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HARVARD UNIVERSITY
CAMBRIDGE, MASS., U.S.A.
HARVARD ECONOMIC STUDIES
PUBLISHED UNDER THE DIRECTION OF
THE DEPARTMENT OF ECONOMICS
[Illustration]
VOL. IV
RAILROAD
REORGANIZATION
BY
STUART DAGGETT, PH.D.
INSTRUCTOR IN ECONOMICS IN HARVARD UNIVERSITY
[Illustration]
BOSTON AND NEW YORK
HOUGHTON, MIFFLIN AND COMPANY
The Riverside Press, Cambridge
1908
COPYRIGHT 1908 BY THE PRESIDENT AND FELLOWS OF HARVARD COLLEGE
ALL RIGHTS RESERVED
_Published May 1908_
PREFACE
It sometimes happens that experiences long since past seem to be
repeated, and that knowledge apparently forgotten proves again of
service. This is illustrated by the subject of railroad reorganization.
In the years between 1893 and 1899 an imposing group of American
railroads passed into receivers’ hands. In 1893 alone more than 27,000
miles, with an aggregate capitalization of almost $2,000,000,000,
were taken over by the courts, and in the following years the amount
was largely increased. Foreclosure sales aggregated 10,446 miles in
1895, 12,355 in 1896, and 40,503 between 1894 and 1898. Among the more
important failures were those of the Richmond & West Point Terminal,
the Reading, the Erie, the Northern Pacific, the Atchison, and the
Baltimore & Ohio;—to say nothing of the Norfolk & Western, the
Louisville, New Albany & Chicago, the Ann Arbor, the Seattle, Lake
Shore & Eastern, the Pecos Valley, and many other smaller lines.
The railroads which failed between 1893 and 1898 were subsequently
reorganized. In order to restore the equilibrium between income and
outgo the companies turned to their creditors, and demanded the
surrender of a part of the rights of which bondholders were then
possessed. This demand the creditors were forced to concede. Some
of them yielded without legal compulsion, assenting to “voluntary
reorganizations”; some insisted upon the sale of the property securing
their loans, but without escaping the loss which fell upon their more
pliant associates. Much injustice to individuals came to light at this
time. Men who had invested in good faith were obliged to sacrifice
their holdings through no fault of their own. The savings of years were
swept away. The demand of the railroads was one, nevertheless, which
the courts supported, and rightly. The companies could not be operated
unless the creditors were deprived of part of their legal rights. At
the same time, these rights no longer had a material basis on which to
rest, and their surrender meant but the recognition of a loss which had
already taken place.
Most of the reorganizations were completed by the year 1899. Since
that date the improvement in railroad earnings has been marvellous.
Gross earnings from operation were $1,300,000,000 in 1899, they were
$2,300,000,000 in 1906, the last year for which the figures of the
Interstate Commerce Commission are at present available. Total income,
after the deduction of operating expenses, was $605,000,000 in 1899,
and $1,046,000,000 in 1906. It is not to be wondered at that the
distress of the years 1893–9 has not been duplicated during the years
1900–7. On the contrary, weak roads have had opportunity to strengthen
their positions, and strong ones have spent enormous sums for
improvements, and have declared liberal dividends besides. In no year
save 1905 has the new mileage put into receivers’ hands been greater
than 800 miles, and in but one has the mileage sold at foreclosure
equalled that figure. Operating expenses have increased because the
amount of business has exceeded the ability of the railroads to handle
it. Equipment has been so inadequate as to provoke drastic legislation
by the legislatures of many states; yards and terminals have been
crowded until a prominent railroad officer has declared the expenditure
of over five billion dollars to be necessary to restore the equilibrium
between facilities and traffic.
These conditions have caused the earlier problems of failure and
reorganization to be lost to view. Nevertheless, the financial panic
of October, 1907, and the recession in activity which has become more
and more apparent since that time, have again brought these problems
forward. The Seaboard Air Line, one of the important railroad systems
of the South, failed on January 5, 1908. The Chicago Great Western
followed three days later. The Detroit, Toledo & Ironton, the Chicago,
Cincinnati & Louisville, the International & Great Northern, the
Western Maryland, and the Macon & Birmingham have since been put in
receivers’ hands. In all, the operation of 5938 miles of railroad,
with a capitalization of nearly $415,000,000, and total liabilities of
$462,000,000, has been taken over by the courts during the first ten
weeks of 1908. Whether this is but the beginning of still more extended
trouble it is of course impossible to say. There are a number of weak
lines in the American railroad system, and the difficulty in obtaining
credit is bound to reveal weaknesses where they exist. At present new
loans have for some months been difficult to obtain, and even strong
railroads have resorted to the issue of short time notes. The Erie,
indeed, escaped bankruptcy on April 8, 1908, only through the timely
aid of important bankers who took up its maturing notes. This points
to serious consequences for the weaker lines. It is true, on the other
hand, that American railroads are generally in better financial and
physical condition than they were in 1893. It is not probable that any
railroad collapse will be so widespread now as it was then. Whether
this be so or not, the failure of nearly 6000 miles of railroad in ten
weeks invests reorganization problems at present with an importance
which they have not had for ten years. How, it will be asked, shall
the financial operations necessary to reorganization be performed?
What methods shall be adopted, what dangers avoided, and what results
expected?
The experience of earlier years will provide answers to many of the
questions asked in 1908. In the hope, therefore, that a study of
railroad reorganization, on which the author has been intermittently
engaged during the last six years, will prove of service, the following
pages have been published. They discuss in some detail the financial
history of the seven most important railroads which failed from 1892–6,
and that of one railroad, the Rock Island, which was reorganized in
1902; and summarize in a final chapter the characteristics of the
various reorganizations in which these roads have become involved.
In some respects the history of each road considered is peculiar
unto itself. The Reading had coal to sell, the Atchison did not. The
Southern ran through a sparsely settled country, the Baltimore & Ohio
through a thickly settled one. The Erie has never recovered from the
campaigns of Gould, Drew, and Fisk from 1864–72, the Northern Pacific
was not opened until 1883. In other respects, however, the roads have
had much in common. Excepting only the Rock Island, each of them has
found itself at one time or another unable to pay its debts, and has
had to seek measures of relief. The problems of the different companies
at these times have been strikingly alike. However caused, their
financial difficulties have been expressed in high fixed charges, and,
usually, in excessive floating debts. Greater annual obligations have
been assumed than the roads could meet, and current liabilities have
accumulated while pressing demands have been satisfied. To this state
of affairs the remedy has been sought in comprehensive exchanges of old
securities for new. The exchanges, it is true, have been carried out
in different ways, and the collateral expedients employed have not been
the same. To similar problems different solutions have been applied.
It is possible, for this very reason, for a careful study of the
alternative reorganization methods which have been developed to point
out some policies which have been dangerous, and to make clear others
which are both just, and likely to be successful. Such a study also
throws light upon the history of the companies upon which it is based.
For the way in which the different roads have been handled, the
reader is referred to the text. The order of treatment is very
roughly determined by geographical location; that is, the Eastern
roads are first considered, then the Southern, and then the Western.
Each chapter, except the last, should be examined as a “case” in
reorganization experience, and as part, therefore, of a united whole.
No one has been so continuously with his work as the author himself,
and no one can more keenly realize its defects. It is offered as a
contribution in a field in which very little has as yet been done,
and it is hoped that it will prove of value to those concerned with
reorganization plans, as well as to those interested in the development
of corporation finance during the last generation.
Without the unselfish and intelligent assistance of the writer’s
Mother, the preparation of this book would have been long delayed. To
her, first of all, thanks are due. To Professor William Z. Ripley, of
Harvard University, should be made warm acknowledgment of his constant
interest and helpful suggestions. To the Carnegie Institution the
author is indebted for grants in aid of research in this special field.
Grateful acknowledgment should also be made of gifts by friends of the
University to cover the expenses of publication.
CONTENTS
CHAPTER I
BALTIMORE & OHIO 1
Early history—Extension to Chicago—Trunk-line rate wars—Effect on
the company—Extension to New York—Sale of bonds to pay off floating
debt—Unsatisfactory traffic conditions—Receivership—Mr. Little’s
report—Reorganization—Subsequent history.
CHAPTER II
ERIE 34
Early history—Reorganization—Wall Street struggles—Financial
difficulties—Second reorganization—Development of coal business
—Extension to Chicago—Grant & Ward—Financial readjustment—New
York, Pennsylvania & Ohio—Third reorganization—Later history.
CHAPTER III
PHILADELPHIA & READING 75
Early history—Purchase of coal lands—Funding of floating debt—
Failure—Struggles between Gowen and his opponents—Reorganization—
Second failure and reorganization.
CHAPTER IV
PHILADELPHIA & READING 118
Difficulties of the Coal & Iron Company—McLeod’s policy of extension—
Collapse of this policy—Failure of company—Summary of subsequent
history.
CHAPTER V
THE SOUTHERN 146
Richmond & Danville—East Tennessee, Virginia & Georgia—Formation
of the Southern Railway Security Company—Growth and combinations—
Failure and reorganization of the East Tennessee—Reversal of
position between the Richmond & Danville and the Richmond & West
Point Terminal—Acquisition of the Central of Georgia—Failure and
reorganization of the whole system—Subsequent development.
CHAPTER VI
ATCHISON, TOPEKA & SANTA FE 192
Charter—Strategic extensions—Competitive extensions—Effect
on finances—Raise in rate of dividend—Reorganization of
1889—Acquisition of the St. Louis & San Francisco and of the
Colorado Midland—Income bond conversion—Receivership—English
reorganization plan—Mr. Little’s report—Final reorganization plan—
Sale—Subsequent history.
CHAPTER VII
UNION PACIFIC 220
Acts of 1862 and 1864—High cost of construction—Forced combination
with the Kansas Pacific and the Denver Pacific—Unprofitable branches
—Adams’s administration—Financial difficulties—Debt to the
Government—Receivership and reorganization—Later history.
CHAPTER VIII
NORTHERN PACIFIC 263
Act of 1864—Failure and reorganization—Extension into the Northwest—
Villard and the Oregon & Transcontinental Company—Lack of prosperity
—Refunding mortgage—Lease of Wisconsin Central—Financial
difficulties—Receivership—Legal complications—Reorganization—
Subsequent history.
CHAPTER IX
ROCK ISLAND 311
Charter—Early prosperity—Reorganization of 1880—Conservative policy
—Extension—Pays dividends throughout the nineties—Moores obtain
control—Reorganization of 1902—Further extensions—Impaired credit
of the company.
CHAPTER X
CONCLUSION 334
Definition of railroad reorganization—Causes of the financial
difficulties of railroads—Unrestricted capitalization and
unrestricted competition—Problem of cash requirements—Problem of
fixed charges—Distribution of losses—Capitalization before and
after—Value of securities before and after—Provision for future
capital requirements—Voting trusts—Summary.
RAILROAD REORGANIZATION
CHAPTER I
BALTIMORE & OHIO
Early history—Extension to Chicago—Trunk-line rate wars—Effect
on the company—Extension to New York—Sale of bonds to pay off
floating debt—Unsatisfactory traffic conditions—Receivership—
Mr. Little’s report—Reorganization—Subsequent history.
The Baltimore & Ohio Railroad was the first important railway company
to be incorporated in the United States. It was designed to aid the
city of Baltimore in securing the Western trade, and not only private
citizens but the city of Baltimore and the state of Maryland early
subscribed to its stock. When in the course of construction it became
expedient to extend into Virginia, the city of Wheeling and the state
of Virginia likewise subscribed, though the action of the latter was
subsequently withdrawn.[1] As a result the funds required for first
construction were obtained from the sale of stocks instead of bonds.
In 1844, seventeen years after the granting of the charter, the annual
report showed $7,000,000 in stock as against $985,000 in 6 per cent
bonds; while in 1849, though the loans had been increased, they yet
stood in the proportion of one to two.[2]
On December 1, 1831, the first train was run over the line, then 72½
miles in length.[3] The early history of the road does not much concern
us. It was one of steady growth, not through an unsettled territory,
as with our Western roads, but through a country the industries of
which were already established. Tracks led, not into prairies, but
to populous cities; and the future of the company, once the initial
difficulties should have been overcome, was at no time uncertain. Thus
extension to Cumberland increased the gross receipts from $426,492
to $575,235, and that to Wheeling in 1853 likewise brought a great
increase in traffic.
The Civil War bore upon the Baltimore & Ohio heavily because of the
peculiar location of its mileage. On May 28, 1861, possession was
taken by the Confederates of more than one hundred miles of the main
stem, embracing chiefly the region between the Point of Rocks and
Cumberland.[4] Government protection was temporarily restored in 1862,
but raids occurred until the end of the war. Each time the Confederates
occupied the line they tore it up, and as soon as they retired the
company hastened to make repairs. The road did not default. A portion
of the track yielded a revenue from first to last, and presumably the
Government paid generously for the transportation of its troops.
It was after the Civil War that the real history of the road began. The
key-note was competition;—competition of the fiercest sort between
parallel lines from Chicago to the seaboard, intensified by the rivalry
of the great seaboard cities, and involving traffic in both directions.
The decade 1850–60 had seen the extension of Eastern roads to Western
connections. In 1851 the Erie had reached Lake Erie; in 1853 the New
York Central and Lake Shore, and in 1855 the Pennsylvania and Fort
Wayne had opened continuous routes from the Atlantic to Chicago. In
1857 the Baltimore & Ohio had obtained connection with Cincinnati
and St. Louis; and in 1858 the Grand Trunk had arrived at Sarnia on
its way from Portland to Chicago. After the Civil War there was both
consolidation and extension. The New York Central was united with the
Hudson River, and the Pennsylvania leased the Pittsburgh, Fort Wayne
& Chicago in 1869. The Baltimore & Ohio reached Chicago in 1874, and
the lines which in April, 1880, were consolidated into the Chicago &
Grand Trunk were completed between Port Huron and Chicago in February
of that year. The completion of these through routes opened the way for
very bitter competition. Five independent lines struggled for Chicago
business, and all of them were prepared to cut rates deeply in order
to test their rivals’ strength. In particular the Baltimore & Ohio was
aggressive. “At the time of its [Chicago branch] opening,” said Mr.
Blanchard before the Hepburn Committee, “it was heralded all over the
Northwest as a ‘Relief for the Farmer,’ ‘the Grangers’ Friend,’ and all
other sorts of headlines were put into the Chicago and Northwestern
papers; and President Garrett’s public utterances, and those to his
Board, were filled with enough statements to show what he intended to
do.... I heard him [say] that upon the completion of his lines, like
another Samson, he could pull down the temple of rates upon the heads
of these other trunk lines.”[5]
Under these circumstances a dispute between the Baltimore & Ohio and
the Pennsylvania in 1874 over the former’s connection with New York
had far-reaching consequences.[6] The Pennsylvania refused to carry
Baltimore & Ohio cars over its line north from Philadelphia, and as a
retaliatory measure the Baltimore & Ohio reduced passenger fares from
Washington and Baltimore to Western points from 25 to 40 per cent.[7]
The reduction in rates thus begun inaugurated the first of the great
railroad wars. The cuts soon extended to east-bound passengers and to
freight, and forced corresponding cuts on the Pennsylvania, the Lake
Shore & Michigan Southern, the Michigan Central, the New York Central,
and the Erie. Rates on fourth class and grain from Chicago to New
York, which had been 60 cents per 100 pounds in December, 1873, and
40 cents in December, 1874, fell to 30 cents in March, 1875. Rates on
special, or sixth class,[8] went as low as 12 cents from Baltimore and
Philadelphia to Chicago. Passenger fares from Chicago to Baltimore and
Washington were reduced from $19 to $9, to Philadelphia from $19 to
$12, to New York from $22 to $15, and to Boston from $22 to $15. The
New York Central and the Erie quoted fares from New York to Chicago
of $18 and to St. Louis of $20, and the Baltimore & Ohio replied by
a cut to $16.25 to Chicago. In April, 1875, the Baltimore & Ohio cut
freight rates from Cumberland to Baltimore over 50 per cent on the four
regular classes, and the Pennsylvania at once announced still greater
reductions.[9]
The effect of this warfare on railroad revenues was sufficiently
serious to cause the Baltimore & Ohio to recede somewhat from
its independent position and to enter into negotiations with the
Pennsylvania;[10] but the terms of the resulting agreement proved
unsatisfactory to the other trunk lines, and no general pacification
was obtained. Late in 1875 rates nevertheless generally advanced,
and in December a general agreement was concluded, followed by a
general increase. This agreement was again hopelessly disrupted by the
following April, when cuts in east-bound rates followed each other with
rapidity. The published rates on grain, which had been 45 cents at the
beginning of March, 1876, fell to 40 cents on March 7, 35 cents on
April 13, 22½ cents on April 25, and 20 cents on May 5. In June rates
on west-bound freight fell to 25 cents first class to Chicago, and 16
cents fourth and fifth class, actual rates going much lower; and it
was possible to travel from New York to Chicago first class for $13.[11]
Warfare between railroads became intensified by the competition between
the cities which the railroads served, and by 1876 the question of
relative rates to New York, Philadelphia, and Baltimore had grown to be
of primary importance.[12] By an agreement in 1869 Baltimore had been
given a differential on east-bound freight of 10 cents per 100 pounds,
which had been reduced to 5 cents on grain in 1870. On west-bound
freight Baltimore had enjoyed a differential in 1875 which had ranged
from 10 cents on first class to 5 cents on special class freight, and
Philadelphia one which had been 2 cents less except on first class,
where the Philadelphia differential had been 3 cents less than that to
Baltimore. A temporary agreement of March, 1876, had replaced these
allowances by differentials of 13 per cent in favor of Baltimore and 10
per cent in favor of Philadelphia as against New York. This relation
was fought over in the rate war of 1876. In December of that year
another agreement was reached on the basis of equal rates from Western
points to Europe on export traffic via all four competing seaboard
cities, and reduced percentage differentials on local traffic to those
cities; but this proved temporary, the subsequent advances in rates
were not general, and final agreement was not secured until April,
1877. The contract then executed was in the nature of a compromise.
The differential to Baltimore was reduced from 13 per cent to 3 cents,
and from Philadelphia from 10 per cent to 2 cents, to apply equally
to local and to export traffic. Rates to Boston were at no time to be
less than those to New York. Differentials on west-bound traffic were
to be the same as those on east-bound on third class, fourth class, and
special freight, and on first and second classes to be 8 cents less per
hundred from Baltimore and 6 cents less from Philadelphia than from New
York.[13]
The years following the agreement of 1877 were marked by low and
fluctuating rates, extensive cutting under the published schedules,
and frequent attempts at pooling and at apportionment of traffic. At a
meeting at Chicago on December 19, 1878, tariff rates were agreed upon
by all lines, but the existence of time contracts depressed receipts
for months thereafter. Another meeting on May 8 was followed by sharp
competition. In June an agreement to raise rates was made, but proved
unsatisfactory owing to long time contracts. “During the period between
December 18, 1878, and July 5, 1879,” said Mr. King in a letter to the
Trunk-Line Arbitrators on July 17, 1879, “the Baltimore & Ohio Company
has practically been out of the market, on account of the low rates by
the Northern lines. It has not secured enough east-bound freight to
give return loads for the small west-bound traffic sent over its lines
to that city, and has repeatedly moved its cars empty from Chicago to
other points on its lines east of that city.”[14]
Early in 1881 the cutting of rates became sufficiently important to
force official recognition by the chairman of the trunk-line pool.[15]
By June 17 quoted rates on grain were 15 cents per 100 pounds from
Chicago to New York, and a railroad war was in full swing.[16] By
October the grain rate had been reduced from 15 cents to 12½ cents;
by August passenger fares were $7 from New York to Chicago, and $16
from Chicago to New York, and there was quoted besides a $5 Boston to
Chicago rate over the Grand Trunk. The radical nature of these cuts can
be appreciated from Mr. Albert Fink’s testimony before the Hepburn
and Cullom Committees. Fifteen cents, said he in 1879, just covered
the actual cost of hauling the grain;[17] twenty cents, he asserted in
1885, was the bare cost of movement, including the general expenses,
but without any profit to the road.[18] Grain was therefore not
repaying the specific cost of hauling, and passengers were obviously
in similar case. Temporary relief occurred through the large increase
in business which took place at the end of 1881. In October the
Pennsylvania and the Baltimore & Ohio advanced east-bound rates because
of the abundance of traffic offering, and the New York Central, Erie,
and Grand Trunk followed to a less degree. In November further advances
occurred, though west-bound rates remained low; but throughout December
and January rates were low and fluctuating,[19] and negotiations were
carried on for the settlement of the differential question which
underlay the trouble. None of the combatants were open to conviction;
the only outlet was therefore arbitration, and this was reluctantly
resorted to.[20] In January, 1882, the roads divided the through
trunk-line business, agreed to raise rates, and left the subject of
differentials to be investigated by Messrs. Thurman, Washburn, and
Cooley.[21]
This solution settled nothing. During the following three years
constant disputes arose over the proper division of traffic,[22] and
in 1884 the old struggle was resumed with unabated vigor. Rates on
grain to the seaboard fell from 30 cents to 20 cents on March 14 of
that year, and to 15 cents on March 21; remaining low and fluctuating
through the year.[23] Immigrant business from New York to Chicago was
handled by the Pennsylvania at one dollar a head. By February, 1885,
rates for traffic in both directions were completely demoralized.
Nominal east-bound charges on grain were 25 cents, or a 10 cent advance
since the preceding March, but actual rates were as low as 8 and 10
cents. Meanwhile published rates on west-bound freight were a third
less than the standard tariff, and passenger rates in both directions
were, roughly, one-half the regular charges. The following month still
further reductions occurred. The warfare was finally terminated by an
agreement to maintain rates late in 1885,[24] followed by an elaborate
pooling agreement between the competing lines.[25]
From 1875 to 1885 the trunk lines to the Atlantic ports were thus
engaged in active competition. What was the effect of this upon the
Baltimore & Ohio? This road was highly prosperous in 1875. Dividends
of 6 per cent and 10 per cent were being paid. The capitalization was
small, and the management conservative. During the ten years following
1875 the rate of dividend was not materially decreased. In 1876 10 per
cent was paid. In 1877 the old 8 per cent rate was restored, and the
following year the distribution was made in stock instead of in cash.
After the agreement of 1878 one-half year’s dividend was paid in cash;
and in 1879 9 per cent cash, and in 1880 10 per cent cash was declared,
this rate enduring until 1886. But although dividends were maintained,
the effect of the railroad wars appeared in the slowness with which
net earnings increased. A comparison of the net returns of 1884 with
those of 1874 reveals a gain of 40 per cent, on a mileage 27 per cent
greater; but the figures for 1885 show an increase of less than 2 per
cent over those for 1874, while the totals for 1884 were not again
equalled until 1900. Meanwhile more bonds had been issued, and the
percentage of fixed charges to net earnings had increased from 16 in
1874 to 63 in 1884. In other words, money was borrowed to put into the
road which did little more than keep the net earnings from declining.
In that same time the stock increased $2,900,000, and according to the
profit and loss account $15,559,636 were put into the property, making
a total of $55,743,092 (of this $37,197,696 were bonds); the only
result of which was the building of 313 miles of line, and the securing
of an increase in net earnings for 1884, which was swept away the
following year.
In 1884 the elder Garrett died, and his son Robert was elected to
succeed him. The old policy of independence and competition was
continued, the objective point being now an entrance into New York.
“When in 1885 the other trunk lines harmonized their differences, ...”
said the Chronicle, “the Baltimore & Ohio ... pursued its policy of
aggression.... The road must reach Philadelphia ... nay, must push
... on to New York.... Instead of seeking to avoid rivalry, its every
effort seemed to encourage it. Rates were reduced, concessions made
to shippers and travellers, the one idea apparently being to get
traffic no matter what the cost.”[26] The necessity of a secure New
York connection had been impressed upon the company in the course
of the rate wars. The first step was to be actual construction to
Philadelphia, the second, construction or traffic agreements from
Philadelphia to New York. Bonds were issued in April, 1883, for
construction of a so-called Philadelphia branch from Baltimore to the
northern boundary of Cecil County, Maryland,[27] there to connect with
the Baltimore & Philadelphia Railroad, which was being built through
Delaware and Pennsylvania to Philadelphia. Entrance into Philadelphia
was secured over the Schuylkill River East Side Railway, a corporation
organized under the laws of Pennsylvania and doing business in the city
only.[28] The distance was approximately ninety-nine miles; the cost
was later asserted to have been $20,000,000. Beyond Philadelphia the
Baltimore & Ohio relied on an agreement with the Philadelphia & Reading
for trackage to Bound Brook, New Jersey,[29] and on a traffic contract
with the Central of New Jersey for its line from Bound Brook to
Elizabeth.[30] Terminals on Staten Island were secured by purchase of
a controlling interest in the Staten Island Rapid Transit Company,[31]
and connection between Elizabeth and the Island was obtained by new
construction. The strength of this route was in its directness and
in its independence of trunk-line control; its weakness was in its
excessive cost between Baltimore and Philadelphia, and in its reliance
upon traffic contracts north of the latter city. A proposition was
advanced to unite the Baltimore & Ohio, the Philadelphia & Reading,
and the Central of New Jersey with the Richmond Terminal System. This,
however, fell through,[32] and the possibility still existed that
the Baltimore & Ohio might some day construct a line of its own from
Philadelphia to New York.
Pending the completion of the preceding arrangements rate conditions
remained naturally unsatisfactory. The Pennsylvania objected to the
paralleling of its Philadelphia-New York branch, and refused to allow
temporary use of that line by the Baltimore & Ohio while the latter’s
independent connections were being established.[33] Freight rates
were slowly and painfully raised after the conflict of 1884–5, and
did not regain a high level. In 1886 the Baltimore & Ohio was forced
to reduce its dividends from 10 to 8 per cent. The following year it
cut to 4 per cent, and in 1888 no dividend at all was declared. The
surplus on the year’s operations, which had not since 1878 fallen below
$1,000,000, dropped to $110,819 in 1885, and to $36,259 in 1886. As
dividends decreased, the funded debt increased,[34] the percentage
of fixed charges to net income rose from 63 to 89, and the floating
debt attained the portentous amount of $11,148,007. The only item
which did not grow was net earnings. There was nothing occult in the
situation. Every one was well aware that the competition to which the
Baltimore & Ohio had been subjected had been severe, and that the cost
of its New York extension had been large. In 1887 the bonds outstanding
were $56,868,201, the stock $19,792,566, and the accumulated surplus
$48,083,720, or a total of $124,744,487. This stood for the sums
invested in the property. Net income on the other hand was $4,994,721;
so that on an investment of over $100,000,000 but 4 per cent was being
obtained to cover interest, improvements, and whatever dividend might
be declared.
That no general apprehension was felt by investors before 1887 was
due to the great prestige which the Baltimore & Ohio enjoyed. The
long series of dividends counted heavily in favor of the road.
The enormous accumulated surplus, said to have been invested in
valuable improvements and extensions;[35] the enterprise of the
company in making extensions; the large volume of business; and the
confident statements of the president, all conspired to prevent a
too keen analysis of the business returns.[36] Relief of two sorts
was nevertheless required. In the first place the floating debt had
grown so large that some means of paying it off was necessary; in the
second place the road needed a sufficient reduction in fixed charges
to restore some of the margin of non-mortgaged earnings which had
been so great a safeguard in the early days. Only the first of these
requirements was met. Cash the road had to have; the existing fixed
charges, it was thought, it could endure if only some abatement of the
intensity of trunk-line competition could be obtained.
The method chosen for raising cash was the sale of bonds. In September,
1887, J. P. Morgan & Co. announced that a preliminary contract had
been entered into between the Baltimore & Ohio Railroad Company and
J. S. Morgan & Co., Baring Bros. & Co., and Brown, Shipley & Co.,
of London, and their allied houses in America, for the negotiation
of $5,000,000 Baltimore & Ohio Consolidated 5s and of $5,000,000
preferred stock, for the purpose of paying off the entire floating
debt, and of placing the company upon a sound financial basis.[37]
The consolidated bonds were to be part of an authorized issue of
$29,600,000, of which $21,423,000 were to be reserved to retire the
main stem mortgage indebtedness when it should fall due, and $8,177,112
were to be exchanged for securities in the company’s sinking fund, the
freed securities to be used to pay the floating debt in part. In case
this exchange should not be made, $7,500,000 of the issue might be sold
direct, and the syndicate before mentioned agreed to take $5,000,000 of
this amount and to place $5,000,000 in preferred stock on condition:
(_a_) That the statements of the company should be verified;
(_b_) That the management of the company should be placed in competent
hands, satisfactory to the syndicate;
(_c_) That satisfactory contracts should be made between the Baltimore
& Ohio and other roads for New York business, which should remove
all antagonism between them on the subject, and should ensure the
permanent working of the first-named in entire harmony with the other
trunk lines, besides avoiding the construction, or the threat of
construction, of expensive lines north and east of Philadelphia.
Annual payments to the Baltimore & Ohio sinking funds were to be made
in the future in consols instead of in cash.[38]
The essence of this arrangement was a funding of the floating debt,
plus agreements with other roads in order to maintain earnings. The
funding involved, however, a certain increase of charges through the
issue of bonds, while the agreements offered but a doubtful chance of
increased earnings. Only by an effective community of interest or of
ownership among the trunk lines could a saving have been secured on
which the new bond issues could safely have relied. That this was to
take place through the syndicate, that body was emphatic in denying.
“The statement,” said Vice-President Spencer, “that the Baltimore &
Ohio Railroad has passed into the hands of a syndicate, of which J. P.
Morgan is the head, is absolutely without foundation.... The syndicate
has the greatest interest now in the growth of the Baltimore & Ohio,
and to secure this growth and progress absolute independence of other
corporate predominance is essential, and the road must be worked in
the interest of the states and territories it reaches.”[39] This
declaration left only informal agreements as a resort; for pooling
had been forbidden in 1887. It did more, it implied the necessity of
a maintenance of competition, for to work the Baltimore & Ohio in the
interest of Baltimore meant to work it against the interest of New
York. In principle the plan was nevertheless adopted. Bondholders
saw no necessity for a radical reorganization, and were willing to
consent only to a new issue of bonds. Certain modifications were,
however, imposed. The exchange of new bonds for securities in the
sinking fund was abandoned, and the alternative of direct sale was
embraced. It was found impossible to secure the consent of stockholders
to an increase in the preferred stock, three attempts to obtain the
required authorization failing in the week ending January 20, 1888.[40]
Furthermore, the failure of the stock issue led President Spencer[41]
to request that the city of Baltimore extend for five years at 4 per
cent a $5,000,000 loan to the company, which was to mature in two
years, and that it return the sinking fund of $2,400,000 which had
accumulated in its hands for the eventual cancellation of the debt.[42]
It may be added that this suggestion was not accepted.
While awaiting final settlement of the syndicate scheme the Baltimore
& Ohio obtained some cash from the disposal of all its free resources;
that is, from the telegraph, express, and sleeping-car businesses which
it had conducted since early in the administration of John Garrett. In
August, 1887, it sold its express business to the United States Express
Company for a period of thirty years, in return for $1,500,000 of the
capital stock of the express company plus a certain percentage of the
annual earnings of the express lines handed over.[43] In October of
the same year its telegraph business was turned over to the Western
Union Telegraph Company in return for $5,000,000 of the Western Union
stock, and an annual payment of $60,000 in cash.[44] Finally, in June,
1888, its sleeping-car equipment and franchises were transferred to the
Pullman Company for a period of twenty-five years at a reported price
of $1,250,000.[45] The company agreed to furnish all the sleeping and
parlor cars required. This brought the incidental advantage of ending
long-continued suits over patents. The terms of sale to the telegraph
and express companies brought in no ready money, but the securities
obtained were readily salable, and being independent for their value
of the commercial success of the Baltimore & Ohio were available for
times of difficulty. It was this policy which offset the refusal of the
city of Baltimore to return the sinking fund to the company, and which
by March, 1888, rendered the road even to some extent independent of
the syndicate. At that date a modification of the syndicate agreement
took place. The bankers gave up all claim to the $5,000,000 of stock
so long under discussion, and took instead the balance ($2,500,000)
of the $7,500,000 consolidated mortgage bonds which the company was
authorized to sell. “The syndicate acted,” said the Baltimore _Sun_,
“in an entirely friendly spirit, and, with a desire to continue its
financial relations with the company, took the remaining $2,500,000 ...
at a better price than was paid for the $5,000,000.”[46]
With temporary financial requirements provided for, President Spencer
was enabled to achieve some much-needed reforms. At a meeting of the
directors on March 14 a complete reorganization of the service was
authorized, with changes and transfers affecting employees from the
first vice-president down. Later a committee of mechanical experts
was organized “to examine thoroughly all the shops, shop tools, etc.,
of the entire Baltimore & Ohio system, and to report on all the
improvements needed.”[47] The form of the annual report was improved.
The much-quoted surplus, which had proved such an unreliable support,
was cut in two by the writing off of bad investments, the marking down
of the price of securities, and the like; and, finally, a committee was
appointed to make a general examination of the financial as well as the
physical condition of affairs.[48] “Great anxiety,” said a resolution
of the directors, “exists in the public mind as to the financial
condition and the value and earning capacity of the road and property
... [and] it is due to all interests that a full, frank, and complete
statement of its affairs should be made public.” So far as lay in his
power President Spencer, and through him the syndicate, tried to secure
a real and permanent improvement in the condition of the road, and
to gain, through increased efficiency in operation, the margin which
the refusal to cut down fixed charges had denied. The failure of the
attempt may be ascribed to the continuance of the Garrett family in
power. Any irregularities or mistakes which had taken place in the past
reflected on the Garretts, so that it was to their interest to stifle
investigation. Moreover, any change in policy for the future implied
a criticism of their acts to which they were reluctant to accede. In
1888 the Garrett holdings amounted to from 50,000 to 60,000 shares out
of a total of 150,000 shares, or, deducting 32,500 shares held by the
city of Baltimore, which were not entitled to vote, to about one-half
of a total of 117,500 shares. This gave undisputed control. The effect
was seen in the annual election in November. Of 12 old members of the
board only 5 were reëlected, and of the 7 dropped 3 formed part of
the investigating committee engaged in securing “the full, frank, and
complete statement of the company’s condition” promised at an earlier
date.[49] The same month President Spencer was ousted and Mr. Charles
F. Mayer was elected in his place.
This revolution was fatal to any radical reform, so that during the
next seven years the condition of the Baltimore & Ohio improved but
little. Net income grew, it is true, up to the panic year of 1893, but
fell so sharply after that that the reported figures for 1895 exceeded
those of 1888 by but $1,283,843, and even this gain was practically
wiped out during the following year. Meanwhile fixed charges grew from
$6,550,972 in 1888 to $6,934,052 in 1895, and to $7,303,781 in 1896;
an increase which transformed the profits of the company the following
year into a deficit. A comparison of the balance-sheets of 1888 and
1895 shows an increase of $10,207,434 in stock, of $16,261,000 in
funded debt, and of $4,554,939 in floating debt. These changes were
offset mainly by increases in bonds and stock owned, or in the hands
of trustees, by advances to subsidiary lines, and by a reduction of
$11,080,000 in bonded debt secured by collateral or by mortgage on
the main line. During this time dividends were nevertheless steadily
paid on the preferred stock, and, beginning in 1891, upon the common
stock as well. The liberal tendencies of the management were also
evinced by a 20 per cent dividend upon the common stock, declared in
1891 to compensate shareholders for expenditures in betterments and
improvements of the physical condition of the property.[50] It will be
seen how different this was from the policy of retrenchment and economy
which had been inaugurated by President Spencer, and which might fairly
have been expected from a corporation barely escaped from bankruptcy.
Traffic conditions from 1887 to 1893 were very far from satisfactory.
The difficulties between the Baltimore & Ohio and the Pennsylvania were
indeed patched up, and the opening of the former’s lines to New York
rendered it independent of other trunk-line connections; but frequent
charges of rate cutting were made in 1887, and a war in dressed-beef
rates was inaugurated by the Grand Trunk in November of that year.
In 1888 rates were pretty much demoralized. Published rates on grain
dropped from 27½ cents in January to 20 cents in October. Emigrant
rates from New York to western points became the subject of active
competition; and, most important of all, the dressed-beef controversy
was pushed till it developed into a war of the most active kind. The
trouble here was started by cuts on dressed beef by the Grand Trunk.
In May other lines retaliated by cuts in live-stock rates; by July
14 published rates on cattle from Chicago to New York were 5½ cents
per 100 pounds, and on dressed beef and hogs 7 cents. In November
the New York Central extended the contest by a general reduction in
west-bound rates.[51] These struggles, though terminated for a time
by an agreement of February, 1889,[52] seriously diminished railway
revenues, and prevented the rapid growth which the general prosperity
of the country might have occasioned.[53] In fact, the Erie management
stated in their annual report for 1888 that their company had retired
altogether from certain classes of through business for a time during
the preceding twelve months, owing to the unremunerative level of
rates. Conditions during the greater part of 1889 were better,[54]
and during the following three years constant attempts at agreement
and arbitration, joined with a considerable volume of business,[55]
prevented a long continuance of any difficulties which arose.
It was perhaps traffic conditions such as we have described which
led the Garrett family to favor a community of interest scheme which
should improve the Baltimore & Ohio connections with the West. In June,
1890, Mr. E. R. Bacon formed a syndicate to control the stock of the
Baltimore & Ohio Company. Acting in harmony with the Garrett family,
the syndicate was made up of Philadelphia, New York, Baltimore, and
Pittsburg capitalists, including the Richmond Terminal, Pittsburgh
& Western, Northern Pacific, and Reading interests. The plan was to
establish a community of interest between a vast network of lines
reaching from the Atlantic to the Pacific, and from New York to the
Mississippi. “The buyers,” it was said, “came in simply as investors
without condition that their other properties would be benefited,
although it was of course intimated that something was to be done.”[56]
They were required to pool their stock for three years, and to give an
irrevocable proxy for that period to President Charles F. Mayer. The
amount of the syndicate purchase was 45,000 shares, of which 32,500
were obtained from the city of Baltimore, and 9686 (preferred) from
the state of Maryland;[57] and the purchase brought the incidental
advantage of removing city and state from any direct interest in the
road. The preferred state stock the syndicate later exchanged for
common stock owned by the Johns Hopkins University. The purchase once
made, the pool was formed on well-known lines. The stock was deposited
with a trust company, trust certificates were issued, and proxies
transferred to Charles F. Mayer.[58] The shares to be deposited were
limited in amount to 110,000; the actual amount put in was 89,750. The
results of the agreement were less sensational than the forecasts made.
It undoubtedly did much to promote friendly feeling among the roads
concerned. When, in 1891, the Baltimore & Ohio was compelled to vacate
the Chicago terminals of the Illinois Central, which it had occupied
for years, it was able to make prompt arrangements with a corporation
controlled by the Northern Pacific for the use of its facilities both
for passengers and for freight. But the influence of the Garrett family
was not lessened, and inasmuch as the main competitors of the Baltimore
& Ohio were not included there was no check to competition, and
earnings showed no striking change.
Matters stood thus at the beginning of 1893.[59] No progress had been
made toward restoring the Baltimore & Ohio to a permanently stable
condition, and the prosperity which its reports declared was fictitious
only. The reorganization to which bondholders had refused to submit
in the comparatively prosperous times of 1888 was compelled by the
depression following the panic of 1893. In 1894 earnings fell off. The
gross earnings for the year ending June 30, 1893, were $26,214,807,
and the net income $9,210,666; the following year the same items were
$22,502,662 and $8,719,830. The directors reduced the dividend and
called attention to the losses incurred through protracted strikes in
the coal and coke industry.[60] The following January (1895) President
Mayer stated that the fixed charges, including the car trusts, sinking
funds, etc., due January 1, amounting to nearly $1,000,000, had been
paid without borrowing one dollar. “I name this fact especially,” said
he, “because it is not unusual for us to make a loan for the unusually
heavy payments January 1. I doubt if the Baltimore & Ohio has owed so
small a floating debt for twelve or fifteen years, perhaps longer, and
it never had the large volume of stocks and bonds it now has, something
over $16,000,000, not put down at their face value but rather at their
market value, or far below their intrinsic value. I can safely say the
road has not been in so strong a position as now for at least fifteen
years.”[61]
It required more than confident statements by the managers, however,
to demonstrate the secure position of the road; and this all the more
because the acts of these gentlemen belied their public assertions.
Dividends on the common stock were passed in 1895, and again in 1896.
The ratio of charges to earnings, according to the company’s reports,
rose from 75 per cent of net earnings in 1894 to 80.2 per cent in 1895,
and to 98.2 per cent in 1896; that is, less than 2 per cent of the
net earnings of $6,300,000 was admitted to be available for dividends
on $30,000,000 of stock.[62] Some relief was evidently necessary. In
January, 1896, it was announced that arrangements had been made with a
strong syndicate to provide for all immediate financial requirements;
but the appointment of receivers in February could scarcely have come
as a surprise. During the two weeks just before the failure Mr. J. K.
Cowen, who had succeeded Mr. Mayer in the presidency, spent a great
deal of time in New York trying to borrow money to meet the pressing
demands. On his eventual failure and return to Baltimore the directors
felt that a friendly receivership was the only resource.[63]
To the well-wishers of the road this failure may have seemed an
opportunity as well as a disaster. It was now possible to accomplish
what the management in 1888 had refused to attempt, _i. e._ a
reduction in the fixed charges of the company which should remove
the burdens under which the road had labored, and should open up the
way for a long period of improvement and prosperity. At least one
more unpleasant experience was, however, to be passed through. With a
view to determining the Baltimore & Ohio’s real position, an expert
accountant, Mr. Stephen Little, had been set to work upon its books,
and from time to time notices had been appearing that he was at work,
that his examinations confirmed the statements of the company, and that
questions raised by hostile critics would be considered in his report.
Thus in April a reorganization committee, composed of Messrs. Alexander
Shaw, C. Morton Stuart, and six others, with whom were deposited the
Garrett shares, issued a circular referring to the large amount of new
capital, estimated by them at $30,000,000, which had been received by
the company since 1888 “without adequate or satisfactory results,” and
to the floating debt, which they asserted had been increased from about
$3,500,000 to $16,000,000. “We make no charges, or even intimations of
wrongdoing,” wrote their secretary, “but desire and require that a full
explanation of the management of the property from the year 1888, when
the road was set on its feet by Mr. Morgan, shall be given, and that
the causes which led to the wrecking of the property shall be clearly
shown.” To which another committee, which directly represented the
management, replied by reference to Mr. Little.[64]
The much-heralded report came out in December, having been withheld
since the previous March for fear of the effect on the company’s
securities; and so far from sustaining the management, it contained
charges of irregularity almost as sensational as those made against the
Atchison at an earlier date. The books of the company, according to Mr.
Little, were in error to the amount of $11,204,858. During the period
of seven years and two months which his report covered he found:
An overstatement of net income of $2,721,068
A mischarge of worn-out equipment to profit and loss of 2,843,596
Improper capitalization of charges to income under the
head of construction, main stem, 2,064,741
Improper capitalization of so-called improvements and
betterments of leased and dependent roads, 3,575,453
-----------
Total, $11,204,858[65]
Deducting these sums from the annual income returns of the company,
he found that but $971,447 had been earned which had been properly
applicable to dividends, whereas $6,269,008 had been declared in the
seven years, of which $3,312,089 were cash and $2,956,920 stock.
Earnings had been increased by the most arbitrary of book-keeping
devices. In 1892 the value of the Western Union stock held in the
treasury since the sale of the Baltimore & Ohio telegraph lines in
1888 had been written up $468,038, and the stock of another company,
the Consolidated Coal Company, had been written up $114,300. Not only
had advances to branch lines been entered as assets, but the interest
on these advances had been credited to income, the only basis being
that it was hoped that such interest would some day be paid; and on
the other side of the account, charges against operating expenses had
been charged to profit and loss on the same principles by which the
Garretts had rolled up their fictitious surplus of 1888. Turning to the
capital account, Mr. Little showed an increase in liabilities from 1888
to 1895 of $22,180,000, not including $5,481,835 representing chiefly
the company’s endorsements of notes of its subsidiary roads which stood
here for the first time revealed. This money apparently had been put
into the property, and yet Mr. Little’s corrected figures showed net
earnings to be actually smaller in 1895 than in the earlier years.
Criticisms of the report attached themselves mainly to the last items
treated. That the extensive endorsement of branch-line notes, absent
as any mention of the practice was from the annual reports, was most
misleading and unsound, nobody could deny; but the broad question
of what charges during the seven years should have been paid out of
income, and what not, gave rise to lively discussion. Severe strictures
on Mr. Little’s statements were made by Patterson and Corwin, two
accountants appointed to re-examine the books of the company. “It would
appear,” said they, “that Mr. Little has made some curious errors, and
has been strikingly inconsistent.”[66] Nevertheless the more damaging
of the latter’s accusations seem to have been accepted, and the
Baltimore & Ohio took its place with other American corporations, the
managements of which have indulged in secret juggling with the books.
Pending Mr. Little’s report, reorganization was of course delayed.
The receivers were then in control,[67] and under their direction a
vigorous policy of improvement was carried out. The rolling stock
of the system was found to be insufficient to handle its business,
and the motive power was in similar condition. All testified to
the consistent desire of the old management to employ every device
which might contribute to greater apparent earnings. Contracts for
5000 freight cars were let as early as May, 1896, to be paid for in
receivers’ certificates, and bids for 75 locomotives were at the same
time received.[68] During their whole administration the receivers
purchased over 28,000 freight cars, 216 locomotives, 123,000 tons of
rails, besides ties, ballast, new steel bridges, and miscellaneous
improvements of various sorts.[69] On the financial side they had to
resist an attempt to compel payment of dividends on the preferred
stock. The case dragged on through 1897 and 1898, and was finally
decided in favor of the company.[70]
After the publication of Mr. Little’s report there remained no serious
bar to reorganization, while the needs to be met were more apparent
than ever before. If the proportion of charges to earnings had been
too heavy on the management’s own showing, how much more burdensome
was it when the reported earnings had been proved too high, and the
reported liabilities too low! The first step after the appointment of
receivers had been the springing up of reorganization committees. The
two most prominent were the Fitzgerald Committee, representing the
directors, and the Baltimore Committee. There were besides committees
representing the 5 per cent bonds of the loan of 1885, the consolidated
mortgage 5s, the 6 per cent bonds of 1874, the preferred stock, and
others. These were all to some extent antagonistic. It was hoped to
secure a reorganization without foreclosure, but to provide against all
contingencies a bill was introduced and passed through the Maryland
legislature, permitting a new company to succeed, after reorganization,
to the property of the Baltimore & Ohio system.
By April, 1898, a reorganization plan was ready, and was withheld only
on account, first of the threatened, and then of the actual, war with
Spain. Two months later this difficulty seemed no longer serious, and
a plan was formally announced.[71] There were contemplated two great
issues of bonds and two of stock as follows:
3½ per cent prior lien gold bonds, $70,000,000
4 per cent first mortgage gold bonds, 50,000,000
4 per cent non-cumulative preferred stock, 35,000,000
Common stock, 35,000,000
These were to be parts of larger amounts authorized but not issued.
Thus the authorized amount of prior liens was $75,000,000, of which
$5,000,000 were to be reserved, and to be issued after January 1,
1902, at the rate of not exceeding $1,000,000 a year, for enlargement,
betterment, or extension of properties covered by the prior lien
mortgage; or for the acquisition of additions thereto.[72] The
authorized amount of first mortgage 4s was $165,000,000. Since
the prior liens matured in 1925, and this mortgage not till 1948,
$75,000,000 were reserved for retirement of the prior issue.
$7,000,000 were further put aside for the new company; $6,000,000
for the retirement of the Baltimore Belt Line 5s, and $27,000,000 for
enlargements, betterments, or extensions, etc., at a rate not exceeding
$1,500,000 a year for four years, and not exceeding $1,000,000 a year
thereafter.[73] The reserves from these two mortgages, therefore, made
liberal provision for new capital requirements. All of the common
stock authorized was to be issued at once; but besides the $35,000,000
preferred stock before mentioned, $5,000,000 preferred were to be held
in reserve for the new company.
Of the immediate issues $60,073,090 prior liens, $36,384,535 first
mortgage 4s, $17,218,700 preferred stock, and $31,178,000 common stock
went toward the retirement of old securities; and $9,000,000 prior
liens, $12,450,000 first mortgage 4s, and $16,450,000 preferred stock
were for cash requirements. The better of the old mortgages received
cash for their overdue interest, something over par in prior liens
for their principal, and from 12½ to 32 per cent in first mortgage
4s and preferred stock to compensate for reductions in their annual
return. Inferior bonds received new first mortgage 4s with preferred
stock (except in one instance) as a douceur. The old stock, common and
preferred, and the Washington City & Point Lookout 6s got mostly new
stock for the principal of their holdings, and preferred stock for
their assessments. The fundamental principle on which the exchanges
were based was the retirement of old bonds bearing high interest
rates by an increased volume of new bonds bearing lower rates; thus
permitting a much smaller reduction in fixed charges than occurred
in other reorganizations which we shall consider. To some extent
reductions in annual yield were made up by allowance of preferred
stock. The consolidated mortgage 5s of 1887, on which interest was
reduced from $50 annually to $41.75, received $85 in 4 per cent
preferred stock as a compensation. The Baltimore & Ohio Loan of 1874
saw a reduction in interest from $60 to $40.41, partially made up from
the dividends on $160 of new preferred stock. In fact, out of thirteen
cases in which new bonds were given for old, ten included an allowance
of preferred stock, thus bringing the Baltimore & Ohio in line with
other reorganizations of the period. But the proportion of preferred
stock given was small in each case, and the principle was not well
carried out.[74]
The cash requirements of the system were estimated at $36,092,500;
being swelled by arrears of interest, receivers’ certificates, need
for working capital, reorganization expenditures, and the like. The
plan proposed to cancel them by assessments on stockholders and by the
sale of securities before described. On the first preferred stock, $2
a share was levied, $20 on the second preferred, and $20 on the common
stock, with a syndicate guarantee for each. This netted $5,460,000.
Stockholders received new preferred stock for their payments. Deducting
$5,460,000 preferred stock from the securities reserved under the
plan to be sold for cash, there remained $9,000,000 prior liens,
$12,450,000 first mortgage 4s, and $10,990,000 preferred stock, or a
total of $32,440,000; all of which a syndicate agreed to take.[75]
In addition the company disposed of securities in the treasury,
including $3,800,000 stock of the Western Union Telegraph Company, for
$3,500,000.[76]
Both classes of stock were vested in five voting trustees, for a period
of five years. The trustees might, however, deliver the stock at an
earlier date in their discretion, and in fact did so in August, 1901.
No additional mortgage was to be put upon the property, and no increase
in the amount of the preferred stock was to be made, except in each
instance after obtaining the consent of the holders of a majority of
the whole amount of preferred stock outstanding, given at a meeting
of the stockholders called for that purpose, and the consent of the
holders of a majority of such part of the common stock as should
be represented at such meeting, the holders of each class of stock
voting separately. During the existence of the voting trust similar
consent of holders of like amounts of the respective classes of trust
certificates was to be necessary for the purposes indicated. Only a
portion of the leased and dependent lines were provided for in the
plan, but the various cases were left to be passed on separately. Thus
the Baltimore Belt Line was finally leased at a rental equivalent to
4 per cent on the outstanding 5 per cent bonds; while the acquisition
of the Baltimore & Ohio Southwestern and the Central Ohio railroads
involved the payment of a cash bonus, and an increase in the preferred
and common stock outstanding. The mileage of the system suffered little
change. Many of the branches were sold at foreclosure, and bought in
by the parent line; and a glance at the balance-sheet in 1899 shows
that besides the prior liens and the first 4s, an issue of Pittsburg
Junction and Middle Division bonds was the principal tool employed.
These securities, bearing 3½ per cent, and falling due in 1925, were
issued; 1st, to retire branch-line securities, and to weld the system
into one united whole; and 2d, to provide new capital for enlargement
and betterment and extension.
The success of this Baltimore & Ohio reorganization plan was very
largely due to the time at which it was put through. In other words,
the reorganization was completed just when an unparalleled era of
prosperity was fairly under way. The moderate reduction in fixed
charges which it secured proved more than adequate when earnings
rapidly grew. The net earnings of the property for the year ending
June 30, 1898, were estimated at $7,724,758, and the new fixed charges
were set at $6,252,351.[77] Net earnings for 1899 were $6,621,599.
In 1900, on a mileage 11 per cent greater, they were $12,359,443,
and fixed charges were $6,831,463 only. In subsequent years, with an
increase both in mileage and in earnings, the margin between charges
and income further increased. In 1903 $3,500,000 were spent out of
earnings for additions and improvements; $7,370,482 were declared in
dividends; and $2,947,681 were carried to surplus. In 1907 $3,000,000
were spent in additions and improvements, $6,965,245 paid in dividends,
$7,480,385 carried to surplus. This situation was in no way due to the
reorganization plan, and would have restored the company to solvency
even if no reorganization had taken place. It may be said that the
receivership did much to enable the road to take advantage of the later
prosperity. The character of the receivers’ work has been mentioned.
By June 30, 1899, they had spent as much as $17,000,000 for cars
alone, $2,500,000 for locomotives, $2,100,000 for rails, and other
sums for improvements and renewals of all kinds. The maintenance of
way pay-rolls in three years amounted to nearly $12,000,000, and the
total expenditure aggregated about $35,000,000; of which $15,000,000
were secured by the issue of receivers’ certificates, and the
balance through car trusts, earnings from the property, and from the
reorganization managers.[78] This was an indispensable and invaluable
preliminary to a growth in earnings, but was, however, distinct from
the financial problems of reorganization. In brief, the Baltimore
& Ohio increased its nominal capitalization more, and reduced its
fixed charges less than any of the seven other reorganizations of the
nineties which we shall consider except the Erie. Its need was perhaps
less crying, but not sufficiently so to explain the difference.
It will be remembered that, while provision had early been made for
foreclosure, it had been hoped to avoid such a drastic step. Hopes in
this respect were fulfilled, and while a number of branch lines were
sold the main stem escaped. Vigorous objections to the plan came from
the preferred stock, which was in 1898 suing to compel payment of its
dividends. In July, at a meeting of shareholders it was declared to be
the sense of the meeting that the preferred stock could not justly be
required to determine whether it would accept the proposition published
by the reorganization committee before the case in the Supreme Court
should be decided.[79] Late in July an injunction was obtained, which,
however, was dissolved in October. Still later in that year the suits
were settled by the sale of the bulk of the first preferred stock
to the reorganization committee.[80] The only other considerable
complaint came from the holders of the 4½ per cent Baltimore & Ohio
Terminal bonds, and was a protest against the reduction of ½ per cent
in their interest without, as they said, the smallest compensation.
Suits for the foreclosure of the mortgages of 1887, 1872, and 1874 were
instituted in October, 1898. Decrees were obtained in February. Decrees
were also given against the Philadelphia Division, the Parkersburg
Branch, the Staten Island Rapid Transit Company, and others. Separate
receivers had previously been appointed for the Sandusky, Mansfield &
Newark, the Central Ohio, the Washington Branch, and others. Decrees
were not asked for against the main line. In August, 1898, only three
months after the publication of the plan, the reorganization managers
were able to pronounce it effective.
The receivers surrendered control July 1, 1899,[81] and the company
started on its new career amid a buzz of satisfaction from all who had
participated in its reorganization. In an address before the Maryland
Bar Association Mr. John K. Cowen summarized the result as follows:
(1) Every bondholder of the Baltimore & Ohio Railroad has received new
securities which substantially pay his full debt. In other words, the
bondholders have been paid in full.
(2) The floating debt creditors have received every cent of their
indebtedness.
(3) The first preferred stockholders have received in cash 75 per cent
of the par value of their stock, the court overruling their claim of
preference over the bondholders and creditors. The second preferred
stockholders have received securities which, after payment of the
assessment, net about $70 per share, at the market price, and at times
over $80 net could have been realized.
(4) The common stockholders, instead of being wiped out, have received
their common stock in the new company upon paying an assessment, the
net amount of which (because of the value of the securities received
for such assessment) would not exceed $5 or $6.
(5) The company saves its old charter for whatever value may be
attached to it.[82]
This statement presents the favorable side of the picture. On the
whole, securityholders were tenderly handled, though the bondholders
were by no means paid off in full. And on the other hand, this very
tenderness made a voluntary reorganization possible, whereby the
charter of the company was saved. The pertinent objections were from
the point of view of the company itself, and these were silenced by the
increase in earnings.
Since reorganization the Baltimore & Ohio has been enjoying great
prosperity. On a mileage operated, which was some 1800 miles greater
in 1907 than in 1900,[83] it earned a return increased by over
$40,000,000; while its income from dividends and interest mounted
from less than half a million to over $3,000,000. Ton mileage figures
were about 11,300,000,000 in 1907 as against 6,800,000,000 in 1900;
passenger mileage had grown from 459,000,000 to 723,000,000. This
prosperity has but reflected the condition of the country at large, but
the Baltimore & Ohio has taken advantage of it in far-sighted fashion.
No less than $17,000,000 have been spent from earnings for additions
and improvements between June 30, 1899, and June 30, 1907, not to
mention maintenance of way expenditures which have ranged from about
$1500 to over $2500 per mile of road operated. Besides the provision
made by the reorganization plan, $15,000,000 convertible debentures
were issued under date of March 1, 1901, for new construction and
improvements. There were authorized $40,000,000 of common stock in
November, 1901, to go in part for improvements, and the bulk of
$27,750,000 new common stock of 1906 will be applied to similar ends.
As a result the company’s equipment has largely increased, grades have
been reduced, curves straightened, light rails replaced by heavy, and
subsidiary track increased. There were two miles of second, third,
and fourth track and sidings for every three miles of main track in
1900; there were three miles to every four in 1907. A considerable
increase in average freight train load has accordingly occurred. In
1900 the average load was 366 tons; in 1907 it was 433.02. That this
figure has not still more greatly increased from the 406.53 tons of
1901 is probably due to the somewhat greater proportion of manufactures
handled and to a considerable decrease in average distance hauled, and
is compensated for by an increase of over one cent in the average rate
received.
The events of most vital importance in the Baltimore & Ohio’s recent
history have been connected with its control. In September, 1898,
Philip D. Armour, Marshall Field, and Norman D. Ream, executors
of the Pullman estate, together with James J. Hill of the Great
Northern, bought a large interest in the stock, though whether or
not sufficient to control no one knew. From statements by Mr. Cowen
it would appear that the deal was somewhat similar to the earlier
one in which the Northern Pacific had been interested: that is, it
involved the sale of Baltimore & Ohio stock to secure the good will
of men strong enough to support the road in case of difficulty, and
influential enough to open desirable connections or to modify the
stringency of competition. “The recent transaction,” said Mr. Cowen,
“has been the realization of my hopes about the future of the road.”
It was not Mr. Hill’s influence, however, that was destined to be
dominant. By the end of the year rumors connected the Pennsylvania
with the purchase of an interest in the property, and the election
of Mr. S. M. Prevost, third vice-president of that company, to a
directorship, gave assurance of the truth of the reports. It was, of
course, impossible to purchase actual control so long as the Baltimore
& Ohio stock remained in trust; but the trustees seemed very ready to
accord to new buyers that representation and influence to which their
stock might give them claim. At the annual election in November, 1900,
an additional representative of the Pennsylvania was elected to the
board, showing the probable increase of the Pennsylvania holdings, and
the following year an absolute majority was said to have been passed,
the shares held by Mr. Hill and his associates, and apparently sold
to the Pennsylvania, being thought to contribute powerfully to that
result.[84] In May, Mr. Hill and Mr. Charles H. Tweed, chairman of the
Southern Pacific, resigned from the directorate, to be replaced by
two further representatives of the Pennsylvania. In June, President
Cowen was replaced by Mr. S. F. Loree, fourth vice-president of the
Pennsylvania lines west of Pittsburg, and in August the voting trust
was dissolved.
The last step has been the sale of part of the Pennsylvania holdings
to the Union Pacific system. It appears that the former’s interest in
the company was largely due to anxiety over the coal situation. Before
1895 rates on bituminous coal had been depressed and demoralized.
Rebates had been freely given in spite of any agreements which could be
arranged. Under these circumstances the Pennsylvania had determined to
buy enough stock of the Chesapeake & Ohio, the Baltimore & Ohio, and
the Norfolk & Western companies to control the policies of these roads,
and, through stock ownership in the Reading by the Baltimore & Ohio, to
influence that company also.[85] Unfortunately for the project public
attention became concentrated on the coal industry at this time because
of the discovery of certain flagrant abuses, and it seemed wise for the
Pennsylvania to dispossess itself of a part of its stock.[86] The Union
Pacific was in the market with large resources derived from its sale of
Great Northern and Northern Pacific stock. It was out of the question
for the Pennsylvania to sell its shares to a competitor, but there
was less objection to a sale to Mr. Harriman, providing a reasonable
portion should be retained. Accordingly, the Pennsylvania sold and the
Union Pacific interests bought, in October, 1906, some $39,540,600 in
Baltimore & Ohio common and preferred stock, being in the neighborhood
of half of the former’s holdings. This is the present situation of the
property. The Baltimore & Ohio is independent, in the sense that it is
not controlled by any single interest, but large amounts of its stock
are owned by its competitor, the Pennsylvania, and by its connection,
the Harriman system. On the whole the alliance with these interests
augurs well for the future of the company.[87]