ERIE
Early history—Reorganization—Wall Street struggles—Financial
difficulties—Second reorganization—Development of coal business
—Extension to Chicago—Grant & Ward—Financial readjustment—New
York, Pennsylvania & Ohio—Third reorganization—Later history.
The New York & Erie Railroad was organized in 1833 in the hope
of bringing to the southern tier of counties in New York State a
prosperity equal to that which the Erie Canal had secured for the
northern tier. It was to run from New York or some suitable point in
its vicinity to Lake Erie. A six foot gauge was adopted, partly because
the grades encountered were thought to require locomotives with more
power than a narrower gauge could accommodate, and partly because it
was wished to make the road independent of any connection which might
lead trade away from the city of New York.[88]
The events of the early years may be briefly dealt with. Difficulty
was experienced in getting subscriptions, and in 1836 the legislature
granted a loan of $3,000,000. An assignment was made in 1842, due to
the difficulty of getting the enterprise under way, which resulted in
the release of the company from liability to the state on condition
that it complete its line from the Hudson to Lake Erie by 1851.
Stockholders were to exchange two shares of old for one share of new
stock, and a first mortgage of $3,000,000 was authorized.[89] In 1851
the line was completed to Dunkirk on Lake Erie, and the following year
it reported a bonded indebtedness of $14,000,000, capital stock of
$6,000,000, and floating debt to the amount of $3,080,000, or a total
of $43,961 per mile of line; a high figure, but probably necessarily
so in view of the difficult work to be performed. Although nominally
completed, the troubles of the road were not over; and a precarious
existence was maintained only by the placing of additional loans in
1852 and 1855, and by the aid of Daniel Drew on two distinct occasions.
A war of rates with the New York Central aggravated the situation;
heavy storms and ice floods in January, 1857, caused serious loss, and
the panic of that year, with the ensuing depression, proved more than
the road could stand. Proceedings were begun in 1859 by the trustees
of the fourth mortgage, and in August a receiver was appointed.[90]
The wonder was that such action had been delayed so long. The income
of the road had been so far short of meeting current expenses that
claims for labor, supplies, rents, and unpaid taxes, and judgments
rendered against the company before the receivers were appointed, had
mounted up to $741,510; while not only had interest on three mortgages
fallen due in April, May, and June, but the principal of the second
mortgage, amounting to $4,000,000, had matured. The settlement of
claims and the reorganization of the company were put in the hands
of J. C. Bancroft Davis and Dudley S. Gregory. Since the earnings of
the road were at so low an ebb, wisdom would have seemed to dictate
some scaling of the charges to correspond. This did not enter into the
views of the trustees; instead, they proposed to give preferred stock
for all unsecured indebtedness, to extend the principal of the second
mortgage coming due, to exchange old common stock for new, to levy an
assessment of 2½ per cent on both classes of new stock, and with the
proceeds of the assessment to pay all coupons in arrears. Provision
was made for the retirement of certain fourth mortgage bonds, and
for a sale under foreclosure of that mortgage. By the arrangement no
saving in fixed charges worth mentioning was secured; no sacrifice was
demanded of bondholders; and, save for the payment of assessments and
the (new) stock given for floating debt, the stockholder’s position was
not made worse. The scheme was an easy and temporary means of escape
from an embarrassing position. Before the reorganization the bonds
outstanding had amounted to $18,006,000, the stock to $11,000,000, and
the unsecured indebtedness to $8,504,000. After reorganization the
totals were: indebtedness, $17,953,000, and stock, $19,911,000 (of
which $8,911,000 preferred); or a capitalization of $67,728 per mile.
The road was sold in 1862, and the Erie Railway took the place of the
original New York & Erie Railroad Company.
With 1864 began the career of the Erie as a speculative Wall Street
stock. Its large capitalization and the painful slowness with which
its earnings grew kept the quotations of its shares normally at a
low figure and invited speculation; while the location of its lines
tempted more serious efforts to obtain control. Up to 1867 Daniel Drew
was in power, while Commodore Vanderbilt spent his best efforts to
drive him out; after that date Jay Gould and Jim Fisk became more and
more prominent, and manipulated the Erie securities with enthusiastic
regard to profits which they might derive both from the Erie Company
itself and from operators who wished to speculate in its stock. In
the course of the abundant litigation to which Gould’s methods gave
rise, various receivers were appointed; but the orders of appointment
were subsequently vacated, and the receiverships were nominal only.
The details of the Wall Street struggles have little interest for us
here.[91] But the result is of importance. In the eight years from 1864
to 1872, when Gould was turned out of Erie by General Sickles and his
English backers, the bonded indebtedness of the company increased from
$17,822,900 to $26,395,000, and the common stock from $24,228,800 to
$78,000,000; in the one case a growth of 48 per cent and in the other
of 221 per cent, at a time when the mileage increased 53 per cent and
the net earnings but 22 per cent.[92] No more disgraceful record exists
for any American railroad. The stock was not issued for the sake of
improving the road, and it was subsequently shown that the road was
not improved; but it was thrown upon the market at critical times in
support of bear operations by the Erie managers, while portions of
it, on at least one occasion, were bought back with the funds of the
company to aid speculation for a rise. The result was to ruin the
credit of the Erie, and to make it the favorite tool of cliques of
gamblers. The increase in bonds occasioned an unmistakable increase in
fixed charges, which rose from 20 per cent of gross earnings in 1864
to 25 per cent in 1871, 21 per cent in 1872, and 30 per cent in 1873,
while the purchase of worthless bonds of subsidiary roads, such as the
Boston, Hartford & Erie, lessened the assets without disclosing the
real position to the casual observer.
In 1872 the control of Erie was taken from Gould through a vigorous
campaign managed by General Daniel E. Sickles, and an “eminently
respectable” board of directors was elected. Temporary relief was
obtained from the use of $6,000,000, available from an issue of bonds
previously approved,[93] and dividends, first on the preferred and
then on both preferred and common stock were declared. Unfortunately
the dividends were not earned; and this fact, which was suspected
from the previous record of the company and the marvel of its so
early restoration to a dividend basis, was shown in the statements of
ex-Auditor S. H. Dunan, who resigned in March, 1874, alleging that the
accounts had been falsified to suit the company’s purposes, and that
he was unwilling any longer to be a party thereto.[94] Investigations
conducted by representatives of English bondholders showed that in
the three years ending in September, 1875, the profits of the road
had been $1,008,775 instead of $5,352,673 as stated in the company’s
accounts; and the severity of this finding was scarcely mitigated by
the conclusion that in the opinion of the committee the dividends on
the preferred stock at least were justified by the books.[95] At the
same time the report of Captain Tyler, another English representative,
laid emphasis on the necessity for a change of gauge, a double track,
improvements in gradient, fresh extensions and connections, and other
similar matters.
The real position of the company at the time was shown but too well
by the frequency of strikes upon its road. Thus in February, 1874,
a strike of freight brakemen on the Susquehanna division broke out,
caused principally by an order to discharge one of the brakemen from
each freight crew, leaving only three on a train; and at the same time
there was a strike of the switchmen on some of the divisions owing to a
decrease in pay. In March occurred a serious strike among the employees
of the road in Buffalo, mainly on account of irregularity and delay in
payment of wages, and, finally, in April, there was trouble both in
the Susquehanna shops and in the Jersey City freight yard over this
same cause. The indications afforded by these troubles were borne out
by the figures of the annual reports. The gross earnings of 1874 were
$1,413,708 less than those of 1873, while the decrease in operating
expenses was so slight as to reduce net earnings by nearly the same
amount. If, now, there is deducted from the net earnings of the years
1871–3, inclusive, the sum which the London accountants declared to
have been improperly reported as profits, there results an average of
$4,175,699 net; or less than the net earnings for either 1864, 1865, or
1866, although the average charges for the years mentioned exceeded the
average of the earlier period by $1,769,060 each year. These figures
exclude the influence of the panic of 1873, which, as has been seen,
caused a still further falling off in the earnings of the company. It
was a time, moreover, when the Erie could not be content to sit still
and wait, for competition was daily becoming more severe. By 1874
the Baltimore & Ohio, the New York Central, and the Pennsylvania had
connections with Chicago, and the Erie was competing with them for
business by means of traffic agreements with connecting lines. The
next decade was to see the bitterest rate wars that the country has
ever known; and the Erie, with its exceptional gauge and single track,
was to compete with rivals of normal gauge, who were adding third and
fourth tracks to the two which they already possessed. The one bright
spot was the development of the coal traffic, which in 1874 formed the
greatest item of the Erie’s tonnage, and was in a measure apart from
the competition of other lines.
Suit was brought in July, 1874, for the appointment of a receiver.
The complaint reviewed alleged improper acts of the management in
declaring dividends, in buying Buffalo, New York & Erie stock and
sundry coal lands, and in issuing the new $30,000,000 mortgage before
mentioned.[96] In October the Attorney-General of New York instituted
suit on nominally the same grounds; not, as he explained, in the
expectation that the appointment of a receiver would be required,
but in order that this action might be taken if the conduct of the
directors should make it necessary. Still other suits were begun before
the year was out.
Meanwhile the management was changed. Whether or not Mr. Watson,
who had been president since 1872, had done all humanly possible to
set the Erie on its feet, his administration was not unnaturally in
bad odor after the charges of Dunan and the report of the London
accountants, to say nothing of the admittedly low earnings for the
year 1874. An attempt was made to secure the very best man possible
for the presidency, and to support him in necessary reforms, in the
hope of some different results from those with which securityholders
had become familiar. The man for the place was thought to be Mr. H. J.
Jewett, a railroad man then in Congress from Ohio; and this gentleman
was accordingly secured at an extremely liberal salary. Soon after his
election a ten per cent cut in salaries was decreed, and an examination
of the accounts of the stations along the line in behalf of the company
was begun. It was too late, however, for the company. The business
of the last of 1874 and first of 1875 was poor; floods in the spring
damaged the property of the road, and rumors of a receivership were
rife. On May 22 a private meeting of stockholders in New York passed
resolutions to the effect that the borrowing of money by the sale of 7
per cent bonds at 40 cents on the dollar, and other means adopted by
the Watson administration, would inevitably result in bankruptcy; that
sound interest required that the money needed to pay interest should
be raised by an assessment on the stockholders, and that the directors
should be thereby requested to open books to examination, and to
invite stockholders to contribute voluntarily a sum sufficient to keep
the company from immediate failure.[97] The proposal showed a proper
spirit, but was impracticable. Four days later Mr. Jewett was appointed
receiver on application of representatives of the Attorney-General and
of the Railroad.[98]
This was the second receivership which the Erie had had to face, and
the situation was materially worse than at the previous failure.
According to the statement of President Jewett the funded indebtedness
in May, 1875, amounted to $54,394,100, and the fixed charges to
$5,059,828; while the net earnings for the previous nine months had
decreased 13.4 per cent from the corresponding period for the previous
year, and a serious deficit was in view. Temporary measures of relief
had served but to drag the company further into the mire;[99] and,
most important of all, the causes for the existing difficulties
were of a permanent nature, so that the future gave promise of still
harder conditions than had existed in the past. What was needed was a
reorganization which should undo the evil work of Gould, Fisk, Drew,
and their associates, and which should secure the margin of surplus
earnings which the reorganization of 1859–62 had failed to provide.
Perhaps the chief difficulty lay in the fact that the men who were
responsible for the increased capitalization were not at all those on
whom the brunt of reconstruction would fall; for while the managers
of the road had been Americans, the gullible investors had been
Englishmen; and it was reported that much of the watered stock of the
Gould régime had been unloaded on the English market.
Committees sprang up promptly. The most important of them were the
English committees of bond- and stockholders, soon consolidated under
the chairmanship of Sir Edward Watkin. On August 7, Sir Edward left
England on a visit of inspection, accompanied by Mr. Morris, counsel
for the bondholders. Conference with the board of directors and with
President Jewett followed, and a provisional scheme of adjustment was
decided upon. In his report to his English constituents Sir Edward
outlined the results. Current indebtedness, said he, was $42,180,075;
estimated net revenues for the year ending in June last were
$3,715,609; operating expenses had been for that year 79 per cent, due
largely to the cost imposed by exceptional gauge, while the chief lines
with which the Erie competed showed proportions of only from 60 to 66
per cent. Out of fourteen branches only three showed a profit above
rentals, and pay-rolls had ordinarily been months in arrears. These
facts were familiar; the remedy proposed was unfortunately familiar as
well. “Let it be hoped,” said this English financier, “that the bond-
and stockholders will have the courage now to submit to a period of
self-denial, and will consent to pay their debts and complete essential
obligations out of available net profits, the bondholders receiving
in place of cash such equitable obligations, realized out of surplus
revenue in the future, as each, according to right of priority, may
justly expect.”[100] What could this have meant save an issue of stock
or income bonds for coupons falling due, with the result of adding
to the unwieldy capitalization of the road instead of reducing it as
should have been done! For the rest, Sir Edward Watkin concluded with
Mr. Jewett the following arrangement:
(1) Three nominees of the bond- and stockholders’ committee proposed by
Watkin were to take seats in the Erie board;
(2) Mr. Morris was to be associated with counsel for the receiver and
for the company, and was to be regarded and treated as one of the
professional agents and officers of the undertaking;
(3) Mr. Jewett was to transmit a memorandum of his views on
reorganization;
(4) Net earnings were to be retained for a while, and bondholders
were to have a voice in their expenditure. Thus a vote was to be
taken under the charge of the stock- and bondholders’ committee in
London on the constitution of a committee of consultation, consisting
of representatives of each class of bondholders and of preferred
and ordinary stock, and that committee was to designate a special
representative whose consent and approval were to be taken by Mr.
Jewett in the expenditure of net earnings;
(5) Monthly reports of actual earnings and expenditures, together
with reports from the president and receiver, were to be regularly
transmitted to the office of the committee in London;
(6) Bond- and stockholders were to be urged to give power of attorney
and proxies to Watkin, or to such other person or persons as the above
representatives of the bond- and stockholders should designate;
(7) Any scheme of reorganization was to include a provision giving
bondholders a voting power.
On the above resolutions Jewett, with his board, and Watkin, with
his committee, agreed to coöperate.[101] Under the circumstances the
increased power given the bondholders was both a natural and a just
demand, and it is probable that Mr. Jewett’s prompt acquiescence in it
had something to do with Sir Edward’s advice to the securityholders “to
rely on the honor, as I feel you may also upon the anxious labors and
full experience of the President and Receiver.”
The report did not go uncriticised. It was pointed out, first, that
a majority of English proprietors could not unhesitatingly share the
confidence expressed in Mr. Jewett; second, that the first mortgage
bondholders were well secured, and would surely refuse to fund their
indebtedness; and third, that the payment of the floating debt,
according to the Watkin plan, would simply create another debt of equal
or greater amount due to the bondholders whose coupons were not paid.
The only sound way, said a committee of bondholders in Dundee in a
letter to the Watkin Committee, is resolutely to shun an accumulation
of mortgage liabilities on the one hand, and on the other to give
increased reality to the bonds and stocks of the company already
existing as items in capital account, _i. e._ an assessment on the
stock and a sweeping reduction in the interest on the bonds secured by
the second mortgage:—the first mortgage bonds are in different case—
they represent investment of cash instead of mere water, and even if
foreclosure is difficult, they have beyond question an absolutely good
security for the ultimate payment of both principal and interest.[102]
In September, 1875, a plan of reorganization was anonymously put
forward as follows: Instead of assessment on the shareholders, it
suggested the issue of 50 per cent more common stock; one new share
for every two shares then existing. If a price of $25 per share could
be obtained a total of $10,000,000 cash would be thereby secured.
Besides the new stock issued bond- and preference-holders were to
capitalize their interest for two years in bonds or shares bearing
their present priorities. This funding should yield $8,000,000; and
the $18,000,000 in all obtained was to be expended on the road over
the next two years, during which period the new shares were to be paid
up by half-yearly instalments. With the line furnished and equipped as
proposed, continued this optimistic plan, the working expenses could be
reduced from 79 per cent to 60 per cent, and the traffic within three
years would be at least $24,000,000 per year, affording a net revenue
of $9,600,000 per annum, sufficient to meet all bond and preference
liabilities and to leave 3 per cent for the ordinary charges.[103] The
all sufficient criticism to this plan was that it required too great a
combination of favorable circumstances to ensure its success. In some
respects, however, it was not unlike the plan ultimately adopted.
Two months later appeared a plan by Mr. John C. Conybeare, an English
bondholder, which was superior to the foregoing in that it proposed an
assessment, and made some slight provision for an ultimate reduction
in fixed charges. Mr. Conybeare proposed to assess preferred stock
$11 and common stock $9. Payment of the assessment was not to be
compulsory, but was to have the effect of giving to the stock which did
pay a right to dividends before anything should be received by that
which did not pay. Shares of the company by the plan would thus have
ranked as follows:
(1) Preferred shares on which assessment had been paid, entitled to 7
per cent dividends before any other dividends were paid.
(2) Preferred shares on which no assessment had been paid, with rights
inferior to the preferred A shares, but superior to the common shares.
(3) Common stock on which assessment had been paid, entitled to 4 per
cent before further dividend on the common.
(4) Unprivileged, unassessed common stock which was to take what there
was left.
In addition there was to be a pre-preference 8 per cent stock, ranking
before all the above, which was to be issued to exchange in part for
second preferred and convertible bonds. First consolidated bonds and
sterling bonds of 1865 were to accept one or two per cent of their 7
per cent interest in bonds, secured perhaps by the coal property of
the company, while the second consolidated and the convertible gold
bonds were to receive 4 per cent in gold and 3 per cent in the new
pre-preference stock as above. To the obvious possibility that the
stockholders would refuse to pay an assessment the plan opposed no
remedy. In this case the very moderate amount of interest funded would
have been the only relief secured.[104]
These plans were, however, but preliminary to the elaborate Watkin
scheme which appeared in December. The most prominent feature herein
was, as previously indicated, the funding of coupons, both those
past due and those to become due for a time into the future. Given
net earnings sufficient to meet fixed charges, the postponement of
interest by this plan would obviously have released revenue with which
to make needed improvements on the road. This funding was to be,
however, limited to the first consolidated 7s, convertible sterling
6s, second consolidated 7s, and convertible gold 7s; the six earlier
issues were to be left untouched. One permanent reduction was also to
be made, in that for the second mortgage and convertible 7s were to
be given two classes of ninety-year gold bonds: the first for 60 per
cent of the principal, with interest at 6 per cent, and payable in
bonds of the same class from the dates of default until March, 1877,
and thereafter in gold; the second for 40 per cent of the principal,
carrying 4 per cent until 1881 and thereafter 5 per cent, payable
only out of net earnings. To start the company on its way and to
meet present obligations an assessment was proposed of three dollars
on the preferred and six dollars on the common stock, in return for
which 5 per cent income bonds were to be given; while finally the
dividends on the preferred stock were to be reduced from 7 to 6 per
cent, and foreclosure was contemplated, so that the opposition of an
irreconcilable minority might be more easily overcome.[105] According
to the figures in the Watkin plan, the old and new capitalization and
interest compared as follows:
The amount of capital stock was unchanged.
_Total bonded indebtedness_ _Principal_ _Interest_
Before reorganization, $54,394,100 $4,073,106
After reorganization, 61,330,241 4,139,240
----------- ----------
Increase $6,936,141 $66,134
Indebtedness on which interest was obligatory:
_Principal_ _Interest_
Before reorganization, $54,394,100 $4,073,106
After reorganization, 46,634,134 3,316,238
----------- ----------
Decrease $7,759,966 $756,868
The net earnings for 1874–5 had been $3,715,609, and those from 1871–3
inclusive, with the deductions declared proper in the report of the
London accountants, had averaged $4,175,699 each year, so that a safe
margin seemed to intervene. The extent of the margin depended, however,
on the fixed charges, such as rentals, over and above interest on the
funded debt; and although it was proposed to cancel burdensome leases
and contracts the actual leeway after 1880 was to be very small indeed.
To speak briefly, the plan was definite but not sufficiently radical
to meet conditions which were likely to arise. In counting upon the
ability of the company to spare considerable sums from revenue for
improvements during the next few years, it was leaning on a broken
reed; in increasing the nominal amount of bonded indebtedness, it was
making a step in the wrong direction; and by interposing additional
claims on earnings while leaving the volume of stock the same, it
took from the stockholders any very lively interest in the road’s
future welfare. The plan was nevertheless accepted by the English
securityholders, subject to such modifications as might afterwards be
found desirable.[106]
The next step was to obtain the unanimous acceptance of this Watkin
scheme. Messrs. Robert Fleming and O. G. Miller were accordingly sent
to New York in February, 1876, to consult with the officers of the
company and the securityholders in America. No very vigorous interest
was taken on this side, but the Erie directors appointed a committee to
confer with the English representatives, and discussions took place for
something over a month. The committee criticised the plan proposed from
the point of view of the stockholders; they maintained that it would
destroy all their interest in the property unless they made further
sacrifices, which they were unable to do, and suggested that the
funding of from four to eight coupons by the first consolidated, gold
convertible, and second consolidated bonds was all that would be needed
to put the road in a prosperous condition, provide for steel rails, and
for the narrowing of the gauge.[107] This was so plainly inadequate
that it is a matter of surprise that it was entertained by the English
committee; and even they insisted that the stockholders agree to put a
majority of the $86,000,000 of stock in the hands of the bondholders as
a preliminary, and would do no more than lay the proposal before their
constituents.
On their return home in April Messrs. Miller and Fleming stated that
the essential conditions to a successful reorganization were:
(1) An effective control of the management by the real owners,—the
bondholders;
(2) The restoration of the equilibrium between the compulsory interest
charge on the mortgage debt and the minimum net earnings;
(3) A change of gauge from 6 ft. to 4 ft. 8½ in.[108]
“The foreclosure scheme of the committee” (Watkin plan), said they,
“is certainly the soundest plan and would doubtless be preferred by
those shareholders who really care for the welfare of their property.”
Then referring to the directors’ plan, “If it were possible to present
to the bondholders the scheme of proceeding by amicable arrangement
as practicable, and therefore as presenting a real alternative for
their acceptance, we should suggest to you at the same time to lay the
option before them. We feel, however, that that scheme can only be
regarded as such an alternative when stockholders enough have signified
their willingness to vest their shares in trustees on the footing
of it, and so secure an effectual control to the bondholders for a
certain period. We must, therefore, content ourselves for the present
with suggesting that the committee should proceed with vigor in the
direction of foreclosure, at the same time inviting the stockholders
to signify their willingness to vest their stock in trustees as above
mentioned.”[109]
The suggestion of the directors was the last alternative plan proposed,
and from April, 1876, the only question was how to perfect and carry
through the Watkin plan. As eventually put forward, this differed
in a few points from its form as earlier announced. The fundamental
principle was still the funding of coupons of the first and second
consolidated and the convertible bonds. Of these the first consolidated
mortgage and sterling 6 per cents were now to fund _alternate_ coupons
from September 1, 1875, to September 1, 1879, instead of funding _all_
coupons to March 1, 1876, and receiving cash thereafter: and whereas
in the earlier plan mortgage bonds of the same class had been given
for funded interest, the later plan created special issues of funded
coupon bonds, secured by deposit of the funded coupons, and bearing
the same interest as the first consolidated bonds themselves. A more
serious difference appeared in the treatment of the second mortgage and
the gold convertibles. It will be remembered that it had been proposed
in December, 1875, to exchange these for two classes of new bonds,
of which 60 per cent were to bear interest at the rate of 6 per cent
and 40 per cent were to consist of 4 per cent income bonds. The new
plan did away with this permanent reduction in fixed charges. Instead,
the second consolidated and convertible gold bonds funded alternate
coupons from June 1, 1875, to December 1, 1879, and received a new 6
per cent bond for the principal of their holdings, and funded coupon
6 per cent bonds for the interest thus postponed; the new mortgage
bonds not having the right of foreclosure until after default for six
successive interest periods (3 years). The funded coupon bonds were to
be funded at the existing rate of interest on the second consolidated
and convertible bonds, _i. e._ 7 per cent, so that the reduction in
interest was compensated for by the greater volume of securities given;
and both classes of these coupon bonds were to bear lower interest at
first than that to which they would ultimately attain. The assessment
proposed in 1875 was retained in 1876, except that stockholders were
given the choice of paying $6 on common and $3 on preferred stock and
obtaining therefor income bonds, or of paying $4 on common and $2
on preferred and receiving nothing but new stock, dollar for dollar
for their old.[110] One-half of the shares of the new company (after
foreclosure) were to be issued in the name of one or more sets of
trustees, who were to hold them to vote on until a dividend had been
paid on the preferred stock for three consecutive years. Provision was
made for an issue of $2,500,000 in prior lien bonds, to take precedence
of the remainder of the second consols, the proceeds to be applied
to capital requirements. Voting power was conferred on the first and
second consols, funded income bonds, prior lien bonds, and income
bonds, in all about $57,000,000; one vote to every $100 of bonds.[111]
The property of the company was to be foreclosed by or under the
direction of certain reconstruction trustees, for the choice of whom
careful provisions were inserted.
Divested of all complications, what this reorganization plan proposed
for the salvation of the property was the funding of the coupons on
four classes of bonds from 1875 to 1879; the reduction of the interest
to be paid on $25,000,000 second consolidated and convertible 7s one
per cent per share; and the raising of a certain amount of cash by
assessment upon the stockholders; while it dropped the one point of the
earlier plan which might have given a key to the solution of the whole
problem, viz. the exchange of mortgage and income bonds for the old
second consolidated in the ratios respectively of 60 per cent and of 40
per cent. When we remember the desperate straits to which the company
had been reduced, the permanent relief seems slight enough; and given
the fact, which proved but too true, that the net earnings were to fall
off until the road was little more than able to meet the alternate
coupons which it was obliged to pay in cash, it appears to have been
nothing at all. If we suppose no changes to have occurred in capital
account between 1878 and 1883 save those provided for in the plan of
reorganization itself, a comparison of the two periods would have stood
as follows:
_Before reorganization_ _Principal_ _Interest_
Sterling convertible 6s, $4,457,714 $267,463
First consolidated 7s, 12,076,000 845,320
Convertible 7s, 10,000,000 700,000
Second consolidated 7s, 15,000,000 1,050,000
----------- ----------
$41,533,714 $2,862,783
Old Mortgages, 13,155,500 921,062
Guaranteed bonds, etc., 6,003,360 449,411
----------- ----------
$60,692,574 $4,233,256
Rentals, 742,226
----------
$4,975,482
_After December 1, 1883_ _Principal_ _Interest_
Consolidated 7s, $20,005,794 $1,400,405
Consolidated 6s, 33,516,666 2,011,000
----------- ----------
$53,522,460 $3,411,405
Old bonds, 13,155,500 921,062
Guaranteed bonds, etc., 6,003,360 449,411
Rentals, 742,226
----------- ----------
$72,681,320 $5,524,104
Total before reorganization 60,692,574 4,975,482
----------- ----------
Increase, $11,988,746 $548,622
It thus appears that this reorganization plan contemplated an immediate
increase in the cumbrous capitalization of the company to the amount
of nearly $12,000,000, and an eventual increase in fixed charges of
over $500,000. It offered no reasonable assurance that the solvency of
the company could be maintained under the average conditions existing
in the past, and left no margin for contingencies of any kind. The
trouble lay in the unwillingness of bondholders to sacrifice any part
of their holdings to meet difficulties caused largely by inflation over
which they had had no control. This reluctance was natural,—it should
have been met, however, by the realization that the question was now
of the future and not of the past, and that the best interests of the
bondholders themselves demanded a reconstruction sufficiently radical
to leave no doubt of the ability of the new company to pay its debts.
The plan adopted, foreclosure was in order, and suits which had been
begun as early as 1875 were taken up and pushed. In November, 1877,
a decree of foreclosure under the second consolidated mortgage was
obtained, appointing a referee to conduct the sale, and providing for
the sale of the road to representatives of the bondholders in case
they made the highest bid. The opposition, which had not been able to
prevent the approval of the plan, now appeared with a multiplicity
of suits to prevent its consummation. In January, 1878, demands were
made to secure a re-accounting from the receiver, and the reopening
of an earlier suit of the people against the Erie which had been
previously discontinued. On January 18 the postponement of the sale
to March 25 was obtained. On January 19 a suit demanded the removal
of Receiver Jewett, making sweeping charges of fraud; and on January
30, in still other proceedings, Mr. Jewett was arrested on a charge of
perjury for swearing to incorrect statements in the annual report to
the state engineer;—a culmination as disgraceful as it was absurd.
In February a suit in Orange County, New York, demanded the removal
of the receiver, and the appointment of a special receiver during the
pendency of the action, with an injunction to prevent the sale of the
road. In March a petition of one Isaac Fowler, a stockholder, for
permission to examine the company’s books, was granted; argument was
heard on the petition of James McHenry to intervene in the foreclosure
suits and further to postpone the sale; the application of Albert Betz
and others to be made parties was granted; and postponement of sale to
April 24 obtained. Last of all, on April 23 and 24, arguments in behalf
of John F. Brown and F. W. Isaacson were heard, asking for postponement
to a still later date. The litigation availed nothing. Judge Potter
in the Brown suit held that the courts could relieve against any
injustice occasioned by the sale, and on April 24 the property of the
Erie Railway was sold for $6,000,000 under foreclosure of the second
consolidated mortgage.[112] The new corporation formed to take over the
railroad was called the New York, Lake Erie & Western Railroad Company,
and had its articles of incorporation regularly filed at the office of
the Secretary of State. Mr. Jewett was elected president. In May the
receiver was discharged,[113] and a new stage in the history of the
road began.
For about seven years the Erie was to be free from the necessity for
further reorganization. This result, unexpected from the nature of
the adjustment of 1878, was due to the vigorous policy of Mr. Jewett,
first, in developing the coal traffic for which the Erie was well
located; second, in improving the condition of the road; and third, in
securing connections with Chicago.
For some time the Erie had been a considerable carrier of coal and a
large owner of coal lands as well. In 1877, the first year in which the
figures were separated in the annual report, roughly 273,000,000 out
of 1,113,000,000 ton miles reported, or something over one-quarter,
were due to the carriage of coal; and $2,697,776 out of a total of
$10,647,807 of the freight earnings came from that business. The
lands owned by the company consisted of 8000 acres in fee, and large
tracts in leasehold and mining rights in the anthracite territory in
the northeast corner of Pennsylvania; together with 14,000 acres in
fee and 13,000 acres of mining rights in the bituminous territory in
the northwest portion of the state.[114] Mr. Jewett felt that this
property could be made of great value to the road, and it was under
his administration as receiver that steps were taken to extend the
holdings of bituminous land, and to control branch roads leading into
the district. The result appeared in a remarkable extension of the
company’s business. While the total freight ton mileage from 1878 to
1884 increased 103 per cent, the ton mileage of coal increased 190
per cent, or nearly tripled; and while the gross earnings on ordinary
freight grew from $7,950,031 to $11,687,520, those on coal increased
from $2,697,776 to $5,437,000. At the same time McKean County, directly
north of the coal lands, and containing large tracts purchased by the
Erie in the course of its other negotiations, turned out to be an
abundant oil-producing district, and made the Bradford branch, which
tapped it, Erie’s most valuable collateral property.[115]
It was partly because of the success of the policy in respect to coal
lands that the Erie was enabled to spend large sums in the improvement
of its road. In the six years from 1878 to 1883 the company put nearly
$14,000,000 into improvements of the road, property and equipment, and
of this about one-half was paid out of surplus earnings. In December,
1883, alone, $304,565 were spent, and in the three succeeding months
nearly double that amount; making a total of nearly $1,000,000 in the
four months previous to April, 1884. The money went toward reducing
grades, straightening curves, increasing weight of rails, etc.,
including the completion of a third rail to Buffalo by which the
serious disadvantage of an exceptional gauge was removed. Its result
was seen in the decrease in the ratio of operating expenses from 75.13
in 1875 and 77.16 in 1876 to 64.78 in 1883; and in the rise of net
earnings per ton mile from .251 cents to .261 cents, while the gross
earnings per ton mile decreased from 1.209 cents to .780 cents. No
policy which the Erie managers pursued met a more crying need, and none
did so much toward maintaining the solvency of the company.
The project of controlling a line of their own to Chicago was brought
actively to the attention of the Erie managers by the danger of being
cut off from a connection with that city. The original line of the Erie
had run to Dunkirk on Lake Erie, from which a branch to Buffalo had
soon been built. For western traffic the Erie had had to rely largely
on the Atlantic & Great Western (later the New York, Pennsylvania &
Ohio), which connected with the main line at Salamanca, New York, and
extended by 1884 west to Dayton, Ohio. In 1857 the Erie first leased
this property. Placed in receivers’ hands in 1869, the Atlantic & Great
Western was re-leased to the Erie on January 1, 1870; sold July 1,
1871, it was again leased to the Erie in May, 1874, only to enter upon
a new receivership on December 9 of that year. The persistent attempt
to control the road showed the value which the Erie placed upon it,
and in fact it was invaluable as a link in a prospective line to the
West. Even while the leases were in force, however, the Erie lacked
that connection of its own with Chicago which seemed necessary to make
it a successful competitor for trunk-line business. In 1882 it was
forwarding passengers over not less than five different routes, over
no one of which could it feel assured of the continuance of contracts
of a favorable nature. In 1881 Mr. Jewett relieved the situation by
acquiring control of the franchise of the Chicago & Atlantic Railway,
extending from Marion, Ohio, on the line of the New York, Pennsylvania
& Ohio towards Chicago, and soon after he entered into a contract
with certain private parties for construction of the road. In 1883 he
executed a new lease of the New York, Pennsylvania & Ohio, which he
hoped would secure for the Erie permanent control of the property, and
about the same time (1882) he purchased a controlling interest in the
stock of the Cincinnati, Hamilton & Dayton, which extended the Erie
system to the important city of Cincinnati. These operations put the
Erie upon a footing which was secure so long as the obligations which
they entailed could be met, and showed a broad-minded appreciation of
strategic necessities. The terms of the arrangement with the Chicago
& Atlantic were as follows: For the construction of the road the Erie
agreed to give to the directors the entire proceeds of the mortgage
bonds of that branch ($6,500,000), and its entire capital stock
($10,000,000); making an aggregate of $61,710 per mile of line. The
proceeds were, however, to be deposited with the president of the New
York, Lake Erie & Western in trust, together with certain subsidies
which had been voted by the counties and townships along the line, and
upon him was to devolve the duty of seeing to the proper application
thereof; and besides this, 90 per cent of the stock was to be deposited
and an irrevocable proxy given thereon for the thirty years’ life
of the bonds.[116] The obligation which the Erie assumed amounted
in practice to guaranteeing that the road should be constructed for
the sum provided, and that interest on the bonds should be paid. In
leasing the New York, Pennsylvania & Ohio the Erie involved itself
more heavily. As lessee it agreed to pay the minimum sum of $1,757,055
yearly (the net earnings of 1882); the actual rental to be 32 per
cent of all gross earnings up to $6,000,000 and 50 per cent of all
gross earnings above $6,000,000, until the average of the whole rental
should be raised to 35 per cent, or until the gross earnings should
be $7,200,000. If 32 per cent of the gross earnings should ever be
less than the $1,757,055 to be paid yearly, then the deficiency was
to be made up, without interest, out of the excess in any subsequent
year. Out of the rental the New York, Pennsylvania & Ohio was to pay
the interest on its prior lien bonds, the rentals of its leased lines,
the expenses of maintaining its organization in Europe and America,
and for five years a sum of $260,000 each year to the car trust.[117]
Finally, in purchasing the Cincinnati, Hamilton & Dayton, the Erie gave
to the holders of the $2,000,000 of stock which it bought beneficial
certificates to the amount of $1,500,000, on which it agreed to make
good any failure of the Cincinnati company to pay 6 per cent per annum.
But though the Erie managers did their best with the conditions which
they were called upon to face, they were unable to hold the company
up under the enormous capitalization and heavy charges left by the
reorganization of 1874–8, at a time when rate wars were sapping its
resources, and when contracts which it was being forced to make
were entailing an annual loss.[118] In spite of the declaration of
sufficient dividends on the comparatively small amount of preferred
stock to terminate the voting trust, it is certain that for most of
the years from 1874 to 1884 the solvency of the road was a precarious
matter, and that there never was a time when any considerable falling
off in earnings or any severe shock to its credit would not have driven
it to the wall.
Such a shock was preparing in the early months of 1884. For some weeks
before the last of April there had been a tendency for the quotations
of Erie securities to fall; no reason was assigned, but it was hinted
that default might be made in the payment of the June interest on
the second consols, and that a receivership was not unlikely. This
weakness was accompanied, and perhaps accentuated, by a strike of
the brakemen on the New York, Pennsylvania & Ohio in consequence of
an order reducing the number of brakemen on each train from three
to two. The truth of the matter came out in May, when the failure
of the Wall Street firm of Grant & Ward both precipitated a stock
exchange panic and laid bare the straits to which the company had
been reduced. Investigation showed that a large floating debt had
been piling up for four principal purposes: First, advances to the
Chicago & Atlantic Railroad; second, advances for coal mines; third,
advances for improvements on the Hudson River at Weehawken; fourth,
equipment instalments.[119] Attempts to raise funds to cover the debt
had resulted in the negotiation of promissory short time notes with
the firm of Grant & Ward, for which $2,500,000 of Chicago & Atlantic
second mortgage bonds had been deposited as security. The company had
been attracted to Grant & Ward by their offer to purchase and dispose
of Chicago & Atlantic bonds at a price 15 per cent above that offered
by any other parties;[120] and had trusted so implicitly in their
integrity as to deposit notes and collateral for its short time loans
detached and independent, one from the other, so that Grant & Ward
were able to, and did, fraudulently raise money upon them to an amount
much larger than the advances they had made. The losses entailed by
the transaction were serious, and the blow to Erie’s credit was even
more severe. The floating debt which had been so hard to carry became
doubly menacing now that the possibility of further short time loans
was practically cut off; and to cap the climax, the earnings for the
first half of the year 1884 showed an unusually large decrease with
the cessation of the fall business. Under these circumstances it was
the part of wisdom to take advantage of every loophole of escape, and
the peculiar provisions of the second consolidated mortgage, denying
to these bonds the right of immediate foreclosure in case of default,
were turned to for relief. It will be remembered that by the terms of
the reorganization of 1878 no right of action was to accrue to the
second mortgage bondholders until on each of six successive due dates
of coupons (three years) some interest secured by the second indenture
should be in default. This being the case the Erie directors decided
to pass the June interest on these bonds. “As a general rule,” said
they in a circular, “the business and earnings of the company are much
less for the first half than for the last half of the year. The falling
off in earnings for the first six months of the previous year has
been unusually large. The coupons of the second consolidated mortgage
bonds are due and payable on the first of June prox.... Under ordinary
circumstances the board might at the present as on the former occasions
provide to some extent for the deficit of the first six months, relying
on the usual increase in earnings of the last half of the year, but in
the present depressed condition of the business of the country and of
the earnings of this company, as well as of others, the board does not
feel at liberty to deal with anything but the business and earnings as
now ascertained, and therefore deems it wise to accept the provisions
of the mortgage as the lawful rule for their government in the existing
emergency....”[121]
However necessary the action, the bondholders of the company could not
have been expected to receive it quietly; and naturally again, the
indignation was intense among the English securityholders, to whom,
more than to any one else, the existing situation was due. In June,
1884, a meeting of stockholders of the company was held in London, at
which much complaint was made of the fall in value of the securities
of the company, and an inquiry into the management was demanded. A
committee was appointed, and two of its members, Messrs. Powell and
Westlake, landed in New York July 15, with protestations of a friendly
spirit toward all concerned. The situation was not encouraging. The
day before their arrival President Jewett had offered his resignation,
and the directors were busy selecting his successor; a large floating
debt was demanding most vigorous attention, and confidence in the
company was at a low ebb. Beyond a doubt the raising of a large amount
of cash, $4,000,000 to $5,000,000, was a pressing necessity, and the
English representatives were anxious to make it plain that at least a
fair share of this should come from American as well as from English
bondholders. Force of circumstances compelled them to give assurance
that the money would be raised, and this done, Mr. John King accepted
the position which Mr. Jewett professed himself ready to resign.
Pending the annual election Mr. King took the position of Assistant to
the President.
On their return to London Messrs. Powell and Westlake reported the
floating debt to be as follows:
Unpaid coupons, June 1, 1884, $1,007,922
Balance of actual and early maturing liabilities other
than the June 1 coupons over and above cash in hand and
money assets considered good and available, $4,447,316
“All the purposes, the expenditures on which have caused the floating
debt,” said they, “seem to us to have been in themselves wise and
politic, but the piling up of a large floating debt for even the
best of purposes is always more or less imprudent and dangerous.
The company’s credit might have borne the strain of the panic, but
it was broken down by the Grant & Ward disaster, and the funding of
its floating debt is now indispensable.... We have suggested to the
president and directors, and now recommend to the committee that an
effort should be made without delay to raise a permanent loan on the
securities available for a total of $5,000,000.”[122] This, it will be
observed, was the old remedy. Inability to meet current expenses was to
be removed by capitalizing the debts which this inability had caused.
The year 1885 was taken up with suits brought against the Erie by
certain of its branch lines. In February the directors of the Buffalo
& Southwestern Company brought suit to recover $345,000 interest
defaulted during the previous January. The complaint alleged that the
Erie was insolvent, and asked that it be restrained from using the
gross receipts of the road until the default should have been made
good. The Erie paid the back interest, but in July, after another
default, an injunction was obtained forbidding it to divert any part
of the earnings received or to be received from this property. It was
recited that on May 24, 1881, the Buffalo & Southwestern had been
leased to the Erie for 35 per cent of the gross earnings, subject to
certain deductions; that the Erie had delayed payment of the rental
due in January, 1885, and had refused to pay that due in July, 1885,
but that it was still receiving the gross earnings of the plaintiffs’
road, and had applied these to the payment of its debts other than
the rentals of this road.[123] In November, after the Erie’s other
troubles were settled, the litigation was terminated by an agreement
to reduce the Buffalo & Southwestern rental from 35 per cent to 27½
per cent. Other suits arose, directly or indirectly, because of the
control which Mr. Jewett maintained as trustee of the stock of the
Chicago & Atlantic and the Cincinnati, Hamilton & Dayton railways even
after his resignation from the Erie Company. On the one hand President
King was anxious to repossess himself of these important branches
for the Erie, and on the other Mr. Jewett was not disinclined to do
what damage he could to the managers who had succeeded in supplanting
him. In the matter of the Chicago & Atlantic Mr. Jewett gained the
first victory in a temporary injunction forbidding the Erie to divert
traffic from this line contrary to contract. This injunction was
soon, however, substantially vacated, and President King in his turn
obtained a decision that Jewett had been made trustee of the Chicago
& Atlantic simply because he had been at the time vice-president of
the New York, Lake Erie & Western Railroad Company and could be relied
upon to control the road as the western outlet of the Erie. A receiver
was subsequently appointed and the road reorganized as the Chicago &
Erie Railroad Company, the Erie agreeing to guarantee payment of its
first mortgage bonds, and receiving in return the $100,000 of capital
stock and $5,000,000 in income bonds, besides $2,000,000 first mortgage
bonds which were in part payment of old advances.[124] In his action
concerning the Cincinnati, Hamilton & Dayton President King was less
successful; and Mr. Jewett was sustained in his refusal to deliver
proxies for the stock held to the larger company. The result was to
turn the Erie to the Big Four, upon which, instead of upon the Dayton
road, the management was for some time to rely for an entrance into
Cincinnati.
During these various contests the suggestions of the English committee
were not lost to view, and in the latter part of 1885 they crystallized
into definite propositions. The floating debt then consisted of two
parts: first, the defaulted coupons on the second consolidated bonds;
and second, the current liabilities accumulated for the purposes before
described. The relief proposed was likewise in two parts, and involved
the issue of a 5 per cent mortgage, secured by deposit of the second
consolidated coupons maturing and to mature in June and December,
1884, June, 1885, and June, 1886, and a 6 per cent mortgage upon the
property of the Long Dock Company, comprising the valuable terminals of
the Erie at Jersey City.[125] The funding of the coupon issue proved
simplicity itself; the funded coupons were exchanged for bonds of the
new gold mortgage, which were to be redeemable at 105 at the pleasure
of the company.[126] By the end of 1886 these bonds had been accepted
by the holders of $32,982,500 of the outstanding $33,597,400 of the
second consols, and $3,957,900 of them had been issued. Dealing with
the Long Dock Company was slightly complicated by the fact that 8000
shares of that company were pledged as part security for the issue of
Erie collateral bonds. To free them $800,000 in cash were deposited
with the trustee of the mortgage, which were in turn employed by him to
pay off $727,000 of the 6 per cent collateral bonds, thus reducing the
interest charge on that issue $43,620 per annum. This done, the Long
Dock Company extended the lease of its property and franchises to the
Erie to 1935 at a rental of $480,000 per annum, and contemporaneously
therewith placed a consolidated mortgage upon its property to secure
$7,500,000 of 50-year 6 per cent gold bonds; of which $3,000,000
were reserved to retire existing indebtedness, and the proceeds of
$4,500,000 were paid to the Erie for the cancellation of its floating
debt. The total result was to increase fixed charges by $270,000 of
interest at 6 per cent on the Long Dock bonds, and by $197,895 on
$3,957,900 of the new funded 5s, less the reduction of $43,620 on
cancelled collateral bonds; leaving a net increase of $424,275.[127]
For its ingenuity the scheme was to be admired; from any other point
of view it was to be condemned as another example of that borrowing to
pay interest which had brought the Erie to its existing straits. The
incapacity of the creditors of the company to realize that continued
borrowing of money to pay current obligations was only to ensure
repeated bankruptcy seemed complete.
After this new “salvation,” the Erie started once more on its laborious
attempt to pay interest on its outstanding bonds. From 1887 to 1892
the business increased somewhat, and despite a decrease in the average
receipts per ton mile[128] a gain of about $4,700,000 in gross earnings
was secured; from which is to be deducted an increase of $310,996 in
fixed charges, and of $4,076,111 in operating expenses.
The prohibition of pooling in 1887 affected the company unfavorably.
Previous to the passage of the Interstate Commerce Act the other lines
had been paying it an annual average of $42,500 on west-bound business
from New York for shortages under the operation of the trunk-line pool,
besides about $88,000 annually on east-bound dead freight and $19,770
on live stock. These payments ceased when the Act was passed, although
a differential on west-bound traffic was subsequently allowed.[129]
But the leakage which was most apparent lay in the large rental and
heavy operating cost of the New York, Pennsylvania & Ohio. It will
be remembered that the Erie had leased that road for 32 per cent of
the gross earnings when earnings were $6,000,000 or under, and 50 per
cent when they should be above that figure. In 1887 this was amended
so as to provide that for every increase of $100,000 over $6,000,000
in the gross earnings the Erie should pay to the lessor an additional
one-tenth of one per cent of such gross earnings until the gross
earnings should be $7,250,000, and the rental 33½ per cent, after which
the percentage was not to increase.[130] Under the old lease the Erie
had guaranteed to carry over the line 50 per cent of all its east-bound
and 65 per cent of all its west-bound through traffic—under the new
lease, these maxima were increased to 55 per cent and 70 per cent; but
even this failed to make the branch road pay. Its grades were high,
its equipment and sidings were limited, its cost of operation was well
above 68 per cent; and the increase in tonnage provided for emphasized
each and every disadvantage. Up to 1893 the results of operations were
as follows:
_Loss_ _Profit_
First 5 months to Sept. 30, 1883 $199,540
Twelve months ending Sept. 30, 1884 $270,281
1885 239,820
1886 51,322
1887 91,965
1888 343,911
1889 331,134
1890 77,376
1891 19,586
1892 425,888
1893 197,106
---------- --------
$1,827,726 $420,203
Net loss, 1,407,523
It thus appears that the terms of the amended lease were in reality
more onerous than the contract which they succeeded, and that whatever
the value of the branch as a feeder, its operation involved large and
fairly regular deductions from the net income of the parent line.
Emphasis on these facts was laid in the annual reports, and frequent
demands were made that the New York, Pennsylvania & Ohio bring its
road up to the standard of like connections of through trunk lines.
Meanwhile improvements were imperative on the Erie’s own lines: new
equipment was needed, new rails and new motive power, and at the
same time surplus earnings were somewhat less. The directors adopted
the expedient of allowing current liabilities to accumulate, and put
$8,496,572 into the road from October 1, 1884, to September 30, 1892,
of which $3,351,977 represented surplus earnings, $2,375,400 increase
in bonded indebtedness, and the balance floating debt. In the matter
of traffic policy they paid particular attention to the coal business,
which, however, lost ground as compared with other freight, and to
the local business, which it was the policy of the management to
encourage. In 1890 the board declared that “the time had arrived when
extraordinary expenditure for improvements and the necessities of the
property were no longer necessary.”[131] In 1891 3 per cent on the
preferred stock was paid, the first dividend since 1884.[132]
From 1887 to 1893, with all its struggles, the Erie was continually on
the verge of failure. The capitalization in 1892 was at the enormous
total of $163,607,485 on an operated mileage of 1698 miles, while
fixed charges were $4993 per mile, and the available net revenue but
$4830.[133] Given, with this condition, a gross floating debt which
amounted in 1892 to $9,163,166, and represented in a large measure
the inability of the company to make necessary repairs, no further
explanation is needed for the bankruptcy which soon took place.
Early in 1893 rumors were current that the Erie might be thrown into
the hands of a receiver. The reports were vigorously denied, but on
July 25, nevertheless, on application of the company itself, Judge
Lacombe appointed President John King and Mr. J. G. McCullough as
receivers of the property. The measure was taken to avoid the sacrifice
of collaterals deposited. “Within the last few weeks,” said President
King, “during the severe money stringency the floating debt of the
Erie ... became impossible of renewal, and in order not to sacrifice
the best interests of the company it was decided to place the road in
receivers’ hands, and preserve the system intact, and preserve and
develop the transportation business for the company.”[134] The action
occasioned no surprise, and there was even a disposition to praise
the management for having preserved the solvency of the company. “The
company was bankrupt _de facto_ when it passed to its new control,”
says Mott, and “that the time when it must become bankrupt _de jure_
was held off so long was a striking demonstration of the tact and
resourcefulness which the new _régime_ had been able to bring to
bear in the management of the company’s unpromising affairs, and in
judicious shifting and manipulating of the heavy burdens Erie bore upon
its chafed and weary shoulders.”[135] What a receivership meant was a
new opportunity to put the company upon a genuinely sound foundation,
by providing new capital to pay off the floating debt and to allow for
future additions and improvements, and by getting fixed charges to a
point well within the road’s capacity to earn. We shall see what use
was made of the chance.
The matter of reorganization was set about at once. On January 1 a plan
appeared, prepared, at least nominally, by a special committee chosen
by the directors,[136] and backed by the well-known firms of Drexel,
Morgan & Co. of New York and J. S. Morgan & Co. of London.[137] By
its terms no mortgage senior to the second consolidated mortgage was
to be disturbed save the first mortgage, which matured in 1897. The
bonds to be dealt with were thus reduced to $41,481,048, besides which
provision had to be made for the floating debt and for future capital
requirements. The plan proposed to authorize a blanket mortgage of
$70,000,000 at 5 per cent, of which $33,597,000 were to exchange at
par for the 6 per cent second consolidated bonds and funded coupons
thereof, $4,031,400 to exchange for the funded coupon bonds of 1885,
and $508,008 for the income bonds. Of the balance, $6,512,800 were to
be reserved to settle with the old first lien and collateral trust
bonds, $15,915,208 to supply capital requirements in the future, and
$9,915,208 to be offered for subscription in order to pay the floating
debt. The new management did not conceive that these last bonds could
be sold to advantage in the general market, but imposed as a condition
of the exchanges as above that second consols, funded coupon, and
income bonds should subscribe at 90 to the extent of 25 per cent
of their holdings; hoping that the grant of the right of immediate
foreclosure upon default would induce the second consols to come in.
Both these consols and the funded coupon bonds of 1885, it may be
remarked, were to be kept alive and deposited with the trustee for the
protection of the new bonds. Stated in tabular form the distribution of
securities was to be as follows:
To acquire the existing second consols, $33,597,400
To acquire the funded coupons of 1885, 4,031,400
To acquire the income bonds, 508,008
For subscription as above, 9,915,208
To acquire the old reorganization first lien and
collateral trust bonds, 6,512,800
To be expended for construction, equipment, etc., not
to exceed $100,000 in any year, except that $500,000
might be used to acquire existing car trusts, 15,435,184
-----------
Total, $70,000,000
The new mortgage was to cover the property of the New York, Lake Erie &
Western, including its leasehold of the New York, Pennsylvania & Ohio,
and the capital stock of the Chicago & Erie Railroad.[138] There was
to be no assessment, no syndicate to raise money, and no voting trust.
This plan was advanced as adequate to restore the prosperity of the
company. Examination will show its weakness. It comprised two measures
of relief: first, reduction of interest by one per cent on the second
consolidated bonds; second, the settlement of the floating debt. The
first might be thought to have been the kernel of the plan, and the
reduction in fixed charges the principal thing aimed at. That it was
not is shown by the fact that so liberal were the new bond issues
that the total fixed charges after reorganization were to be greater
than those before. The floating debt which remained had arisen from
lack of funds with which to make current and necessary improvements
and repairs. This debt was the immediate cause of the failure of the
company, and its cancellation was the real purpose of the plan. The
method proposed was a forced levy upon bondholders, but the levy
took, not the form of an assessment, but that of a subscription to
new bonds on which payment of interest was to be as obligatory as any
other charge. The operation differed, therefore, from an ordinary sale
of securities in the more favorable selling price which it assured.
It did little, however, to lighten the burden which had crushed the
company. The only bright spot in the plan was the provision for future
construction and improvement, which, though involving a still further
increase in indebtedness, was justified because these improvements
would serve not only to maintain but to make greater the earning
powers of the company. Finally, it was the peculiar effect of this
plan that it put the pressure imposed upon the wrong parties: the
second consolidated and other junior bondholders were to be forced to
subscribe to the new issue, when in fact it was the stockholders who
should have been turned to, and whom it was consonant with no sound
principle of finance to spare. Other matters come out in the objections
raised by bondholders.
Opposition to the plan was vigorously headed by men like Kuhn, Loeb &
Co., E. H. Harriman, August Belmont, Hallgarten, Peabody, Vermilye,
and others.[139] In England a meeting of dissentients was held and a
committee was elected;[140] in America the first formal action was the
dispatch of a letter to the Erie managers by opposing bankers which is
important enough to be quoted in full.
“Consultations and comparisons of views have recently taken place,”
said these gentlemen, “between the owners and representatives of the
second consolidated mortgage bonds and other bonds of your company,
to whom the proposition as detailed in your circular of January 2 is
not satisfactory.... Your plan seems unjust, inasmuch as it demands a
permanent reduction of interest on the bonded indebtedness for which
no adequate equivalent is offered, and it levies a forced contribution
upon the bondholders through the demand for a subscription to new bonds
at a price considerably over and above the market value these new bonds
are likely to command, while the fixed charges proposed to be created
appear to be considerably larger than, in the light of past earnings
and experience, the property of the company can carry with safety.
“Instead of 5 per cent bonds, as provided in the published plan, 4 per
cent bonds, in our opinion, should be issued, while for the interest
to be surrendered the bondholders should receive an equivalent in
interminable non-cumulative 4 per cent debentures, interest payable if
earned; the holders of the debentures to have sufficient representation
in the management to protect them.
“The floating debt should be liquidated from the proceeds of an
adequate amount of new 4 per cent bonds (and debentures if desirable),
which shall be offered to the shareholders and bondholders at a
price rather below than above the probable market value of the new
securities, and under the guarantee of an underwriting syndicate.
“Provision should also be made to obtain the conversion on fair terms
of the reorganization prior lien bonds into the new bonds, so that it
shall become practicable to secure the new 4 per cent bonds at once by
a lien second only to the ‘Erie first consolidated 7 per cent bonds’;
the new 4 per cent bonds to be issued under a general mortgage to an
amount sufficient to provide for future additions and improvements, and
with adequate provision for the taking up of the underlying bonds, and
the issue of 4 per cent bonds in their stead.... Any plan now adopted
for the readjustment of the finances of your company should seek,
as its first object, to reduce the permanent charges so well within
the earning capacity of the property as to make another default in
the future an improbability.... We trust this communication will be
received in the spirit in which it is submitted.”[141]
The directors refused to modify their plan, and the bankers, therefore,
notified them of the election of a protective committee.[142] On March
6 a meeting of stockholders approved the plan, and the same week
Messrs. Drexel, Morgan & Co. gave notice that, having received deposits
of a majority of each class of bonds, they had declared the plan
operative as announced.[143]
Defeated in their appeal to the securityholders, the opposition
turned to the courts. As a preliminary, they obtained an opinion from
the well-known firm of Messrs. Evarts, Choate & Beaman, which held,
first, that the Erie could not legally pay interest on the new bonds
proposed until it had paid the interest on every one of the old second
mortgage bonds, regardless of whether the latter was deposited with
the reorganization committee; second, that if the old second mortgage
bonds which were deposited as security for the new issue should be kept
alive as proposed, the company would be increasing its obligations
beyond the legal limit;[144] and third, that much of the stock voted
at the special meeting at which the new mortgage had been authorized
was not really owned by the persons who had issued the proxies thereon
as the law provided.[145] Following the opinion, suit was commenced by
Mr. Harriman in April for an injunction against the recording of the
new mortgage, on the ground that the Drexel & Morgan proxies did not
represent the actual stockholders, and in June by one John J. Emery to
prevent the execution of the mortgage. Judge Ingraham in the Supreme
Court Chambers denied an injunction, using in his opinion the following
language: “While it is clear,” said he, “that there are certain
obligations resting upon the majority to refrain from infringing the
legal right of the minority, and that a court of equity will enforce
and protect the rights of the minority, still, when the holder of a
very small number of bonds or shares of stock seeks to enjoin a very
large majority from carrying out a plan such majority deem to be for
their benefit, I think the court should not interfere unless it plainly
appears that some legal right of the minority is endangered.”[146]
What could not be accomplished by the hostile bankers was nevertheless
to happen from the inherent weakness of the plan itself. It has been
said that the new scheme involved an increase instead of a decrease
in fixed charges. How this was to be met was not demonstrated; and
already in June, 1894, it was necessary to announce that the coupons
then due would not be paid for the present. In December matters were
even worse, and a circular from Drexel, Morgan & Co. confessed the
company’s inability to meet the coupons maturing. “Nevertheless,” the
firm continued, “it seems to us inexpedient to treat the inability of
the company to pay interest as an occasion for present foreclosure
without giving a further chance to the company, especially as payment
of bondholders’ subscriptions to the new bonds has not yet been called
to provide the company with money necessary to pay the floating
debt. It is, therefore, now proposed that the new bonds be issued
with the coupons of June 1, 1894, and December, 1894, attached, but
stamped as subject to a contract with the company which shall provide
that they shall be paid as soon as practical out of the first net
earnings over and above the railroad company’s requirements to meet
interest and rentals accruing after December 1, 1894, except in case
a default on later coupons shall give power of foreclosure, in which
event the stamped coupons shall retain all their original rights.”
The modification was assented to,[147] but could not save the plan.
Reluctantly the managers were forced to abandon it, and to consent to
more radical propositions.
August 26, 1895, the new and final reorganization plan appeared. There
were to be issued:
$175,000,000 first consolidated mortgage 100-year gold bonds;
30,000,000 first preferred 4 per cent non-cumulative stock;
16,000,000 second preferred 4 per cent non-cumulative stock;
100,000,000 common stock.
The first consolidated mortgage bonds were to be divided into prior
lien bonds to the amount of $35,000,000, and general lien bonds to the
amount of $140,000,000; the former to have priority of lien over the
latter for both principal and interest. Both classes of bonds were to
be secured by mortgage and pledge of all railroads and properties of
every kind embraced in the reorganization as carried out and vested in
the new company, and also all other properties which should be acquired
thereafter by issue of any of the new bonds. Both issues were to bear
interest at 4 per cent, except $29,435,000 of the general lien bonds,
which were to bear 3 per cent for two years from July 1, 1896, and 4
per cent thereafter. The stock was to rank for dividends in the order
given. Provision was made that no additional mortgage could be put upon
the property to be acquired, and that no additional issue of first
preferred stock could be made except with the consent in each instance
of the holders of a majority of the whole amount of each class of
preferred stock, given at a meeting of the stockholders called for that
purpose; and with the consent of the stockholders of a majority of such
part of the common stock as should be represented at such meeting, the
holders of each class of stock voting separately; also that the amount
of second preferred stock could not be increased except with like
consent of the holders of a majority thereof, and a majority of such
part of the common stock as should be represented at the meeting. All
classes of stock were to be deposited in a voting trust until December
1, 1900, and until the expiration of such further period, if any, as
should elapse before the Erie should in one year have paid 4 per cent
cash dividends on the first preferred stock; though the voting trustees
might terminate the trust earlier at their discretion.
Generally speaking, the prior lien bonds were relied on to pay the
floating debt, to buy in the New York, Pennsylvania & Ohio, and to
retire certain prior liens of the old company. The general lien bonds
were reserved for undisturbed bonds, and, with the first preferred
stock, exchanged for junior New York, Lake Erie & Western securities.
The second preferred stock went for old preferred stock and income
bonds, and the new common stock exchanged for old common.
The distribution was as follows: The old New York, Lake Erie & Western
reorganization first lien and collateral bonds were paid off from the
proceeds of the new prior lien bonds; the second consols received
75 per cent in new general lien bonds and 55 per cent in preferred
stock; the funded coupon bonds of 1885 received 100 per cent in general
lien bonds, 10 per cent in first preferred, and 10 per cent in second
preferred stock; the income bonds 40 per cent in general liens and 60
per cent in first preferred stock; the New York, Lake Erie & Western
preferred stock, on payment of assessment, 100 per cent in new common.
For all other bonds included in the plan there were reserved general
lien bonds in amounts usually equal to the par of the securities to be
retired.
The cash requirements and the floating debt were as follows:
Floating debt, receivers’ certificates, etc., $11,500,000
Collateral trust bonds (Erie), at 110, 3,678,400
Reorganization first lien bonds (Erie), 2,500,000
Early construction and expenditures, 5,337,288
Car trusts for three years, 2,000,000
-----------
$25,015,688
The necessity for retirement of the first lien and collateral bonds
arose from the early maturity of the former, and from the fact that
stocks and bonds of various Erie properties which it was desirous to
consolidate with the new company were pledged for the latter. The
wisdom of allowing for early construction and expenditure could not be
denied; car trust payments were required to preserve the rolling stock,
and the floating debt and receivers’ certificates called obviously for
cash. Provision was made, first, by an assessment on the stock of $8
on preferred and $12 on common, with higher payments in case of delay,
and estimated to yield $10,023,368; second, by a contribution from
the New York, Pennsylvania & Ohio of $742,320; and third, by the sale
of $15,000,000 prior lien bonds as indicated above. A syndicate of
$25,000,000 was formed to subscribe to the prior liens, and to take the
place of and succeed to all the rights of stockholders who should not
deposit their stock and pay the assessment thereon.
With the settlement of cash requirements, unification of the Erie
system was assured; “subject only to the undisturbed bonds and stock
until retired by use of the bonds reserved for that purpose or the
rentals corresponding thereto.” “The new bonds and stock will,” said
the plan, “represent the ownership (either in fee or in possession of
securities) approximately of:
N. Y., L. E. & W. proper, 538 miles
N. Y., P. & O., 600
Chicago & Erie, 250
N. Y., L. E. & W. Auxiliary Companies, 550
----
Total, 1938 miles[148]
—with valuable terminal facilities at Jersey City, Weehawken, Buffalo,
etc., and also one-fifth ownership in the stock of the Chicago &
Western Indiana Railroad Company. Also all the Erie coal properties,
... representing an aggregate of 10,000 acres of anthracite, of which
about 9000 acres are held in fee, and 14,000 acres of bituminous, held
under mining rights ... also the Union Steamboat Company, with its
terminals and other properties in Buffalo, and its fleet of five lake
steamers on which the Erie mainly depends for the lake and railway
traffic,” etc.
Fixed charges under the plan were estimated at $7,850,000. Fixed
charges in 1894 had been $9,400,000. For the first two years after
reorganization, moreover, the charges were to be further reduced by
$300,000 per annum, as the new general lien bonds were to bear only
3 per cent interest during that period; and an additional saving of
$1,000,000 was looked for when the exchange of old bonds for new on
the maturity of its existing prior issues should have been eventually
completed. This sum of $7,850,000 the company was expected to have
no difficulty in earning in view of the immediate expenditure of
$5,337,208 for new construction, additions, and betterments, and the
gradual distribution of the proceeds of $17,000,000 of general lien
bonds to the same end. The compensation to Messrs. J. P. Morgan & Co.
and Messrs. J. S. Morgan & Co. for their services as depositaries, and
in carrying out the plan was put at $500,000 and expenses. Foreclosure
was finally to take place and a new company was to be organized.
This plan differed from its abandoned predecessors in four important
particulars, each of which was in its favor:
(1) It employed bonds and stock instead of bonds alone;
(2) It lowered instead of increased fixed charges;
(3) It procured cash from stockholders instead of from second
consolidated mortgage bondholders; and
(4) It absorbed the New York, Pennsylvania & Ohio into the Erie system
instead of continuing the lease thereof.
In the employment of bonds and stock instead of a simple issue of
bonds, the Erie managers adopted what experience has shown to be the
best method of dealing with the complicated situation arising from
a great railroad default. The use of securities on which return was
optional side by side with those on which return was obligatory tended
both to protect the railroad company when earnings were low, and to
benefit the recipients of the new securities when earnings were high.
As worked out, it gave to the second consols and funded coupons a less
return in the one case, and an equal or greater return in the other,
than did the plan of 1894, and to the income bonds, though it offered
no chance of equal gain, it at least promised a minimum below which
payments should not fall. It further made a far nicer recognition of
the relative priorities of different classes of old bonds possible, and
whereas the previous plan had made the same demands on, and had given
the same return to the second consols, the funded coupon bonds of 1885,
and the income bonds, the new plan gave, as has been pointed out, to
the first 75 percent in general lien bonds and 55 per cent in first
preferred stock; to the second, 100 per cent in general lien bonds, 10
per cent in first preferred, and 10 per cent in second preferred; and
to the third, 40 per cent in general liens and 60 per cent in first
preferred stock. Income, coupon, and consolidated bonds benefited
alike from the assessment upon the stock, which laid the burden of
raising cash upon the owners of the road, where it most properly fell.
No species of security was given for the assessment, not even common
stock, with which the managers might well have been generous; although
it must be remembered that the sale of $15,000,000 prior lien bonds
for cash was part of the reorganization plan. It may be remarked that
since, on July 2, 1895, the common stock was being offered at 10⅝, with
no sales, and the preferred at 22½, and since the chance for dividends
which the new stock was to enjoy was most remote, it was perhaps well
that the syndicate guarantee of the payment of assessments had been
obtained. Fixed charges by the new plan were lower, as a result of the
liberal use of stock in the exchanges and the cancellation of floating
debt as above; while the terms under which the outstanding New York,
Pennsylvania & Ohio bonds were retired were the most drastic part of
the scheme. In all, the total mortgage indebtedness of the Erie Company
and its leased or controlled lines of $234,680,180 for January, 1896,
was reduced to $137,704,100 by June 30 of that year.[149]
A weak point in the plan was, nevertheless, the small reduction in
bonded indebtedness which it occasioned. Although, to repeat, the
bonded indebtedness of the system was reduced from $234,680,180 to
$137,704,100, the shrinkage was more apparent than real, since it
consisted chiefly in the exchange of stock for New York, Pennsylvania
& Ohio mortgage bonds, on which interest had not been paid by the
Erie, and but seldom by the New York, Pennsylvania, & Ohio itself.
These securities were slashed in most drastic fashion, particularly
such of them as were inferior to the first mortgage. The amount of
the reduction in the volume outstanding is indicated by the fact that
for $5000 first mortgage New York, Pennsylvania & Ohio bonds were
given $1000 Erie prior lien bonds, $500 Erie first preferred, $100
Erie second preferred, and $750 Erie common stock; and for $500 second
mortgage, or for $1000 third mortgage, were given $100 Erie common
stock. If, now, we exclude the New York, Pennsylvania & Ohio bonds
from our consideration of the funded debt, we find the indebtedness
of the Erie system on January 1, 1896, excluding the non-assumed New
York, Pennsylvania & Ohio bonds to have been $121,399,431; and on June
30, excluding the new prior lien bonds used to exchange for these
securities, to have been $123,304,100; or an increase through the
reorganization of $1,904,669.[150] Further, there was an accompanying
increase in the capital stock of the combined companies, which did
not, of course, involve an increase in fixed charges, but which
increased the volume of securities outstanding.[151] What the reduction
in the capital of the New York, Pennsylvania & Ohio, joined with its
amalgamation with the Erie system, did do was to lessen the burdens of
that line to the parent company. For many years the Erie had engaged
to operate the branch for 68 per cent and had paid 32 per cent of its
gross earnings to the New York, Pennsylvania & Ohio, to be applied to
payment or partial payment of interest on the excessive issues which
were now retired. It was probably to be long before an operating
ratio of 68 per cent could be successfully maintained; but the Erie
after reorganization was obliged to turn over, not 32 per cent of
gross earnings, but 4 per cent on the $14,400,000 prior lien bonds
which had been given for New York, Pennsylvania & Ohio securities, or
an amount of $576,000; which amounted to a reduction of the minimum
rental of more than one-half, and of the sums actually paid of almost
three-quarters.[152]
Turning again to fixed charges, we find them estimated, after the first
two years, at $7,850,000. The average net earnings for the period
1887–94 had been $9,331,250. These earnings will not serve strictly as
a basis for calculation, for from 1887 to 1892 they include an average
of perhaps $750,000 derived from Lehigh Valley trackage payments
and other sums now discontinued. With the deduction, therefore, of
this amount from the net earnings of the period named, the average
is reduced to $8,768,750; or $918,750 more than it was thought fixed
charges would be. When it is considered that this $918,750 represented
the sum available for dividends on $146,000,000 of outstanding Erie
stock, it is plain that the over-capitalization of the company in 1895
was still very great.
With these comments it is necessary to leave the plan. It was far
the best that had ever been applied to the rehabilitation of Erie’s
affairs; it was discriminating in its nature, and, thanks to the
increasing prosperity of the last eleven years, it has been fortunate
in its results. In August, 1895, a decree of foreclosure was signed
in the city of New York, and the following November the property was
sold under the second consolidated mortgage, and purchased by the
reorganization committee for $20,000,000.[153]
Since 1895 the Erie has shared in the prosperity of the country. Its
ton mileage has increased from 3,939,679,175 in 1897 to 6,275,629,877
in 1907; its gross earnings have grown from $31,497,031 to $53,914,827;
and its net earnings, which had hovered for so many years near or
below the level of fixed charges, have now soared away above. Under
these circumstances it is but natural that large sums should have been
applied to improvements. Between December 1, 1895, and June 30, 1907,
$12,732,486 were spent in the purchase of land, in yards, stations,
and buildings, in reducing grades, relocating tracks, and in other
ways, and charged to capital; $36,511,046 were spent for new equipment,
and charged to capital; and $8,625,307 were taken from income for
equipment and improvements of various sorts. These expenditures have
had a most gratifying result. The average train load has grown from
224.74 tons in 1895 to 471.67 in 1907, although coal now constitutes a
smaller proportion of the freight; and the average revenue per train
mile has more than doubled, in face of a revenue per ton mile which
has only slightly increased. In 1907 the Erie’s ton mileage was 59 per
cent greater than in 1897, and its passenger mileage was 73 per cent
greater, but the expense of conducting transportation had increased
but 27 per cent. Instead of freight cars with an average capacity of
22½ tons the company now uses cars which average 34 tons. Instead of
locomotives which on the average could exert a tractive force of only
24,500 pounds as late as 1901, it has now engines which average 31,000.
Freight train mileage is 2,600,000 less than it was in 1896, and
passenger train mileage has only slightly increased.
And yet, with all this prosperity, it cannot be said that the Erie
enjoys an assured position. In 1907 it had to pay out 89 per cent of
the largest income which it had ever received for operating expenses,
fixed charges, and taxes. Of its net income of about $6,000,000 the
modest dividends of 4 per cent on its first and second preferred stock
absorb some $2,500,000, and the widespread financial difficulties of
1907 have led its management to declare the dividends for that year
payable in scrip and not in cash. And although the present period of
reaction dates back but a little way the company has been already
obliged to the issue of short term notes.
In matters of railroad policy the Erie has accordingly been
conservative. In 1898 it acquired control of the New York, Susquehanna
& Western, from New York City to Wilkesbarre in northeast Pennsylvania.
Three years later it bought the entire stock of the Pennsylvania
Coal Company in order to protect its tonnage, and, as the directors
expressed it, for other reasons which seemed good; and in 1901 also it
bought an interest in the Lehigh Valley. The most sensational episode
which has occurred has been the purchase and subsequent release of
the Cincinnati, Hamilton & Dayton. It seems that in 1905 Mr. J. P.
Morgan bought a majority of a syndicate’s holdings in Cincinnati,
Hamilton & Dayton stock, amounting to a majority of the total issue;
a purchase which carried control of the Pere Marquette and of the
Chicago, Cincinnati & Louisville, or of a total system of 3675 miles.
This stock Mr. Morgan turned over to the Erie at a price reported to be
$160 a share. From a traffic point of view the deal seemed likely to
strengthen the Erie’s position in Ohio, Indiana, and Michigan, while
more than doubling the mileage of its system. Because of the financial
condition of the new companies, however, the purchase was decidedly
unwise; and, after an investigation, Mr. Morgan’s offer to take the
road off the Erie’s hands was gladly accepted. On December 4, 1905,
Mr. Judson Harmon was appointed receiver of the Cincinnati, Hamilton
& Dayton and of the Pere Marquette, and the reorganization of these
properties is just being completed.
At present the Erie is operating 2169 miles of road as against 2166
in 1896. Its earnings have greatly increased, its capitalization has
grown in less proportion,[154] but it has not yet a sufficient margin
of surplus earnings to meet a decline in prosperity without serious
misgivings. Dividends on its first preferred stock have been paid since
1901, and on its second preferred since 1905. The common stock cannot
expect a dividend in any period which can be foreseen.