could not save the plan. Reluctantly the managers were
forced to abandon it, and to consent to more radical propositions.
August 26, 1895, the new and final reorganization plan appeared. There
were to be issued:

$175,000,000 first consolidated mortgage 100-year gold bonds;
30,000,000 first preferred 4 per cent non-cumulative stock;
16,000,000 second preferred 4 per cent non-cumulative stock;
100,000,000 common stock.
The first consolidated mortgage bonds were to be divided into prior
lien bonds to the amount of $35,000,000, and general lien bonds to the
amount of $140,000,000; the former to have priority of lien over the latter
for both principal and interest. Both classes of bonds were to be secured by
mortgage and pledge of all railroads and properties of every kind embraced
in the reorganization as carried out and vested in the new company, and also
all other properties which should be acquired thereafter by issue of any of
the new bonds. Both issues were to bear interest at 4 per cent, except
$29,435,000 of the general lien bonds, which were to bear 3 per cent for
two years from July 1, 1896, and 4 per cent thereafter. The stock was to
rank for dividends in the order given. Provision was made that no additional
mortgage could be put upon the property to be acquired, and that no
additional issue of first preferred stock could be made except with the
consent in each instance of the holders of a majority of the whole amount of
each class of preferred stock, given at a meeting of the stockholders called
for that purpose; and with the consent of the stockholders of a majority of
such part of the common stock as should be represented at such meeting,
the holders of each class of stock voting separately; also that the amount of
second preferred stock could not be increased except with like consent of
the holders of a majority thereof, and a majority of such part of the common

stock as should be represented at the meeting. All classes of stock were to
be deposited in a voting trust until December 1, 1900, and until the
expiration of such further period, if any, as should elapse before the Erie
should in one year have paid 4 per cent cash dividends on the first preferred
stock; though the voting trustees might terminate the trust earlier at their
discretion.
Generally speaking, the prior lien bonds were relied on to pay the
floating debt, to buy in the New York, Pennsylvania & Ohio, and to retire
certain prior liens of the old company. The general lien bonds were reserved
for undisturbed bonds, and, with the first preferred stock, exchanged for
junior New York, Lake Erie & Western securities. The second preferred
stock went for old preferred stock and income bonds, and the new common
stock exchanged for old common.
The distribution was as follows: The old New York, Lake Erie &
Western reorganization first lien and collateral bonds were paid off from the
proceeds of the new prior lien bonds; the second consols received 75 per
cent in new general lien bonds and 55 per cent in preferred stock; the
funded coupon bonds of 1885 received 100 per cent in general lien bonds,
10 per cent in first preferred, and 10 per cent in second preferred stock; the
income bonds 40 per cent in general liens and 60 per cent in first preferred
stock; the New York, Lake Erie & Western preferred stock, on payment of
assessment, 100 per cent in new common. For all other bonds included in
the plan there were reserved general lien bonds in amounts usually equal to
the par of the securities to be retired.
The cash requirements and the floating debt were as follows:

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

The necessity for retirement of the first lien and collateral bonds arose
from the early maturity of the former, and from the fact that stocks and
bonds of various Erie properties which it was desirous to consolidate with
the new company were pledged for the latter. The wisdom of allowing for

early construction and expenditure could not be denied; car trust payments
were required to preserve the rolling stock, and the floating debt and
receivers’ certificates called obviously for cash. Provision was made, first,
by an assessment on the stock of $8 on preferred and $12 on common, with
higher payments in case of delay, and estimated to yield $10,023,368;
second, by a contribution from the New York, Pennsylvania & Ohio of
$742,320; and third, by the sale of $15,000,000 prior lien bonds as
indicated above. A syndicate of $25,000,000 was formed to subscribe to the
prior liens, and to take the place of and succeed to all the rights of
stockholders who should not deposit their stock and pay the assessment
thereon.
With the settlement of cash requirements, unification of the Erie system
was assured; “subject only to the undisturbed bonds and stock until retired
by use of the bonds reserved for that purpose or the rentals corresponding
thereto.” “The new bonds and stock will,” said the plan, “represent the
ownership (either in fee or in possession of securities) approximately of:

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

—with valuable terminal facilities at Jersey City, Weehawken, Buffalo, etc.,
and also one-fifth ownership in the stock of the Chicago & Western Indiana
Railroad Company. Also all the Erie coal properties, ... representing an
aggregate of 10,000 acres of anthracite, of which about 9000 acres are held
in fee, and 14,000 acres of bituminous, held under mining rights ... also the
Union Steamboat Company, with its terminals and other properties in
Buffalo, and its fleet of five lake steamers on which the Erie mainly
depends for the lake and railway traffic,” etc.
Fixed charges under the plan were estimated at $7,850,000. Fixed
charges in 1894 had been $9,400,000. For the first two years after
reorganization, moreover, the charges were to be further reduced by
$300,000 per annum, as the new general lien bonds were to bear only 3 per
cent interest during that period; and an additional saving of $1,000,000 was
looked for when the exchange of old bonds for new on the maturity of its

existing prior issues should have been eventually completed. This sum of
$7,850,000 the company was expected to have no difficulty in earning in
view of the immediate expenditure of $5,337,208 for new construction,
additions, and betterments, and the gradual distribution of the proceeds of
$17,000,000 of general lien bonds to the same end. The compensation to
Messrs. J. P. Morgan & Co. and Messrs. J. S. Morgan & Co. for their
services as depositaries, and in carrying out the plan was put at $500,000
and expenses. Foreclosure was finally to take place and a new company was
to be organized.
This plan differed from its abandoned predecessors in four important
particulars, each of which was in its favor:
(1) It employed bonds and stock instead of bonds alone;
(2) It lowered instead of increased fixed charges;
(3) It procured cash from stockholders instead of from second
consolidated mortgage bondholders; and
(4) It absorbed the New York, Pennsylvania & Ohio into the Erie
system instead of continuing the lease thereof.
In the employment of bonds and stock instead of a simple issue of
bonds, the Erie managers adopted what experience has shown to be the best
method of dealing with the complicated situation arising from a great
railroad default. The use of securities on which return was optional side by
side with those on which return was obligatory tended both to protect the
railroad company when earnings were low, and to benefit the recipients of
the new securities when earnings were high. As worked out, it gave to the
second consols and funded coupons a less return in the one case, and an
equal or greater return in the other, than did the plan of 1894, and to the
income bonds, though it offered no chance of equal gain, it at least
promised a minimum below which payments should not fall. It further
made a far nicer recognition of the relative priorities of different classes of
old bonds possible, and whereas the previous plan had made the same
demands on, and had given the same return to the second consols, the
funded coupon bonds of 1885, and the income bonds, the new plan gave, as
has been pointed out, to the first 75 percent in general lien bonds and 55 per
cent in first preferred stock; to the second, 100 per cent in general lien

bonds, 10 per cent in first preferred, and 10 per cent in second preferred;
and to the third, 40 per cent in general liens and 60 per cent in first
preferred stock. Income, coupon, and consolidated bonds benefited alike
from the assessment upon the stock, which laid the burden of raising cash
upon the owners of the road, where it most properly fell. No species of
security was given for the assessment, not even common stock, with which
the managers might well have been generous; although it must be
remembered that the sale of $15,000,000 prior lien bonds for cash was part
of the reorganization plan. It may be remarked that since, on July 2, 1895,
the common stock was being offered at 10⅝, with no sales, and the
preferred at 22½, and since the chance for dividends which the new stock
was to enjoy was most remote, it was perhaps well that the syndicate
guarantee of the payment of assessments had been obtained. Fixed charges
by the new plan were lower, as a result of the liberal use of stock in the
exchanges and the cancellation of floating debt as above; while the terms
under which the outstanding New York, Pennsylvania & Ohio bonds were
retired were the most drastic part of the scheme. In all, the total mortgage
indebtedness of the Erie Company and its leased or controlled lines of
$234,680,180 for January, 1896, was reduced to $137,704,100 by June 30
149
of that year.
A weak point in the plan was, nevertheless, the small reduction in
bonded indebtedness which it occasioned. Although, to repeat, the bonded
indebtedness of the system was reduced from $234,680,180 to
$137,704,100, the shrinkage was more apparent than real, since it consisted
chiefly in the exchange of stock for New York, Pennsylvania & Ohio
mortgage bonds, on which interest had not been paid by the Erie, and but
seldom by the New York, Pennsylvania, & Ohio itself. These securities
were slashed in most drastic fashion, particularly such of them as were
inferior to the first mortgage. The amount of the reduction in the volume
outstanding is indicated by the fact that for $5000 first mortgage New York,
Pennsylvania & Ohio bonds were given $1000 Erie prior lien bonds, $500
Erie first preferred, $100 Erie second preferred, and $750 Erie common
stock; and for $500 second mortgage, or for $1000 third mortgage, were
given $100 Erie common stock. If, now, we exclude the New York,
Pennsylvania & Ohio bonds from our consideration of the funded debt, we
find the indebtedness of the Erie system on January 1, 1896, excluding the

non-assumed New York, Pennsylvania & Ohio bonds to have been
$121,399,431; and on June 30, excluding the new prior lien bonds used to
exchange for these securities, to have been $123,304,100; or an increase
150
through the reorganization of $1,904,669. Further, there was an
accompanying increase in the capital stock of the combined companies,
which did not, of course, involve an increase in fixed charges, but which
151
increased the volume of securities outstanding. What the reduction in the
capital of the New York, Pennsylvania & Ohio, joined with its
amalgamation with the Erie system, did do was to lessen the burdens of that
line to the parent company. For many years the Erie had engaged to operate
the branch for 68 per cent and had paid 32 per cent of its gross earnings to
the New York, Pennsylvania & Ohio, to be applied to payment or partial
payment of interest on the excessive issues which were now retired. It was
probably to be long before an operating ratio of 68 per cent could be
successfully maintained; but the Erie after reorganization was obliged to
turn over, not 32 per cent of gross earnings, but 4 per cent on the
$14,400,000 prior lien bonds which had been given for New York,
Pennsylvania & Ohio securities, or an amount of $576,000; which
amounted to a reduction of the minimum rental of more than one-half, and
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of the sums actually paid of almost three-quarters.
Turning again to fixed charges, we find them estimated, after the first
two years, at $7,850,000. The average net earnings for the period 1887–94
had been $9,331,250. These earnings will not serve strictly as a basis for
calculation, for from 1887 to 1892 they include an average of perhaps
$750,000 derived from Lehigh Valley trackage payments and other sums
now discontinued. With the deduction, therefore, of this amount from the
net earnings of the period named, the average is reduced to $8,768,750; or
$918,750 more than it was thought fixed charges would be. When it is
considered that this $918,750 represented the sum available for dividends
on $146,000,000 of outstanding Erie stock, it is plain that the over-
capitalization of the company in 1895 was still very great.
With these comments it is necessary to leave the plan. It was far the
best that had ever been applied to the rehabilitation of Erie’s affairs; it was
discriminating in its nature, and, thanks to the increasing prosperity of the
last eleven years, it has been fortunate in its results. In August, 1895, a

decree of foreclosure was signed in the city of New York, and the following
November the property was sold under the second consolidated mortgage,
153
and purchased by the reorganization committee for $20,000,000.
Since 1895 the Erie has shared in the prosperity of the country. Its ton
mileage has increased from 3,939,679,175 in 1897 to 6,275,629,877 in
1907; its gross earnings have grown from $31,497,031 to $53,914,827; and
its net earnings, which had hovered for so many years near or below the
level of fixed charges, have now soared away above. Under these
circumstances it is but natural that large sums should have been applied to
improvements. Between December 1, 1895, and June 30, 1907,
$12,732,486 were spent in the purchase of land, in yards, stations, and
buildings, in reducing grades, relocating tracks, and in other ways, and
charged to capital; $36,511,046 were spent for new equipment, and charged
to capital; and $8,625,307 were taken from income for equipment and
improvements of various sorts. These expenditures have had a most
gratifying result. The average train load has grown from 224.74 tons in
1895 to 471.67 in 1907, although coal now constitutes a smaller proportion
of the freight; and the average revenue per train mile has more than
doubled, in face of a revenue per ton mile which has only slightly increased.
In 1907 the Erie’s ton mileage was 59 per cent greater than in 1897, and its
passenger mileage was 73 per cent greater, but the expense of conducting
transportation had increased but 27 per cent. Instead of freight cars with an
average capacity of 22½ tons the company now uses cars which average 34
tons. Instead of locomotives which on the average could exert a tractive
force of only 24,500 pounds as late as 1901, it has now engines which
average 31,000. Freight train mileage is 2,600,000 less than it was in 1896,
and passenger train mileage has only slightly increased.
And yet, with all this prosperity, it cannot be said that the Erie enjoys
an assured position. In 1907 it had to pay out 89 per cent of the largest
income which it had ever received for operating expenses, fixed charges,
and taxes. Of its net income of about $6,000,000 the modest dividends of 4
per cent on its first and second preferred stock absorb some $2,500,000, and
the widespread financial difficulties of 1907 have led its management to
declare the dividends for that year payable in scrip and not in cash. And
although the present period of reaction dates back but a little way the
company has been already obliged to the issue of short term notes.

In matters of railroad policy the Erie has accordingly been
conservative. In 1898 it acquired control of the New York, Susquehanna &
Western, from New York City to Wilkesbarre in northeast Pennsylvania.
Three years later it bought the entire stock of the Pennsylvania Coal
Company in order to protect its tonnage, and, as the directors expressed it,
for other reasons which seemed good; and in 1901 also it bought an interest
in the Lehigh Valley. The most sensational episode which has occurred has
been the purchase and subsequent release of the Cincinnati, Hamilton &
Dayton. It seems that in 1905 Mr. J. P. Morgan bought a majority of a
syndicate’s holdings in Cincinnati, Hamilton & Dayton stock, amounting to
a majority of the total issue; a purchase which carried control of the Pere
Marquette and of the Chicago, Cincinnati & Louisville, or of a total system
of 3675 miles. This stock Mr. Morgan turned over to the Erie at a price
reported to be $160 a share. From a traffic point of view the deal seemed
likely to strengthen the Erie’s position in Ohio, Indiana, and Michigan,
while more than doubling the mileage of its system. Because of the
financial condition of the new companies, however, the purchase was
decidedly unwise; and, after an investigation, Mr. Morgan’s offer to take the
road off the Erie’s hands was gladly accepted. On December 4, 1905, Mr.
Judson Harmon was appointed receiver of the Cincinnati, Hamilton &
Dayton and of the Pere Marquette, and the reorganization of these
properties is just being completed.
At present the Erie is operating 2169 miles of road as against 2166 in
1896. Its earnings have greatly increased, its capitalization has grown in
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less proportion, but it has not yet a sufficient margin of surplus earnings
to meet a decline in prosperity without serious misgivings. Dividends on its
first preferred stock have been paid since 1901, and on its second preferred
since 1905. The common stock cannot expect a dividend in any period
which can be foreseen.

CHAPTER III

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

The Philadelphia & Reading Railroad has been peculiarly unfortunate.
Although serving a region of abundant traffic, it failed three times between
1880 and 1895, and was in the hands of receivers ten years. It was
reorganized after each failure, and each reorganization was marked by bitter
struggles between contending parties, due in part to divergence in financial
interests, and in part to personal rivalries.
In 1833 the Philadelphia & Reading Railroad was chartered by the
Legislature of Pennsylvania to build a road from Philadelphia to Reading, a
distance of 58 miles. Its early history does not concern us. In 1862 it leased,
owned, and operated 437.4 miles of track, equivalent, roughly, to 119.4
miles of line; and derived $2,879,419 out of its gross earnings of
$3,911,830 from the carriage of coal. Its capitalization was extremely high,
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roughly, $193,417 per mile of line, and the necessary payments each
year, not including dividends, took up $1,454,635. At this time the road
owned no coal lands, but, like the Lehigh Valley Railroad and the Schuylkill
Canal, remained a common carrier, and relied upon the advantages of its
position in respect to the Southern coal fields to secure the tonnage which it
required.
From 1862 to 1865 inclusive the Reading enjoyed a period of extreme
prosperity. The Navy Department, during the war, required large quantities
of fuel, and in the revival of business after the conclusion of peace the
Reading took its part. Merchandise earnings increased from $523,416 in

1862 to $1,165,277 in 1865; coal earnings from $2,879,419 to $8,627,292;
and though expenses also increased, yet net earnings grew from $2,375,247
to $5,236,655, and the balance of earnings, after all charges had been paid,
from $920,612 to $2,632,566. Dividends meanwhile ranged from 14 per
cent on the preferred stock in 1862 to 10 per cent on both preferred and
common in 1866, though the majority of the distributions were made in
stock. On the whole, during the Civil War and for a whole year afterwards,
the Reading was able to carry without difficulty the burden of an enormous
capitalization. What increase in capital occurred at this time was in stock,
and did not add to the load, although the desire to pay dividends on the
increased stock led to the piling up of new issues.
In 1869 an entirely new departure in Reading policy occurred. Whereas
the road had previously owned no coal lands, with the advent of Mr. F. B.
Gowen to the presidency it began to purchase on an enormous scale. “The
repeated and serious interruptions of the business of the company,” said the
annual report for 1871, “caused by strikers in the coal regions during the
last few years, and the many fluctuations in the coal trade, produced by
alternate periods of expansion and depression resulting therefrom, have
attracted the attention of the managers of the company to the necessity of
exercising some control over the production of coal, so as to prevent a
recurrence of the difficulties heretofore experienced; and it was believed
that the best way to accomplish this result, without injuriously affecting
individual interests, was for the company to become the owner of coal lands
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situate upon the line of its several branches.” Further, it was felt that
some steps were necessary to retain for the Reading even the coal tonnage
which it enjoyed. In 1871 every rival carrier had invested large sums in coal
properties, and all the fields but the Schuylkill and Mahanoy (western
middle) were occupied, while carriers had begun to enter the Mahanoy
district, and it was reported to be their intention to build lines straight
through to the Schuylkill fields.
The anthracite coal regions of Pennsylvania lie in four main districts:
the Northern or Wyoming; the Southern or Schuylkill; and two smaller
intermediate fields known respectively as the Eastern Middle or Lehigh
region and the Western Middle or Mahanoy and Shamokin basins. The
Northern field is the more easily worked, and the Southern field is the
157
richer. Between 1869 and 1881 the Reading Railroad and its alter ego,

the Coal & Iron Company, formed for the purpose, spent $73,326,668 for
lands in the Schuylkill and Western Middle districts, securing 142 square
miles, or 60 per cent of all the anthracite lands of these districts, and 30 per
cent of all in Pennsylvania. Of the purchase money $69,816,204 were
supplied either by the Railroad Company or by sale of Coal & Iron
Company bonds which the Railroad Company guaranteed. The Coal & Iron
158
Company incurred non-guaranteed liabilities for the rest. This gave
ample resources for the permanent supply of coal tonnage to the railroad,
and was sufficient also to give a considerable measure of control over
production in the Southern district. Independent operators did continue,
however, and the Reading coal was subject to the competition of coal from
other fields. More important still, in attaining control, “all kinds of coal
properties, good, bad, and indifferent, were purchased without regard to
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original cost, location, or revenue producing capacity.” In 1880 an
engineer of reputation was appointed to evaluate the Reading coal lands,
and recommended the surrender of five properties that originally cost
$5,207,167, upon which there were encumbrances of $5,015,000. “But little
weight,” said he, “should be given to the fear that rivals will possess the
surrendered property; most of it is not a tempting investment.” Exorbitant
prices were paid for the lands purchased. By 1881, as noted, there had been
expended in all by the two Reading companies $73,326,668. This same
report said that, “assuming the profit on the future coal product to be 30
cents per ton of coal shipped, that the company will be able to reduce the
rate of interest on the money needed to hold and develop the property from
7 per cent to 6 per cent per annum, and that the development will be at the
rate just stated [outlined earlier in the report], the whole estate has a value
of $32,394,799: the company’s interest in the estate is worth $30,630,648,
and, including colliery improvements belonging to the company, but situate
on lands owned by others, the whole of the company’s property is worth
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$31,197,484.”
It is unquestionable that the Reading did acquire an enormously
valuable property in the decade succeeding 1870. It seems just as clear that
it paid more for this than was necessary; but what is perhaps more to the
point is the fact that the Reading paid more than it could afford. Whatever
the ultimate advantages to be gained by exclusive possession of any
considerable section of the coal fields, the Reading was not large enough

nor financially strong enough to make such vast purchases within so short a
space of time. The prosperity of the Civil War had disappeared, net profits
were fluctuating without marked tendency to increase, the figures for 1870
being actually less than those of 1863, while the interest on bonds had more
than doubled since 1867, and the sum required for dividends had increased.
To advance $54,886,647 to the Coal & Iron Company under these
conditions, and to become responsible as guarantor for $14,929,557 more,
would have been ill-advised even had the prices paid by the company been
in strict accord with the commercial estimate of the time. Under the best of
circumstances returns from much of the property acquired could not be
secured for many years. The parts of the coal fields which were worked
yielded an income, though it was seldom that the collieries were allowed to
run to their full capacity; but those districts which were bought for the sake
of controlling the coal situation, or in order to secure a future reserve, and
which in many cases could not be worked at existing prices, occasioned a
drain upon the company to the amount of interest on the purchase money,
with no return of any kind. Moreover, the purchase of the coal lands put the
Reading in the anomalous position of a railroad corporation interested in
industrial lines. It could no longer be content with encouraging the
transportation of its main source of revenue (coal), but had to care as well
for the price at which this coal was sold. When depression in the coal trade
came, the Reading lost both as producer and as carrier, for less was
transported, and that amount was sold at a lower price; but when good times
came, from which as a simple carrier it might have profited largely, it
struggled with conditions of over-production which should rightly have
been none of its concern. There was, finally, a peculiar fatality in the time
which the Reading chose for its expansion. The year 1873 will always be
remembered as one of the most disastrous in the history of the United
States. Commencing with the failure of Messrs. Jay Cooke & Co. on the
18th of September, the panic spread with such rapidity as to lead to the
closing of the New York Stock Exchange on September 30. All railroad
securities were exceedingly depressed, call loans were high, and it was
nearly impossible to secure new capital. Business the next five years was
very dull, and the Reading actually earned less gross in 1879 than in the
year before the panic, and this at the very time that its liabilities were so
largely extended. The natural result was the financial difficulty which can
be detected as early as 1876. In June it appears that, owing “to the

continued depression in the iron and coal trades and the consequent falling
off in transportation,” the road was obliged to reduce its working force. In
July the usual dividend was passed; salaries were lowered in September,
and still later a temporary loan was secured to tide over the floating debt,
which then amounted to $8,272,359. By the next year the matter had
become serious enough to necessitate a formal proposition to creditors for
the postponement of interest payments and of payments on the floating
debt. The company professed itself able to carry out the following:
(a) To pay the interest on prior liens in full.
(b) To pay one-half the interest on the general mortgage bonds and on
the Perkiomen sterling mortgage bonds for three years in cash, and one-half
in five-year interest-bearing scrip, with the option to the holder of receiving
instead scrip for the three coupons first maturing and cash for the rest.
(c) To pay for five years in scrip the interest on the debenture bonds of
both the Railroad and Coal & Iron Companies; the convertible bonds of the
Railroad Company, the bonds due in 1885, 1902, and 1918 of the Tidewater
& Susquehanna Canal Company, and so much of the rent due to the
Schuylkill Navigation Company as was applicable to the payment of
dividends to stockholders of the Company and to the interest upon its
mortgage loan of 1895.
(d) To suspend the drawings for the payments of sinking funds and of
the improvement and general mortgage bonds for a period not exceeding
four years, if so long a time should be required for the payment of the
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floating debt.
“The relief to be obtained from the above,” said President Gowen, “will
undoubtedly enable the managers, even with no improvement in traffic or
increase of rates, to meet the fixed charges on all obligations of both
companies other than those above named, and to pay off the entire floating
debt within such time as will be satisfactory to the holders thereof.” Certain
modifications were suggested by the London securityholders, providing for
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trustees with some power to protect the creditors, and the plan went
quietly into effect.
From now on matters went from bad to worse. The year 1878 showed a
falling off in almost every source of revenue, while expenses and charges

remained very nearly the same. Depression in the coal trade and connection
with the Coal & Iron Company, general dulness of business after 1873,
troubles with employees, over-capitalization, all had their share in pushing
the company still further into the mire. It became unable to keep its share of
the existing business, and the percentages of the Schuylkill output carried
by it steadily decreased from 83.49 in 1877 to 75.45 in 1881, while its
percentage of the aggregate output from all the anthracite region diminished
from 32.82 to 24.44. “It appears, therefore,” said the annual report for 1881,
“that while other companies have steadily increased their capacity of
production by regular and judicious expenditures for new openings,
breakers, machinery, and other facilities for mining and delivering coal, the
Reading Company has apparently remained stationary.... For this policy the
local officers in charge are not probably responsible, as it was undoubtedly
forced upon them by the management, because of the impoverished and
163
embarrassed condition of the company’s finances.”
Throughout 1879 there was trouble over the payment of wages, perhaps
as good a sign of financial difficulty as can be desired. Employees were
paid in scrip, not cash, and even scrip wages were left overdue. President
Gowen went to Europe toward the middle of the year, but not at all, as he
carefully explained, in order to place a new loan, or to transact any business
except a little in relation to some railroads for the company; in fact, the
condition of the Reading was an open secret, and new loans were
impossible to obtain. In May, 1880, the New York and Philadelphia banks
began to refuse further accommodations. At the same time the period during
which, according to the agreement of 1877, cash payment of general
mortgage coupons was suspended, drew to a close, and on May 21 the
Philadelphia & Reading announced its inability to meet its obligations. As
was said at the time, the company did not fall with a crash because it had
not far to fall.
The failure occurred on May 21, and on May 24 Messrs. F. B. Gowen
(president of the company), Edwin A. Lewis, and Stephen A. Caldwell were
appointed receivers. Their resources were scanty and they had to do with
them as best they could. On the one hand they applied to the court for
authority to borrow $1,000,000 to pay the wages of employees and interest
falling due July 1, and on the other they cut down expenses by reducing the
working force in the repair shops, by putting the shops on short time, by

discontinuing many of the trains on different lines, and by ceasing all dead
work at the collieries.
Before any plan could be proposed for the rehabilitation of the
company the condition of its finances had to be known, and this again the
receivers took in charge. Their report in June, 1880, showed a sufficiently
serious state of affairs. The floating debt of the Railroad Company had
mounted up to $10,254,766, besides $1,900,482 more for the Coal & Iron
Company. This represented an increase of $3,604,000 as compared with
November 30, 1879, and an English bondholders’ committee declared that
164
only $2,930,000 of it were represented by value. The rest had apparently
been incurred in desperate attempts to preserve the solvency of the
company. The total liabilities of the Railroad and Coal & Iron Companies,
including mortgage, debenture debt, floating debt, and miscellaneous items,
but excluding stock, were $152,436,890. The deduction from these figures
of the Coal & Iron bonds held by the Railroad Company, which would have
constituted a duplication of indebtedness, left a total of $106,215,830.
The stock of the two companies amounted to $42,278,175, and the
stock in the hands of the public to $39,278,175. The grand total of liabilities
was thus the enormous sum of $145,494,005. The charges for interest and
sinking funds were $7,542,094, and the annual payment of $5,629,764, due
on $87,558,482 of railroad bonded indebtedness, shows that the rate of
interest upon the bonds was high. The net revenue was $5,494,979, and
there was therefore a deficit of $2,047,115. Meanwhile the Coal & Iron
Company had reported a regular deficit up to 1880, which, though not
significant in itself, because of close relations with the Railroad Company
and the impossibility of determining how much the Coal Company’s
rightful profits were reduced by exorbitant transportation rates, yet made it
very clear that from this source the Railroad Company could expect no aid
toward the cancellation of the railroad deficit revealed.
The combined companies were unable to earn their fixed charges: the
continuation of the struggle to do so was sure to mean, as it had in the past,
merely a piling up of the floating debt. The coupon-funding scheme of 1877
had shown the inevitable result of temporary measures of relief; and though
business in 1880 was rapidly improving, there was need for a radical
reduction in the burden resting upon the company. Pending action, a bill for

165
foreclosure was introduced under the general mortgage of 1874. A
valuation of the Reading coal properties, to which reference has already
been made, was started. It was entrusted at first to Mr. S. B. Whitney, chief
engineer of the Coal & Iron Company, and to Mr. Frank Carver, the land
agent; but was later given over to Mr. Joseph S. Harris, chief engineer of the
Lehigh Coal & Navigation Company, in order to have the opinion of an
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unprejudiced expert.
The first suggestion for a plan of reorganization came from England.
The consolidated mortgage, prior to the general mortgage, was to be
foreclosed; general mortgage bonds were to be deprived of their right to sue
or to foreclose; all unsecured bonds and junior mortgages were to be
exchanged for preferred stock; and a $15 assessment was to be levied upon
the stock, for which collateral trust 7 per cent bonds were to be given. This
assessment was relied on to pay off the floating debt, and the new company
167
was to start free, with but $33,564,000 of mortgage indebtedness.
This plan was a step in the right direction. It recognized the validity of
prior liens, followed a sound principle in providing for the floating debt by
assessments upon the stock, and relieved the company from the likelihood
of a future failure by its treatment of the general mortgage bonds; but it was
weak in that it reduced the general mortgage to the anomalous position of a
bond entitled to a fixed return without the power to enforce it. Stockholders,
moreover, objected strenuously to the assessment, maintaining that business
conditions were now such as to make milder measures sufficient.
In October, 1880, Mr. J. W. Jones, formerly vice-president of the
Reading Company, urged that an assessment on the stock was not
necessary, and proposed the following:
(1) To convert the income, debenture, and convertible bonds and scrip
into second preferred stock bearing 5 per cent interest if earned;
(2) To issue $15,000,000 of first preferred stock, with which to retire
the floating debt;
(3) To scale the Coal Company mortgage bonds $200,000 per annum,
which could possibly be done by consent of holders, if not, then by
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foreclosure.

The main difference between this and the English scheme lay in the
treatment of the floating debt. It is improbable, however, that the substitute
which this plan offered would have been sufficient, and that the preferred
stock could have brought $66, at which price alone it would have covered
the floating debt. Reading common stock was selling in the middle of the
month at 16⅜; general mortgage 6s were bringing only 74¼, while
debentures and convertible 7s were being quoted at 28 and 37 respectively.
In October a representative of the English bondholders arrived in
Philadelphia for the purpose of examining into the condition of the
company, and the following month agreed with the board of managers upon
a reorganization committee to act in the United States. “The probabilities
are,” said this gentleman (Mr. Thomas Wilde Powell), “that it will be found
that the bondholders in London will be willing to do as they did in the case
of the Erie, that is, fund a reasonable number of coupons ... for the purpose
169
of setting at liberty a portion of the revenue to pay unfunded claims.”
The next move in the reorganization of the company came, however, not
from this committee but from President Gowen, the man who had led the
Reading into the purchase of coal lands, and who still remained in office in
spite of the hostility shown toward him. His scheme comprised two parts:
the first an issue of income bonds with which to pay off the floating debt
(together with $5,000,000 mortgage bonds); the second a grand general
mortgage to retire existing indebtedness. The plan in more detail was as
follows:
(1) The company was to create $34,300,000 deferred income bonds, on
which interest was to be deferred to a dividend of 6 per cent on the common
stock. After this amount had been paid the bonds were to take all revenue
up to 6 per cent and were then to rank pari passu with the common shares
for further dividends. The debentures were to be issued at 30 per cent of
their par value, or $15 per bond; and before selling or disposing of said
bonds in the market the option of taking a pro rata share was to be first
170
offered to the stockholders of the company.
(2) A more permanent relief for the company was to be obtained from
the proposal to issue a new long time or perpetual 5 per cent funding
mortgage of $150,000,000, divided into two classes, A and B, of
$75,000,000 each: class A having priority of lien and interest charge over

class B. With this issue it was proposed, by purchase or exchange, to retire
all outstanding indebtedness, and to acquire by purchase the securities of
the companies owning the leased lines. It was estimated that $140,000,000
of the new issue would provide for all of this, the total interest on which
would be $7,000,000, as against fixed charges for interest, sinking funds,
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and rentals, of $10,657,116, making an annual saving of $3,657,116. Mr.
Gowen did not expect to secure so large an annual reduction, owing to the
impossibility of purchasing the higher securities and the probable
appreciation in value of the lower ones; but he did expect to realize in all a
saving of some $2,700,000.
In part this plan was commendable; in part it was inadequate, and in
part it relied on a mere juggling with words. The proposal to unify all
classes of indebtedness by a grand consolidated 5 per cent mortgage was a
good one, both in the simplification of accounts which was to be expected,
and in the reduction in fixed charges so far as this reduction went; but on
the one hand a reduction of $2,700,000 in charges was too little for a
company which had reported for that very year a deficit of $2,000,000, and
on the other hand too little allowance was made for the difficulty of forcing
securityholders without a foreclosure sale to submit to a definitive scaling
down of their holdings, with not even a preferred stock to show for the
sacrifice. In its handling of the floating debt, the plan was a second edition
of Mr. Jones’s stock-selling scheme, with all the good points left out. What
justification there could have been for calling securities, such as the
deferred incomes, “bonds,” which were to be issued for no definite time,
ranked even after the common stock for dividends, and were of such
doubtful character that Mr. Gowen himself proposed to sell them for one-
third of their face value, does not appear; unless it be that the lack of voting
power, itself a disadvantage, entitled them to the more respected name. The
deferred income bonds were a device for saddling the holders of the
unsecured debt with a worthless certificate which they might be induced to
accept because of its name, and to which not even the Reading stockholders
could object. Furthermore, even if the creditors had been eager for this new
issue, in itself it would not have been sufficient. The issue, if taken up,
would have yielded $10,200,000. It was proposed besides to sell $5,000,000
of unissued general mortgage bonds, which, after the success of the
deferred income bonds, it was presumed would sell at par. Income bonds

and general mortgage together promised a total of $15,200,000, or more
than $1,000,000 over cash requirements after commissions had been
172
paid.
However poor the prospect, there was no lack of syndicate guarantee.
In November, 1880, a London syndicate agreed to deposit with an American
bank, to be named by the company, the sum of $2,058,000, to be forfeited
in case they failed to take at the issue price all deferred income bonds not
taken by the shareholders. This syndicate further agreed that the company
might retain, up to $1,000,000, out of the deposit money, whatever might be
173
necessary to make up a second instalment of $4 on such neglected bonds.
Nothing was asked from the company in return except the chance to sell the
bonds purchased at a premium. “As long as the bond- and shareholders find
the money,” remarked the London Times, “there is nothing to be said. In all
probability, however, these deferred bonds will become a medium for the
very worst kind of gambling, and their chances for a dividend appear to us
174
to be very small.”
In December Mr. Gowen’s plan received the approval of the American
committee and of the board of managers of the company. Bondholders were
in no way injured by the worthlessness of the deferred income bonds, and
only the most far-sighted could be expected to have demanded a larger
reduction in their claims. The same month a meeting of London bond- and
shareholders passed unanimously a resolution expressing confidence in
175
President Gowen, and adopting his scheme. Opposition came from the
influential London banking firm of McCalmont Bros., and the struggle
centred about the annual election set for January 10, 1881. The last of
November or first of December President Gowen issued a circular in which
he said: “As I am about to visit Europe on business of the company, and as
it is possible that I may not return until the first week in January, I think it
proper to call your attention to the fact that it is highly important that all
shareholders who can possibly do so should attend the annual meeting in
Philadelphia on the second Monday in January. An effort will undoubtedly
be made at the next election to control the management of the company in
the interest of rival lines, and if the effort is successful the future of the
Philadelphia & Reading Railroad Company will be little, if any, better than
that of the Philadelphia & Erie Railroad Company, or of the Northern

176
Central Railroad Company.” In Europe, or, more strictly speaking, in
London, Gowen busied himself in placing his deferred income bonds, with
apparently a very considerable measure of success. As to the result of the
coming election he professed absolute confidence. It made little difference,
said he, which way the McCalmonts decided to vote their shares. He could
be elected without any English votes at all, and with the backing of the
English bondholders who had resolved to support him, the matter was not at
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all in doubt. On January 4, six days before the date set for the election,
Gowen actually issued a prospectus for his new income and mortgage
loans, and cabled to Vice-President Keim that he was satisfied that he could
dispose of the general mortgage A bonds at 110 and the general mortgage B
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bonds at par.
Meanwhile in America both parties had recourse to the courts: the
McCalmonts, to prevent the issue of the deferred income bonds, and the
friends of Mr. Gowen to get the election postponed in order to give the
president time to return from Europe. The latter suit was the first decided.
Judge McKennan, of the United States Circuit Court, refused to grant an
order, but unofficially advised postponement. The board of managers
therefore withdrew the notice of the annual meeting, and on January 12
voted to postpone it indefinitely. Counsel for the McCalmonts then made
application to the Court of Common Pleas in Philadelphia for a mandamus
to compel the board to call a meeting. They obtained a peremptory
mandamus on January 24, but accepted the date of March 14 as satisfactory,
and forbore further proceedings.
The matter of the deferred income bonds was complicated by a full and
complete authorization which Mr. Gowen had before obtained from the
Circuit Court for the issue of his bonds. The request of the McCalmonts was
twofold: the court was prayed to revoke the previous decree, and to enjoin
any further action in the negotiation or consummation of the said scheme;
or, failing this, to direct the officers of the company and the receivers to
refrain from the issue of the bonds until the form thereof should have been
settled by the said court, and also until deposit with the receivers should
179
have been made of the $2,058,000 provided as a guarantee. The first
request sought a prohibition of the issue; the second attempted to delay the
negotiation of the bonds until the annual election should have passed and

the McCalmonts should have had a chance to obtain control. The immediate
result was the transference to Philadelphia of the $2,058,000 guaranteed,
from its place of deposit in London. In February the McCalmonts obtained
a revocation of the original grant of authority for the deferred income
bonds, a continuance of the suit for a preliminary injunction, and an order
restraining the respondents from “making any agreement or ordering any
act by which the Philadelphia & Reading Railroad Company [might] be
definitely bound touching the deferred bond plan or the proposed mortgage
180
loan of $150,000,000.”
In January the Coal & Iron Company quietly held its annual election,
and chose Mr. Gowen president. As the time for the postponed election of
the Railroad Company came round, the activity of both sides became
intense. Both Gowen, who was still in London, and the McCalmonts issued
calls for proxies. The former appealed to the shareholders to save the
property from passing into the hands of the Pennsylvania Central Railroad
Company, which he said was believed to be the ruling power behind the
McCalmont litigation. The latter objected vigorously to this charge, and
pointed out that the Reading managers held only 16,500 shares of the
company’s stock, and that some of them had barely enough to qualify them
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for the positions which they held. The McCalmonts, furthermore, applied
to the courts for an injunction to prevent Gowen from voting on the shares
pledged as collateral for the floating debt. They maintained with some
justification that these shares could not legally be voted, and that it was
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particularly illegal for the president to use them to elect himself.
On March 12 the Court of Common Pleas issued a decree regulating
the conditions under which the election should be held, providing for the
separate count of votes of shares transferred three months before the
election, and for the ultimate reference of all disputed points to the Court.
By this time Mr. Gowen had become alarmed at the apparent strength of the
McCalmonts, and had come to realize that a possible disenfranchisement of
a part of his own holdings on the ground of too recent transference might
lessen his chances of retaining control. He recalled, however, that the
annual meeting had been postponed from January 10 to March 7, and
finally to March 14. This, it occurred to him, might transform it from a
regular to a special meeting, and might, according to the terms of the

company’s charter, make necessary the presence and vote of a majority of
all the shares outstanding, instead of a simple majority of all the shares on
hand. If this should be true a disenfranchisement of his holdings would be
of less importance; for whether disenfranchised or not, these would form
part of the total shares outstanding, of which an absolute majority would be
required.
On March 12, two days before the appointed date, Mr. Gowen issued a
letter to the shareholders. “I hold,” said he, “up to the present time, the
proxies of 1921 shareholders of the company, owning 359,500 shares of the
capital stock, being very considerably more than a majority of all the
shares.... Of the shares for which I hold proxies, so large a proportion,
however, may possibly be disenfranchised by failure to register, that if the
legal meeting of the stockholders is held on Monday next, and it should
subsequently be determined by the Court that three months’ prior registry is
essential to confer the right of voting, it may be possible that the wishes of
the great majority of bona fide shareholders may be overruled by a
minority.... I have determined to abstain from attending the meeting, and I
earnestly request all shareholders who support the present management to
absent themselves from the meeting on Monday, and thus to give legal
effect to their wishes by making it impossible for the minority to secure the
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attendance of a quorum....”
Mr. Gowen’s friends, English and American, followed his suggestion;
and at the meeting on Monday but 211,095 out of 687,663 registered shares
appeared to vote. The immediate result was the almost unanimous election
of Mr. Bond, the candidate of the McCalmonts, which was followed by
litigation on the part of Mr. Gowen, disputing the legality of the election.
By the terms of the decree under which the election had been held, the
matter came first before the Court of Common Pleas, which, on April 9,
decided that the meeting had been a legal one, and that the officers then
voted for by the McCalmonts had been duly elected. With the above court
ranged against him, Mr. Gowen took appeal to the Supreme Court of the
state, and meanwhile declined to surrender his position. On April 11 the
new board proceeded to the Reading offices in Philadelphia, made formal
demand for admittance, and were refused. On April 22 President Bond
issued formal notice of his election. An injunction was asked against Mr.
Gowen, but was held back until the Supreme Court should have taken

action. Meanwhile the old board of managers announced that if a decree
supporting the decision of the Court of Common Pleas should be rendered
they would make no further opposition; and the transfer agents of the
company in Philadelphia and New York refused to transfer any stock until
the dispute should have been settled. On April 19 an order of the United
States Court interfered with Mr. Gowen’s exclusive possession, and
compelled him to furnish to Messrs. Frank S. Bond, etc., suitable
accommodations in the offices of the Philadelphia & Reading Railroad
Company, with free access to all books and papers. In May the Supreme
Court rendered its decision, holding the meeting of March 14 to have been a
regular meeting, and a majority of all the stock outstanding not to have been
required for a quorum. Gowen asked for a rehearing, which was denied, and
in June, nearly four months after the election, he grudgingly acknowledged
Mr. Bond and his associates as the legally elected president and board of
managers.
During all this time the deferred income bond scheme had not remained
untouched. In April, 1881, on application of the McCalmonts, the United
States Circuit Court at Philadelphia had granted a preliminary injunction
against it. “Whatever power the defendant has in the premises can only be
found in the general authority to borrow money,” said Judge McKennan,
and went on to state that the issue did not constitute a loan, because a loan
implied reimbursement, and the income bonds were redeemable at no
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special time. Mr. Gowen promptly proposed to make them redeemable,
and insisted that this made them still more desirable. A week later the
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$150,000,000 general mortgage was also enjoined.
Once out of the presidency Mr. Gowen endeavored to induce the
McCalmonts to accept his plan. If they would adopt the deferred income
bond scheme, he said in an address to shareholders, he would resign the
receivership of the road at once, give bonds never to stand for the
presidency again, and further coöperate with them in selecting a new board
of directors. As an alternative he offered to buy the McCalmont shares at
$40 each, and threatened to beat that party at the next election if it
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refused. In September he assured the stockholders that he could without
difficulty put the road upon its feet. “If Bond and his colleagues will resign
and reinstate the old management,” he cabled from London, “and advise me

by cable of the change, I can, before sailing on Saturday, procure sufficient
advances against the proceeds of preferred [deferred?] income bonds and
new 5 per cent consols to pay the floating debt, receivers’ certificates, and
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all arrears of interest.” Finally, appealing to Mr. Bond direct, Gowen
made formal application that the new board should adopt his plan after
changing the form of the proposed obligations by making them payable in
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100 or 200 years. Bond refused. He pointed out that the deferred income
bondholders would be in constant conflict with the management in their
endeavor to secure dividends on their holdings, and would attempt to
prevent proper and necessary expenditures upon the property from current
net revenues. He declared that it was questionable whether the company
had authority to sell its unsecured obligations below par, and that in any
case the process would be enormously expensive; and, further, that the
language of the obligation did not limit the payment of interest to the source
of net revenue only, but might be construed to compel the declaration of 6
per cent on the income bonds whenever 6 per cent should be paid on the
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common stock. Failing in his attempts to win over his opponents, Gowen
turned his energies toward securing their defeat.
Meanwhile President Bond brought forward a plan of his own. He had
grasped three points of weakness in Gowen’s scheme, namely,—
(1) The issue of a mass of worthless obligations in the deferred income
bonds;
(2) The high level of fixed charges which a $150,000,000 5 per cent
mortgage entailed;
(3) The lack of any security which had a right to interest only when
earned, and which might be given to the bondholders in return for sacrifices
which they would otherwise refuse to make.
He proposed, therefore, to create a general consolidated mortgage to
cover all the property of the Reading Railroad and Coal & Iron Companies,
together with the interest of both companies in all other corporations and
property, whether owned or controlled by lease or otherwise. This mortgage
was to be junior to the consolidated and to the improvement mortgages
only, but was to contain a provision by which, as bonds under these senior
mortgages should be retired, additional bonds might be issued under the

new mortgage, which was eventually to become a first lien upon all the
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properties of both companies. The total was to be $150,000,000, to be
divided into two series: of which series A, for $90,000,000, was to run for
fifty years, and was to have a prior lien over series B upon the revenues for
interest at the rate of 4½ per cent, with a right to enforce foreclosure in case
of a twelve months’ default; and series B was to run sixty years, and was to
carry interest at 3 per cent, with a right to enforce foreclosure in case of a
three years’ default. In prosperous years series B might receive more than 3
per cent: thus the mortgage provided that from current net revenue
applicable to dividends it should get 1½ per cent additional interest before
any dividend should be paid on the stock of the company; after that 3 per
cent might be paid on the capital stock, and then 1½ per cent additional
might be paid on series B; it being understood that the interest in excess of
3 per cent should not be cumulative, but was to be paid only from current
net revenues of the company otherwise applicable to dividends. These two
issues of unequal worth were to be used for different purposes. Series A was
to be in part reserved to retire the senior obligations, and in part to be sold
to pay off the general mortgage bonds, the general mortgage scrip, the
income bonds, the floating debt of the Railroad and Coal & Iron Companies
secured by collateral, the receivers’ obligations, and the mortgages on real
estate that could be paid off. Series B was to be exchanged for the junior
obligations, such as the debenture or convertible loans, or was to be held in
reserve for subsequent acquisition of the guaranteed stock or obligations of
affiliated corporations of the Railroad and Coal & Iron Companies.
What this meant for the immediate future was that all prior liens were
to remain untouched, while everything from the general mortgage down
was to be funded into the new obligations. In some ways this resembled the
earlier scheme of Mr. Gowen, since in each case there was to be a
$150,000,000 general mortgage in two parts, of which one part was to have
priority over the other, and in each case this grand mortgage was to be used
ultimately to retire all previously existing indebtedness. An innovation was
now made, however, in the difference introduced between the two series. In
Gowen’s scheme the amount of each series was to be the same, and each
was to fare alike, except for the priority of series A; in that of President
Bond, series A was to be half again as large as series B, and was to bear a
higher rate of compulsory interest; although, a point of extreme importance,

the return upon series B was to run from a minimum of 3 per cent to a
maximum of 6 per cent whenever the road should earn it. Thus President
Bond gained two things: he reduced the rate of interest which his new
bonds could claim in any year from 5 per cent (as under Gowen’s scheme)
to an average of something under 4 per cent, which would yet, in
prosperous times, net them as much as the old bonds surrendered; and as a
still further concession, he gave to the 3 per cent bonds a term of sixty
instead of fifty years, raising their value to that extent. As the various
existing issues of bonds had different market values, he thought it proper to
equalize these values in the exchange by the grant of a bonus in stock, for
which the capital stock of the company was to be increased one-third. Here
were two of Gowen’s problems in a fair way of solution: the reduction of
fixed charges was accomplished, while some incentive was given to the
junior bondholders to assent. Scarcely less from the point of view of sound
finance was the gain from the abandonment of the anomalous deferred
income bond scheme, with its $34,300,000 of worthless speculative
securities. Instead, the floating debt, under President Bond’s plan, was to be
cared for by the sale of series A bonds, not at one-third their face value, but
as near par as possible; by the best of the company’s new securities, in other
words, and not by the worst. And, finally, the acquisition of the securities of
subsidiary roads was provided for rather ingeniously by the conversion into
series B bonds of $10,527,900 convertible 7 per cent bonds, against which
had perforce been reserved an equal amount of stock. Conversion released
the stock, which became a free asset available for any uses to which the
company saw fit to apply it.
Yet while the advance which the plan of President Bond marks over
that of President Gowen may be recognized, its defects must also be
observed. It was, in the first place, in common with all other schemes
suggested, too mild, too little drastic in its operations. The condition of the
Reading companies was desperate in the extreme. By President Bond’s own
figures the previous five years had shown a deficit of $11,479,217, or an
average loss per annum of $2,295,853. The net earnings for 1881 by the
same computation had been $8,418,009, and the fixed charges
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$11,265,666. What was needed was a radical scaling down of
indebtedness, to take effect not in the far distant future but at once.
President Gowen, face to face with a similar situation, had evolved a

reduction in fixed charges from about $11,000,000 to about $7,000,000, but
had explained that, owing to the impossibility of retiring all of the prior
liens at once, the actual figures would be approximately $7,957,000.
President Bond, less optimistic, or more honest, stated that the ultimate
charge under his plan would be about $6,000,000; but that the immediate
reduction would be to about $8,339,000 only, scarcely more than $100,000
below the net earnings of the current year. Both estimates would probably
have been under the mark; but the relief which President Bond proposed
was utterly inadequate even on his own showing. A margin of surplus
earnings which could be wiped out in a single month was no answer to the
demand for a restoration of the Reading companies to solvency. In regard to
the floating debt, too, Bond’s plan left something to be desired, in that it
provided for no assessment, but cared for the floating obligations by the
sale of bonds. The danger in relying upon the sale of securities to supply the
cash requirements of a bankrupt road has been mentioned in connection
with Mr. Gowen’s scheme, as indeed at other times before. At best it is
advisable only in prosperous times, and when the bonds offered are of high
grade; and though the series A bonds might perhaps have been considered
high grade, the prosperity of 1880 was not repeated in 1881, and a year of
bankruptcy and litigation had not improved the Reading’s credit. That the
plan failed, however, was due neither to its inadequacy nor to its method of
dealing with the floating debt; but rather to the resolute and
uncompromising opposition of Mr. Gowen and his friends, and to the
determination of the junior securityholders to stand out for better terms.
This twofold resistance caused a syndicate of bankers, which had been
relied upon to place the new loan, ultimately to reject it, and the plan fell
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through.
To return now to Mr. Gowen. This gentleman had been strengthening
his following in every possible way, and had secured one ally of particular
importance in the person of Mr. Vanderbilt, who in October, 1881, was
reported to be buying largely of the company’s stock. Early in November
Mr. Gowen and President Bond both issued addresses to the shareholders.
The former maintained that although the present management had been in
power for over four months it had done nothing to extricate the company
from its difficulties, and promised that if elected he would “retain the office
long enough to place the company in a good financial condition, by

completing the issue of deferred income bonds and by issuing and selling
the 5 per cent consolidated mortgage bonds, the result of which will be the
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resumption of dividends upon the company’s shares.” The business
prospects of the company were never better, he continued, and the wisdom
of the purchase of the great anthracite coal estate was being demonstrated.
Bond, on the other hand, alluded to the failure of Mr. Gowen’s many
promises, to the wasteful expenditure of money, to the coal speculations in
which the road had been engaged, to the payment of unearned dividends,
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and to other points of Gowen’s policy, actual or alleged; and his
statements were repeated by the McCalmonts in spite of Mr. Gowen’s
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vehement denials.
The election was held from January 9 to January 14, 1882. There were
cast 493,601 votes, of which Gowen received 270,984 and Bond 222,617; a
result mainly due to the 72,000 Vanderbilt shares voted for Mr. Gowen. The
same meeting approved by resolution Gowen’s financial plans, and called
on the incoming board of managers to carry them into effect. To clear the
way a test suit was brought in the Supreme Court of the state of
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Pennsylvania, and a close decision obtained favoring the issue. Counsel
for the McCalmont Bros. petitioned in the Circuit Court for leave to
withdraw their complaint, stating that the McCalmonts had disposed of
almost all their holdings, and the Circuit Court vacated the injunction which
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it had previously granted.
Gowen’s plan was now triumphantly brought forward, with the few
alterations which time had suggested. There was to be as before a deferred
income bond issue of $34,300,000, which was to retire the floating debt; the
general mortgage was to be increased in amount from $150,000,000 to
$160,000,000, but was still to be divided into two series, equal in amount,
and differing in privileges only on the point of priority of lien; of which
series A was ultimately to exchange for the senior, series B for the junior
obligations of the company. $13,500,000 of the first series and $10,000,000
of the second series were to be put out at once, and $4,000,000 convertible
adjustment scrip were to be issued to settle back coupons. Time had
apparently made more modest Mr. Gowen’s estimate of the saving to be
secured; for instead of not more than $7,000,000 as before, he now hoped
for fixed charges of not more than $8,000,000; but with undaunted

optimism he made up for this admission by glowing pictures of what the
company in the future was going to earn. “Net earnings last year” (1881),
said he, “were over $10,000,000—in 1882 they may be expected to reach
$11,000,000, and they will before long be over $12,000,000. With net
earnings of $12,000,000, and fixed charges of $8,000,000, there will remain
a dividend fund of $4,000,000, equal to 6 per cent on the share capital, and
6 per cent upon the par, or 20 per cent upon the issue price, of the deferred
income bonds. “In order to get the property out of the hands of the receivers
an earnest effort was made to sell the $13,500,000 series A bonds of which
mention has been made, but at the minimum price of 98 subscriptions for
but $723,500 were received, and the company was obliged to have recourse
to the $5,000,000 unissued general mortgage 7 per cent bonds, which it
fortunately had at its disposal. Even before this the management had been
forced to abandon any immediate attempt to retire the old general mortgage
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bonds, and had been compelled to answer inquiries as to the reasons for a
decline in the price of the deferred income bonds. On February 28 the
receivers of the Railroad and Coal & Iron Companies formally surrendered
the control of the property to the officers of those corporations.
One of the first acts of the reconstructed company was the lease for 999
years of the Central Railroad of New Jersey. This road in many ways
formed a natural complement to the Reading system. Like it, it was a coal
road, carrying something less than half as great a tonnage as the Reading
itself, and owning extensive coal lands in the Wyoming region; while in
location it supplied the necessary connection between the Reading lines and
New York. At a later date Mr. Joseph S. Harris testified that all the business
of the Reading coming from the South or Southwest went to New York over
the Central; while, on the other hand, business from the Northwest was
carried by the Jersey Central from Scranton, where its lines began, to
Bethlehem, and was there handed to the Reading for transportation to
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Philadelphia. The advantages of the Central to the Reading were thus
enumerated by General Traffic Manager Bell in 1885: “The joint traffic
with the Central Railroad, outside of coal, and outside of passengers, adds
$1,500,000 to the revenue of the old Reading system. By means of the
Lehigh & Susquehanna division of the Central Road we extend from
Phillipsburg to Scranton or Green Ridge through the entire Lehigh Valley;
that system feeds our North Pennsylvania line; it is our connection for the

Catawissa system by way of Tamanend and Tamaqua; it is the connecting
link in the cross line or Allentown system; it creates the shortest line from
interior Pennsylvania, and from Northwest Pennsylvania to New York
waters. Through the operations of the lease we reach the largest slate
territory in Pennsylvania, and the largest iron producing furnaces anywhere
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in this country, with the exception of Pittsburg.” In 1883 the Central was
bankrupt with no immediate prospect of recovering from its difficulties, and
had therefore an incentive to accept any arrangement by which interest on
its obligations should be paid; while Mr. Gowen, with misplaced confidence
in his scheme of reorganization, was ready to put fresh burdens on his road
in the hope of future gain.
Rumors of a lease were abroad in 1882, and after the termination of the
Reading receivership the operation was pushed to a speedy conclusion. The
Reading undertook to assume all the obligations of the Central, and to pay 6
per cent on its capital stock then outstanding, as well as $18,000 annually
for maintaining the corporate organization of the lessor. In case any of the
Central bonds should be retired, or rentals or interest reduced, the rental to
be paid by the Reading was likewise to be reduced. The roadbed and rolling
stock of the Central was to be maintained undiminished, but if the Reading
should make any additions or improvements, or if from its own funds it
should pay off any of the Central’s obligations, it was to receive equivalent
bonds with interest not exceeding 6 per cent from the Central Company.
The lease was terminable on 60 days’ notice in case the lessee should fail at
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any time to carry out its provisions. This involved something more than a
nominal obligation. The net earnings of the Jersey Central in 1882 had been
$5,091,072, while the sum due for rentals, interest, 6 per cent dividends,
etc., had mounted up to $5,898,087, not including payments on car trusts or
certain contingent obligations. Broadly speaking, the Reading proposed to
guarantee 6 per cent on the stock of a road which had failed because unable
to meet its fixed charges; and however great the ultimate advantages, it is
apparent that the prospect of a drain upon the Reading Company was real.
In order to get the road out of receivers’ hands, the Reading had further to
take care of a floating debt of $2,062,000, and to compromise with certain
creditors by settling back interest on their bonds. This was done, and on
May 29, 1883, possession formally passed over. The same day was
concluded another arrangement, whereby the Central of New Jersey leased

the coal and railroad companies comprised in the Lehigh Coal &
Navigation Company for one-third of their gross receipts, and the
Philadelphia & Reading Railroad became liable for the faithful execution of
the contract. The Reading agreed that the Lehigh coal lands should be
developed pari passu with its own, so that the product of the two estates
should be constantly as 28 to 72 until the Lehigh production should reach
3,000,000 tons. The rental of the road was not in any year to be less than
$1,414,400, nor more than a sum rising from $1,728,700 before 1887 to
$1,885,800 from 1887 to 1892, and $2,043,000 after 1892, plus certain
minor payments; and there was provision for arbitration of any disputes
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which might arise.
The year 1883 now seemed to find the Reading imbued with new life.
Earnings increased, both gross and net, fixed charges as reported rose less
rapidly, and the net profits for the year, or balance on all operations, showed
a threefold increase. “The company,” said Mr. Gowen, “has now
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surmounted the difficulties of the last four eventful years.” The annual
meeting in January was a genuine love-feast, marked by the presentation of
resolutions highly flattering to Mr. Gowen. “We trust,” said one, “we
thankfully appreciate your herculean efforts in our behalf, in the face of
unparalleled difficulties and obstacles, in rescuing our property from
bankruptcy against the malignant and determined efforts of its enemies and
conspirators to foreclose and wreck it.” “As citizens of this great
commonwealth,” said another, “we beg to add our gratitude and admiration
for your untiring, brave, honest, and able devotion, which has preserved the
Philadelphia & Reading Company intact, and has fairly started it on a
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broader career of usefulness.” Not less extraordinary was the further
action of this harmonious meeting. In the first place, it authorized the
creation of a collateral trust loan of $12,000,000 for the purpose of paying
the floating debt, the balance due upon the purchase of Central Railroad
Company of New Jersey stock, and the retirement of the outstanding
income mortgage bonds. What, may be inquired, had become of the
deferred income bonds of which Mr. Gowen had been so proud, and the
$5,000,000 additional first series consols which with them were to cover the
floating debt, if a new collateral loan was needed for the purpose for which
they had been considered ample? As for the purchase of Jersey Central
shares, an account would require a chapter in itself. The intent had been to

secure more complete control of this subsidiary road. The purchase had
been made on margin in May. By January, 1884, more funds were necessary
to carry the stock; and as the business depression grew acute, the Reading
was obliged to seek a time loan from Mr. Vanderbilt, and to pledge the
purchased securities as collateral therefor. When the loan matured Reading
was no better off than it had been before, and Vanderbilt, who seldom
mixed philanthropy with business, sold the stock. The original purchase had
been at 78; the prices obtained when the stock was thrown on the market
ranged from 57 to 50, and the Reading lost the difference, besides those
advantages which it had expected to gain.
In the second place, the meeting proposed a dividend of 21 per cent on
the preferred stock, representing arrears due, and of 3 per cent on the
common; both cash, and to be paid in case the collateral loan should
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succeed. In order to give shareholders time to consider, an adjournment
was taken for two weeks, after which the dividend on the preferred stock
was approved, though that on the common was not. It seems almost
superfluous to insist upon the folly of this dividend. The Reading had not,
in reality, “surmounted the difficulties of the last four eventful years.”
Scarcely any of the benefits promised by Mr. Gowen’s plan of
reorganization had been secured; fixed charges had not been reduced,
because it had been found impossible to get creditors to take new securities
in exchange for the old, and equally impossible to sell any considerable
amount of the new securities for cash. While old charges had remained
unabated, new charges had been added through the lease of the Jersey
Central, new car trusts, and the like, and the very gain in earnings which
might have been construed as favorable was due to increased mileage, and
206
was not proportional to the growth of the system. A fitting sequel to Mr.
Gowen’s words and acts was the scrip payment for labor and supplies
which took place in May, 1884, and the accompanying fall in the prices of
the company’s securities. On June 2 the company again passed into
receivers’ hands. The same judges were applied to as in 1880, and the same
receivers were appointed, except that Mr. Gowen, who had given up the
presidency of the company, was replaced by Mr. George de Keim, his
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successor.

The various creditors had now to do what should have been done
before, and, by lightening the charges upon the road, to put it in a position
where its solvency could be maintained. The chances for obtaining radical
action from the bondholders were somewhat brighter, since even the most
obstinate were being forced to realize that no halfway measures would
avail; and a reasonable solution was even thus early hinted at in the
suggestion that some of the bonds under which the road was staggering
should be replaced by stock. Nevertheless, we shall find in this
reorganization a slow working out of the requirements for a plan, and a
slow process of at least partial reconcilement to the inevitable.
The receivers’ report was issued in October, but contained little not
known or suspected before. From November 30, 1883, to June 2, 1884,
there had been a net loss in operation for the Railroad Company of
$2,322,282, and for the Coal & Iron Company of $1,049,702, showing
conclusively the condition of the companies. The total bonded indebtedness
was $94,613,042; a total to be compared with the $78,101,894 of four years
previous. The total floating debt was $16,549,968 as compared with
$10,254,766 at the beginning of the previous receivership. Including the
Central of New Jersey, the total fixed charges for the Railroad and Coal &
Iron Companies were $18,241,051; a sum which certain offsets, however,
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reduced to $16,584,732.
The first suggestion for a reorganization came from a committee
primarily representing the general mortgage bondholders, though including
other interests as well. The chairman was Mr. Townsend Whelen, and the
committee may be taken to represent the views of the management. “The
present fixed charges of the company,” said Mr. Whelen, “are in round
numbers $16,650,000, while the earnings of the past fiscal year are, in
round numbers and after proper deductions, $12,900,000. The objects
sought to be accomplished by the committee are:
“(1) To reduce fixed charges to the limit of last year’s earnings;
“(2) To preserve the proper order of priorities of each class of
securities, so that no income applicable to any senior security that remains
unpaid can by any possibility be diverted to paying the interest on a junior
security;
“(3) To provide a method of paying the floating debt.”

The plan was, roughly, to leave the prior liens untouched, to fund one-
half the coupons upon the general mortgage for three years, and to convert
all of the other obligations into income bonds. Preferred stock was to be
changed from cumulative to non-cumulative; rents of leased lines, including
the Central of New Jersey, were to be reduced to the amounts which the
properties had earned; the canal leases were to be reduced; the interest on
some of the divisional coal land mortgages was to be reduced, and on some
was to be paid in full. In regard to the floating debt the committee decided
to postpone any attempt to raise money for its extinction. If the bondholders
should accept the scaling down of their indebtedness, the company might
have no difficulty in procuring cash by a collateral loan; if this should prove
impossible, the duty of providing funds would devolve upon the junior
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securities. The committee found it impossible to prepare within the short
time at their disposal a complete plan of reorganization with exact figures of
present and proposed fixed charges; and it is therefore impossible to
ascertain how great was the saving which they expected to secure.
The plan marks sufficiently well the advance which had been made
since the reorganization of 1880–3. The best that could then be imagined
had been the creation of a grand general mortgage for which the old
bondholders might, but mostly did not, exchange their holdings; while now
the very first suggestion endeavored to retain for all bondholders a chance
for the same return as before, and found the salvation of the company in the
transformance of certain bonds from mortgage to debenture obligations.
The general criticisms which may be made are three: first, that it was
unwise to defer all provision for the floating debt; second, that the new
income bonds might better have been replaced by stock; and third, that the
probable reduction in fixed charges would have been insufficient. So far as
the committee suggested any action in relation to the floating debt, it
favored a funding of it. This funding might have been either into mortgage
or into income bonds: if the former, the fixed charges of the company
would have been increased, or else the other mortgage bondholders would
have been compelled to accept a lower rate of interest; if the latter, the
volume of securities of slight value would have been increased, or the
junior securities would have had to take less for their holdings. The action
taken would have gone far to determine what classes of securities would
assent, while in the absence of definite declaration it was on the whole

likely that all classes would hold off. As for the income bonds, it is in
general true that they are an unsatisfactory sort of security, and likely to
hinder the legitimate increase of capital. Most important was the question of
fixed charges. It will be remembered that of the first and second series 5s of
the previous reorganization only $23,500,000 had been intended for
immediate sale, and that of these but a portion had been disposed of; and
yet these consols were the only securities the nature of which was really
changed by the Whelen plan. Interest had been optional before on the
income bonds, the convertible bonds, the convertible adjustment scrip,
debenture and deferred income bonds; interest was not made optional on the
general mortgage or prior liens. The result would not have been, in spite of
the reduction in rents and the scaling of the divisional coal mortgages, any
sufficient lessening of the fixed requirements. This fact was, moreover,
perceived. The board of managers, to whom the scheme was reported,
concluded a favorable opinion with the declaration, “to conclude, we are
satisfied that the large economies already in operation, with those which are
still being introduced, should be regarded as a margin to meet adverse
contingencies.... That the revenue we reckon on, though reasonably certain
under such reorganization, will surely not be realized in case the property
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should be torn asunder by foreclosure sale.” In other words they relied,
much as Mr. Gowen had done two years before, on a subsequent increase in
earnings to ensure the solvency of the company. A final objection made at
the time was that the plan asked too little of the junior securities.
The Whelen plan was reported to the general managers’ committee, and
was approved by them. Some slight modifications were made, and a large
number of signatures was secured. Opposition was not slow to spring up. In
February a meeting of general mortgage bondholders elected a committee,
known as the Bartol Committee, to prepare a plan more suited to their
interests. This body conferred with the Whelen Committee, and two
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members from each were selected to construct a new reorganization plan.
In March it reported to its constituents that it had made all the concessions
which were possible without sacrificing the interests of the general
mortgage bondholders, and that in spite of this, the negotiations had not
212
proved successful.

In April, ten months after the beginning of the receivership, the
Reading managers evolved a plan for dealing with the floating debt.
Holders were to agree to accept renewals at intervals of three months for
three years, with interest at the rate of 6 per cent, paid at the time of each
renewal, and to hold the collateral pledged as security until the whole of the
debt should have been discharged. In case the Philadelphia & Reading
should fail at any time punctually to pay the interest on any of the
obligations agreed to be renewed, or should fail to cause the same to be
renewed, or in case nine-tenths of the floating-debt holders should not
assent to the plan, or in case an adverse judicial sale should be made, the
213
obligation to accept further renewals should immediately cease. The
scheme deservedly fell through. Creditors were asked to tie up their assets
for three years, with no concession in return except the payment of interest
quarterly in advance; while the unofficial suggestion that the Reading pay ¼
per cent commission on each renewal was felt to be too expensive for the
company to entertain.
The following month the Whelen and Bartol committees came out with
a new edition of the Whelen plan, which introduced an assessment on the
junior bonds and stock, but preserved the same method of dealing with the
214
old securities as before. Assent to the plan was to be on the condition that
sufficient money should be raised to pay off the floating debt. Interest on
such debt was not to have priority of payment over interest on the general
mortgage for longer than three years; and during those three years the
preference was to be limited to that part of the floating debt secured by
collateral yielding income to cover interest, or important for other reasons
to be retained. There were to be seven reorganization trustees to receive the
assents of parties in interest, and to receive and hold the securities and
assessments thereon pending reorganization, and when accomplished to
215
return such securities duly stamped to their respective owners. The
trustees were further to decide whether the assents to the plan in question
should be considered adequate, and if they should conclude on or before
May 1, 1886, by a vote of six of their number, that the assents were not
sufficient, they were to call into a council the managers of the Philadelphia
& Reading Railroad Company, the receivers of that company, and the
committees of the general mortgage (Bartol) and income mortgage
bondholders; and this council, by a vote of four of the five interests therein

represented, was to formulate a plan of reorganization adapted to the
circumstances, and involving no larger contribution in money to be paid
than under the plan as then modified; and under such power the trustees
were to proceed to foreclose under such mortgage or mortgages as they
216
might deem advisable. The plan was obviously a compromise whereby
the Whelen Committee clung to the main lines of its previous proposition,
and the Bartol Committee secured modifications which benefited the
general mortgage at the expense of the junior securities. Criticisms which
applied to the earlier plan largely apply to this also; but it is to be noticed
that at last the idea of funding the floating debt was abandoned for the
sounder scheme of paying it off in cash. The reorganization trustees were an
innovation, but were destined to be a useful one. On the whole the
compromise was a step forward; and yet it was not more successful in
obtaining assents than the scheme which had preceded it. Although the
directors approved it, as was to have been expected, the bulk of the
bondholders held off.
Matters now went on in much the same old way. The seven
reorganization trustees, representing the principal interests concerned, held
meeting after meeting with no apparent result. The courts became
impatient; bondholders clamored for their interest; but after the failure of
the earlier plan the way out seemed harder and harder to find. In September,
1885, Mr. E. Dunbar Lockwood addressed an open letter to Mr. John B.
Garrett, one of the trustees, in which the following points were made:
(1) “The trustees should recognize promptly and unequivocally that the
Reading Railroad is bankrupt, and has not sufficient available assets to meet
its obligations.
(2) “Two dollars of obligations cannot be paid with one dollar and a
half of assets, and the sooner all persons interested ... recognize this fact,
and agree to scale both principal and interest sufficient to meet the
obligations of the company and put it upon a strong financial basis, with
sufficient working capital to enable it to conduct its future business
economically, the better it will be for all concerned.
(3) “The trustees should look only at the facts as they exist ... and while
endeavoring to rehabilitate the road, also bring it into harmonious relations
with its adversaries.

(4) “The trustees should consider the problem ... precisely as business
men consider the matter of the settlement of a bankrupt firm. The question
at once presents itself, is it best that the company should continue in
217
business, or should it be wound up?”
In his reply Mr. Garrett pointed out the difficulties to be overcome, and
concluded by saying that in his judgment no reorganization would be final
that did not ensure the establishment of credit, the entrusting of the
management to an interest having an actual equity in the property, and just
expectation of pecuniary return from it, and harmony with competing lines,
218
coupled with due regard for the rights of the public.
The reorganization trustees by this time appeared discouraged, and the
following month called a conference of creditors at which a resolution was
passed looking toward foreclosure. In November a suit was actually begun,
supplementary to a similar suit instituted a year before. It was during the
pendency of these proceedings that the plan of reorganization devised by
the reorganization trustees themselves came out, and marked a third effort
to rehabilitate the road. The first plan proposed, it will be remembered, had
suggested the conversion of all of the junior securities into income bonds,
plus a funding of one-half the general mortgage coupons for three years;
and the second had introduced an assessment on the junior bonds and stock.
This third plan, while preserving the assessment, and making it more
severe, added a provision for the conversion of general mortgage liens into
3 per cent bonds, and of junior liens into preferred stock. For the ultimate
retirement of the prior liens a new fifty-year 5 per cent mortgage was to be
created; for both the prior and general mortgage liens the difference
between the return from the old bonds and that from the new was to be
adjusted by the use of 5 per cent preferred stock, so that bondholders in
prosperous times would not find their incomes diminished. Preferred stock
was to be of two kinds, of which the first was to go to satisfy the general
mortgage bondholders and for assessments, while the second was to
exchange at varying rates for the junior securities above the second series
5s. Everything below the second series 5s was to receive common stock
instead. Under the scheme the company’s obligations would have been
reduced to $60,731,000, of which $33,400,000 prior liens and $24,686,000
new 3 per cents; while its stock would have been increased to the very
considerable figure of $96,516,282. The total cash assessments, if all paid,

would have amounted to $13,506,620; and, joined with the balance of
stock, were expected to be sufficient to cover the floating debt. The new
219
fixed charges were to be $7,064,830.
Various points in the plan deserve mention. For the first time since the
failure of 1880 it was proposed to use two kinds of securities, of which
interest on one should be fixed, and interest on the other optional. For the
retirement of senior bonds President Bond had suggested a bond on which
half the interest should be fixed and the other half variable, but his plan had
been inferior in flexibility to the one now proposed. The junior securities
received less favorable treatment than before; but the general mortgage
itself did not escape, and was required to accept 3 per cent plus preferred
stock instead of a mere funding of its coupons. The increase in the amount
of stock was very great, and naturally so, in view of the new uses to which
220
it was put. Assessments were made heavier, and for the first time the
management frankly excluded from their calculations the Central of New
Jersey, foreshadowing the abandonment of the lease. To repeat, the first two
plans described had developed the idea of an assessment and the conversion
of the junior bonds into income obligations. To this the reorganization
trustees added the use of preferred stock, and, more important still, the
combination of two securities, respectively with obligatory and optional
liens, which were to be given for the general mortgage bonds. In principle
the result was excellent, in practice the degree of reduction was somewhat
too slight from the point of view of the company, although it seemed more
than the creditors were willing to accept. The general mortgage bondholders
in particular were loud in their protest. “The truth of the matter is this,” said
one of them, “while the plan of the trustees has much to commend it, and is
based on an excellent theory, it fails to cover the whole ground, and falls
terribly short of meeting our reasonable demands.” Thus, although the
Bartol and Whelen committees accepted the plan, matters again stood still
for a while, while the financial powers talked and wrote and threshed the
question out.
In February, 1886, the reorganization trustees received a letter signed
by J. Pierpont Morgan and John Lowber Welsh, which is important enough
to be quoted in full.

“A syndicate has been formed,” said these gentlemen, “composed of
leading bankers and capitalists here and in Europe, together with
corporations or their representatives controlling large transportation and
coal producing interests, who have agreed to subscribe in the aggregate
$15,000,000 for the purpose of aiding in the reorganization of the
Philadelphia & Reading Railroad Company and its affiliated lines. The
syndicate has no commitment of any kind with any other railroads or
corporations upon this subject beyond securing a management in harmony
with the principle that capital invested in internal improvements should be
so managed as to result in a fair return in the way of interest and dividends.
Their object and purpose is to secure the reorganization on business
principles for the Philadelphia & Reading bondholders, stockholders, and
creditors without prejudice to the relative position of either, and in their
interest only.
“To do this effectually there must be suitable arrangements made with
the Pennsylvania Railroad and other kindred coal interests for harmonious
relations, in order that suitable prices may be obtained for coal produced
and shipped. These objects we shall endeavor to secure, and we now
enclose you a copy of a correspondence with Mr. Roberts, president of the
Pennsylvania Railroad, on these subjects, which seems to us sufficient to
warrant the syndicate in placing reliance upon the assurance given by that
company.
“As the reorganization shall proceed our effort and expectation will be
to bring about satisfactory arrangements with all the anthracite coal roads,
and also the trunk lines, which shall secure to the Philadelphia & Reading
Railroad Company, when reorganized, its just share of the business at
remunerative rates.
“The syndicate have believed that your plan was, in the main, suitable
for the purpose of reorganization, and that your board was composed of
gentlemen who would command the confidence of all parties in interest.
“They therefore prefer to make an arrangement with you and to aid you
in working out a plan.
“But they also think that there should be certain modifications as to
your organization, and also as to your plan, as follows:

“(1) The syndicate would wish two persons, to be named by them,
added to your board.
“(2) Your plan should be made so flexible that it could be modified
hereafter in such respects as may be found necessary to success.
“(3) There should be an executive committee of five to take charge of
the foreclosure proceedings, the purchase of the property, the organization
of the new company, and generally of whatever may properly appertain to
reconstruction under the plan. There should be five voting trustees who
should vote on the stock when deposited under the plan, and to whom the
power of voting on the stock in the reorganized company should be
confided for five years after reorganization. These two committees should
be composed of parties satisfactory to the syndicate and the trustees, and
shall fill their own vacancies. But in case the syndicate and trustees cannot
agree upon the five, then, and in that case, three shall be named by the
syndicate and two by the trustees, and each class shall fill any vacancy
occurring in its own number.
“(4) The compensation to be allowed to the syndicate shall be 5 per
cent on the amount of the syndicate capital.
“(5) The syndicate to be allowed interest at the rate of 6 per cent upon
any amount they may advance the company in the course of the process of
foreclosure and reorganization.
“(6) Proper provision must be made for securing to the syndicate the
refunding of the money they may advance on account of interest not
exceeding 4 per cent per annum on the general mortgage bonds during
reconstruction, and also for the substitution of the syndicate in the place of
any creditor or stockholder who may abandon his holding and refuse to pay
his assessment, it being the purpose of the syndicate to pay 4 per cent per
annum interest on the general mortgage bonds during reconstruction, and
also to pay the assessments of such parties as may abandon their holdings or
221
right to take the securities to which they may be entitled under the plan.”
The correspondence with Mr. Roberts referred to contained the
assurance that the Pennsylvania Company would not hold aloof from an
understanding with the Reading either in respect to the coal or
transportation business, and would, moreover, “cordially unite in the

222
arbitration of all differences.” This could not, of course, force distasteful
terms upon the Reading bondholders, but it could and did supply sufficient
capital to ensure the success of any plan adopted, and it infused confidence
and vigor into the action of the nearly discouraged reorganization trustees.
The executive committee which they were to name was perhaps a useful
tool, but the suggestion of a voting trust was a genuine contribution, and
aided powerfully in securing necessary backing for future schemes.
It is to be remarked that the syndicate appeared with no panacea, was
without a plan of its own, and at first merely adopted that of the trustees,
with a few modifications which it thought advisable; but that by March,
1886, it had so worked over the proposals of the reorganization trustees as
to make in many respects a new plan; which retained the assessments,
likewise the combination of fixed and optional charges and the use of
preferred stock, but reserved 4 per cent bonds against prior liens, gave 4 per
cent bonds with preferred stock in exchange for the general mortgage
instead of 3 per cents, and created four classes of stock instead of three.
Somewhat more in detail this plan was as follows: The Reading was to
issue a new 4 per cent general mortgage for $100,000,000, and four kinds
of stock: a preferred, income, consolidated, and common. Of the general
mortgage $9,792,000 were to be for future use in the improvement of the
railway; of the remainder $38,422,000 were to be reserved against prior
liens; $24,686,000 were to exchange for the general mortgage if such
should not be paid off in cash; $15,000,000 were to take up shares or bonds
of leased lines, and $10,000,000 were to exchange for or to redeem Coal &
Iron Company divisional mortgages. The total amount issued was to be
$90,208,000, and no mortgage in addition was to be placed on the Reading
properties for five years after the reorganization without the consent of a
majority of the preferred stockholders. Of the different classes of new stock
the preferred was to be given dividends up to 5 per cent non-cumulative,
and then the income and consolidated stocks were to have up to 5 per cent
non-cumulative. Generally speaking, the preferred stock was to go for
assessments; the income stock for the income mortgage and convertible
adjustment scrip; the consolidated stock for the first series 5s and one-
quarter of the principal of the second series 5s; the common stock for the
rest of the second series 5s, for the convertible debentures, deferred income
bonds, and for old preferred and common stock. New fixed charges were

estimated at $6,971,687, which dividends on the preferred stock would raise
to $8,198,636. There was to be a voting trust for five years, consisting of J.
Lowber Welsh, J. P. Morgan, Henry Lewis, George F. Baer, and Robert H.
Sayre; and a syndicate was to advance necessary expenditures and
disbursements pending reorganization, including unpaid assessments. The
syndicate compensation was to be 6 per cent on its advances, plus a
commission of 5 per cent upon its $15,000,000 of subscribed capital. The
property was to be sold at foreclosure sale, and a new company was to be
223
organized.
A comparison of this with the plan of the reorganization trustees at first
announced will show the changes made. Nothing of value which previous
reorganizations had worked out was cast aside. The fixed interest allowed
the general mortgage bondholders was raised in the hope that they might
support the plan, and more care was taken to follow the order of priority in
the advantages offered to the various classes of junior securityholders; an
end to which the four classes of stock were admirably adapted. The voting
trust was altogether new, and was doubtless intended to ensure a policy in
accord with the syndicate’s wishes for a series of years, and to prevent a
renewal of the vagaries of Mr. Gowen’s administration. The provision for
foreclosure was to be expected in view of the extreme difficulty of
obtaining the assents of so many conflicting interests; but with a net
revenue of $12,026,309 (both companies) and fixed charges of $6,971,687,
the task of maintaining the solvency of the companies in future did not
seem an impossible one.
In opposition to the plan the Lockwood Committee urged that the
scheme was unjust to certain classes of bonds; that it was cumbersome,
expensive, conferred power on the trustees which should have been
reserved for the direction of the new company, and that the reserved powers
to change any part of the plan, and the uncertainties connected with the
224
settlements under it, involved risks which creditors should not accept.
The objections were not weighty. If the Lockwood or any other committee
had proved itself able to formulate and carry through a plan, or if the
syndicate arrangement had been proposed at the very beginning of the
receivership, bondholders might fairly have criticised its expense. In point
of fact numerous attempts to reconcile divergent interests had failed, and
what with Messrs. Lockwood, Bartol, Whelen, Gowen, and their respective

followings, the future offered no more promising result. Meanwhile
bondholders were going without their interest, and costs of the receivership
were mounting up; so that a greater expense than that of which Mr.
Lockwood complained was being incurred by delay. As for the general
mortgage bondholders, they were given a chance at their old interest
whenever the road should earn it, and could fairly ask no more; while that it
was inequitable to ask income bondholders to accept a reduction to $50 in
their annual interest, or holders of the first series 5s to wait for their interest
until liens before theirs had been satisfied, are conclusions to which few
will agree.
In April Messrs. Whelen and William H. Kemble, representing the
Reading consolidated mortgage bondholders, announced that they had
determined not to accept the syndicate plan. Even before this Mr. Gowen
announced that he was organizing a syndicate and would soon be able to
pay off overdue coupons on the general mortgage bonds, and to prevent any
225
foreclosure under that mortgage. It is scarcely necessary to say that he
had a plan of his own. He proposed to issue $100,000,000 4 per cent 70-
year consolidated mortgage bonds much as did the syndicate, part of which
should go to redeem the general mortgage and the floating debt; but second
to this he suggested a cumulative 4 per cent first preferred income bond, to
take the place of the income and consolidated stock under the syndicate
plan, and to be exchanged for the first series 5s, a portion of the second
series 5s, and some of the leased canal securities; while finally he planned a
second preferred cumulative 4 per cent income bond, to be exchanged for
those securities down to the deferred income bonds, which under the
syndicate scheme were to receive common stock. The surplus of income
offered by the old general mortgage was to be made good by first
preference bonds. The existing preferred and common stocks were to
remain as they were, and the deferred income obligations were to remain
untouched. Finally, the New Jersey Central was to be retained in friendly
alliance, either under a modified lease at a rental equal to earnings, or under
a special traffic contract.
A comparison of this with the syndicate plan shows that Mr. Gowen
gave up the idea of an assessment; provided for the floating debt through
first preference bonds; swept away three of the four classes of stock,
replacing them by two kinds of income bonds; and retained the deferred

income bonds which the syndicate proposed to retire. His plan was to be
carried through without foreclosure, but outside of this its advantages are
rather difficult to ascertain. The abandonment of the assessment was
distinctly bad; the retention of the deferred income issue was also bad; the
reduction in the number of kinds of securities tended towards simplicity, but
made impossible the nice distinction of priority on which the syndicate had
relied; while even the replacement of stock by income bonds must be
condemned, substituting as it did an obligation without any very distinct
character of its own for a stock which represented frankly only a share in
the profits of the enterprise. These things were realized, and the plan
received no serious support; but as every plan so far proposed contributed
something to the final product, so Mr. Gowen’s income bonds and his
aversion to foreclosure were not without influence upon the scheme which
ultimately attained success.
The next few months saw active hostilities between Mr. Gowen and the
syndicate; the former taking the position that he would never consent to
foreclosure, nor to the placing of the property for five years under the
226
management of a board of trustees named by his adversaries. To Mr.
Garrett, chairman of the reconstruction trustees, he wrote suggesting that
the board should substitute his plan for that of the syndicate, and that seven
reconstruction trustees should be appointed by the managers of the
company to carry it through. “Upon this being done,” said he, “I will
engage that the plan shall be underwritten by an association of capital
sufficient for the purpose of paying off all the general mortgage bonds
which do not voluntarily accept the new securities provided by the plan, and
I will agree that the financial responsibility of these subscribers to this fund
shall be determined by the presidents of the Bank of North America, the
Farmers’ & Mechanics’ National Bank, the Pennsylvania Company for
227
Insurance of Lives, etc., and the Union Trust Company....” Mr. Garrett
naturally refused.
As in many cases before, the struggle ended in a compromise. The new
agreement was as follows: The syndicate was to be enlarged by $4,000,000
additional subscriptions, and the reconstruction trustees increased to
thirteen by the addition of certain friends of Mr. Gowen, one of whom was
also to be given place upon the executive committee. The syndicate plan
was to be carried through without foreclosure, providing sufficient assents

could be obtained, and was to be modified by the substitution of first,
second, and third 4 per cent income bonds for preferred, income, and
consolidated 5 per cent stock. Dividends on the bonds, like those on the
stock, were to be payable from net earnings only; but net earnings were
defined as the profits derived from all sources after paying operating
expenses, taxes, and existing rentals, guarantees and interest charges, but
not fixed charges of the same sort subsequently created. All third preference
bonds issued for convertible bonds were to have the right to be converted
into common stock; and the company was to have the privilege of
increasing the issue, subject for five years to the approval of the voting
trustees. As finally worked out, the first preference bonds were to be given
for assessments; the second preference for all securities which had been
promised income or consolidated stock; and the third preference for the
second series 5s, convertible and debenture bonds, and preferred stock to
which common stock had before been allotted. Somewhat more emphasis
was laid on the possibility of paying off the general mortgage. It was
proposed to reduce the aggregate of rentals and guarantees (exclusive of the
Central of New Jersey, the Schuylkill Navigation Company, and the
Susquehanna Canal Company) to an annual charge of less than $2,350,000
by direct negotiation with the companies affected. And to deal directly with
the three companies above named upon the basis of a continuance of their
respective leases at rentals involving no fixed liability beyond the earning
power of the leased line, or on the basis of a surrender of the said leases,
and the cancellation of the traffic agreement with the Schuylkill Navigation
Company for a consideration. The voting trust was to be composed of three
representatives of the syndicate and one friend of Mr. Gowen, which four
should elect a fifth who should be satisfactory both to the syndicate and to
the reconstruction trustees. A united effort was to be made by the company,
the reconstruction trustees, and the syndicate to secure the immediate
appointment of Mr. Austin Corbin as an additional receiver; and, if Mr.
Corbin would take the position and legally qualify himself to fill it, it was
understood that the presidency of the company would be offered to him.
228
The other provisions of the syndicate plan were to remain unchanged.
The total capital and charges under the plan were to be as follows:
Fixed
Est’d Capital
Charges

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

We have now the reorganization in its final shape, and it will be
interesting to review briefly the gradual way in which this shape was
fashioned. With the company plunged anew into bankruptcy after a
reorganization insufficient to afford any genuine relief, the proposal was
made to fund one-half the general mortgage coupons for three years and to
convert all junior claims into liens on income. This scheme failed because
plainly inadequate to meet the needs of the situation, and a modified version
was presented providing for an assessment with which to pay the floating
debt. The assessment was approved, but not the plan, and an ensuing
scheme supplied an altogether new method of treatment, whereby on the
one hand the assessment was made more heavy, and on the other two
classes of preferred stock were proposed, with one issue of bonds at 3 per
cent. This plan failed, not so much because of its inadequacy, although it
was inadequate, but because general mortgage bondholders felt that a 3 per
cent bond was less than they could reasonably expect for their holdings, and
insisted on a security with a higher obligatory rate of interest. The next plan
took note of these objections: it raised the interest on the bonds which it
proposed from 3 to 4 per cent; and in the endeavor to please the junior
bondholders as well, created four classes of preferred stock, by means of
which the relative priority of different issues was carefully and completely
recognized. Assessments were retained, and a guarantee by a syndicate and
a voting trust for five years was suggested. In the discussion that followed,
a new scheme was introduced, which replaced the preferred stock by two
classes of income bonds, and forced the managers to realize the desire of
the old bondholders for some new security with at least the name of bond.
As a result, the syndicate which had fathered the previous plan consented to

substitute for three of their classes of stock first, second, and third
preference bonds. Meanwhile the fixed charges estimated for the successive
plans steadily decreased. The first looked for $12,911,000, or $14,266,051
as variously reckoned; the second for $14,143,384, or, deducting the Jersey
Central, for $8,223,177; the third for $7,064,830; the fourth for $6,971,687;
and the sixth for $6,583,055. Thus each plan took over what was most
satisfactory in its predecessor; and there was on the one hand a steady
decrease in the fixed charges proposed, and on the other a continuous effort
to discover some plan which might be satisfactory to all concerned.
That the compromise plan last mentioned succeeded was in part due to
the feeling of all contending parties that concessions must be made; it was
due also to endorsement by the leaders of the more important interests; and,
finally, to an appreciation that the plan was after all a good one, reducing
largely the fixed charges which the company would have to pay, while
depriving no one of a return which, under the circumstances, he could fairly
expect to receive. Mr. Corbin proved willing to undertake the new
responsibilities put upon him. He was therefore appointed receiver in
October, and elected president in the January following.
Nevertheless, it would be a mistake to suppose that the plan was
unanimously accepted from the start. The Lockwood Committee of general
mortgage bondholders were prompt in their disapproval, pronouncing it
“unjust, uncertain, and indefinite”; saying that reorganization under it
would be unduly expensive, and that it was more objectionable than the
229
plans which had preceded it. Equally decided was a small group of
capitalists which held a majority of the first series 5s outstanding, the
members of which were said to have agreed to hold their bonds and to abide
230
the result. The original time limit for deposits expired on March 1, 1887;
it was then extended to March 15, and again to March 31, and deposits of
$110,409,464 out of a total of $117,972,859 were secured. By October
certain other bondholders had been induced to come in, and the trustees
declared the plan operative. Holders of $3,348,000 of first series 5s stayed
out, and forced an arrangement by which they were practically paid off in
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cash. Arrangements were made with some of the subsidiary Reading
lines, but the lease of the Central of New Jersey was not renewed. Only
odds and ends now remained to be cleared up, and all through the rest of the

year the managers were busy paying off receivers’ certificates, floating
debt, overdue interest, etc. On January 1, 1888, without formalities, the
Reading passed out of receivers’ hands and into the control of the
stockholders.

CHAPTER IV

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

With the year 1888 a new period in the history of the Reading began. The
long struggle to bring the company back to solvency was fairly over, and
for the first time in seven years the road saw before it a chance for genuine
prosperity. Unlike the reorganization of 1880–3, that of 1884–7 succeeded
in accomplishing the greater part of the saving expected of it. According to
the plan, interest charges were to be reduced to $4,233,055;—in 1888 they
were $4,516,433, and in 1889 $4,058,139; rentals were not to exceed
$2,350,000;—in 1888 they were $2,882,582, and in 1889 $2,842,319. Other
payments, it is true, the necessity for which was passed over by the
advocates of the plan, raised the total which the road was obliged to meet,
but did not prevent a comfortable balance of over $2,000,000 for the
Railroad Company in 1888, and one of $1,444,000 for both Railroad and
Coal Companies combined. During the next few years large sums were
spent in improving the permanent way. By January, 1889, almost the entire
line between New York and Philadelphia had been relaid with 85 and 90
pound rails; grades had been smoothed, bridges strengthened, and culverts
strengthened or rebuilt.
Less satisfactory than the results for the Railroad Company, however,
were those for the Coal & Iron Company. In this case profits of $654,211
for 1887 turned into a loss of $806,222 for 1888, and in the following year a
weak demand for coal, combined with a high cost of mining, increased the
loss to $974,373. President Corbin felt called upon to explain that prior to
1886 the deficits of the Coal Company had been habitually met by inflating

the capital account of the Railroad Company; so that with allowance for this
fact the showing of the companies under his management had been
232
relatively good. In November, 1889, a letter of Mr. Gowen’s was issued,
hopeful as ever, criticising the management for their refusal or neglect to
give authoritative information about actual earnings, but pointing to the
large expense for new coal cars, barges, and collieries, and explaining the
233
benefit which these would confer.
The weakened position of its allied company pulled the Reading down,
and prevented it from attaining the secure position which had seemed in
sight. The payment of dividends only increased the general dissatisfaction.
In February, 1889, holders of a considerable amount of second preference
bonds circulated a petition objecting to the official statement of net earnings
applicable to these securities, and demanded an examination of the books.
After an investigation their expert declared that a 7½ per cent dividend had
been earned, but the bondholders could not induce the company to increase
its distribution. The next year preference bondholders fared even worse.
The managers declared that the surplus over all fixed charges for the year
was barely $100,000, and that no dividends at all upon their holdings could
be paid. Again an investigation was demanded and accorded, and Mr.
Howard Lewis, the expert appointed, reported that there was applicable to
the payment of interest upon first preference bonds the sum of $90,101, or
⅜ of one per cent; a sum which the company promptly agreed to pay.
Meanwhile even the stockholders were becoming restless. In June, 1889, a
suit was commenced in Philadelphia, praying that the company’s voting
trustees and the trust under which they acted should be set aside, on the
ground that the trust was to be exercised by five voting trustees, whereas
only four had ever been appointed. Later on the matter was taken up by
London stockholders, and became serious enough to force a concession of
two seats in the board of managers of the company.
There was no question but that the trouble was caused by depression in
the anthracite coal business, for in the carriage of both passengers and
freight the Reading in these years made steady and substantial gains. In the
three years following 1887 the number of passengers transported increased
by 2,400,000 and the earnings from them by $470,000; while the freight
tons moved gained 1,500,000 and the freight earnings $1,000,000. Only in
coal was there a decrease, which appeared for the Coal & Iron Company in

the figures for sales and gross and net receipts, and for the Railroad
Company in the earnings from anthracite transported. The result was an
attempt to improve the situation: first, by a combination among coal
producing roads which should raise the selling price of that commodity; and
second, by extension of the railroad into new markets, whereby an outlet for
increased production should be obtained. At the instigation of Mr. Gowen a
syndicate was formed to purchase a majority of the stock of the Reading
234
Company, which bought much more than 50 per cent, even though Mr.
Gowen, the prime mover, died in the mean time. The existing managers
showed no desire to combat the movement, although the voting power lay
entirely in their hands. In June, 1890, President Corbin resigned, and Mr.
A. A. McLeod was elected in his place.
Mr. McLeod now began a vigorous policy of consolidation and
expansion with the lease for the second time of the Central of New Jersey.
He evaded a New Jersey law which forbade the lease of a domestic to a
foreign corporation by incorporating the Port Reading Railroad Company
235
and then executing a lease of the Central to this minor corporation. The
Port Reading promised 7 per cent on the Central stock for 999 years, plus
one-half the surplus earnings above the dividend up to 10 per cent, and
secured a guarantee of the fulfilment of these promises from the Reading
Railroad proper. Finally, Mr. McLeod leased the Lehigh Valley to the
Reading direct, on a guarantee of 5 per cent on the stock until May 31,
1892; 6 per cent from that time until November 30, and 7 per cent thereafter
for the rest of the 999 years. So far as control over the coal supply was
concerned this put the Reading in a very favorable position. The Lehigh
Valley tapped the northern Wyoming field, and the Central of New Jersey
the Mahanoy and Shamokin deposits, and both had access to New York
through New Jersey. The Lehigh, moreover, extended to Buffalo; and with a
line of steamers to Duluth, Milwaukee, and Chicago, promised to command
a large proportion of east-bound traffic in other things than coal. Figures for
the coal industry show that the Reading, Central, and Lehigh shipped in
1891 53.3 per cent of the total production of 40,448,000 tons; in 1890 55.5
per cent; and in 1889 57.75 per cent. In addition, control of the Delaware,
Lackawanna & Western was said to have been acquired by the purchase of a
236
majority of its stock, which added 15.1 percent more; making a total of
68.4 percent for the year 1891, or sufficient to give a considerable measure

of control over prices. But the terms were severe; quite as severe as in the
case of the leases earlier put through; and though the Reading was in better
shape than it had been five years before, full interest on its preference bonds
was not being paid, and so long as this continued no outside payments
could properly be made. The subsidiary companies, on the other hand, were
not earning the dividends promised on their stock by nearly one-third of a
million dollars; and it seemed unlikely that sufficient economies could be
secured to cover permanently the deficit. The question could fairly have
been asked whether the Reading had not bought a chance to contribute an
annual sum to the Lehigh Valley and Jersey Central stockholders; and
whether these roads had not deliberately entered into a contract which was
little likely to be carried out. The justification of the arrangement lay in the
control of coal prices which it made possible, and in the advantages of close
traffic arrangements and connection with both Philadelphia and New York.
“The main reason why the combination failed,” said Mr. I. L. Rice before
the Industrial Commission, “was that there was not an understanding of the
first principles of an operation of that kind, i. e. that it must reduce prices
and not increase them. The anthracite coal combination was killed because
prices were immediately put up....
“Q. Mr. McLeod has testified before this commission that it was his
intention to effect such economies as should be reflected in lower prices.
Do we understand that you criticise the policy in that it did not so reduce
the prices?
237
“A. He did not do it, no matter what his intention was.”
The situation was, however, as clearly understood by the public as by
the managers themselves. Even before the combination had begun to carry
out its policy, outcry was made, and as prices went up the agitation became
intense. In New Jersey an act to legalize the combination which passed both
houses was vetoed by Governor Abbot on the ground of the effect upon the
238
price of anthracite coal; and in June the Attorney-General applied for an
injunction to dissolve the lease of the New Jersey Central to the
Philadelphia & Reading, alleging that the tripartite agreement between
these companies and the Philadelphia & Reading was illegal. The court
239
granted a temporary injunction, which it continued in August to a final
hearing, with conditions to make it more effective.

Prices did not go down, and in October Attorney-General Stockton of
New Jersey again appeared before Chancellor McGill. He now charged the
Philadelphia & Reading, the Central, and the Port Reading with having
conspired to advance the price of coal in defiance of the order of the court,
and asked for the appointment of a receiver to enforce the former decree,
and to restrain the company from further using the New Jersey railroads for
240
carrying any coal until the advanced price should have been reduced.
The officers denied the allegations, but the Chancellor sustained the
Attorney-General on every point; and only the official announcement of the
241
abrogation of the lease prevented the granting of the order. The lease of
the Lehigh Valley fared better. In a suit brought by M. H. Arnot, a
stockholder in the Lehigh Valley, Judge Metzger of the Court of Common
Pleas held that the Reading and Lehigh Valley were not parallel and
competing lines in the sense contemplated by the law; and that mere
incidental competition between branches or spurs of two systems would not
242
prevent the consolidation of their main lines. So much then of the
original programme was allowed to stand.
Meanwhile, in the search for new markets, the Reading had stretched
into New England, having chosen that territory in the hope of increasing its
243
tonnage without a desperate struggle with its neighbors. The most
available subject for control was the Boston & Maine, which reached from
Northampton and Boston, Massachusetts, to Portland, Maine, was
independent of the large trunk lines, and had a profitable local business of
its own. Purchases of this railroad’s stock were quietly made; and in
October, 1892, the public was surprised by the election of Mr. McLeod to
the presidency, although, as it subsequently transpired, an actual majority of
244
Boston & Maine stock was not secured. It was obvious that nothing
could be gained from the new arrangement unless the gap between the
Reading and the Boston & Maine should be filled; and so, even before the
purchase of stock in the latter was begun, the lease of the Poughkeepsie
245
Bridge across the Hudson was put through, and a controlling interest was
bought in the stock of the Central, New England & Western. The last-
named road extended from Hartford, Connecticut across the Poughkeepsie
Bridge to Campbell Hall, 145½ miles, and connected at this point with the
Pennsylvania, Poughkeepsie & Boston, a road controlled in the interest of

the Reading. This completed a through route from Philadelphia to Hartford.
Later the Central, New England & Western Railroad Company and the
Poughkeepsie Bridge Railroad Company were consolidated into the
246
Philadelphia, Reading & New England, with Mr. McLeod as president;
and a controlling interest was purchased in the New York & New England
Railroad, which ran from Poughkeepsie via Hartford and Providence to
247
Boston, and afforded another entrance into New England. All this
involved a very great extension of the Reading system. The lease of the
Lehigh Valley had connected it with Buffalo; the subsequent consolidations
brought it into every New England state, and gave it a total mileage of,
roughly, 5000 miles.
Danger lay in two directions. First, it was possible that even the union
of the Lehigh, Jersey Central, and the Reading might fail to secure a profit
for the mining end of the business, and second, the financing of the New
England deals might be so conducted as to put the parent road into a very
difficult situation.
Both these contingencies occurred. The early termination of the Jersey
Central lease weakened the control of the Reading over prices, while the
severity of the winter of 1893, though assisting to maintain prices, so
increased the expense of operating the mines that earnings fell below fixed
charges for the three months ending February 28, 1893, by the amounts of
$933,443 for the Railroad Company and $468,362 for the Coal & Iron
Company. Moreover, losses of $616,351 accrued during the same time
under the Lehigh Valley lease, and were met by the Reading, contrary to
expectation, and contrary to the express provisions of the mortgage by
which its income bonds were secured. In order to accomplish the New
England extensions shares were bought on margin by President McLeod
personally with collateral in part supplied by himself, in part taken from the
treasury of the company, and consisting of general mortgage, collateral
trust, and income bonds. “On or about September 22,” said Mr. I. L. Rice, a
representative of the bondholders, who had been examining the books, “Mr.
McLeod entered into certain individual stock transactions which resulted in
the purchase of 24,036 shares of the stock of the Boston & Maine Railroad
Company and 32,000 shares of the stock of the New York & New England
Railroad Company. On October 15, 1892, he withdrew from the control of
the company, without having previously obtained the authority of the board

of managers therefor, and without expressing the purpose for which he
intended to use the securities, 30,000 general mortgage bonds of the
company, which as afterwards appeared were used at that time as margins
in the transaction. He subsequently withdrew from the control of the
company in the same manner and for the same purpose, between October
28 and December 1, 1892, $713,000 of collateral trust bonds, and $99,000
third preference bonds. No reference whatever is made to these stock
transactions on the books of the company except the mention of the
withdrawal of securities against the personal receipt of the president, nor
are they referred to on the minutes of the board of managers prior to
December 24, 1892. On the latter date the board of managers in a resolution
approved the transaction, calling for the use of $613,000 of the company’s
collateral, and indemnifying Mr. McLeod for advances made for the same
purpose to the extent of $400,000. On January 17, 1893, Mr. McLeod
deposited $250,000 additional collateral trust bonds as margin, making a
total of $963,000. On February 15 Mr. McLeod directed that the account be
248
transferred from his individual name to that of the company’s.”
Leaving aside the matter of the propriety of Mr. McLeod’s action, it is
plain that the method which he employed was an extremely expensive one,
in that it raised the necessary cash by temporary loans at high rates from
brokers in New York and Philadelphia instead of by the sale of stocks or
bonds, or by the use of funds which the company might have had on hand.
According to President Harris, the average charges paid on the floating debt
in 1892, a large portion of which had been accumulated in these operations,
was 9 per cent. If the control over the corporations acquired had been
desired for temporary reasons the operation would have been a stock
speculation pure and simple, and the Reading would have trusted to the
possible rise in price of the securities purchased to cancel the expense of
advances to the brokers who did the buying; but in this case the control was
designed to be permanent, not temporary, and Mr. McLeod expected results
which could be obtained only after a series of years.
This brings us to the beginning of 1893. Mr. McLeod had succeeded in
carrying out his plans for a combination of coal producing roads and for the
extension of the Reading into New England, but had seen his first project
bitterly attacked, and his second scheme become a burden because of the
insufficient funds behind it. Matters came to a head in February with an

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

success, but the loss had not been sufficient to ruin it within a year; its New
England extensions had not brought all the results desired, but they had not
had a fair trial; the true cause for the failure was the attempt to accomplish
by means of stock speculation and temporary loans at high rates more than
the road could do out of its legitimate resources, with the intent on the one
hand to raise the price of coal and on the other to secure fresh markets for
the sale thereof.
After the failure the first impulse of the bondholders was to denounce
Mr. McLeod. A meeting of European creditors in London chose a
committee to represent them and solicited McLeod’s removal from the
receivership on the “serious ground” that the administration of their
property should not any longer be jeopardized by remaining under the
control of an official who had already brought it into its existing difficulties.
A New York general mortgage bondholders’ committee decided to act in a
similar direction, and Mr. Drexel represented to the president that he should
254
resign for the sake of the future of the company. Mr. McLeod unwillingly
gave way. For successor the board of managers chose Mr. Joseph S. Harris,
a man of long experience in railroad affairs. Mr. Harris had been for many
years connected with the Lehigh Valley system, and was the same man who,
it will be remembered, had evaluated the Reading coal properties in 1880.
Following his election as president he was appointed receiver in the place
of Mr. McLeod.
The receivers’ statement came out in March and announced a floating
debt of $18,472,828, against which were held reported assets to the amount
of $15,779,784; but of these last $4,985,276 were in the shape of coal, and
$8,861,065 consisted of the items “due for freight,” “tolls due from
connecting roads,” “bills receivable,” “cash,” etc., a large part of which was
probably of little worth. Both the current liabilities and the current assets
are instructive, and show that on the one hand Mr. McLeod’s stock
operations had involved the company in heavy obligations to his brokers,
and that on the other losses in the coal business had necessitated current
advances to branch lines from which it was impossible to get return. It
appears, for instance, that the Coal & Iron Company had been unable to pay
the sums charged it for freight, and while the full amounts had been
nevertheless included in reported earnings, the actual result had been a

swelling of bills receivable by debts which the Railroad Company was quite
255
unable to collect.
The general lines of the policy to be pursued were now sufficiently
clear; the more pressing claims were to be met by the issue of receivers’
certificates, expenses were to be cut down, payments under leases were to
be amicably reduced where possible, holdings of Boston & Maine stock
were to be sold, and on the side of the bondholders the various interests
were to agree on some scheme for raising cash and for improving the
general condition of the property. There was need for some reduction of
fixed charges, but not for such radical cuts as in 1880 or in 1884.
The receivers and managers carried out their part of the work first.
Application was made in March, and again in June, for permission to issue
certificates in settlement of the most urgent claims. In May Mr. McLeod
resigned the presidency of the Boston & Maine after a large part of the
Reading’s holdings had been sold, and the same month President Harris
inaugurated a policy of retrenchment by the retirement of four out of the
five vice-presidents which the Reading had been accustomed to maintain. In
July the receivers obtained permission to dissolve the agreement with the
Pennsylvania, Poughkeepsie & Boston Railroad, and in August the
appointment of a separate receiver for the Philadelphia, Reading & New
England marked, except for the minor matter of the Poughkeepsie Bridge,
the final abandonment of New England extension. Meanwhile an
arrangement had been made with the Lehigh Valley, whereby the payments
under the lease were reduced for two years from 7 per cent to 5 per cent, on
condition that the Reading should make extra payments at the end of that
time if the Lehigh proved to have earned more than 10 per cent in the
interval; and permission had been obtained from the Circuit Court to
surrender the possession and operation of the Eastern & Amboy Railroad
and the Lehigh Valley Terminal Railroad, both lines belonging to the
Lehigh Valley in the state of New Jersey. The Lehigh lease, even as
modified, aroused much opposition from bondholders, who rightly
maintained that payments under it constituted a diversion of funds which
should have gone to the creditors of the Reading proper. Suit was begun
before the Circuit Court, and on August 8, 1893, a formal abrogation was
obtained. This incidentally caused the resignation of Mr. Wilbur, president

of the Lehigh Valley, from his position as receiver of the Reading, and the
appointment of Mr. J. Lowber Welsh in his place.
The more complicated task of the bondholders was at first undertaken
by two committees: one for the general mortgage bondholders, of which
Mr. J. Edward Simmons was chairman; and one for the income
bondholders, led by Mr. George Coppell. Three demands were at once
made: first, that Mr. McLeod retire from the receivership; second, that the
lease of the Lehigh Valley be abrogated; and third, that the books of the
company be examined by a railroad accountant. The first and second points
were complied with, though not altogether because of the insistence of the
committees, and in the end the third was also granted, and Mr. Stephen
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Little was set to work.
On May 27, 1893, the managers of the company brought forward a
reorganization plan, which estimated the floating debt at $19,991,941, and
proposed to cover it by the issue of $22,000,000 collateral trust bonds at 95.
These bonds were to be redeemable any time before maturity at 110, and
the trustee was authorized “to apply the surplus income or the proceeds of
sales ... of any of the securities pledged until 1898, and thereafter so much
as might be determined from time to time by the Railroad Company, to the
purchase of the said bonds at the best price obtainable, or, if necessary, to
draw the same for redemption.” General mortgage and first, second, and
third preference bonds were to be entitled to subscribe to the amount of 10
per cent of their holdings; deferred income bonds to 4 per cent; and
stockholders to 24 per cent; while besides the $22,000,000 mentioned,
$2,000,000 additional bonds were to be issued each year for working capital
and for the acquisition of real and personal property. General mortgage
bondholders were to fund their coupons to and including January 1, 1898,
and to receive an equivalent amount of coupon trust certificates. The rental
under the Lehigh Valley lease was to be reduced, and the Reading stock was
to be transferred for seven years to a voting trust composed of Joseph S.
Harris, E. P. Wilbur, Thomas McKean, and two others to be afterwards
257
named. Assents of 90 per cent of the general mortgage bondholders and
of 60 per cent of the stockholders were required by the 21st of June to make
the plan effective, and a syndicate was pledged to carry out the provisions if
258
such assents should be obtained.

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

undisturbed by meddling in the business of other people; an attention which
would be sure to result in increased economies, and was the true remedy for
the lack of prosperity in the coal industry which had driven Mr. McLeod on
his wild career. It is to this latter judgment that we must in the end conform.
The plan of President Harris was not so inadequate as might at first appear;
it accomplished much that needed to be accomplished, and it gave an
opportunity to the management of the road to retrace many of the steps of
the previous two years; but on the other hand, it did not embrace the chance
to free the Reading from all its mistaken enterprises, and passed by an
occasion which could only again occur after much suffering and loss.
Discussion turned, however, on other features. In a circular to
securityholders in June, President Harris said: “My deliberate opinion is
that the assistance asked for by the proposed plan ... is none too great, and
that there is a good probability that if it is afforded and the plan is carried
out prudent and careful management may prevent the recurrence of such a
crisis. My judgment is that the securityholders will make a very serious
mistake if they do not accept the relief offered them, for I see no probability
that the necessary assistance can hereafter be obtained except upon much
more onerous terms. I strongly advise that the plan shall be promptly
259
accepted.” “We cannot but regard these terms as very easy,” said the
Financial Chronicle. “To be sure a new collateral trust mortgage for
$30,000,000, bearing 6 per cent, is to be created, but the greater part of this
goes to take up floating debt and other existing obligations, and will involve
260
no increase in fixed charges....” On the other hand, it was objected that
the plan was formed entirely in the interest of the floating debt holders,
income bondholders, and stockholders; and that the management under the
arrangement would have the power to pay dividends upon the income
bonds, while at the same time the coupons on the 4 per cent mortgage bonds
261
were being funded. In an editorial urging foreclosure proceedings the
London Standard said: “That [foreclosure] will prevent holders of pledged
collaterals from getting a market for their securities, and, at the same time,
bring a good many doubtful matters connected with the finances of the
company into the light of day. It should also tend to make the ‘floating debt’
swindle less popular with eminent American financiers. At present they pile
these debts up in the full assurance that they can easily arrange matters so
as to put them, when funded, before existing mortgages. It is for the

Reading general mortgage bondholders to act promptly for their own
262
interests.” Finally, it was objected that the plan was in the interest of the
McLeod management, and that the voting trust was to be a McLeod
organization, which would either whitewash the ex-president’s operations,
or by keeping them in the background would virtually outlaw them.
The plan failed because the time allowed for deposits was too short. In
spite of the objections raised 31,356 general mortgage bonds and 411,218
shares of stock were deposited in twenty-five days, and it was maintained
that additional securities would surely be obtained to make up the
percentages required. The managers alleged, however, that extension was
263
impracticable, and announced that the scheme could not go through.
The year following this attempt at rehabilitation was full of the
struggles of different interests, each jealous of any concession and working
devotedly for its own hand. Prominent at this time was Mr. I. L. Rice, the
same gentleman who has before been quoted in connection with Mr.
McLeod’s operations in New England stocks. Mr. Rice had been a member
of the syndicate which had put Mr. McLeod into the presidency, and had
served as foreign representative of the company during his régime. He had
been instrumental in forming the anthracite coal combination, and at the
time of the Reading failure had been in England raising money to finance
264
the coal holdings then acquired. Returning from Europe upon the
appointment of receivers, he examined the Reading books with the results
which have been noticed, and now appeared as the active enemy of
everything connected with Mr. McLeod, even to the receivers who had
succeeded him. In May, 1893, he resigned the seat which he had held on the
Reading board, on the ground that the management had condoned the use
by Mr. McLeod of the company’s securities in carrying on his private and
personal speculations; in September he resigned from the income
bondholders’ committee, and attacked in a circular the McLeod régime and
265
the succeeding receivership; and in December he applied for the removal
of the receivers, alleging that they had grossly neglected their duties to the
stockholders, and had ignored the financial transactions of Mr. McLeod
266
prior to their appointment.

In spite of his hostility to the existing régime, Mr. Rice hoped to
rehabilitate the company without foreclosure or, indeed, formal
reorganization. The action of others was inspired by a less optimistic view.
The original suit on which receivers had been appointed had been brought
by one Thomas C. Platt; but as early as March Alfred Sully and A. B. Rand
of New York, and John Lowrie of London, holders of first and second
preference income bonds, petitioned to intervene. In July Judge Dallas
dismissed the Lowrie suit, but the petition was renewed in September,
alleging that Mr. Platt “did not file his bill in good faith on his own behalf,
and on behalf of all other holders of bonds, but at the request and for the
benefit and protection of the men who were then managers of the
Philadelphia & Reading Railroad Company and the Philadelphia & Reading
Coal & Iron Company, and that the suit was not being pressed with due
267
diligence.”
All this time the receivers had been busy on a plan, which they
presented in January, 1894. By leaving out of consideration some
$5,000,000 of car trusts they arrived at the figure of $12,500,000 for the
floating debt. This they proposed to cover by the issue of $6,000,000 in 6
per cent ten-year trust certificates, based on the stock of coal on hand, and
by $10,000,000 in 5 per cent collateral trust bonds then in the treasury of
the Reading Company. They hoped that a balance of $2,500,000 would then
remain available for working capital or other purposes. General mortgage
coupons were to be funded for five years, although the receivers planned to
have a syndicate formed to purchase at par for cash the coupons as they
matured, giving to the bondholders in each case the choice between
receiving money or coupon trust certificates for the interest due. There was
to be no formal reorganization, no cuts in charges, nothing but a provision
for the floating debt and for a temporary funding of interest payments; and
this was the more feasible because the Lehigh Valley lease had been by this
268
time abrogated and the New England extensions definitely abandoned. It
will be remembered that to the plan of May, 1893, it had been objected that
the provisions contrived to bring in the floating debt ahead of previously
existing liens, and were a premium on a kind of financial juggling too
common among American railroads. This plan, therefore, avoided a new
issue of bonds, and used only what the treasury already possessed. The coal
notes were obviously unobjectionable, and served at the same time to utilize

the unsalable stock which the management had earlier accumulated. If their
value should prove small the loss would fall on the holders of the floating
debt and not on the owners of the general mortgage bonds; while the return
to the company was assured by arrangement with Drexel & Co., Brown
Bros. & Co., and J. Lowber Welsh on the one hand, and the Finance
Company of Pennsylvania on the other. On the whole this plan was gentle
even to tenderness with the creditors of the road, and its failure revealed
clearly the bondholders’ state of mind. The holders of the general mortgage
refused to fund their coupons for five years, they refused to fund them for
two years, and they insisted that foreclosure proceedings should be
instituted unless they should receive immediate payment of their interest.
“In view of this,” the receivers were forced to remark, “it would be idle for
269
[us] to continue the efforts to readjust the affairs of the company....” The
trouble with the receivers’ scheme was not that it demanded large
concessions,—much larger had been asked and granted in 1887,—but that
the general mortgage bondholders felt that on the one hand the road was
very nearly earning fixed charges, so that in the contingency of a
foreclosure sale their interests would be reasonably safe; and on the other
that a demand for concessions so soon after a complete reorganization of
the property was an irritant which might well be resented even at the risk of
some pecuniary loss. Fortunately the assent of the bondholders was not
necessary to the issue of the coal trust notes, and the receivers executed
them under the authority of the court, practically as proposed.
In April, 1894, Mr. Simmons, chairman of the old general mortgage
bondholders’ committee, resigned his position, and Mr. Fitzgerald, president
of the Mercantile Trust Company, was chosen to succeed him. The
committee presently issued a notice which, after reviewing its early activity,
went on to say that it had believed it prudent to give the receivers every
opportunity to familiarize themselves with the affairs of the company, but
that in its judgment the time had come for action to enforce the rights of the
270
bondholders under the mortgage. In May, 1894, a new general mortgage
committee was organized, with Mr. F. P. Olcott as chairman, designed not
directly to oppose the Fitzgerald Committee, but to hasten the rehabilitation
of the property. The committee prepared a bondholders’ agreement calling
for the deposit of general mortgage bonds, and in a statement of their
position said: “Difficulties in the way of a foreclosure and reorganization

thereafter are exaggerated; if any danger is wrought by such foreclosure it
271
will fall upon the junior securities and not upon us.” Lastly, at this time,
there was a committee headed by Mr. Earle, president of the Finance
Company of Pennsylvania.
The first matured suggestion after the failure of the receivers’ plan
appeared in what was known as the Olcott-Earle Agreement, published on
September 25, 1894, which seems to have been in many respects a revival
of that scheme. It proposed to cover the floating debt by the sale to
securityholders of $10,000,000 collateral trust bonds, heretofore held in the
treasury, and to fund coupons on the general mortgage 4s for five years. A
syndicate agreed to advance $9,000,000, or as much thereof as might be
needed, to buy the coupons as they should mature. The stock was to be held
and voted by the reorganization committee until all the money advanced by
the syndicate should have been repaid; that is, till June, 1898; a second
syndicate guaranteed the sale of the collateral bonds at 70; and the preferred
bondholders were asked to forego any claims for interest until all the
general mortgage coupons should have been retired and cancelled. Certain
other details are of interest. The collateral bond issue was to be taken up by
the preferred bondholders and stockholders, each individual subscribing to
10 per cent of the par value of his holdings; but the bondholder might, if he
preferred, pay 3 per cent of the par value of the securities he owned and
receive nothing, instead of paying 10 per cent and getting a collateral bond.
Securityholders were given 60 days in which to assent, and if at the end of
that time the number of assents did not amount to practically all the
interests involved, the committee proposed to reorganize by foreclosure for
the benefit only of those who had assented to the plan; while for the future
the committee was to provide by agreement with the railroad company that
the latter should call an annual meeting of general and income mortgage
bondholders and stockholders, at which bondholders as well as stockholders
272
should vote in proportion to the par value of their holdings.
It will be observed that the source of relief sought by this plan was
precisely that of the receivers’ plan earlier described. Certain changes,
however, of considerable importance were introduced. The subscriptions to
the collateral issue were made distinctly obligatory, and an alternate
assessment was provided; greater use was made of syndicate assistance;
some voting power was given to the bonds; and a voting trust was added to

ensure permanency of control to the designers of the reorganization till their
work should be complete. On the whole there were still few concessions to
creditors, and indeed could be few. Ten coupons of the general mortgage
were to be funded, though it was made easy for the bondholder to get cash
if he preferred it; the provisions concerning subscriptions to the collateral
bonds were rather more burdensome than before; and the voting trust, while
redounding to the ultimate advantage of creditors, was only indirectly a
concession to their demands. The grant of voting power to the bondholders
would have been a great concession, but the wording of the clause was
vague and probably little practical effect would have ensued. As in the
previous plans, no particular attention was paid to the reduction of fixed
charges.
So much for the provisions of the plan. It was a hopeful innovation for
the suggestions it contained to come from holders of general mortgage
bonds, and seemed to give some evidence of a change of heart; especially
since the Olcott Committee did secure the assent of a larger proportion of
the issue than had accepted either of the propositions before brought
forward. The Fitzgerald Committee strenuously protested, still insisting on
the advisability of foreclosure; and further objections came from Mr. Rice
and from the Hartshorne Committee. Nevertheless, the general mortgage as
a whole gave its consent, and ultimate shipwreck was due only to the
273
abstention of the income mortgage bonds. It is not surprising that the
income bondholders should have felt that the plan had little in it for them.
They had been given no voice in its making,—their wishes had at no time
been regarded. During the whole reorganization the question had been of
the terms to which the general mortgage bondholders would consent, and
the only sign of the existence of junior liens had been an occasional fearful
inquiry as to what would become of them under foreclosure; until now the
combination of a voting trust with the expenses of a syndicate
reorganization, and an assessment upon them and upon the stock, touched
the limit which they would stand. There was, moreover, at this time no
question of the wiping out of the value of their holdings. The preamble to
the Olcott-Earle plan stated that the annual charges were $10,477,560 and
that the net earnings for 1891 had been $10,977,398; thus showing that
something was left for the junior securities even after the payment of
interest on all prior and general mortgage liens. It seemed also barely

possible that the difficulties of a foreclosure, with the danger under the laws
of Pennsylvania of losing the coal properties of the company, might secure
better terms for the holders of junior obligations in case they should
withhold their assent.
Early in January, 1895, the following official notice was issued: “The
plan of readjustment, dated October 1, 1894, has not been assented to by a
sufficient number of income bondholders and stockholders to make the
same effective. The committee now hold over a majority of the general
mortgage bonds, and have, in accordance with the bondholders’ agreement
of May 7, 1894, and their circular of October 1, 1894, notified the trustees
of the general mortgage to bring suit for the foreclosure thereof ... as
274
expeditiously as possible.” Suit for foreclosure was brought March 2 in
accordance with the announcement, and the Junior Securities Protective
Committee, an organization with purposes indicated by its name, was
allowed to intervene.
Meanwhile the Fitzgerald and Olcott committees together prepared and
brought forward the final reorganization scheme. The conditions now
differed from those with which any previous plan had been confronted, in
that it was no longer necessary to seek for as little change as possible, and a
broader, more radical reorganization was in point. “Unless,” began the
scheme, “the managers shall decide to proceed without foreclosure or sale,
the properties of the existing Reading companies will be sold and successor
companies will be organized under the laws of Pennsylvania, and the stock
and securities of these successor companies will be vested in a new
company formed, or to be formed, under the laws of Pennsylvania or of
some other state.”
There were to be issued:

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

If at any time dividends of 4 per cent should have been paid on the first
preferred stock for two successive years the company might convert the
second preferred stock at par, one-half into first preferred and one-half into

common stock. These new issues were ultimately to retire all outstanding
securities, to provide for expenses of reorganization, and to go for new
construction, additions, betterments, etc., in the succeeding years. Since,
however, it was obviously impossible to cancel prior liens before maturity,
sufficient general mortgage bonds ($44,550,000) were reserved from
immediate issue to retire these when they should fall due. This left new
general mortgage bonds with four classes of stock against old general
mortgage bonds with three classes of preferred bonds, common stock, and
deferred incomes; and, as might be expected, new general mortgage 4s were
given for the old general mortgage, second preferred and common stock
went for preference bonds, and new common stock for old common stock
and deferred income bonds. Certain cash payments were made on the
general mortgage, and $4,000,000 of the new issue were sold to a syndicate;
but on the whole we may say that the prior liens and general mortgage
bondholders occupied the same position in the new company which they
had occupied in the old; that the income bondholders exchanged a bond
with a lien on income for a stock with a right to dividends; and that the
floating debt, syndicate, and other expenses were given equal rights with
the general mortgage.
No additional mortgage was to be put upon the property, nor was the
amount of the first preferred stock to be increased, except with the consent,
in each instance, of the holders of a majority of the whole amount of each
class of preferred stock, given at a meeting of the stockholders called for
that purpose, and with the consent of the holders of a majority of such part
of the common stock as should be represented at such meeting, the holders
of each class of stock voting separately; neither was the amount of the
second preferred stock to be increased, except in a similar way. These
careful clauses made some provision for future capital requirements
necessary which should be independent of the consent of the stockholders at
any time; and $20,000,000 general mortgage bonds were accordingly set
aside, to be issued in amounts not greater than $1,500,000 in any one year
for future construction, equipment, and the like. Additional general
mortgage bonds were provided to retire Philadelphia & Reading Terminal
and Coal & Iron Company bonds up to the sum of $21,000,000.
The floating debt, estimated at $25,150,000, was provided for in part
by assessment, and in part by the sale of securities to the syndicate for cash;

20 per cent being levied on first, second, and third preference income
bonds, 20 per cent on the stock, and 4 per cent on the deferred incomes;
while the syndicate agreed to take $4,000,000 of the new general mortgage
bonds and $8,000,000 of the new first preferred stock. The assessment was
expected to yield $20,862,289, and the syndicate to contribute in cash
$7,300,000; leaving an estimated cash balance of $3,000,000. In addition,
the syndicate (Messrs. J. P. Morgan & Co., J. Kennedy Tod & Co.,
Hallgarten & Co., and A. Iselin & Co.) undertook to underwrite the
payment of the assessments on the income bonds and stock, and to
guarantee the extension or payment of the improvement mortgage and Coal
& Iron Company bonds, most of which were to mature in the following two
years. No great reduction of fixed charges was of course to be expected.
The cancellation of the floating debt effected, nevertheless, a certain saving,
so that charges for the future were estimated at $9,300,000 as against net
earnings of $9,839,971 in 1894; while the refunding or extension of
275
maturing bonds was looked to for a reduction of $500,000.
It is plain that this plan favored the general mortgage bondholders to
the last degree, and admitted them to the reorganized company with
absolutely no sacrifice save that of the addition of $4,000,000 to the total
general mortgage issue. They funded no coupons, they suffered no
diminution of interest and no shaving of principal; they paid no assessment;
and as an additional protection to them, the provision was inserted that all
classes of stock of the new company, except such number as might be
disposed of to qualify directors, were to be voted by three voting trustees, of
whom J. P. Morgan and F. P. Olcott were designated in the plan. It has
seldom happened in any reorganization that a mortgage similar to the
general mortgage in this case has been able to take and hold so strong a
276
position. The secret lay in the fact that the road had been earning the
interest on the general mortgage bonds; and that under these circumstances
no interest or combination of interests could force the holders to accept less
than payment in full of all their claims. The situation could never have
arisen in the earlier reorganization; it could never have occurred where a
reduction in annual payments was required for the salvation of the property,
or even where the amount of cash to be raised to pay the floating debt was
so large that junior securityholders would have relinquished their holdings
rather than pay the necessary assessments. In this case none of these

conditions existed, and all the burden was thrown on the holders of junior
mortgages and stock. It must be remembered, also, that though in ordinary
cases the difference between the income bonds which the old first and
second preference bondholders surrendered and the preferred stock which
they received would not have been very great, yet here the provisions of the
old income mortgage, which forbade the deduction from net earnings of any
interest on bonds subsequently created until its interest should have been
paid, rendered the loss more serious.
To sum up, the holders of junior securities and stock paid the expenses
of reorganization, paid the floating debt, lost what right they had to interest
before the settlement of interest on subsequently created claims, and got
only stock, and for the most part second preferred or common stock at that.
The general mortgage bondholders got new 4 per cent bonds, plus 12 per
cent, or 2 per cent in cash, had no greater interest charges ahead of them,
and without paying any assessment or making any concession, except to
allow the immediate increase of the amount of their issue by $4,000,000,
and thereafter by $1,500,000 per year, secured a lien on the assets of the
company; a privilege which was, moreover, extended to undeposited as well
as to deposited bonds. The company itself was dissolved, but the new
corporation which took over its assets enjoyed, with slightly decreased
charges, freedom from the old floating debt and from the extensions and
combinations which had caused the floating debt of the old management,
and seemed besides a strong financial backing.
In May, 1896, Judge Atchison of Philadelphia signed the decree for the
foreclosure and sale of the property of both the Railroad and the Coal &
Iron Companies, and on September 23 the sale took place, C. H. Coster, of
J. P. Morgan & Co., and Francis Lynde Stetson paying an aggregate of
277
$20,500,000 for the whole estate. The sale ended the life of the old
Reading charter; and in view of the constitution adopted for the state of
Pennsylvania in 1871, which forbade any railroad owning more than 30,000
acres of coal land, some device had to be sought whereby the Philadelphia
& Reading Railroad and the Philadelphia & Reading Coal & Iron
Companies could hold together. Diligent search revealed the existence of
the “National Company,” a corporation chartered in 1871 by special act of
the legislature of Pennsylvania at the very time when the new constitution
was under consideration. This company, originally the Excelsior Enterprise

Company, had power “to purchase, improve, use, and dispose of property to
contractors and others and for other purposes,” with privileges fully as
278
broad, it was said, as those enjoyed by the Reading before foreclosure.
The National Company now changed its name to the Reading Company,
called a special meeting, increased its stock to the amount required by the
plan of reorganization, and, jointly with the Coal & Iron Company,
authorized a mortgage to secure bonds up to a possible amount of
$135,000,000; to be secured on the property of both companies, including
the stock and bonds of the Railway Company. Meanwhile the Philadelphia
& Reading Railway Company had been organized to succeed to the
property and franchises of the old Philadelphia & Reading Railroad
279
Company, with a capital stock of $20,000,000 in $50 shares. The charter
of the Coal & Iron Company was preserved in spite of the foreclosure
280
sale. The next step was for the Reading Company to exchange its bonds
and stock for the general mortgage bonds and stock of the two minor
companies in the proportions already agreed upon, and to deposit the
securities so obtained in its treasury; leaving the prior liens the only direct
obligations of either company in the hands of the public. This meant, of
course, absolute control of both companies by the Reading Company; and
in the future, when the prior liens should mature, it was to mean the
replacement of all outstanding obligations by the obligations of the holding
company. Both the Railway and the Coal & Iron Companies retained their
separate organizations; the belief was that there was no merger which might
be attacked before the courts; that it only happened that one corporate
individual had invested in both Railroad and Coal Company shares and
proposed to vote this stock, as was lawful, to further the policies of which it
281
approved.
Representatives of the reorganization managers laid an elaborate
defence of the legality of these operations before Attorney-General
McCormick of Pennsylvania, and on January 2 secured an opinion
confirming the validity of the charter of the Reading Company. “After due
consideration,” said Mr. McCormick, “I reach the conclusion, most
reluctantly, that the Commonwealth of Pennsylvania cannot now
successfully attack the chartered rights of the Reading Company.... My
view of the whole matter is that the charter of the company authorized it to

do the kind of business in which it engaged prior to January 1, 1874, which
business was of the same general character as that in which it proposes to
engage for the purpose of controlling the stocks of the Railway Company
282
and the Coal & Iron Company.”
Like the Baltimore & Ohio and the Erie, the Reading has benefited
largely from the favorable business conditions of the last decade. The
combined income of the three Reading companies has grown from
283
$48,422,971 in 1898 to $95,715,088 in 1907. Earnings on the
Philadelphia & Reading Railway alone are now nearly as great as the
combined income of the three companies at the earlier date. Net receipts
were $13,586,710 in 1898 and $29,190,316 in 1907; and the surplus over
all payments rose from $1,376,420 to $8,741,454 between those years. It is
important to notice that this showing does not depend primarily upon the
anthracite business. Not only has the carriage of general merchandise
increased until it affords to the railway a return almost equal to the earnings
on coal, but in the coal business itself bituminous has assumed an
importance nearly as great as that of its harder rival. The Coal & Iron
Company still concerns itself almost entirely with anthracite, and has
accordingly been more affected by special causes. The strike of the miners
in September and October, 1900, and again from May to October, 1902,
checked the growth in production for a time; but the increased demand for
domestic consumption has made possible an increase in output from
4,849,002 tons in 1897 to 10,034,713 in 1907. Increasing business has
stimulated improvements. Over $15,300,000 have been withdrawn from
income by the Philadelphia & Reading Railway Company for this purpose
between 1896 and 1907; and over $10,000,000 have been invested from
earnings by the Coal & Iron Company during the same time in colliery
improvements alone. Maintenance charges have been ample. Whereas
$1300 to $1500 per mile of single main track are sufficient for normal
repairs upon a trunk line, the Philadelphia & Reading Railway has spent
over $2600 per mile of line for the last seven years, and over $1700 for the
three years preceding. As much as $73 has been spent in a single year for
average maintenance per freight car, $609 in maintenance per passenger car,
and $3244 in maintenance per locomotive. In consequence of these repairs
and of renewals upon a considerable scale, the average value of all
locomotives has increased between December 1, 1896, and June 30, 1906,

from $4906 to $8393; the average value of freight cars producing revenue
from $383 to $622; the average value of steam colliers and tugs from
$41,533 to $55,451; and the average value of barges from $7930 to
$21,074. The average freight train load was 194 tons in 1897 and 403 tons
in 1907. Ton-mileage has increased during the period 159 per cent and
freight train mileage only 27 per cent.
It is true that no great sums have been spent from capital account.
$5,137,825 in car trust certificates were outstanding on June 30, 1907, and
$5,608,000 in general mortgage bonds have been sold and the proceeds
invested principally in new equipment, but this is all. Improvements have
been made mainly from earnings, and fixed charges have not had to be
increased. In fact, the voting trustees stated at the expiration of their
trusteeship in 1904 that, eliminating the fixed charges created since
December 1, 1896, on account of the acquisition of additional properties
and interest upon the additional mortgage bonds issued for the purchase of
equipment, the fixed charges of the Reading system were $1,018,065 less
for the fiscal year ended June 30, 1904, than they were for the fiscal year
284
ended November 30, 1896.
It thus comes about that the finances of the Reading, while not as
secure as could be desired, are yet in better shape than they have been for
285
thirty years. Fixed charges, taxes, and operating expenses took 86 per
cent of gross income in 1907, but a decline of nearly $12,000,000 in net
earnings must precede a default on any bonds outstanding. To this margin
should be added the considerable amount by which maintenance expenses
now surpass normal figures. An initial dividend was declared on the
Reading Company first preferred stock in August, 1900; on its second
preferred in October, 1903; and on its common in February, 1905. Four per
cent is now being paid upon all classes of stock.
Large amounts of Reading stock are held by the Baltimore & Ohio and
by the Lake Shore. The Reading has again bought control of the Central of
New Jersey, and owns besides a steamship line and something under 500
miles in other subsidiary roads. Its large earnings, its troubles with its mine
employees, its influence over the supply of a necessity of life, and the
possibility of discrimination which its control of both railroad and coal
properties affords, have made it a target for legislative attack from state and

national governments. Action was begun by the Department of Justice in
1907 to dissolve the merger between the Reading and the Central of New
Jersey. In June of the previous year the so-called “commodity clause” of the
Hepburn Act forbade any railroad company to transport in interstate
commerce any article except timber and the manufactured products thereof
which it should have produced, or in which it should have any interest,
except those products necessary and intended for its own use in its business
as common carrier. The legality of the Reading’s position in these matters is
yet to be decided by the courts. The student may well doubt whether
legislative action will ever succeed in preventing the common ownership of
the Reading railroad and mining interests. What is more probable is that a
strict governmental control will come to be imposed. Against this proper
development no appeal to legal technicalities will avail.

CHAPTER V

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

At the present time there are in the South five great railway systems: the
Atlantic Coast Line; the Seaboard Air Line; the Southern Railway; the
Louisville & Nashville Railroad; and the Illinois Central Railroad, which
cover, in the order named, the territory between the Atlantic Ocean and the
Mississippi River.
The backbone of the Southern Railway is formed by the old Richmond
& Danville and East Tennessee, Virginia & Georgia companies: of which
the first formerly stretched with its subsidiary lines from Washington and
Richmond on the north to Atlanta, Georgia, and Greenville, Mississippi, on
the south and west; and the second reached from Bristol, Tennessee, in a
great half circle to the ocean at Brunswick, Georgia, and by means of the
Mobile & Birmingham straight to the Gulf at Mobile.
The Richmond & Danville was opened in 1856 between Richmond and
Danville, Virginia. It was largely aided by the state of Virginia. Three-fifths
of its stock were owned by the state in 1867, there was a state loan of
286
$400,000, and a state guarantee of $200,000 besides. In natural
consequence the state elected three of the six directors. It was not long,
however, before the state was able to relieve itself of a large part of its

investment. On the 31st of August, 1871, all of the state shares were taken
287
over by the Pennsylvania Railroad Company. The money sunk in the
company’s bonds still remained. From Danville the Richmond & Danville
steadily pushed south in the years following 1856. Under the leadership of
the Pennsylvania it became its ambition to open direct rail communication
from the great Northern cities to the heart of North and South Carolina and
Georgia. To obtain a ninety-mile extension to Charlotte the company leased
287
the North Carolina Railroad, 223 miles in length. To get into Atlanta it
allied itself with the Atlanta & Richmond Air Line Company, projected to
288
construct a line between Atlanta and Charlotte. In 1878 it bought a
controlling interest in the Charlotte, Columbia & Augusta Railroad and
289
secured entrance to the latter city. The Pennsylvania aided the new
enterprise by advances from time to time, and when the current liabilities
290
became unmanageable took $1,000,000 of a new refunding mortgage.
Meanwhile the East Tennessee, Virginia & Georgia Railroad had been
established to the west of the Richmond & Danville, in the heart of the
291
southern Appalachians. This company was a consolidation in 1869 of the
East Tennessee & Virginia Railroad, from Bristol, on the boundary between
Virginia and Tennessee, to Knoxville, Tennessee; and the East Tennessee &
Georgia Railroad, from Knoxville, Tennessee, to Dalton, Georgia. Both
roads were aided by the state of Tennessee. In 1870, however, the new
company extinguished its debt to the state by the payment of $4,117,761 in
state bonds. Not long after the completion of its line from Bristol to Dalton,
the East Tennessee fell under the control of the Pennsylvania Railroad,
which already dominated its neighbor to the east. To facilitate the control
and to unify the interests of the Pennsylvania south of Washington a
“Southern Railway Security Company” was formed, with a capital of
$5,000,000. This company was entrusted with a majority of the stock of the
Richmond & Danville and of the East Tennessee. It also controlled the
Coast Line railroads from Richmond to Charleston, and the Memphis &
292
Charleston from Chattanooga to Memphis. Unfortunately the financial
results of the combination were disappointing. Of the subsidiary roads the
East Tennessee managed to pay at least 3 per cent on its capital stock from
1872 to 1876; but the Richmond & Danville paid nothing, the Coast Lines
nothing, and the Memphis & Charleston barely earned the 3 per cent

guaranteed under its lease. In 1873, therefore, a special meeting was held at
the office of the Southern Railway Security Company to consider the
293
propriety of making sale of certain properties of the company. In 1874
294
the lease of the Memphis & Charleston was surrendered, and in 1876 the
bulk of the securities held, outside of the Richmond & Danville stock, were
295
disposed of.
The retirement of the Southern Railway Security Company marked the
beginning of the withdrawal of the Pennsylvania from investment in the
South. For the rest, it left the lines north of South Carolina in three main
competing groups. There were the Coast Lines from Richmond south, the
Richmond & Danville, and the East Tennessee, Virginia & Georgia
properties. And stretching from west to east was the Memphis &
Charleston, which was already in financial difficulties of a serious nature.
All three of these groups were now thrown upon their own resources; and
two of them, at least, took vigorous measures in self-protection. The policy
of the East Tennessee was the most aggressive. Shut up in the narrow valley
between the Clinch and the Great Smoky Mountains, and flanked by hostile
roads, it conceived it to be necessary for it to acquire connections to the
south, to the east, and to the west. Accordingly, it leased the Memphis &
296
Charleston in 1877 and obtained an outlet upon the Mississippi River. In
1878 it bought the Georgia Southern and the Selma, Rome & Dalton and
297
provided itself with a line as far south as the Flint River in Alabama. In
1881 it bought the Alabama Central, extending some 96 miles west from
Selma. The same year it secured control of the Macon & Brunswick in
Georgia, and began construction from Macon to Rome to complete a line to
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the South Atlantic coast. In the north it made an alliance with the Norfolk
299
& Western, which opened that company’s line from Bristol to Norfolk,
and arranged with the Louisville & Nashville and the Kentucky Central for
construction to a connection at the Kentucky-Tennessee state line which
300
should open to it the business of the Central West.
The Richmond & Danville fell under the control of a group of
capitalists who already controlled the Atlantic Coast lines and held an
interest in the East Tennessee, and who now bought the 24,000 shares of
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Danville stock still held by the Pennsylvania Railroad. Like its rival, it

302
enlarged its system. It leased the Atlanta & Charlotte Air Line in 1881,
with certain minor roads in the Carolinas and in Georgia. In 1882, under the
charter of the Georgia Pacific, it began construction westward from Atlanta
to the Mississippi. It did not stretch out, as did the East Tennessee, but it
secured a very complete control of the territory between Richmond in the
north and Augusta, Savannah, and Atlanta in the south. In 1881, also, the
Richmond & Danville took a step destined to have important consequences.
Since it desired to acquire certain railroads, and since its charter allowed it
to hold stock in none but connecting lines, it caused to be incorporated a so-
called Richmond & West Point Terminal Railway & Warehouse Company,
with authority to acquire stocks and bonds of railroad companies in North
Carolina, South Carolina, Tennessee, Kentucky, Georgia, Alabama,
Mississippi, and other states. This company increased its stock by October,
1881, to $3,000,000; of which the Richmond & Danville then owned
$1,510,000. The most important acquisition which it made at the time was
the Virginia Midland Railway, from Alexandria, Virginia, to Danville; but
other additions were to follow.
The independent action of the Danville and East Tennessee companies
was followed by a new consolidation which reunited most of the lines
dominated by the old Security Company. In response to queries in August,
1883, Mr. Calvin S. Brice admitted that a syndicate in which he was
interested had bought control of the Richmond & Danville.
“We have secured,” said he, “about 28,000 of the 50,000 shares of
stock issued by the Richmond & Danville Company. Our syndicate
controls, besides our new purchase, the East Tennessee, Virginia & Georgia
Railway and the Chesapeake & York River line of steamers that ply
between West Point, on the Chesapeake, and Baltimore, and has close
traffic arrangements with the Clyde steamers, which run between New York
and Philadelphia and all Southern points. Our purpose is to confine all our
railroad and steamship lines under one management, and to equip and
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operate the system in the best possible manner.”
It appears from this statement that the capitalists who controlled the
East Tennessee now again consolidated with the leading interests of the
Richmond & Danville and lines east, albeit changes in personnel and
transfers of holdings occurred. Return to the old combination was made

desirable by the more intimate connection of the two groups of roads. The
Western North Carolina had been opened across the mountains of North
Carolina in 1882. This had made practicable the diversion of the western
traffic of the East Tennessee from the Norfolk & Western to the Richmond
& Danville; a traffic which the northern connections of the East Tennessee
promised largely to increase. Consolidation was doubtless also prompted by
the desire to save the East Tennessee from serious financial difficulty which
threatened it. It had become apparent that this company, at least, had
severely taxed its strength in the rapid extension of mileage which had
followed 1876. Before that time its position had been secure. It had
possessed a monopoly of the somewhat limited local traffic between
Chattanooga and Bristol, and had formed part of the most direct route
between New York, Philadelphia, Baltimore, and Washington, and towns in
Tennessee, Northern Alabama, and Mississippi. Its extensions had changed
the situation. They had brought it into touch with the Mississippi River and
the Atlantic Ocean, and had increased its fighting power; but they had also
endowed it at large cost with a group of poorly equipped, unprofitable lines
located in a keenly competitive territory. The Selma, Rome & Dalton had
been purchased just after a foreclosure sale. The Macon & Brunswick had
never been able to earn much more than working expenses. The Alabama
Central had not seen fit to publish its financial figures after 1878, while the
Memphis & Charleston, as we have seen, had turned to the East Tennessee
only to escape bankruptcy.
The East Tennessee had hoped to make profitable the lines which it had
so rapidly acquired. Unfortunately the company was poorly equipped for
such a task. Its finance had been extravagant. In 1875, on 269 miles of lines
there had been $7317 in stock and $15,620 in bonds per mile. In 1883 the
mortgage bonds and car trusts outstanding per mile owned amounted to
$23,444, the income bonds to $15,404, and the capital stock to $41,079. A
grand total of $79,927 as compared with the $22,937 of eight years earlier,
and an average of almost $100,000 in securities per mile of new line
acquired! Ninety-nine per cent of net income was being absorbed in paying
interest on all classes of securities, although maintenance figures were kept
as low as $630 per mile of line. This large volume of stocks and bonds
made improvement from earnings impossible, and prevented conservative
management by taking from the stockholders any chance of dividends, and
by reducing the quotations of common stock to less than $5 per share. And

though in some respects the location of the system was good, the route
which it offered to much of its business was indirect, the competition which
it had to meet was severe, and its Atlantic terminal, Brunswick, was of
small importance compared with the thriving cities of Savannah and
Norfolk. The result was a failure to secure the gains from consolidation
which had been expected. Surplus earnings were continuously small, and
current bills were left to run; until by 1883 the floating debt had become so
large that an issue of $1,200,000 in debenture bonds was required to take
care of it.
The failure of the East Tennessee to weld its connections into an
efficient transportation system left it helpless in face of the panic of 1884.
304
Earnings fell off in that year, a directors’ committee was appointed, and
the resulting report revealed a plain inability on the part of the company to
meet its charges.

“The interest charges proper for the calendar year 1885 are,”
said the committee, $1,476,505.85
“To this must be added the principal due on car trusts and
debentures in 1885, 280,954.11
“Or a total of $1,757,459.96
“The payments on similar account will be—
in 1886, $1,739,196.28
in 1887, 1,720,932.60
gradually decreasing until the debentures and car trusts
being paid off in 1894, the total fixed charges for the
year 1895 will be $1,295,970.00
“The net revenue for the year 1883–4 was 1,699,925.84
“The net revenue for 1885 and 1886, allowing for the decrease
in earnings following the panic, and supposing the road to
be operated for 60 per cent, may be estimated at $1,400,000.00

“This will leave,” said the committee, “an annual deficit of $350,000,
to which must be added a total of $1,000,000 required by the general
manager for steel rails, iron bridges, and other needed improvements.
“The sums for covering these expenses should not be raised by
temporary loans, as this would not relieve the company of its
embarrassments nor place its finances upon a sound footing. It cannot be
raised by an additional mortgage, on account of the provisions of the
mortgage securing the income bonds. It must and can be raised from a

funding of coupons which shall leave the earnings of the company
sufficiently free to meet the demands upon them. The committee therefore
recommends:
(1) “That the holders of the consolidated 5 per cent bonds be asked to
fund four coupons, being those maturing January and July 1, 1885, and
January and July 1, 1886, by depositing said four coupons with the Central
Trust Company of New York, as trustee, and receiving instead the
company’s funded coupon bond dated July 1, 1885, and bearing 6 per cent
interest per annum from that date, ... which bond shall run ten years from its
date and be redeemable at the pleasure of the company at par and accrued
interest after three years, on three months’ notice; such funded coupon bond
to be secured by the coupons so deposited, the lien of which will be in all
respects preserved.
“The total extensions under this clause would be $1,467,400.
(2) “That the holders of the $2,000,000 of the Cincinnati & Georgia
Division first mortgage 6 per cent bonds be asked to fund four coupons, ...
being those maturing March and September 1, 1885, and March and
September 1, 1886, ... and accepting in lieu thereof a funded coupon bond
... dated September 1, 1885.
“The total amount extended under this clause would be $240,000.
(3) “That the holders of the debentures be asked to extend for ten years
such of the debentures as fall due during the years 1885 and 1886, and to
accept similar debentures running from five to ten years, for the interest....
“The total amount extended under this clause would be $373,200.
(4) “That an arrangement be made with the holders of the car trust
certificates of the company, series A, for an extension for ten years of all the
payments of principal falling due in 1885 and 1886, being $100,000 in each
year.
305
“The total amount extended under this clause would be $200,000.”
The committee had an apology to offer for the state in which the
company was placed. “The actual cost of the 190 miles of the new roads
constructed by the company has largely exceeded,” said they, “the estimated
cost. The physical condition of the roads purchased by the company

necessitated the expenditure of large sums in the improvement of roadway
and track; the construction and reconstruction of bridge masonry and bridge
superstructure. The facilities for the conduct of the company’s business
were entirely inadequate to the requirements of its increasing traffic and had
to be enlarged. Unfortunately the company did not fully provide for these
expenditures, and the shrinkage of the value of its securities greatly
aggravated the evil.” This much was very true. In its criticism of existing
facilities the committee was on sure ground. In its suggestions for relief it
was less well advised. It seems to have felt that the East Tennessee’s
difficulties were due to a temporary inability to raise cash for the
improvement of its roadbed and equipment, and that the suspension of
certain charges for a few years would allow the expenditure of liberal sums
from income, ensure the improvement of the road, and bring about a
condition of permanent prosperity. The truth was that the East Tennessee
was in too bad a shape to be reëstablished by such means. The heavily
burdened and physically defective lines which made up the system were
past being restored from income even with the aid of a funding of a few
years’ coupons. They required a definitive surrender of portions of the
claims against them, extensive new charges to capital account, and a
306
correspondingly complete reconstruction of their whole operating plant.
The practical service which the committee rendered was not in suggesting
an adequate remedy for existing troubles, but in making plain how serious
these troubles were. So imminent, in fact, did they show collapse to be, that
the management determined to forestall hostile action by themselves asking
for the appointment of a receiver; and on January 7 the Circuit Court
307
appointed Henry Fink to that position. The committee’s funding scheme
fell of its own weight. The decrease in the earnings of the company, a truer
appreciation of its condition, and, it may be surmised, the influence of New
York banking houses, forced it to make room for a thorough plan of
financial reconstruction.
Action looking toward reorganization of the East Tennessee, Virginia &
308
Georgia began with the year 1886. In January Mr. Nelson Robinson, who
had held proxies for a controlling stock interest at the previous election,
returned from Europe; and after a conference with certain large bondholders
agreed with them to draft a plan for the reorganization of the property. A
reorganization committee was chosen from members of large banking

309
firms, meetings were held, and in the first part of February, 1886, a
scheme was put forth. This plan comprised the following points:
(1) Reduction of fixed charges;
(2) Exchange of new bonds and preferred stock for old bonds;
(3) Assessment on the junior securities;
(4) Foreclosure.
Foreclosure was to take place under the consolidated mortgage. A new
5 per cent seventy-year consolidated mortgage was then to be created.
Enough of the bonds under this mortgage were to be reserved to retire the
liens prior to the existing consolidated mortgage as they should mature, and
the balance was to be used for taking up the outstanding consolidated
mortgage bonds, the Cincinnati & Georgia division bonds, and the ten-year
debentures. It was estimated that the exchanges would reduce the annual
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interest charge from $1,757,460 to $994,737. This necessitated
considerable demands upon old securityholders. Thus the old consolidated
mortgage bonds bearing 5 per cent received only 60 per cent of their face
value in new consolidated bonds with the same rate of interest; and the old
6 per cent Cincinnati & Georgia division bonds received only 48 per cent in
consols, besides suffering a decrease in interest rate from 6 to 5 per cent.
The difference was made up by the allowance of preferred stock, to which,
moreover, was given the right for five years to elect a majority of the board
of directors, unless before that time the new company should have paid out
of its net earnings 5 per cent dividends on such preferred stock for two full
successive years. To the Cincinnati & Georgia division bonds were given 62
per cent in new first preferred besides the 48 per cent in bonds,—a total of
110 per cent; upon which the yield in prosperous times might exactly equal
the yield on the securities which they surrendered. To the consolidated
bonds were given 50 per cent in new first preferred, making possible a total
return greater than that which they had formerly enjoyed. For the
debentures was made the same provision as for the divisional bonds. In
order that net earnings might go first of all to the prior liens and to the
above securities, new second preferred and common stock was issued for
the benefit of the old income bonds and stock. Of these the income bonds
received 100 per cent in new second preferred; while the old preferred

received 100 per cent and the old common stock 40 per cent in new
common. Only in return for their assessments did the income bonds receive
first preferred stock, and even for their assessment the common stock took
second preferred. Cash assessments were 5 per cent on the income
mortgage and 6 per cent on the new common stock. This was expected to
yield $2,475,000, which, with a surplus of new securities in the treasury of
$1,534,000, was thought sufficient to liquidate outstanding car trusts and to
311
provide the company with a fund available for future use.
The plan may be criticised in some respects. It made no adequate
provision for future capital requirements. Two millions and a half of cash
and two millions of securities were considerable sums in hand, but of these
over half a million was in the form of stock, and from the rest had to be
deducted at least a million and a half for the liquidation of car trusts. This
312
left, it is true, enough for existing needs, but it did not allow for
constantly recurring and legitimate demands for improvements out of
capital in future years. Moreover, the securities given for the consolidated,
the Cincinnati & Georgia division, and the debenture bonds exceeded by 10
per cent the nominal value of the bonds retired by them. But on the whole
the reorganization plan was an excellent attempt to solve a difficult
problem. It proceeded on a sound principle, it laid the burden on the proper
parties, it avoided a funding of current liabilities, and even in respect to the
volume of securities outstanding it accomplished a much needed reform by
313
wiping out 60 per cent of the almost worthless common stock. It was
accordingly accepted by the securityholders. On March 18, the
314
reorganization committee obtained a decree of sale. By May 1,
practically all the consolidated and income bonds, with a majority of the
315
preferred stock, had assented; and on May 25, 1886, the East Tennessee,
Virginia & Georgia Railroad was sold for $10,250,000 to a representative of
the reorganization committee. Previous to this the opposition committee,
316
which had been formed by the minority stockholders, had disbanded.
The final step was the organization of the East Tennessee, Virginia &
Georgia Railway, which on July 1 took over the title to the East Tennessee,
Virginia & Georgia Railroad and branches, a controlling interest in the
stock of the Knoxville & Ohio, and a controlling interest in the stock of the
317
Memphis & Charleston Railroad Company.

During this time the Richmond & Danville had not been standing still.
It will be remembered that in 1883 the capitalists who dominated the East
Tennessee and the Coast Lines had purchased a controlling interest in this
company, with the purpose, according to Mr. Brice, of confining all their
railroad and steamship lines under one management and of operating the
system in the best possible manner. These gentlemen had found the earnings
of the Richmond & Danville sufficiently unsatisfactory and the need for
improvements sufficiently great to lead them to pass the interest on its
debenture bonds in October, 1883. The net earnings for 1882, out of which
this dividend would have been paid, they found had been fully taken up by
the fixed charges and the expenses for new equipment and betterments. The
net earnings for 1883 they believed sure to show large gains, but still not
318
likely to be equal to necessary expenditures. Strict economy was to be
the order of the day. In the three previous years the company had
accumulated a large floating debt. This the new management reduced more
than one-half by the end of 1885. The funded debt it allowed to increase
largely, but the earnings it managed somewhat to improve. In general,
however, it secured no very striking gains. Union in interest with the East
Tennessee and the Coast Lines modified the severity of competition, but the
panic of 1884 checked business, and the real saving in operating cost was
319
very slight.
In their search for means to reduce expenses the owners of the
Richmond & Danville came across the Richmond & West Point Terminal
Company. By 1884 this company was in peaceful possession of 1815.8
miles of railroad, which included all the important branches of the
Richmond & Danville except the North Carolina Railroad, from Goldsboro
to Charlotte, and the Atlanta & Charlotte Air Line, from Charlotte to
Atlanta. It had been obliged to issue notes to retire its floating debt in
320
1883, but had no earnings apart from dividends on the stock which it
held, and no expenses other than its cost of administration and the interest
on the notes above mentioned and on its floating debt. There was a
possibility, nevertheless, that the maintenance of the company involved the
Richmond & Danville in unnecessary outlay, and caused a certain loss of
efficiency through indirectness of control. The Terminal Company had
originally been necessary because the Richmond & Danville could by its
charter hold stock in none but connecting lines. By 1885 this prohibition

had been removed, and there was open an opportunity to consolidate the
system.
Early in 1886 the directors of the Richmond & Danville appointed a
committee to report a plan of union with the Richmond & West Point
321
Terminal. Apparently this committee recommended the elimination of
the Terminal Company; for in April it was known that the Richmond &
Danville was trying to buy from the Terminal the stock of certain of the
322
more important branches which it had formerly controlled. In that month
323
the Richmond & Danville leased the Virginia Midland Railway and the
Western North Carolina; in May it took over the Charlotte, Columbia &
Augusta and the Columbia & Greenville; in June the Northeastern of
Georgia; and in October the Washington, Ohio & Western, or a total of 1483
324
miles out of the 1839 held by the central corporation. At the same time
the Richmond & Danville transferred into its own treasury $13,617,400 in
stock and bonds of subsidiary companies, giving in return 25,000 shares of
the Terminal’s own stock, and a guarantee of the Virginia Midland’s general
mortgage bonds. This done, the Danville Railroad threw the rest of its
holdings of Terminal stock upon the market; where they were bought by
investors who knew nothing of the above transactions. The operation left
the Terminal high and dry. It was of no further use to the Richmond &
Danville, for that company had made arrangements with its branch lines
direct; and it could not launch upon an independent existence, because the
greater part of its mileage was in its rival’s hands.
Fortunately for the small Terminal holders it so happened that men of
large wealth and resourcefulness were interested with them. Under the
leadership of these capitalists the Terminal Company began in its turn the
purchase of Danville stock. It may have been that the East Tennessee group
who had acquired a majority in 1883 had meantime parted with their
holdings, or members of that syndicate may have sold in 1886 to take
325
advantage of a favorable price. At any rate, 25,000 shares were rapidly
acquired, and the control of the company obtained. This done the new
Terminal interests turned to the East Tennessee, Virginia & Georgia.
Negotiations were at once begun, and culminated in an agreement in 1887
by which the Brice-Thomas group sold 65,000 shares of East Tennessee
first preferred for $4,000,000 in cash and 50,000 shares of new Terminal

common. Since the Tennessee first preferred elected a majority of the
directors this ensured control. At the same time the Richmond Terminal
provided for its floating debt, and for the purchase of the balance of the
326
Richmond & Danville shares outstanding.
Thus was the Richmond & West Point Terminal Company saved, and
the principal railroads east and west of the southern Appalachians still kept
under common control. The new grouping was weaker than the old,
however, in that it did not include the Coast Line railroads. It was also
imperfect as regards the nature of the control possessed over the East
Tennessee, Virginia & Georgia. It has been said that the Richmond Terminal
327
held a majority of the first preferred stock of this latter road. By the
terms of the Tennessee reorganization of 1886 this stock was to have the
right for five years to elect a majority of the directors, unless before that
time it should have received 5 per cent dividends for two successive years.
This gave control to the Terminal Company; but it plainly made a control
precarious which rested, as this did, on ownership of first preferred alone.
In 1887 4 per cent was paid in dividends, and in 1888 5 per cent. In 1888,
accordingly, a lease was drawn up, and the Richmond & Danville took the
operation of the road for ninety-nine years. For four years it agreed to pay
over 33⅓ per cent of the gross earnings; for five years more 35 per cent;
and so on until 37 per cent should be reached. And, further, it guaranteed
that the percentage allowed should be sufficient to pay all the East
Tennessee’s fixed charges, including 5 per cent annually on the first
328
preferred shares outstanding.
It cannot be denied that the ethics of the Tennessee’s lease were
questionable. The East Tennessee reorganization had invested the first
preferred stock of that company with temporary authority. To use this to
bind the property for years to come was neither fair to the other
stockholders, nor in accordance with the spirit of the reorganization plan.
We need not, therefore, be surprised at the prompt application for an
329
injunction and for the appointment of a receiver which occurred. In a
circular to the second preferred and junior stockholders the opponents of the
lease urged that its consummation would constitute an abuse of power on
the part of the existing board; that it was entirely in the interests of the first
preferred stockholders; that under no circumstances could the junior

stockholders derive any income from the lease; that it failed to provide
other safeguards and was in many respects improvident and imperfect. In
one suit before State Chancellor Gibson at Knoxville, Tennessee, emphasis
was laid on the statutory prohibition of the consolidation of competing
lines. In another, petition was even made that the holders of the first
preferred stock be enjoined from electing a majority of the board of
330
directors at the approaching meeting. Chancellor Gibson handed down
two vigorous opinions. He refused to enjoin the voting of the first preferred
stock, on the ground that the plaintiffs had been in possession for two years
of stock certificates which bore on their face the conditions and agreements
under which they were issued, and that the complaint was not justified,
331
either in law or equity. But he held that the East Tennessee had no power
under its charter to lease its road as it had done; that the combination of the
East Tennessee and the Richmond & Danville was forbidden by the law of
Tennessee against the consolidation of competing lines; and that similar
prohibitions in the laws and constitution of Georgia were so stringent as to
imperil the East Tennessee’s charter in case the lease should be carried
332
through. This effectually checked the lease. After Chancellor Gibson’s
first opinion the East Tennessee election had been held and the arrangement
333
with the Richmond & Danville approved. After his second the lease was
cancelled, and the management of the East Tennessee restored to its own
334
officers. The Richmond Terminal was still left in control of the property.
It was forced, however, to secure a majority of all the East Tennessee stock
outstanding if it wished to make its control permanent, and it was prevented
from using the power temporarily given a section of the stock to bring about
a ninety-nine-year arrangement distasteful to the majority.
Master of the Richmond & Danville, the East Tennessee, and their
allied lines, the Richmond Terminal now took one step further; it acquired
the Central Railroad & Banking Company of Georgia. The importance of
this was very great. The Central Company owned the most considerable of
the lines in Georgia and Eastern Alabama. It stretched from Savannah and
Port Royal on the Atlantic coast to Spartanburg, South Carolina, on the
north; to Atlanta, Birmingham, and Montgomery on the west; and to
Albany, Georgia, and to Columbia on the south. Its system had been formed
by a consolidation in 1872 of the Central Railroad from Savannah to Macon

335
with the Macon & Western from Macon to Atlanta, and was compact,
ably managed, and profitable. Previous to June, 1847, the Central Railroad
Company had paid seven dividends aggregating 10.68 per cent. From June,
1847, to June, 1889, the Central Railroad and the Central Railroad &
Banking Company which succeeded it, had paid seventy-five dividends
336
aggregating 337.5 per cent, besides stock dividends of 8 per cent in 1854
and 12 per cent in 1861, and a dividend of 40 per cent in certificates of
indebtedness in 1881. It was paying 8 per cent in 1888 when the Richmond
& Danville was paying 5, and the East Tennessee was congratulating itself
337
on the 5 per cent which it was able to turn over to its first preferred stock.
So fruitful a piece of railroad property was naturally looked on as
desirable, especially since its acquisition was to free the East Tennessee
from one of its most dangerous competitors. From a traffic point of view,
nevertheless, the advantages of a consolidation were doubtful. The local
business of the Central was likely to be little increased by a merger. The
through business was in danger of being decreased. The Central lines ran on
the whole east and west. It was to their interest to carry freight from
Georgia, Alabama, and the West to Savannah, and thence to send it north by
way of the Ocean Steamship Company which they controlled, and from
which they obtained in 1889 one-fifth of their total net earnings; while the
Richmond Terminal’s interest was to send this traffic north by land so as to
secure for its own railroads the long haul. The advantages to the Terminal of
a union depended on the price at which the Central Railroad could be
acquired. The purchase was made, and the price was a high one. And this
price was paid, it was freely charged, not in pursuance of an honest though
mistaken judgment, but in order to allow a large personal gain to individual
capitalists who were interested in both the Central and the Terminal
Companies.
Among the most prominent owners of Central of Georgia stock at this
time were members of the Logan-Rice group of financiers, who had begun
to accumulate holdings at least as early as 1886. The average price which
these parties paid was later estimated at 130, and their holdings were
apparently secured with a view to resale at a higher figure. At any rate,
when 40,000 shares had been purchased, a double operation was put
through. The shares bought were turned over, with $400,000 cash, to a

newly formed “Georgia Company,” and for them $4,000,000 in 5 per cent
trust bonds and $12,000,000 in Georgia Company stock were received in
exchange. And, second, a vigorous campaign was entered upon to secure
control of the Richmond Terminal. Sully resigned the Terminal presidency
in April. For his vacant place the Logan-Rice people offered General
Alexander of the Central of Georgia, and the Terminal management
supported John H. Inman. The struggle which ensued was most
extraordinary. The existing board of directors charged the Central group
with trying to unload their Georgia Company’s stock upon the Terminal
system; and the Logan-Rice party insinuated that the purchase of the East
Tennessee Railroad had been the occasion of fraudulent profits to the
338
Terminal directors.
“We understand,” declared the directors, “that a majority of the names
thus far proposed by the parties soliciting proxies to be cast for directors
and president of this company are gentlemen who are well known to be the
owners of a majority of the stock of the Georgia Company, which owns
railroads whose business and interests are at all points of our system in
competition with and antagonistic to the business and interests of this
Company; any diversion of traffic, or exercise of influence favorable to the
Georgia Company at the numerous competitive points would work
incalculable injury to your prosperity.... If on the other hand the
preponderance of the Georgia Company’s interest in this Company should
result in a sale to and purchase by your Company of the Georgia Company
stock owned by these gentlemen, it would necessitate the issue of many
millions of your common stock, or some kind of obligation taking
precedence of that stock, the effect of which upon the value of your
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property you are fully competent to judge.”
The general election of the Terminal was held on May 31, and Mr.
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Inman was elected president for the remainder of the unexpired term.
The Rice party was apparently overwhelmingly defeated. In reality its
activity and the presence of its friends in the councils of the victors resulted
in the successful sale of the Georgia Company securities. In October, 1888,
little over five months after the directors’ circular of April 6, the Richmond
Terminal took over the Georgia Company stock at $35 a share and allowed
its owners to withdraw successfully from their speculation. Subsequently it

also took the Georgia Company bonds from the bankers who had purchased
341
them. This left Inman, Hollins, and the rest a profit of $60 a share on
their original investment. It meant for the Richmond Terminal a direct
annual loss which there was very little prospect of making good. To provide
for the $4,000,000 in bonds and the 120,000 shares of stock acquired, this
latter issued approximately $8,200,000 of 5 per cent collateral bonds
bearing an annual interest charge of $410,000. Now both the stock and the
$4,000,000 of bonds were a lien on 40,000 shares of Central of Georgia
stock and depended altogether upon the dividends declared on these by the
Central Company. The Central never paid over 8 per cent, or a total of
$320,000 on 40,000 shares. The difference between this and $410,000, or
$90,000, constituted a direct loss which the Terminal pledged itself to meet
each year. If the victory of the friends of the company in May is to be
considered a genuine one, one wonders what price the owners of the
Georgia Company would have charged had the election gone the other way.
With the Central of Georgia, the East Tennessee, and the Richmond &
Danville under its control the Richmond Terminal could look for still
further extension. In 1890 it acquired control of the Erlanger group of roads
from Cincinnati in the north to Chattanooga, thence to Meridian,
Mississippi, thence to Vicksburg, Mississippi, and to Shreveport, Louisiana.
At the same time it took in the Louisville Southern, which joined Louisville
342
with the Cincinnati lines. In 1888 the Richmond & Danville had
343
concluded a close alliance with the Atlantic Coast Line, and
344
arrangements had been made for terminal facilities at Norfolk. In 1889 it
leased the Georgia Pacific, and two years later, when this road reached
345
Arkansas City, it executed a traffic agreement with the Missouri Pacific.
In 1891 the Georgia Pacific leased the Central Railroad & Banking
Company of Georgia for ninety-nine years at 7 per cent on its capital
346
stock. This immensely improved the connection of the East Tennessee
with the North and West, did away with the competition of a parallel line,
and afforded another outlet upon the Mississippi.
Here, then, was the Richmond Terminal system in 1890. Three great
north and south lines: one from Cincinnati through Birmingham to York,
over the Erlanger system; one from Bristol through Rome to Selma, over

the East Tennessee, Virginia & Georgia; and one from Alexandria and West
Point through Danville, Charlotte, and Atlanta to Montgomery. One of these
took business from Indiana, Illinois, and the North and Central West; one
from Baltimore, Philadelphia, and the East; one from both West and East;
and all three opened upon the Gulf over the Mobile & Birmingham to
Mobile. In addition, three parallel east and west lines: from Chattanooga to
Memphis, from Birmingham to Arkansas City, and from Meridian to
Shreveport in Alabama; outlets on the Atlantic coast at Charleston, Port
Royal, Savannah, and Brunswick; and dominance of the local traffic of the
whole territory east of Alabama, south of Kentucky and Tennessee, and
north of Florida. It was by all odds the leading system in the South. It had a
mileage of 8558.5 as compared with the 2383.4 of the Louisville &
Nashville, and gross earnings, exclusive of the Erlanger lines, of
$41,361,095, or more than twice those of its greatest competitor.
And yet, for all its size, the Terminal group was perilously near
collapse. Its physical condition was poor and much of its mileage was
unprofitable; its capitalization was tainted with dishonesty; and the legality
of its recent combinations had not been tested in the courts. Let us quote
from the results of an examination made by a well-known banking firm
three years later.
“While in a general way the main lines of the Richmond & Danville
[West Point and Alexandria to Atlanta],” said this firm in its report, “are in
fair condition—better than those of the East Tennessee, excepting parts of
its main line between Bristol and Chattanooga, the Cincinnati, New Orleans
& Texas Pacific, and the Alabama Great Southern—nearly all the rail in
both systems is too light (50 to 60 lbs. while on the main lines it should be
70 to 75 lbs.), many of the trestles need renewing, and a large number of the
bridges, principally on the East Tennessee system, are not sufficiently
strong to warrant the use of heavy engines, which are essential to hauling
long trains and operating with economy. To a very large extent ballast is
altogether lacking or insufficient in quantity. Excepting that portion of the
equipment represented by equipment bonds or notes, the engines and cars
are generally small and weak and unsuitable for main-line service, and are
also insufficient in quantity for any considerable enlargement of business.
Other appointments, such as shops, yards, etc., are, with but few exceptions,
crude and uneconomical.

“On the branches and secondary lines, especially those of the
Richmond & Danville system, the condition is even worse, little or no effort
having been made to maintain them at proper standard, even for a moderate
traffic. About 700 miles of the Richmond & Danville secondary lines and
branches (including about 200 miles of narrow-gauge lines) are still laid
with iron rails. On July 1st, 1892, there were 72 miles of iron rails in the
main lines of the East Tennessee.
“An expenditure of several million dollars should be promptly made on
these properties for equipment alone, but it is no use to do so, even if it
were possible, unless additional track and yard facilities are also provided,
nor unless such enlargements of engine and car shops be made as will
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permit of the equipment being kept in order.”
This verdict was only reinforced by the characterization in detail of a
number of the subsidiary lines. Thus the Columbia & Greenville was
termed “a collection of weak lines of constantly decreasing value”; the
Mobile & Birmingham “of no value whatever to the East Tennessee”; and
the Memphis & Charleston “valuable, but in a condition totally unsuited to
modern requirements.” How the capitalization of the system was tainted
with fraud has already been pointed out. The legality of the recent
combinations had not been tested in the courts. In January, 1889, counsel
for certain unnamed parties had a plea for a quo warranto presented to the
348
Attorney-General of Virginia. The petition alleged that the purchase of
the control of the East Tennessee, Virginia & Georgia Railway and of the
Virginia Midland was an abuse of the powers of the Richmond & West
Point Terminal ... a violation of public policy, and an usurpation to the great
damage and prejudice of the constitution and laws of Virginia. This petition
the Attorney-General dismissed on technical grounds. The legality of the
various mergers was soon, however, to be attacked again, and in 1889 the
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question was decidedly unsettled.
The storm broke in August, 1891. On the eighth of that month the New
York Herald published a vigorous onslaught upon the company. It
maintained that the Richmond & Danville system had failed to earn its
fixed charges by $526,560 in the year ending 1890; that this fact had been
concealed by deceptive or false entries on the books which made a fictitious
profit emerge by covering up the losses on auxiliary lines; that the 8 per

cent dividends which had been paid on the Central of Georgia had not of
late years been earned, and that the price paid for the Georgia Central stock
had been grossly excessive; that the East Tennessee was just about paying
its way; and, finally, that the other recent acquisitions were either just
350
paying their way or were showing annual deficits. Color was given to the
charges by the trouble caused by the floating debt. Though denied by the
officials of the company, the sale of 2000 shares of Baltimore & Ohio stock
351
held in the Terminal treasury; the negotiation of a short time loan at 6 per
cent and 2½ per cent commission for the Central of Georgia and the
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extension of another loan; the placing of $500,000 at 6 per cent for the
Richmond & Danville; and the active financial support which General
Thomas felt obliged to render the East Tennessee showed the anxiety which
it occasioned.
On November 25 the directors held a meeting and appointed Messrs.
Eckstein Norton, late president of the Louisville & Nashville; Wm.
Solomon, of Speyer & Co.; Jacob H. Schiff, of Kuhn, Loeb & Co.; Chas. S.
Fairchild, president of the New York Security & Trust Company; and Louis
Fitzgerald, president of the Mercantile Trust Company, a committee to
carefully inquire into and examine the condition of the Terminal properties
and to aid the company in perfecting a plan of readjustment. Owing to the
financial depression, they explained, “the company has been unable to sell
securities based upon engagements they had made prior to the period of
depression and to pay for necessary equipment and improvements. A large
floating debt has in this way been accumulated, but each of our important
railroad systems is solvent.... After maturely considering the whole
situation, we felt it wise to invite the gentlemen whose names appear ... to
aid us in perfecting the best plan for a permanent adjustment of our
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affairs.”
The committee reported provisionally on December 8. It then stated
that it was essential to the proposed plan of relief that the elections of all the
subordinate companies in the Richmond Terminal system should be
postponed till after the Richmond Terminal affairs were settled, and
requested that financial provision be made for the employment of an expert
or experts in the examination of the properties and accounts. It was
understood that the committee’s plan was to make a considerable

assessment on the stockholders. The board of directors refused to respond
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and the committee therefore withdrew.
The next day the stockholders selected Mr. F. P. Olcott to appoint a new
355
committee to take up the work. They were not in favor of radical action,
and Mr. Olcott expressed the opinion that there was no necessity for
measures so stringent as those which the Schiff-Norton Committee had had
in mind. It was but natural that at this point there should have been some
delay. Meetings were held, expedients for raising cash discussed, and a
reorganization plan was gradually whipped into shape. It was not, therefore,
until March 19, 1892, that the public were informed what Mr. Olcott and his
backers did consider that the situation required. The main points of the
elaborate scheme which was then proposed were as follows:
First, a consolidation of the Richmond Terminal, Richmond &
Danville, and East Tennessee properties. The Central of Georgia and the
Erlanger systems were not to be included in the reorganization, but the
interest of the Richmond Terminal and the East Tennessee in their stock was
to be made subject to a new mortgage.
Second, a reduction in fixed charges.
Third, the sale of securities to pay off the floating debt.
Consolidation of properties was found advisable for several reasons.
“While some of the companies show a surplus of earnings,” said the
committee, “in many instances it has been impossible to apply such surplus
earnings to make up deficiencies arising from the operations of other
companies. The committee finds that the various systems have not been
operated throughout for the common benefit of the controlling interest, but
that they have competed among themselves for business, each system
maintaining separate organizations for obtaining business.... In the
judgment of the committee the only adequate remedy which can be adopted
is to unite the several corporations, as far as practicable, in one system
under one management, and to consolidate their obligations.”
In order to unify the system the committee proposed three great issues
of new securities as follows:

$170,000,000 four per cent first mortgage 35-year gold bonds, to be
issued by a new corporation representing the consolidation of the Richmond
& Danville Railroad Company and the Richmond & West Point Terminal
Railway & Warehouse Company.
$70,000,000 five per cent non-cumulative preferred stock.
$110,000,000 common stock.
In general, the new bonds were to exchange for old bonds and the new
common stock for old common and preferred, while the new preferred
stock was to be joined in varying proportions with each of the other issues
to make the exchanges look attractive. Thus, for the Richmond & Danville
consolidated 6s were offered 120 per cent in new bonds and 45 per cent in
new preferred; for the East Tennessee first mortgage 7s 120 per cent in new
bonds and 45 per cent in new preferred stock; for the Richmond Terminal
common stock 100 per cent in new common and 50 per cent in new
preferred. This arrangement was not rigidly adhered to. Some of the poorer
of the outstanding stocks received new common only, and the Richmond
Terminal preferred was given par in new bonds besides a bonus in
preferred. These were, however, exceptions. The principle which
determined the various ratios of exchange is more difficult to discover. It
was not that of equivalence of return. The plan did not attempt to allow to
each holder a chance at the same receipts which he had formerly enjoyed
while reducing the amount which he could demand, but gave sometimes
more than this and sometimes less. And the variations from what might be
called a normal ratio did not always correspond with the relative security of
different issues as indicated by their market quotations. For instance, the
East Tennessee first 7s sold in December, 1891, at 113½ and the Richmond
Terminal collateral 6s at 83; yet the former received 120 per cent and 35 per
cent and the latter 120 per cent and 40 per cent in new bonds and preferred
stock respectively. Again, the Atlanta & Charlotte first 7s sold in October,
1891, at 118½ and received under the plan 120 per cent in bonds and 40 per
cent in preferred stock; the Richmond & Danville consolidated 6s sold at
109 and received 120 per cent and 45 per cent. It is clear that the committee
desired to reduce the interest which the various classes of bonds should
have a right to demand, and that it expected to make compensation by
means of preferred stock on which payments should be made if earned. So
much of its scheme was commendable. On the other hand, the rates of

exchange of old securities for new were in many cases ill-advised. The
reduction in fixed charges was to be $1,819,837, although by the exchanges
alone the capitalization was to be increased by over $50,000,000. The
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charges on the system had amounted in 1891 to $9,474,837. Net earnings
had been $8,744,736. Fixed charges under the plan were to amount to
$7,666,000. As a matter of fact they would have been greater than this, for
some of the old bonds would have remained outstanding, and the estimate
did not include interest on any bonds issued for improvements. The floating
debt was to be retired by the sale of new securities, namely, $18,235,800
new first mortgage bonds and $6,382,530 preferred stock. These were to net
$14,588,640, or sufficient to cancel a debt of $6,310,000 and car trusts of
$2,369,564 and to provide a balance for miscellaneous uses. A syndicate
guaranteed the sale, but holders of stock or of collateral trust 5 per cent
bonds were to be allowed to subscribe up to 16 per cent of their holdings at
the rate of $800 for one new mortgage bond and $350 in new stock. New
bonds to a maximum of $10,000,000 were to be issued only for the
acquisition of additional property, while beyond this the vote of a majority
of preferred stock was to be required to authorize any additional mortgage
357
on property covered by the first mortgage.
Such was the plan laid before securityholders. It proposed a
considerable reduction in fixed charges, though probably not enough to put
the company out of danger, and a large increase in new securities. It failed
because it imposed losses upon the wrong parties. As between the various
classes of bonds its terms were frequently inequitable. As between the
bonds and the stock it altogether favored the latter. It levied no assessment,
it compelled no subscription to new securities, and in three cases only did it
announce an intention of reducing the nominal value of the stockholders’
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holdings. The original time limit for deposits was set at April 14, 1892.
This was subsequently extended, but without effect, and on May 16 the
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Olcott Committee announced that the plan had failed.
The collapse of this attempt at readjustment was a blow to those who
had hoped for a speedy and amicable reorganization of the Richmond
Terminal system. On the same day that failure was confessed the
stockholders met and appointed Messrs. W. E. Strong, Samuel Thomas, and
W. P. Clyde a committee to confer with the Olcott Committee to ascertain

what had best be done. A week later General Thomas reported a plan for the
reorganization of the Richmond & Danville alone. The Richmond Terminal
Company, he said, should be wound up and be succeeded by a new
company with $43,000,000 of preferred stock and $70,000,000 of common.
The present 6 per cent bonds should be given 170 in new preferred stock;
the present 5 per cent bonds and preferred stock par in new preferred stock;
and the present common should receive par in new common and be
compelled to subscribe for $8,000,000 collateral trust two-year 6 per cent
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notes at 92½. This amounted to an assessment of 10 per cent upon the
common. It was not proposed to pay off the floating debt with the proceeds
of this assessment, but to buy the claims held by bankers, and, if necessary,
foreclose these claims and take possession for the stockholders. If the full
amount should not be subscribed by the stockholders the preferred stock
was to have the right to make subscription for the balance, and to take the
securities that would have gone to the non-paying common stock; and the
common stock not subscribing was to have no rights to the common stock
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of the new company.
That this scheme was much more radical as well as more limited than
the Olcott plan appears upon its face. No serious attempt was made to carry
it into effect. On suggestion of General Thomas the stockholders’ meeting
voted that a consulting committee of fifteen be appointed by the chair to
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confer with the committee of three, and then adjourned subject to call.
The enlarged committee found that application had been already made to
Messrs. Drexel, Morgan & Co. by a number of prominent banking firms,
asking that they enter upon the work of reorganization. It therefore dropped
the Thomas plan and joined in the petition. Drexel, Morgan & Co. on their
363
part agreed to undertake an examination of the Terminal property, but
four weeks later replied that while in their opinion a reorganization was
feasible, the lack of assurance of support from Mr. Clyde made them
364
unwilling to undertake the task.
At this point efforts at reorganization were checked. One plan had
failed, one had been formulated but not pushed forward, and the task of
creating a third had been refused by the banking firm which was apparently
best able to carry a plan to a successful conclusion. For a time now the field
was left to the disputes between members of the Richmond Terminal family,

which made up in bitterness for what they lacked in the matter of valuable
result. Mention will be made only of the wrangles between the Central of
Georgia and the other parts of the system.
The Central of Georgia had been placed under a receiver of its own
some two weeks before the publication of the Olcott plan. Some months
later this receivership was made permanent, and the Richmond Terminal
was enjoined from voting the 42,200 shares of Central stock which it held.
It can scarcely be said that the withdrawal of the Central of Georgia from
the Terminal system was unwelcome to the latter. Already the Richmond &
Danville had refused to carry out its guarantee on the Central’s stock unless
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that company should deposit bonds to cover an alleged sum due from it,
and President Oakman had hastened to inform General Alexander, the
temporary Central receiver, that the Richmond & Danville would not
operate the Central of Georgia after the end of the temporary
366
receivership. When, however, the Central not only insisted on
withdrawal, but asked Judge Speer, of the District Court of Macon, Georgia,
to appoint a receiver for the Richmond & Danville Railroad on the ground
that that company was insolvent and was indebted to the Central in the sum
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of $2,459,670, prompt action was made necessary. Application was made
to Judge Bond of the Circuit Court for the Eastern District of Virginia, and
on June 16 this magistrate appointed Messrs. F. W. Huidekoper and Reuben
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Foster receivers of the Danville road.
“This appointment of receivers by Judge Bond,” explained the parties
369
responsible, “is not only not inimical to nor in opposition to any plan for
the financial reorganization and rehabilitation of the Danville system, but
will be found to greatly facilitate and aid any plan of reorganization, while
if the Georgia court had obtained possession of and jurisdiction over the
Danville system this would have been rendered practically impossible....
The necessity for such action,” they continued, with a touch of pathos, “will
be further appreciated when it is known that for some weeks past the
Richmond & Danville Company has not been able to keep either a dollar in
bank or in its safes within the state of Georgia, because every such dollar
has been attached or garnished by parties alleging claims against the
company, and even the money sent by express for the liquidation of pay-

rolls has been attached in the hands of the express company, and in every
370
instance enormous bonds have been required to release such moneys....”
The temporary securing of their position by the receivership allowed
the Danville people to hit back at the Central in its weakest point—the
details of the sale to the Terminal of the Georgia Central Company. On
August 19 the Advisory Committee of Seventeen of the Terminal
securityholders declared that the investigations of their sub-committee
showed that certain trustees of the company, with their friends, had profited
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to the extent of between three and four million dollars in this operation.
Toward the end of the year tender of the Georgia Company stock and bonds
372
was made back to the original vendors and was refused. In December
suit was begun to set aside the purchase on the ground that there had been
no ratification sufficient in law or equity to bar the stockholders from
cancelling the transaction. The plaintiff charged that “the said combination
and plan so formed by and between its president and divers of its directors
[referring to the purchase of the Georgia stock], confederating with the
other syndicate defendants for the purpose of selling their unsalable and
discredited securities to the plaintiff at such prices as yielded them an
enormous profit and necessarily imposed on plaintiff a heavy yearly loss,
was contrary to equity and good conscience, and that the pretended contract
dated October 26, 1888, ... and all the acts done in pretended purchase of
the stocks and bonds of said Georgia Company ... and the taking from the
assets and money of the plaintiff of over $7,000,000 cash ... to put into the
pockets of the said faithless directors, the syndicate defendants, and their
confederates, were all acts planned ... and performed by said Inman, or
under his direction, in the execution of such original fraudulent scheme,
combination, purpose, and confederacy....” And so the plaintiff prayed the
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court to decree the contract of purchase void.
These accusations and counter-accusations, justified though many of
them were, had little direct bearing on reorganization. In this progress had
completely ceased. At the same time some progress was urgently required.
The Richmond Terminal, the Richmond & Danville, and the Central of
Georgia were in the hands each of a different set of receivers, unpaid
interest was piling up, and the year 1893 was to show a marked decline in
earnings. Necessity and mutual distrust dictated a second appeal to Drexel,

Morgan & Co. to undertake the rehabilitation of the property. On February
2, 1893, the following letter was addressed to the firm in question:

Messrs. Drexel, Morgan & Co.,
Gentlemen: Since the time you were previously requested to
take up the reorganization of the Richmond Terminal system much
time and thought have been devoted to its affairs, and we realize
that adverse financial conditions and also the present general
distrust of all plans for the restoration of this system require that, to
be successful, its reorganization must be undertaken by parties
possessing the confidence of both the securityholders and the
public, and also the financial strength sufficient for its
accomplishment. We therefore ask you to take up this reorganization
of the Richmond Terminal and its allied properties, each pledging
you our personal support and aid in full confidence that the
securityholders will support us in this request.
We appreciate the labor and responsibility connected with this
undertaking, and are therefore willing to do all in our power to give
you full control of the reorganization, as suggested in your letter of
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June 28, and to advise our friends and the securityholders
generally to deposit their securities, without requiring the assurances
customary in such cases.
Very respectfully,
Wm.
P. Clyde,
Geo.
F. Stone,
Wm.
E. Strong,
J. C.
Maben,
Tho
mas F. Ryan.

This letter was accompanied by a letter from F. P. Olcott, president of
the Central Trust Company, pledging his support. Inasmuch as lack of the

assurances contained in this correspondence had alone prevented Drexel,
Morgan & Co. from undertaking the task proposed the previous year, their
prompt though conditional acceptance was not surprising. A definitive
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engagement to attempt the work followed on April 12. The enlistment of
Drexel, Morgan & Co. in the reorganization provoked general satisfaction.
Mr. Hollins, of the Central of Georgia reorganization committee, expressed
his pleasure in having responsible parties to deal with not connected with
376
any past differences. The directors of the Richmond Terminal urged all
classes of securityholders to deposit, and the Clyde Committee was
emphatic in its recommendation. It was recognized that the situation was
the most favorable which could be hoped for. No group of Southern railroad
financiers seemed capable of producing a fair reorganization plan, and it
was also probable that no plan from such a source, however fair, would
have received a sympathetic welcome. Drexel, Morgan & Co., on the other
hand, were both capable and sure of a hearing.
There was remarkably little delay in making public the Drexel-Morgan
plan. Less than three weeks after their final acceptance of responsibility,
though about three months after the correspondence of February 2, the firm
published a comprehensive plan, to the examination of which the next few
pages may be devoted. The principles of this plan of May 1, 1893, were
simple, and were clearly and convincingly set forth. The property to be
considered was to be that of the Richmond Terminal, the Richmond &
Danville, and the East Tennessee. The Central of Georgia was to be omitted.
The imperative needs of these properties the plan declared to be two:
First, the provision of a large sum for the physical improvement of the
system;
Second, the reduction of fixed charges to an amount which the
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companies could earn.
The physical condition of the above roads in 1893 was extremely bad.
“One obvious trouble ... is,” said the plan, “that their maintenance and
repairs have been neglected. Another is that, while nearly all the lines in the
United States have been steadily substituting solid roadbeds, heavy
equipment, and other modern facilities for the light and ineffective
appliances formerly in use, these lines, because of the constant drain to

which they were subject for the obligations assumed, and from the
necessities of the Terminal Company for the payment to it, as dividends, of
every available dollar with which to meet its own obligations, have not been
in a financial condition to keep up to the times in this respect, and now they
find themselves so far behind as to be, to a considerable extent, unqualified
to handle business with economy, or to compete successfully with other
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lines.” The financial condition was little better. The absolute fixed
charges of the Richmond Terminal, the Richmond & Danville, and the East
Tennessee systems, viz., interest on bonds held by the public, rentals,
equipment notes, and sinking funds, and interest on floating debts,
receivers’ certificates, etc., the plan declared to amount annually to about
$9,900,000. The entire net earnings for the fiscal year ending June 30, 1893,
were estimated at $7,000,000. The result was a deficit for the year of about
$2,900,000. This state of affairs required serious sacrifices from somebody.
The Olcott plan had illustrated the folly of laying the burden largely on
well-secured senior bonds. The Drexel plan proposed to demand the
necessary concessions from the junior bonds and from the stock. “About
$74,000,000 of the bonds and guaranteed stocks of the Richmond &
Danville and the East Tennessee systems held by the public,” it continued,
“are on properties which are believed for the most part to afford adequate
security, and for this or other reasons this plan has not sought to disturb
them. About $50,000,000 (mostly recent issues) are junior liens,
inadequately secured, or else are on new or branch lines of uncertain
earning capacity, and the holders, in self-preservation, must make such
reasonable concessions as the situation necessitates, taking compensation
therefor in preferred or common stock of the new company....”
The tools of the reorganization were to be the following new issues:
$140,000,000 first consolidated mortgage and collateral trust 100-year
5 per cent bonds, secured by mortgage and pledge of all the property of the
new company. This total might be subsequently increased to acquire the
whole or part of the Georgia Central system, or to acquire the ownership of
the Cincinnati Southern Railway or any other line as a substitute therefor.
$75,000,000 5 per cent non-cumulative preferred stock.
$160,000,000 common stock.

“The general theory of adjustment of disturbed bonds,” said the plan,
“is to substitute for them the new 5 per cent bonds to such an extent as is
warranted by earnings and situation of the properties covered by the present
mortgages, and the new preferred stock for the remainder of the principal.
In some cases, where the bonds are on properties of no actual and little
prospective earning capacity, a more severe reduction is necessary. In
several instances, where the bonds are on properties which are likely to
improve more rapidly than other disturbed parts of the system, this fact is
recognized, and an extra allowance is made in compensation. Finally, in one
or two cases, where the bonds are on properties the loss of which would
adversely affect the rest of the system, a proper recognition is made of this
fact.” In practice not only bonds and preferred stock, but preferred and
common stock, or even common stock alone were exchanged for old
securities of little value.
This provided for old securities but not for cash requirements. To raise
cash three devices were resorted to, all of which bore entirely on the junior
securityholders or on the stock. The most direct was the levying of an
assessment. Terminal common stock was assessed $12.50 per share, East
Tennessee first preferred $3, second preferred $6, and common stock $9;
new preferred stock being in each case given in return. This distribution
was based on the idea that the stockholders of each railroad should provide
for its floating debt. The floating debt of the Richmond & Danville was
about $7,000,000, that of the East Tennessee about $3,000,000, and that of
the Richmond Terminal about $100,000. But since the last named held
practically all of the Richmond stock and a considerable proportion of the
East Tennessee, its stockholders were saddled with a total of $8,300,000 or
an equivalent of $12.50 per share, while the East Tennessee was taxed
proportionately. The rest of the cash requirements were covered by the sale
of $8,000,000 new bonds at 85, and $33,333,000 new common stock at 15.
Depositors of all classes of Terminal securities and of all classes of
readjusted securities of the other systems were allowed to subscribe to the
extent of $1000 in a new bond and $4000 in new stock trust certificates for
each $22,000 par value of stocks or bonds deposited. The balance of the
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issues was looked after by an underwriting syndicate.
Future capital requirements were provided for mainly by new bonds.
$35,383,000 in new 5 per cents were set aside to be used only for new

construction, betterments, purchase of rolling stock, and extensions and
additions to the system. Not over $2,500,000 of these were to be used in
any one calendar year; except that, in addition to this annual appropriation,
a total of $3,000,000 in bonds might be specifically appropriated with the
unanimous consent of the stock trustees, for the building of branches or
extensions, if undertaken within three years after the creation of the new
mortgage. All property acquired with these bonds was to be brought under
the lien of the new mortgage. $8,000,000 of the cash raised by assessment
and sale of securities, moreover, were to be available for new construction
and equipment on the Richmond & Danville and the East Tennessee. And,
finally, there was provision for the limitation of new bond issues, for a
voting trust and for the consolidation of the Terminal system.
“The ultimate object of the reorganization,” said the plan “(excluding
the Georgia Central Company from consideration), is to have the new
company acquire, so far as practicable, the ownership of the Richmond &
Danville and East Tennessee systems, including the various securities now
owned by the Terminal Company ... and the securities pledged for the
Richmond & Danville and East Tennessee floating debt....
“Both classes of stock of the new company ... are to be issued to three
Stock Trustees, who shall be appointed, on or before completion of
reorganization, by Messrs. Drexel, Morgan & Co. The stock shall be held
by the Stock Trustees and their successors, jointly, for five years, and for
such further period (if any) as shall elapse before the preferred stock shall
have paid 5 per cent cash dividend in one year, although the Stock Trustees
may, in their discretion, deliver the stock at an earlier date....
“No additional mortgage shall be put upon the property to be acquired
hereunder by the new company, nor shall the authorized amount of the
preferred stock be increased without the consent in each case of the
380
majority in amount of the preferred stockholders.”
The result of all these provisions was to be a cancellation of the
floating debt, a reduction in fixed charges, and a decrease in mortgage
bonds; though inevitably also an increase in stock outstanding. The plan
proposed to disturb $49,117,900 of outstanding bonds, or, including the
Richmond Terminal 5s and 6s, a total of $65,617,900. But the new bonds
which it offered in exchange amounted to $19,806,700 only. On the other

hand it took $111,819,550 in stock from the hands of the public, and offered
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$165,559,514 new stock in the course of the exchanges. This was very
conservative, since the increase in total capitalization through these
exchanges was less than 4½ per cent; and less too than the cash assessment
for which preferred stock was allowed. Somewhat greater increase in
securities appears if we consider, not only the exchanges, but the provisions
of the plan as a whole; for here we must include $33,300,000 new common
stock and $8,000,000 new bonds issued to retire in part the $12,900,000 of
floating debt and for other purposes. Even so the net increase was only 6
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per cent. The natural result was a considerable reduction in fixed
charges. The absolute fixed charges of the system in 1893 the plan stated to
be $9,900,000. The fixed charges under the plan were to be $6,789,000.
This was certainly a step in the right direction. It was the point,
nevertheless, at which the plan was weakest. The clauses which have been
outlined made abundant and conservative provision for cash requirements;
and the sums which they allowed for future development were not on their
face inadequate; but the reduction in fixed charges was less than should
have been ensured. The net earnings for the year ending June 30, 1892,
were $7,725,000, and those for 1893 were estimated by the plan itself as not
likely to exceed $7,000,000. This would have left $936,000 over the
proposed fixed charges in 1892 and $211,000 in 1893:—or a surplus of
some 3 per cent in the latter year. This was altogether insufficient. It not
only put out of the question dividends on the $200,000,000 of stock, but it
precluded the partial improvement of the road from earnings, and left the
system at the mercy of the slightest decrease in the annual returns.
Compared with previous fixed charges the plan proposed noteworthy
reductions; compared with the earnings of the lines involved it did not go
383
far enough.
The reception of the Drexel-Morgan plan was, nevertheless,
satisfactory. Certain concessions were made to various classes of bonds,
and by June 17, over 95 per cent of the securityholders had given their
384
assent. Unfortunately the earnings of the property now steadily
decreased. The gross receipts of the Richmond & Danville proper were 15
per cent less in 1893 than in 1892; and Terminal system lines which had
earned $6,100,000 in 1892 earned $5,300,000 in 1893, and promised to

earn some $4,250,000 only in 1894. This decrease was common to the
country at large. It was of peculiar importance, however, in emphasizing the
weak point in the Drexel plan. From January 1 to July 1, 1893, the Terminal
floating debt, exclusive of car trusts, increased $2,600,000. From July 1 to
March 1 it increased at least a million more. The reorganization plan had
been prepared “on the assumption that, during reorganization, the receivers
of the various properties could provide for the interest charges on the
undisturbed securities, as well as accumulate a sum sufficient for the
385
interest accruing on the ‘disturbed securities’ as readjusted.” As it turned
out, the receivers were obliged to make many defaults among the
undisturbed securities, and saved nothing for the disturbed. Some
modification of the published plan had perforce to be arranged.
These modifications were detailed in a pamphlet dated February 20,
1894. They comprised three proposals:
(1) To exclude from the reorganization certain unprofitable properties
which had previously been included. Certain alterations had already been
made toward this end in the exclusion of the Erlanger line, the Memphis &
Charleston, and the Mobile & Birmingham. Further modification was to
exclude the Northeastern Railroad of Georgia, the Macon & Northern, and
five other subsidiary lines.
(2) To fund for a year or two the coupons on new bonds given for
certain securities, and to provide in other cases that the new bonds should
not bear interest till 1895 or 1896.
(3) To lighten the assessment on Richmond Terminal and East
Tennessee common stock, and to allow to all assessed securities one-quarter
of their assessment in bonds and three-quarters in preferred stock instead of
all in preferred stock.
At the same time a few other modifications allowed to some bonds a
more liberal grant of new securities than they had obtained in May. It was
hoped by these means to raise the average earning ability of the system,
386
while reducing the new securities to be issued. The temporary funding of
coupons further lightened fixed charges until business should have had time
to revive. “Under the plan as now modified,” stated Drexel, Morgan & Co.,

“and assuming that one-half of the new bonds to be sold are used in 1894
and the other half in 1895, the fixed charges are estimated at about
$4,100,000 in 1894,
4,700,000 in 1895,
387
5,400,000 in 1896.
“The depression in the South began in 1890–91. There would appear to
be no reason why in a comparatively short time these properties should not
very easily earn, gross, as much as and more than they earned in that fiscal
year, viz., over $21,000,000. Operated at 70 per cent ... there would remain,
387
say $6,600,000 net against an interest charge of $5,400,000.”
The reduction in assessments was made possible by the decrease in
mileage. Although the floating debt had increased $2,600,000 from January
388
1, 1893, and the equipment notes recorded were greater by $1,048,000,
yet the debt to be provided for by the modified plan of 1894 was estimated
at only $12,200,000. Besides this the cash to be reserved for new
construction was reduced $3,000,000, and the surplus for expenses and
contingencies $1,380,000. Assessments were therefore set at $10 a share on
Richmond Terminal common instead of $12.50; $7.20 on East Tennessee
common instead of $9; and $3 and $6 on East Tennessee first and second
preferred as before. The new securities to be sold were reduced
correspondingly to $8,000,000 of bonds and $25,000,000 of common stock.
Finally, the bonds to provide for new construction, betterments, and
additions were reduced from $35,383,000 to about $19,000,000, of which
not over $2,000,000 (instead of $2,500,000) were to be used in any calendar
year. Other provisions of the earlier plan were to remain unchanged.
It was this modified plan which was carried to a successful conclusion.
In principle it did not mend the weak spot in its predecessor of May. That
plan had contemplated a surplus of $211,000 over fixed charges for 1893.
This estimated charges at $4,100,000 for 1894 and net earnings at
$4,250,000 on a somewhat reduced mileage. There was not to be more left
for dividends and improvements than there had been before, while the cash
and bond provisions for improvements were notably reduced. The
concession of bonds to stockholders for one-quarter of their assessments
was unsound financiering, as was, on the whole, the funding of coupons on

the new mortgage bonds. The success which the modification had,
nevertheless, in restoring the company to solvency, was due to the
improvement in earnings which soon took place. The original plan had
based its calculations on the first year of depression; the amended plan kept
charges down till three years had elapsed. By that time business had begun
to mend, and all danger of bankruptcy was past. Other points in either plan
leave little to criticise.
The modifications to the original plan were issued on February 20,
1894. Over 75 per cent of the system bonds had assented by March 24. At
one foreclosure sale after another the reorganization committee now bought
in the portions of the old system covered by the plan. Suits against the
Richmond Terminal had been brought under the two collateral mortgages,
and on July 13, 1893, the reorganization committee bid in the pledged
securities. On February 6, 1894, it bought the remaining assets of the
Terminal Company; on June 15 it bought the Richmond & Danville, and on
July 7 the East Tennessee, Virginia & Georgia. Two trustees’ sales, one
receivers’ sale, ten foreclosure sales, and six conveyances without
foreclosure had occurred by September, 1894, and more minor sales were in
389
progress. On June 15 the Southern Railway Company was organized
with a charter from the state of Virginia, and took over in succession
390
properties to the extent of 4607 miles. Samuel Spencer was elected
president. Some thirty corporations were swept away and thirty boards of
directors abolished; for the Southern Railway was an operating company,
and, unlike the Richmond Terminal and the Richmond & Danville,
controlled but an inappreciable fraction of its mileage through the
ownership of stock. The new securities were issued at the proper times, and
according to the plan the common and preferred stock was turned over to
391
three voting trustees, who issued trust certificates in their stead.
This completed the reorganization of the Richmond Terminal Company
so far as the principal part of its mileage was concerned. The portions of the
system excluded from the plan have been to some extent bought back in
later years. Control of the Alabama Great Southern was bought in 1895; the
Memphis & Charleston was acquired in 1898; the Richmond &
Mecklenburg was leased in 1898 and the Mobile & Birmingham in 1899;
and the Northeastern of Georgia was bought in 1899. The system has not

yet, however, fully regained its old position. The most important loss has
undoubtedly been that of the Central of Georgia. We left this company
engaged in active disputes with the Terminal management. During 1892 and
1893 efforts to reorganize it were made under the leadership of Hollins &
Co. The principal difficulties were the large floating debt and the money
392
required to put the property into good physical condition. A plan was
actually prepared at the beginning of 1893 and submitted to securityholders,
but failed because of that same decline in earnings which had caused the
modification of the Terminal reorganization plan. A second plan, prepared
393
in 1894, had a better fate, and in modified form was put into effect. The
Railroad was sold at auction in 1895, the Central of Georgia Railway was
394
organized to take its place, and the corporation entered upon a new
395
career which we have not space to follow.
As for the Southern Railway, the years from 1895 to 1907 have brought
it prosperity. It has extended considerably in mileage. Besides reacquiring
lines which formerly were part of the Richmond Terminal system, it has
grown south to Jacksonville and Palatka, east to Charleston and to a more
direct connection with Norfolk, and west from Louisville to East St. Louis.
It has further joined its Louisville-East St. Louis line to Chicago by
acquiring a half-interest in the Monon, and to the rest of its system by a
half-interest in the Cincinnati, New Orleans & Texas Pacific; and it has
bought control of the Mobile & Ohio, which stretches through four states
from East St. Louis to Mobile. Instead of 4392 miles as operated on June
30, 1895, it now reports 7546. The earnings of the system have increased
more rapidly than its mileage. The revival of business after 1897 occurred
with singular force in the South, and seems to have introduced there a new
industrial era. As a result, the Southern’s gross earnings have trebled and its
net earnings have been multiplied by two. Passenger receipts, which were
$4,329,499 in 1895, have become $14,683,006 in 1907. Freight receipts
have increased from $10,816,024 to $37,368,095.
It has been this increase in earnings which has at last allowed some of
that margin for improvements which the reorganization plans weakly
attempted to secure. And accordingly, large sums have been expended.
Maintenance of way charges are now over $1000 per mile instead of $630.
Expenses per locomotive mile have increased from 4.19 cents in 1895 to

7.54 cents in 1907; expenses per passenger car mile from .83 to 1.03 cents;
and expenses per freight car mile from .47 to 2.18 cents. It is true that
locomotives and cars are larger to-day and that rails are heavier, but this
fact is far from accounting for the difference. Not only has the existing plant
been kept in good repair from earnings alone, but distinct improvements
have been made. New rail has been laid, additional ballast put in, wooden
trestles filled or replaced with steel. It was estimated in 1906 that
$5,000,000 had been spent in betterments and charged against income up to
that time, besides some $15,000,000 more paid for equipment out of
earnings. Meanwhile considerable sums had been spent from capital
account. The reorganization plan allowed for some $19,000,000 of new
396
bonds to be sold at the rate of $2,000,000 per year. Of these the company
had sold $13,000,000 for improvement of the property by February 1, 1906,
besides disposing of some $23,000,000 of equipment obligations.
The appreciation of the need for still more liberal expenditure led in
1906 to a comprehensive plan for the issue of new capital. Under date of
397
February 1, the company submitted to its voting trustees a scheme for a
$200,000,000 mortgage, of which $15,000,000 were to be issued at once
and the rest were to be reserved. Of the immediate issue $4,962,774 were to
refund payments for equipment hitherto made and charged to capital;
$3,501,000 were to refund investments in securities of, and advances to,
subordinate companies, as well as to be used for the acquisition of property
not heretofore funded; and $6,536,226 were for double track, revision of
grades, new yards, shops, etc. Of the securities reserved, $65,164,000 were
for refunding purposes: $20,000,000 for certain subsidiary lines: and
$99,834,000 to go, first, for betterments and improvements on the entire
system and for new equipment in amounts not exceeding $5,000,000 in
each year; and second, in exchange for first mortgage bonds not exceeding
in amount the actual cost of railroads and terminals hereafter to be acquired.
In other words, about one-half of the total issue is to go, sooner or later, for
398
improvements, and the rest for refundings and for new acquisitions. It
was believed that the Southern could readily pay the interest on the
increased immediate issue without endangering dividends on its preferred
stock, and that the subsequent increases in earnings would more than
provide for whatever additions to charges might occur. Negotiations for the

placing of the new securities were concluded with J. P. Morgan & Co. at a
reported price of 96½.
The results of the expenditures for improvements have been
remarkable. In 1895 the Southern Railway had in use 623 locomotives; in
1907 the number was 1536. In the former year there were 487 passenger
cars and 18,924 freight cars; in the latter there were respectively 995 and
399
56,225. Only 370 miles of track in 1895 were over 65 pounds in weight
per yard; more than 3100 surpassed that limit in 1907. It is nevertheless in
its inability to handle the business offered it that the Southern has provoked
sharpest criticism. Over 3600 miles of its system still have rails weighing
62 pounds or less to the yard;—that is, rails incapable of meeting modern
operating conditions. Only 206 miles of double and 1981 of side track exist.
Equipment appears to be still inadequate. Signals are imperfect, and speed
and promptness seemingly impossible to attain. The late tragic death of Mr.
Spencer was a forcible illustration of the deficiencies of the road which he
had done so much to improve.
The earning power of the system cannot yet, therefore, be said to be
400
secure. Moreover, the capitalization of almost $72,000 per mile, as well
as the less dense railroad business in the South, the slight construction of
many of the Southern Railway lines, the lack of adequate facilities which
compels an operating ratio of 76 per cent, and the absorption of minor roads
less prosperous than the main stem,—all these factors have kept down the
net surplus from operation. On the other hand, the management is making
an earnest attempt to raise the standard of the property. Bonds and notes to
the par value of over $32,000,000 have been sold to provide for additions
and improvements during the past year, and a very great change for the
better has taken place. Dividends on the preferred stock have been paid
since 1897. As the country develops, and as the sums spent upon
improvements come more and more to have their effects, a dividend upon
the common stock will be paid. The near future is more likely to witness the
cessation of dividends upon the preferred.

CHAPTER VI

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

The Atchison, Topeka & Santa Fe Railroad has been reorganized twice, in
1889 and in 1893–5; the first time without, but the second time after a
foreclosure sale. The keynote of its history has been extension. It was the
enterprise of the men in control before 1889 which gave it the position and
power it holds to-day, but it was also that enterprise which necessitated its
first reorganization by imposing upon it heavier burdens than it could bear.
Chartered in Kansas in 1863, the Atchison spread west, southwest,
south, and northeast. It received some aid from the state of Kansas in the
shape of a grant of lands, but depended primarily on the investment of
private capital. Kansas itself was not, in 1870, a very encouraging field for
railroad building. It had been admitted as a state only in 1861, and could
boast for the most part of less than two inhabitants to the square mile;—
although settlement was pushing westward with considerable rapidity, and
stores of mineral wealth had been discovered in Colorado. The railroad in
those days had to create its own traffic, and population followed the means
of transportation. The peculiarity of Kansas was a central position, which
lent itself to schemes of the most far-reaching nature. A railroad reaching
from one end of the state to the other might almost equally well have been
extended to California, to Chicago, or to the Gulf; and could be sure in
time, if it survived, of the carriage of a vast volume of traffic out in every

direction from the Central West. The Atchison managers saw this
opportunity, and courageously and persistently endeavored to realize it;—
part of the project they announced, and part they kept back till the fitting
time should come.
The systematic extension of the Atchison Railroad may be divided into
four parts:
(1) The construction through Kansas to Colorado, to save the charter,
then down the valley of the Rio Grande to Albuquerque.
(2) The securing of a connection with the Pacific Coast by construction,
lease, or traffic agreement.
(3) The connection with the Gulf.
(4) The connection with Chicago.
As the system neared completion, and its territory came to be invaded
by other roads, there were added to this systematic extension what may be
called competitive extensions, consisting largely in the construction of
branch lines, and multiplied beyond anything which the country could need
for years to come. This sort of building was most prominent from 1884 to
1888 and will be considered in its place.
The first stretch of road was built with few difficulties or
complications. It was commenced in 1869, and, after numerous delays, it
reached the western border of the state of Kansas on December 28 of the
same year; from this point it went on more leisurely, first west and then
401
southwest, to Albuquerque. These early miles were paid for from the
proceeds of both stocks and bonds. From Albuquerque a variety of routes
presented themselves. The Southern Pacific had by that time built to El
Paso, and it was feasible to extend the Atchison to that point and to rely on
a traffic agreement for the handling of the western business. Or, building to
Deming near El Paso, Atchison might have extended its line down the river
valleys in the northwestern part of Mexico to Guaymas on the Gulf of
California. Or, Atchison might have built directly west from Albuquerque.
All three of these routes were considered, and all three were eventually
402
carried out.

The connection with the Southern Pacific was not a very difficult one
to make, and the Atchison reached Deming in March, 1881. By the traffic
agreement then concluded the Atchison secured the use of the Southern
Pacific tracks from Deming to Benson, Arizona, and arranged to build south
into Mexico from this point; while the Southern Pacific was allotted 51 per
403
cent of the through rate on traffic passing over Southern Pacific lines.
This formed the second through route from the East, and in September,
1881, it took one-quarter as much business as the Central Pacific. It was
also the first of Atchison’s projected routes to be completed. The line to
Guaymas was added by purchase. Instead of building, Atchison exchanged
its stock for the stock of the already existing Sonora Railroad in the
proportion of one to two, and guaranteed the interest on the Sonora first
404
mortgage 7 per cent bonds. This made up for the lack of an independent
line to the coast further north. The total of Sonora stock was $5,400,000,
requiring $2,700,000 Atchison stock in exchange. The total first mortgage 7
per cent bond issue was $4,050,000. With the railroad came a subsidy of
$2,608,200 (American gold), equal to $11,270 (Mexican) per mile. This
subsidy kept cropping up in Atchison finance for some time, and was finally
adjusted in 1896 by the transfer to the company of $1,159,800 in 3 per cent
bonds of the Mexican Interior Consolidated Debt.
For the direct route President Strong sought the help of the St. Louis &
San Francisco, and the use of the charter of the Atlantic & Pacific which it
owned. The Atlantic & Pacific was a road incorporated in 1886, with a
charter to build from St. Louis to California. In spite both of its charter and
of its name it had never gone further west than Vinita, in the northeast
405
corner of Indian Territory. President Strong and the Frisco now agreed to
continue construction under the name of the Atlantic & Pacific, both from
Vinita and from Albuquerque. The Atchison was to be given a half-interest
in the charter, directors were to be chosen equally from the two companies,
and the cost was to be met by a $25,000,000 loan, which the Atchison and
406
the Frisco were to guarantee jointly but not severally. Before the new
construction neared completion, however, the St. Louis & San Francisco
fell under the control of Messrs. Gould and Huntington, who, as owners of
the Texas & Pacific and the Southern Pacific respectively, naturally
disapproved of the plan to extend the Atlantic & Pacific to the coast. The

Atchison, therefore, agreed to build no further west than the Colorado
River. At that point the Southern Pacific was to meet it with a line from
Mojave. The Southern Pacific gave to the Atlantic & Pacific an interest
guarantee on its bonds to the extent of 25 per cent of the gross earnings
derived from Atlantic & Pacific through business, and the latter road
407
retained all its rights for a line in California. This proved unprofitable,
for the Southern Pacific persistently diverted traffic to Ogden and El Paso,
and in 1884 still another arrangement was made. By this—
(a) The Atlantic & Pacific bought the Southern Pacific division
between the Needles (the Colorado River) and Mojave, 242 miles, for
$30,000 per mile, and, until such time as title could be given by the
discharge of the mortgage upon it, took a lease at an annual rental of 6 per
cent on the purchase price.
(b) The Atlantic & Pacific secured trackage and traffic rights and
facilities between Mojave and Oakland and San Francisco, as well as the
use of terminals at the latter point.
(c) The Atchison (and the St. Louis & San Francisco likewise) agreed
to buy from the Pacific Improvement Company first mortgage bonds and
other securities of the Atlantic & Pacific of the par value of $3,096,768, at
the actual cost to the Improvement Company, to wit, $1,524,356.
To complete the connection to the coast the Atchison built from
Waterman, some seventy miles east of Mojave on the Atlantic & Pacific, to
Colton on the Southern Pacific, and secured control of the California
408
Southern from Colton to San Diego. In 1885 entrance was obtained to
Los Angeles by lease of the Southern Pacific track between Colton and that
409
city.
The money for this rapid progress was obtained by the sale of both
stocks and bonds, but on the whole stock predominated. The directors
rightly considered it much more conservative to issue stock and sell it at par
than to load the road down with a heavy debt in the shape of bonds; and
what is more, they were able to make good their word, and to sell stock at
or near par in spite of the risk incident to operations such as the Atchison
was conducting and the frequent bonuses or stock dividends declared.

By 1884, then, Atchison had reached the Pacific coast. The next great
steps were the extensions to Galveston and to Chicago. The year of entrance
to Los Angeles the Atchison did not cross the southern boundary of Kansas.
Certain of its stockholders were, however, unofficially interested in the
Gulf, Colorado & Santa Fe, which ran from Galveston on the south to the
Indian Territory on the north, roughly 200 miles. In 1884 a charter was
obtained for the Southern Kansas Railway Company, a corporation
organized solely to build south from Arkansas City. The same year the Gulf,
Colorado & Santa Fe obtained permission to stretch north. The two roads
410
met at Purcell in the summer of 1887. In 1886 the Gulf, Colorado &
Santa Fe was formally brought in. Gulf stock then amounted to $4,560,000
and bonds had been issued to a limit of $17,000 per mile. For the entire
capital stock, subject to the above encumbrance, Atchison agreed to pay
411
$8000 a mile in Atchison stock, par value. The final move was to get into
Chicago. “The Atchison Company has been much too conservative during
the last few years,” said the Chronicle, “and thus has allowed its territory to
be invaded.” The first intent was to build direct. There were incorporated, in
Illinois the Chicago, Santa Fe & California Railway Company, and in Iowa
the Chicago, Santa Fe & California Railway Company of Iowa. In 1887 the
Atchison was able to purchase the Chicago & St. Louis Railroad, between
412
Chicago and Streator, with a branch to Pekin, and to save itself
construction between these points. The whole line was opened for traffic in
413
May, 1888.
This completed Atchison’s systematic extensions before 1889. From a
local road in Kansas it had become a through route, taking freight over its
own rails from Chicago to Galveston and to the Pacific coast. But especially
in the latter eighties competition had become keen; and to its strategic
extensions Atchison was obliged to add competitive building on an
enormous scale. Of the 7000 miles in 1888, over 2700 had been added since
January, 1886, and had been built, not to tap new sources of traffic, but to
defend what was thought to be Atchison’s rightful territory by means of a
desperate war of rates. “About three or four years ago,” said a competent
observer, “a mania seized three great corporations (Atchison, Missouri
Pacific, and Rock Island) to gridiron Kansas with railroad iron, and each
tried hard to see which could cover the most ground, without regard to the

character of the ground, the result [being that] railroads were built where
414
they would not be required for ten years to come.” Such roads could not
be expected to pay, and in fact did not. Even in the case of better planned
extensions, the lines had to be built in an unopened territory, the traffic of
which had yet to be developed. In Indian Territory, Oklahoma, and Arizona,
the bulk of the country had less than two inhabitants to the square mile; in
New Mexico and Lower California only one-half of the area was more
thickly settled; and it was largely from this southwestern corner that local
traffic for the Atchison had to be built up.
The method of financiering these competitive extensions varied:
sometimes the parent company guaranteed the principal and interest of the
branch-line bonds; sometimes it took these into its treasury and issued
collateral bonds against them; sometimes, perhaps more frequently still, it
leased new roads for a rental equivalent to the annual interest on their
bonds. If the branches could have earned their fixed charges the burden on
the Atchison would have been nominal, but as in large part they could not it
was real and serious. In 1888 there were actually paid in rentals, interest on
Sonora Railway bonds, and on sundry railway bonds, $2,361,300. Large
sums were carried to capital account. In 1888 there was an accumulated
account of “due from sundry leased, controlled, and auxiliary roads in
construction and general account” (net) $13,558,678, including various cash
current construction and other charges, which was carried as an asset, but
which in reality consisted of advances from which there was little or no
hope of return. Besides the claims for interest the parent company had in
practice other claims to meet. Where a branch failed to earn operating
expenses, as often happened, sums had to be advanced to keep the road and
rolling stock in repair. Thus the item “due from auxiliary roads in current
traffic and operation accounts” amounted in 1888 to $1,008,554. Bills and
accounts payable the same year were $6,553,775, and accrued interest,
taxes, and sinking funds totalled $915,337. The following table shows
vividly the effect upon the system of the rapid extension of the years 1884
to 1888:

Total System
1884 1888
Mileage 2,799 7,010
Bonds 48,258,500 163,694,000

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

Whatever may be said as to the necessity of extension, it is evident that
the position of the system by 1888 had changed for the worse. This last-
named year was a bad one, it is true, but certain evils of which the directors
then complained were permanent, and should have been permanently
allowed for. Some realization of the fact that the Atchison might be going
too fast appeared in the financial journals of the time. “Were these
undertakings less solidly backed,” said the Railway Age, “there might be
415
apprehension that enterprise was being pushed too far and too fast.” But
on the whole the rapid growth and enormous extent of the system seem to
dazzle beholders. “The career of this company,” said the Railway Age again,
“has been one of the marvels of railway enterprise, and it would be unsafe
now to attempt to fix a limit to its extension or to the ambition of its
416
Napoleonic president and its bold and enterprising directors.”
In 1887 the directors increased the rate of dividend from 6 to 7 per
417
cent. The action was thoroughly unjustifiable, and the rate was speedily
again reduced. By the end of 1888 the main company was liable to be called
on any year to the extent of $8,625,365, which was the amount of interest
on auxiliary roads either guaranteed or payable as rentals. In four years the
mileage of the Atchison system had increased 150 per cent; its bonded
indebtedness 239 per cent; its fixed charges 216 per cent; and its gross
earnings only 69 per cent; while the deficits on its branch lines were
obviously not matters of bookkeeping, and the value of interchanged
business was not equal to the increased burdens which the subsidiary lines
imposed. The floating debt mounted up, as is usual in times of trouble.
From a total of $3,317,446 in 1884 it increased to $8,076,059 in 1888. To
offset it the directors secured in October, 1888, subscriptions to a
$10,000,000 issue of “guarantee fund,” three-year notes. Not all of the
amount authorized was to be sold at once, but from time to time Atchison
was to call on subscribers to take part of their subscription, and the notes

418
were to bear 6 per cent from the time they were put forth. For the rest,
the directors economized as much as possible. Salaries were cut 10 per cent
in every branch of the service, beginning with the president, and the
unlucky 7 per cent rate of dividend was reduced to 6 per cent, to 2 per cent,
and then to nothing at all in successive quarters. None of these expedients
proved sufficient. In fact, the situation was so critical that nothing short of a
general reorganization could probably have secured the radical reduction in
fixed charges which the company required.
In September, 1889, accordingly, Messrs. Libby, Abbott, Peabody, and
Baring were appointed a committee to consider the broad question of
419
financial and general reorganization, and in October a plan for the
complete rehabilitation of the company was brought forward. The
obligations with which the plan had to deal are indicated in the following
table:

Obligations of the Atchison Company in 1889
Principal Interest
Bonds, guarantee fund notes $160,786,000 $9,203,620.00
Contingent issue of additional bonds 775,000 38,750.00
Car trusts 1,445,660 86,739.60
$163,006,660 $9,329,109.60
Less interest on bonds and guarantee
fund notes owned by the Company 253,340.00
$9,075,769.60
Sinking Fund 359,000.00
Taxes 1,221,000.00
Rentals 502,000.00
$11,157,769.60

Of the bonds outstanding $56,498,000 were direct loans upon the
Atchison’s main lines, bearing anywhere from 4½ to 7 per cent, and
$104,288,000 were bonds upon some of the thirty-two subsidiary
corporations for whose obligations the Atchison was responsible.
The dealing of the Libby Committee with this situation was intelligent
and comprehensive. It proposed an increase and simplification of securities,
a decrease in fixed charges, and a cancellation of the floating debt. In place
of the forty-one classes of bonds outstanding it suggested that two grand
issues be put forth, one of 4 per cent general mortgage bonds to the amount

of $150,000,000, and one of 5 per cent income bonds to a total of
$80,000,000. From these issues $13,750,000 should be used to provide for
420
cash requirements, and the remainder should be employed in direct
retirement of old obligations. The exchange of some $216,000,000 of new
bonds for $163,000,000 of old was to mean an increase in securities
outstanding, but since interest on only part of the new bonds was to be
obligatory fixed charges were to be less than they had been before. The
managers figured on what the property could earn, good times or bad, and
capitalized this sum into 4 per cent general mortgage bonds. They then
calculated the difference between this and the former return to bondholders,
421
and capitalized the difference into income bonds. Each individual
bondholder, therefore, was offered a chance to receive the same return
which he had previously enjoyed, although his right to demand an annual
payment was limited to an amount which the road could earn.
A few points deserve to be specially noticed. The reduction in interest
was sufficient to have transformed the deficit for the whole Atchison system
for 1888 into a respectable surplus, providing that no dividends had been
paid; but this reduction was dependent on the retention of the income bonds
as optional obligations. There was no cash assessment. Had the
reorganization taken place in a time of general depression, the sale of
securities for cash would probably have been impossible, but the days of
depression had not yet arrived. The stockholder suffered in the introduction
of the principal of some $67,000,000 additional indebtedness between him
and his property, although he was not called upon directly; but it should not
be forgotten that for a long while the Atchison stockholders had received
very liberal dividends, both in stock and in cash, and could not well
complain of the moderate loss now necessary. There was no voting trust,
although one was proposed, and the bonds were not even temporarily given
voting power. The situation seems to have been that the securityholders
thought it more to their advantage to reduce voluntarily the rate of interest
than to force a foreclosure sale and take their chances; for the directors, in
submitting the plan, said that they felt it necessary “to state in the strongest
terms that the non-success of this proposal will inevitably result in
422
foreclosure, with all its attendant misfortunes.”

By the end of November, although the plan had not been promulgated
until well into October, more than one-half of the outstanding bonds had
assented, and the directors were enabled to announce success. Certain
changes in the management had already taken place. President Strong had
resigned in September, and had been succeeded by Mr. Allen Manville,
423
general manager of the St. Paul, Minneapolis & Manitoba Railway. Mr.
Reinhart was credited with a large part in the construction of the new plan
of 1889, and his later promotion may have been connected therewith.
After the reorganization Atchison resumed its policy of expansion, its
new directors being apparently as “bold and enterprising” as the old. In
1890 it took in the St. Louis & San Francisco, a road running from St. Louis
west and southwest through Missouri, Kansas, Arkansas, and Indian
Territory, connecting at Paris, Texas, with the Gulf, Colorado & Santa Fe,
and through half-ownership of the Atlantic & Pacific connecting
Albuquerque in New Mexico with Barstow in Southern California. The
total length of the Frisco system, exclusive of jointly owned roads, was
1329 miles, and this constituted the largest single acquisition that the
Atchison had ever made. The terms of the purchase were highly favorable
to the Frisco shareholders, but the benefits to the Atchison were less than
was expected. Although the consolidation removed certain difficulties
experienced from the joint ownership of the Atlantic & Pacific, and
although the united roads were in a better position to compete for
transcontinental and Gulf traffic than either of them had been before, the
Atchison directors were forced to announce in 1891 that, “with every
opportunity given it to work with advantage, the property (Frisco) has failed
to demonstrate its ability to carry itself financially and to liquidate its debts;
nor could it hope to obtain such results without the provision of New
Capital.... This is due largely to the absence of complete and proper
facilities and machinery with which to conduct operations in the nature of
Round Houses, Machine Shops, Stations and other buildings, improved
424
Bridges and Equipment.” A bond issue was needed, and was in fact put
forth,—the Atchison taking a goodly share.
Less important than this was the purchase, in 1890, of the Colorado
Midland, a road 346 miles long in Colorado, valued chiefly for its ore
traffic. In August, 1890, the Mexican Government resumed payment of the

425
Sonora subsidy, on which nothing had been paid for eight years. It does
not seem as if at any time after 1889 the Atchison enjoyed unalloyed
prosperity. The year 1890 showed an increase in net earnings of 48 per cent
according to the figures given, and the directors were unhappy until they
had increased the fixed charges to match, but the year 1891 recorded a
falling off, and 1892 showed a comparatively slight gain over the figures of
1891. There was obviously nothing in the reported figures to cause alarm,
but there was nothing which justified the payment of more than 2¾ per cent
any year on the income bonds, or of any dividends on the stock.
Toward the end of 1891 the guarantee fund notes fell due. They had
been issued, it will be remembered, to protect the property in 1888, and
were secured by an equal amount of general mortgage 4s; but now the
directors, disliking to put these 4s on the market at 83¼, decided to extend
426
the notes for two years at par with a cash commission of one per cent.
Extension of the guarantee fund notes did not increase the fixed
obligations, it merely postponed a reduction; but the conversion of the
income bonds of 1889 acted as a positive increase. There were $80,000,000
of these incomes, and it was in the optional character of payments upon
them that the saving of fixed charges by the reorganization of 1889 had
consisted. They had been issued instead of preferred stock probably because
more acceptable to the bondholders; but it was early found that their use
involved difficulties which had not been sufficiently regarded. By the
conditions of their indenture no bonds could be inserted between them and
the general mortgage 4s; they held a second lien for all time. But similarly it
was difficult to put bonds after them. Their lien was on income,—interest
was payable only when earned; any regular mortgage would of necessity
have taken precedence. The hindrance to new issues was real and serious,
and although some check on an aggressive management was salutary, yet
the system required additions and improvements from time to time which
could not be supplied from current income. Under these circumstances the
Atchison directors decided within three years to sacrifice the reduction in
fixed charges secured in 1889 in order to obtain new capital with greater
ease. “It is the opinion of the Management,” said the annual report for 1892,
“that the time has now arrived when all the obligations of the Company can
be returned to a Fixed Basis, sufficient funds provided to take care of all
Improvements ... required for at least four years, and at the same time the

junior Bonds and Capital Stock be restored to a more permanent market
value with assured returns on the first, and probable balances for the
427
latter.” “The Atchison plan of conversion,” said Mr. Reinhart, “... is the
completion of the reorganization plan put in effect October 18, 1889, and
428
returns the obligations of the company ... to a fixed and stable basis....”
The plan so cordially referred to provided for the issue of a new, second
mortgage, 4 per cent bond, and the exchange of this security for the
outstanding income bonds. The second mortgage was to be issued in two
classes:
(a) $80,000,000. These were to exchange for income 5s, par for par,
and bore a rate of interest which increased from 2½ per cent in 1892 to 4
per cent in 1896, and then remained at 4 per cent until maturity.
(b) $20,000,000. These bore 4 per cent and were to be issued in no
greater sum in any year than $5,000,000 for specific improvements on the
Atchison exclusive of the Colorado Midland or the St. Louis & San
Francisco. There was reserved to the company the right, when all the above
should have been exhausted, to issue more bonds of the same sort as in
class B for the same purposes and on the same mileage, up to a limit of
429
$50,000,000.
The conversion plan was approved at the annual meeting in 1892, and
was put into effect. The result was most unfortunate. The annual burden on
the company was increased at the very time when the panic of 1893 was
about to reduce railroad earnings, while the advantages of freer issues of
new bonds were of little account in a year when the sale of new securities
was practically impossible. Moreover, a new light was soon to be thrown on
the whole operation by disclosures of dishonest manipulation of figures in
the Atchison reports.
In 1892 and 1893 rumors of trouble were afloat, and were repeatedly
and vigorously denied by Mr. Reinhart, president of the Atchison Company.
Thus in June, 1893, this officer declared that “the Atchison, Topeka & Santa
Fe Railroad Company, strictly speaking, has no floating debt. Its current
430
liabilities are more than equalled by its current cash assets.” In December
Mr. Reinhart said again: “The interest on the General Mortgage Bonds of
the Atchison Company, due January 1, will be paid. It seems hardly

necessary to make this statement, because doubts as to its payment have, in
my judgment, been created solely by speculators who have no substantial
interest in the property.” These official denials did not carry conviction, but
opinions varied as to the seriousness of the situation. The Boston News
Bureau cheerily insisted that all the Atchison needed was “days of grace”
431
during the existing depression, while in England it was thought that the
432
rumors of a receivership were at most but premature.
At the end of the year President Reinhart went to Europe to float a loan.
On his return, after a failure to obtain subscriptions, a receivership was
applied for and granted. It had been hoped up to the very last moment that
the January interest could be met; but the refusal of English bondholders to
subscribe additional capital, the failure to place a third mortgage loan in the
United States, and the death of Director Magoun, one of the strong
influences in Atchison’s affairs, made a crash inevitable. Current
obligations had mounted to over $10,000,000, credit had disappeared, and
the railroad necessarily succumbed. The Atlantic & Pacific, the Colorado
Midland, the Gulf, Colorado & Santa Fe, and the Southern California lines
were not included in the Atchison receivership, though the Atchison
433
receivers were given like office in respect to the Atlantic & Pacific. The
Gulf, Colorado & Santa Fe announced that it would continue to operate its
434
own line, and was prepared to pay its current obligations as before.
No sooner was failure announced than committees of bondholders
sprang up. In Boston a committee was formed with six members, including
J. L. Thorndike and H. L. Higginson. In New York the Union Trust
Company, the Mercantile Trust Company, the New York Life Insurance
Company, Baring, Magoun & Co., and Giddes & Smith got together in a
committee, with Edward King as chairman. A second New York committee,
R. Somers Hayes, chairman, was formed by express invitation of the road.
A directors’ committee was organized, of which E. B. Cheney, Jr., was
chairman. The London holders of the second mortgage class A bonds
themselves formed a committee. Even before 1888 Englishmen had
invested heavily in Atchison, attracted perhaps by glowing stories of the
business to spring up across the western plains. It was said that not only had
they been influential in shaping the reorganization of 1889, but that from
that date to 1893 the management had been controlled by a board elected by

proxies entrusted to representatives of English interest. In particular
Englishmen had become interested in the second mortgage bonds of 1892,
successors to the income bonds of 1889, holding about one-half of the total
issue, and they now fought for the protection of this issue as against the
stock.
A plan of reorganization was early matured after the English influence
substantially as follows: Either the general mortgage or the second
mortgage bonds were to be foreclosed and a new company was to be
formed. If the foreclosure should be under the general mortgage, overdue
interest on that mortgage was not to be paid, and new securities, similar to
the existing bonds, were to be issued, bond for bond. If the foreclosure
should be under the second mortgage, the company was to provide for past
due interest, and was to assume the payment of principal and interest on the
general mortgage bonds. The capital stock was to remain as before. There
was to be a new income mortgage to the amount of $115,000,000, of which
$84,000,000 were to go for the existing second mortgage A bonds, and
$5,600,000 for the existing B bonds; the surplus to be given for
assessments, or for the securities of such auxiliary companies as it should
be thought advisable to acquire. These income bonds were to bear 5 per
cent and were to have voting power. There was to be a second mortgage, to
amount eventually to $35,000,000; of which $5,000,000 were to be used at
once to retire the floating debt and for other purposes, and $3,000,000 were
to be used each year for improvements. The new stock was to be held in
trust until 5 per cent per annum should have been paid in cash on the new
income bonds for three consecutive years. Finally there was to be an
assessment of $12 per share upon the stockholders, the proceeds of which
were to go as far as necessary to pay the debts of the old company,
435
including interest on the general mortgage.
On the whole, the scheme was to put the Atchison back to the condition
of 1889, and to regain the margin of safety afforded by the income bonds.
So far it was acceptable enough. Conservative officers had looked askance
at the income bond conversion in 1892, and this was a simple
acknowledgment of the mistake. The old difficulty as to future capital
requirements, moreover, was evaded by a provision for an annual increment
of second mortgage bonds to take precedence of the incomes. The notable
part of the scheme was the anxious care of the bondholders to protect

themselves. Since their bonds had been converted from income bonds less
than two years before they could not claim a large allowance for the
reconversion; but as a condition of their assent to this and to the
introduction of a second mortgage for $35,000,000 before their lien they
demanded not only a bonus of 5 per cent in the new incomes for their
holdings, but the grant of voting power to the income bonds, a stock
assessment of $12 per share, and the interposition of an additional
$5,000,000 of bonds between the stock and the property of which it was
nominally the possessor. “It is true,” said the Railway Review, “that the
scheme contemplates the issue of income bonds which shall be given to
assenting stockholders at par in return for the cash assessment, but it is a
little difficult to see wherein such bonds are of very much more value than
436
the stock of the company except that they are not subject to assessment.”
The reception of the plan was what might have been expected. On July 30,
in London, the London bondholders’ committee met and passed a resolution
in its favor. Having now secured, they said in substance, the substantial
features for which they had contended, and although the plan was not
altogether what they could have desired, they considered, after very
prolonged and anxious negotiations, that a plan had been arrived at which
437
was the best obtainable in the interests of bondholders. Meanwhile
meetings of stockholders were held in New York in protest. Resolutions
were adopted condemning the plan, and a stockholders’ committee was
438
chosen.
Debate was stopped by the publication in August of the report of an
expert who had been selected to examine the books of the Atchison
Company. Few more disgraceful instances of the juggling of figures have
been brought to light in the history of American railroad finance. Whereas
the reports of the company had shown net earnings steadily increasing from
$7,600,000 in 1890 to $12,100,000 in 1893, being ample to meet existing
charges and to pay from 2 to 2¾ per cent on the income bonds besides to
the time of their conversion, Mr. Little, the expert, reported that the net
earnings had never exceeded $8,085,608; and maintained that an annual
deficit had occurred each year from 1894, which reached the portentous
amount of $3,000,000 for 1891 alone. The condition of the company was
far worse than had been imagined, and all plans had to be thoroughly recast.
The following is an abstract of the report in question:

“I have already advised you verbally,” said Mr. Little, “that income
was, in my judgment, overstated in these several years (since ’89), to the
extent of $7,000,000 or more, and I now confirm this specifically. These
overstatements may be classified as follows:
“(1) Rebates. For the four years ending June 30, 1894, the debits for
rebates to shippers on the Atchison system aggregated $3,700,776, and on
the St. Louis & San Francisco system $205,879, or a total of $3,906,656.
“This sum was charged, not to the earnings from whence it came, as it
should have been, but to an account entitled, ‘Auditor’s Suspended Account-
Special,’ and was reported from year to year as a good and available asset,
while in fact it had no value whatsoever.
“(2) Additions to Earnings and Deductions from Expenses. Next in
order of importance to the rebate account comes an aggregate of
$2,791,000, which, on instructions from the East, was credited from time to
time to the earnings and expenses respectively, but which credit has no
foundation in fact. Of this aggregate $2,010,000 was added to earnings and
$781,000 deducted from operating expenses, the sum of the two being
debited to ‘Auditor’s Suspended Account.’
“(3) Improvements. The sum of $488,000 was in the period under
consideration transferred, improperly as I contend, from Operating
Expenses to Improvements or Capital Account, these Improvements being
finally closed into the account of Franchises and Property, which represents
the cost of the road and property.
“(4) Traffic Balances. It further appears that a traffic agreement for a
division of business was formed in November, 1890 (running to July, 1891),
between the Atchison Company and certain other companies, whereby such
other companies were charged with a balance of $305,843, which the
Atchison Company was unable to collect, and which is absolutely
uncollectable, and should have been heretofore written off, though it still
stands as an asset, and hence must be written to the debit of profit and
439
loss.”
Two facts appear from these charges on which emphasis was laid from
different points of view: (1) That for four years the Atchison had been
persistently violating the law by the granting of rebates. (2) That to conceal

these rebates, and for other purposes, the books had been so systematically
falsified as to defy detection, and to deceive not only the investing public
but the whole railroad world. The report was handed to Mr. Reinhart, and an
answer was requested by the following day. The answer was made, and
proved inadequate; for though Mr. Reinhart pointed out some half-dozen
items which he argued that Mr. Little had wrongly excluded, he explained
440
no one of the charges directly brought against him. There is no doubt at
the present time that Mr. Reinhart was guilty, though perhaps because of the
difficulty of fixing legal responsibility he was never prosecuted for
falsification of the books. He resigned, of course, and Major Aldace F.
Walker was appointed receiver in his stead. Two months later he was
indicted with other officers of the company and certain shippers, not for
falsifying the books, but for the illegal granting of rebates. His defence was
that he had been, at the time the rebates were given, only the general auditor
at Boston, and had had no part in the fiscal or executive business of the
441
road. The Government failed to prove connection, and the case fell
through.
All this completely altered the requirements to be met by a
reorganization plan. A more sweeping reduction in charges, and a more
general distribution of losses was needed than before had been the case. Old
proposals were laid aside once and for all, and a new scheme was built up
from the beginning. The mortgage indebtedness of the Atchison in 1895
was $233,595,247, of which the first and second mortgage bonds comprised
$217,258,276. The reorganization of 1889 had done its work in one respect
at least, and the reorganization managers were able to concentrate their
attention on two issues. The annual net earnings, according to the
company’s reports had been:

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

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

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

1894 5,956,615

Inasmuch as Mr. Little had discovered annual deficits of

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

it was very evident that a reduction in interest charges was called for. As in
1889 the salvation of the company was sought in the substitution of
securities on which payment was optional for securities bearing an
obligatory charge.
Soon after Mr. Little’s final report in November three of the existing
committees, namely, the General Reorganization Committee, the London
Committee, and Messrs. Hope & Co. of Amsterdam, joined in a Joint
442
Executive Reorganization Committee, with Edward King as chairman.
With these now worked a committee chosen by the directors themselves.
The result was a reorganization plan under date of March 14, 1895. The
purposes announced were:
(a) To reduce fixed charges to a safe limit;
(b) To make adequate provision for future capital requirements, subject
to proper restrictions as to issue of bonds for this purpose;
(c) To liquidate the floating debt, and to make adequate provision for
existing prior lien indebtedness shortly to mature;
(d) To reinstate existing securities upon equitable terms in their order of
priority;
(e) To consolidate and unify the system (so far as practicable) and thus
to save large annual expense.
It was proposed to foreclose the Atchison general mortgage ... and to
vest in a railway company the bonds, stocks, and other properties of the
existing company, acquired at foreclosure sale or otherwise. The new
company was to issue:

(a) Common Stock $102,000,000
(b) Five per cent non-cumulative preferred stock 111,486,000

(c) General mortgage 4 per cent bonds 96,990,582
(d) Adjustment 4 per cent bonds 443
51,728,310

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

should be vested in the new company, and also any other property which
might be acquired by use of any of the new bonds, but the Joint Executive
Committee might, in its discretion, except from the new general mortgage
the stocks and bonds deposited under the existing general mortgage,
representing branch lines, the operation of which should be found to be
unprofitable and an unnecessary burden to the system. A voting trust was
considered, but was rejected as unsatisfactory; and the committee confined
its efforts to the securing of the best possible management.

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

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

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

The estimated cash requirements were:

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

This reorganization had certain interesting features. As before
remarked, it sought, as did the reorganization of 1889, to replace securities,
the interest on which was a fixed charge, by securities on which payment of
interest or dividends should be optional. But whereas the earlier
reorganization had depended on income bonds, this plan included both
income bonds and preferred stock. There are several reasons why preferred
stock is preferable to income bonds, and it will be remembered that a
peculiar difficulty experienced from the income bonds of 1889 had arisen
from the impossibility of putting other mortgages ahead of them; yet that

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

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

November, 1894, and no further obstacle to reorganization was
encountered.
Practically all of the assessments were paid in by September 21. On
November 25 Mr. E. P. Ripley was elected president, and in the first week
of December, 1895, Mr. Aldace F. Walker was elected chairman of the
board of directors of the new company. On December 10, 1895, the
property and franchises of the Atchison were sold at foreclosure, and were
purchased for $60,000,000 by Edward King, Charles C. Beaman, and Victor
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Morawetz, representing the reorganization committee. The Atchison,
Topeka & Santa Fe Railroad Company was then organized by the
purchasers pursuant to the laws of Kansas, under a certificate of
incorporation dated December 12, 1895. A board of directors was elected,
and by-laws were adopted. The entire estate embraced in the foreclosure
sale was duly conveyed by deed of the same date as the incorporation of the
company, in consideration of which the company executed a delivery to the
Joint Executive Reorganization Committee of the securities acquired under
the plan of reorganization. Certain subsidiary roads were subsequently
foreclosed and bought in, notably the Atlantic & Pacific and the Chicago,
Santa Fe & California. The St. Louis & San Francisco was not so bought in.
“The question of retaining the St. Louis & San Francisco as a part of the
Atchison system,” said the annual report of 1896, “received very careful
consideration from the Directors.... A series of conferences was held, which
resulted in the matter ultimately presenting the alternative of the sale of our
existing interest upon favorable terms, or the purchase by us of all other
outstanding interests upon terms involving the outlay of a very large
amount of both cash and securities. While the future control of that road
was regarded as important, the financial considerations affecting the
situation prevailed, and the sale was decided on the whole to be more
prudent than the purchase.” “With the acquisition of the Frisco,” said Mr.
Fleming of the Joint Executive Committee, “the fixed charges on the
Atchison system of 7780 miles would have been increased from $7000 to
$9000 per mile. Atchison is financially much stronger without Frisco.”
This ends that part of the history of the Atchison Company which can
be connected with either of its reorganizations. From 1895 to the present
time the Atchison has enjoyed a rapidly increasing prosperity, due in part to
the lightening of the charges upon it, in part to able management, and in

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

shorter route from California to Eastern Kansas. A still more noteworthy
project is under consideration for a road to join the Gulf, Colorado & Santa
Fe at Brownwood with the Belen line at Texico, and to open direct
connection over the Atchison from California to the Gulf.
Briefly stated, the Atchison’s mileage has increased from 6479 miles in
1897, to 9273 in 1907. Its gross earnings have grown from $30,621,230 to
$93,683,407; its net earnings from $7,754,041 to $32,153,692; and its
surplus above all charges from $1,452,446 to $21,168,724. This marvellous
showing has been accompanied by heavy expenditures for improvements,
so that the physical condition of the system is much better than before.
Operating expenses, fixed charges, and taxes took less than 77 per cent of
gross income in 1907, and a decline of over $21,000,000 can be suffered in
net before interest on even the adjustment bonds becomes imperilled. It is
not to be wondered at that Mr. Harriman saw fit to invest $10,395,000 of
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Union Pacific money in Atchison preferred stock in 1906, nor that
dividends of 5 per cent on preferred, and 5 per cent on common stock are
being paid. The Atchison owns 1791 locomotives instead of 953 as in 1897;
1135 passenger cars instead of 622; 49,770 freight cars instead of 26,776.
There has been a large increase in the capacity and power of rolling stock.
The average freight train load has increased from 131 to 320 tons. Freight
train mileage has grown but 35 per cent, while ton mileage has more than
tripled. Thus, although the average length of haul has increased and the
average receipts per ton mile have diminished, the earnings per freight train
mile are actually more than double in 1907 what they were in 1897. And,
finally, the Atchison is not dependent for its revenue upon any single kind
of business. Coal, ore, and other mineral products yielded but 30.87 per
cent of its tonnage in 1907; products of agriculture 25.34 per cent;
manufactures 17.37 per cent; and products of the forest 12.12 per cent.
The capital account, meanwhile, has been kept from undue expansion.
The funded debt has increased from $174,196,750 in 1897 to $284,171,550
in 1907, but the capital stock has decreased somewhat, and the greater part
of the new bond issues have been convertible serial debenture bonds, which
occasion no permanent increase in charges. It is within the last two years
only that Atchison stockholders have authorized the issue of new capital on
a scale commensurate with the growth of their property. In 1906
$26,060,000 in 4 per cent convertible bonds were offered to them at par,

and this last year they have authorized the issue of $98,000,000 of common
stock for improvements, extensions, and the like. This provides ample
facilities for the future without endangering the solvency of the road.

CHAPTER VII

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

The construction of the Union Pacific was made possible by direct grants of
lands and government bonds by Congress. The motive for the project was
military and political as well as economic; on the one hand California was
to be cemented to the Union, and aggression on the part of England was to
be forestalled; on the other a great and fertile territory was to be opened and
an additional market provided for the products of the East.
In 1862 the first act “to aid in the construction of a Railroad and
Telegraph Line from the Missouri River to the Pacific Ocean, and to secure
to the Government the Use of the same for Postal, Military, and Other
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Purposes” was passed. . It created a corporation to be known as the Union
Pacific Railroad Company, with a capital of 100,000 shares of $1000 each,
and authorized it to construct a railroad from the one hundredth meridian of
longitude west from Greenwich at a point within the territory of Nebraska
westward to the western boundary of the territory of Nevada. It granted the
right of way, and in addition five additional sections per mile on each side
of the track, plus a varying amount of United States bonds per mile, the use
and delivery of which was to constitute a first mortgage on the property of
the company. All compensation for services rendered to the Government
was to be applied to the payment of these bonds and interest thereon; and
after the road was completed, until the bonds and interest should have been

paid, at least 5 per cent of the net earnings of the road was to be annually
applied to the payment thereof. The directors were to be not less than fifteen
in number, of whom two were to be appointed by the President of the
United States. It was hoped that the offer would be sufficient to attract
private capital to the undertaking, and when it failed in this, the
inducements were increased. The Act of 1864 amended that of 1862. It
reduced the par value of the shares of stock from $1000 to $100, and
increased their number from 100,000 to 1,000,000. It increased the land
grant from five to ten alternate sections per mile, and subordinated the
government lien to the rank of a second mortgage. Only one-half the
compensation for services rendered for the Government was required to be
applied to the payment of the bonds issued by the Government. The
directors were to be twenty in number, of whom five were to be appointed
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by the Federal President.
It was under these main provisions that the Union Pacific Railroad was
constructed. In their final shape they were intended to provide for the
greater part of the cost of construction, while allowing the company to
supply deficiencies by the issue of its own first mortgage bonds.
Capitalization under these conditions would not have been excessive; the
Government’s investment would have redounded unmistakably to its own
benefit, as well as to that of the country, and the corporation would have
looked forward to a long and prosperous career. Three things interfered to
swell the cost of the construction of the road, and with that its
capitalization: First, construction was carried on during a time of high
prices, swollen not only by depreciation of the currency, but by artificial
conditions occasioned by the war; second, the normal level of the prices
paid was raised by the speed with which the road was completed; third,
construction was entrusted to a construction company, the famous Crédit
Mobilier.
In its comparison of the prices of the years 1864–9, with those of 1860,
the Aldrich Committee arrived, in 1893, at the following result:

Metals &
Implements
Bar Iron Rails, exc. Pocket
Year Food Rolled Iron Knives All Articles
1864 165.8 249.3 262.5 198.0 190.5