STOCK AND BOND INFLATION.
The complaint is frequently heard from railroad men that our freight
rates are too low, and in support of it the statement is usually made
that the greater part of the railroad stocks of the United States pays
dividends considerably smaller than the average interest realized by
capitalists on money loaned or invested in other enterprises.
This statement may be true, and yet it is valueless as an argument for
higher rates. It may be admitted that the dividends declared upon the
face values of railroad stocks are quite moderate, but it is a fact too
well authenticated to be contradicted that railroad securities represent
to a considerable extent only fictitious capital. The public concedes
that liberal returns should be allowed to railroad companies on money
actually invested, but it naturally objects to being taxed for the
purpose of making dividends on watered stock. The evil referred to is a
serious one, and has contributed much to the general demand for railroad
reform. Most of the early roads of this country were built for the
accommodation of local traffic. They were constructed and managed by
business men upon business principles. The stock issued by the companies
was in most cases paid for in full and was not unfrequently sufficient
for the completion of the entire road, and no incumbrance was permitted
by the owners to be placed upon the property. These enterprises as a
rule proved very profitable. One of the first roads running west of
Chicago will serve as an illustration. The Galena and Chicago Union
Railroad Company paid a 10 per cent. dividend within a year after being
opened to traffic, and gradually increased its dividends to 15, 20 and
22 per cent. During the first two years of the road's operation its
expenses were only 38-1/2 per cent. of its earnings. During the second
year the company, after paying a 15 per cent. dividend, diminished its
debt nearly $60,000 and increased its surplus $11,700. In 1856 the road
had a length of 232 miles, on which the gross earnings amounted to
$2,315,787. This revenue exceeded the estimate made by the company's
officers the year previous by $300,000. In his annual report for 1856
the president of the company said: "This result shows an _increased
surplus_ of $65,000, after paying 22 per cent. in dividends and all
expenses and interests chargeable to income account." The report also
shows that expensive improvements, such as large permanent bridges and
stone culverts, displacing as a rule wooden ones, were charged to
current expenses.
The financial success of railroads soon attracted the cupidity of
financial adventurers--men of great energy, but small means--whose aim
was to secure the greatest possible returns with the least possible
outlay of money. With the introduction of these elements into railroad
circles the era of speculation commenced. Take the line just referred
to. In 1852 the average number of miles operated was 62, and the year
following, 90. But while the number of miles operated increased less
than 50 per cent., the capital stock of the company grew from $444,193
to $1,362,559, and its debt from $60,145 to $542,287. The capitalization
of the road was thereby increased from $8,000 to $21,000 per mile, and
this was done for the purpose of making the capital appear adequate to
its earnings. Nearly all railroads became in time the foot-balls of
shrewd manipulators. They were bonded before they were constructed, and
often for more than the value of the completed road. Stocks at the best
only represented nominal values and were given as premiums to the
bondholders or promoters of the road.
But the science of stock-watering did not reach its fullest development
until during the period of railroad consolidation. Fictitious values
were now created as often as a new consolidation took place. Watered
stocks and bonds were watered again and again, until they represented
little more than a purely imaginary capital upon the basis of which
dividends might be declared. Take the case of the New York Central and
Hudson River Railroad companies, which consolidated in 1869 with a
capital of $103,110,137.31. The former of these roads was organized in
1853 by the consolidation of ten smaller roads connecting the cities of
Albany and Buffalo. The capital stock of these companies amounted to
$20,799,800, of which $16,852,870 was claimed to have been paid in.
Their funded debt was $2,497,526. It is impossible at this day to
ascertain the original cost of all these roads, but it is certain that
the above sums represent about three times the amount actually expended
for their construction.
One of the roads entering into the consolidation was the Utica and
Schenectady. It was 78 miles long and formed about one-fourth of the
consolidated line. It had the heaviest grading and rock-cutting, was the
best-equipped and undoubtedly the most expensive, in proportion to its
extent, of the ten roads out of which the New York Central was created.
The original cost of this line was $2,000,000. Bonds were never issued
by the company. The line was profitable from the very beginning, paid
regularly ten per cent. dividends,--the limit to which railroad
companies were then restricted,--and had a large surplus, which it
expended mainly for improvements. No assessment was ever made on the
stock beyond the $1,500,000 which was originally paid in by the
shareholders and upon which they had drawn regular and liberal
dividends. Taking the original cost of this line as a basis, it is but
fair to presume that the entire line from Albany to Buffalo, covering a
distance of 297 miles, did not cost to exceed $6,000,000. These roads,
however, entered into the consolidation with a capital stock of
$15,274,800 and a bonded indebtedness of $1,696,326.
Estimating the cost of the branches upon the same basis upon which we
have estimated that of the main line, we shall find that the total
original cost of the consolidated lines cannot have exceeded $8,000,000.
The Mohawk Valley road was put in at $2,000,000 and the Syracuse and
Utica direct at $600,000, though the roads only existed on paper and did
not represent any value whatever. The Schenectady and Troy road, which
went into the consolidation with $650,000 stock and $90,000 bonds, had
been bought for less than $100,000 two months previous to the
consolidation.
It will thus be seen that already nearly one-third of the stocks and
bonds of the consolidated companies was water. The consolidation
agreement fixed the capital stock of the New York Central at $23,085,600
and its funded debt at $11,564,033.62, increasing the stock over
$2,000,000, and the bonded debt over $9,000,000. The latter was more
than quadrupled, and $8,000,000 worth of bonds were, under the name of
consolidation certificates, given as a present to the stockholders of
the new road. The capital stock of the New York Central grew steadily up
to the time of its consolidation with the Hudson River road, when it was
$28,795,000. All improvements made during this time were paid for out of
its surplus earnings, with the single exception of the Athens branch,
for which the company issued $2,000,000 of its stock.
The gross earnings of the New York Central in 1854 were $5,000,000, and
its net earnings $2,830,000. In 1863 its gross earnings were in round
numbers $10,000,000, and in 1869 they reached $15,000,000. The dividends
paid during that year amounted to $4,300,000, and the interest to
$894,000. In view of the fact that the bonded indebtedness of the road
was from two to three million dollars more than the original cost, this
dividend of 15 per cent. upon a wholly fictitious capital must be
regarded as an unwarranted tribute levied upon the commerce of the
country. But we shall soon see that in railroad hydraulics, as well as
in other branches of human industry, success stimulates to still greater
energy.
The Hudson River Railroad Company was organized in 1847. It extended
from New York City to East Albany and was 144 miles long. There are no
data extant upon which could be based a reliable estimate of its
original cost. Estimating it upon the basis of that of the Utica and
Schenectady, we should have to place it somewhat below $3,000,000. While
such an estimate may be too low, the amount of its funded indebtedness
in 1851, which was $5,640,000, probably more than covers the amount
actually expended in the construction of the road. In 1851 the capital
stock of the Hudson River road was $4,000,000. In 1853 the funded debt
had increased to $7,000,000, and in 1862 to $9,000,000. In 1869 the
bonded indebtedness had decreased to $4,309,000, but the capital stock
had grown to over $16,000,000. Between 1853 and 1869 the company
increased its stock and bonded indebtedness nearly $11,000,000, while
the assessments paid by its stock and bondholders during this time did
not exceed $1,000,000. Improvements were made, but these were chiefly
paid for out of the surplus earnings of the road. It has been shown by
experts that $6,640,000 is a high estimate of the actual original cost
of the Hudson River road to its stock-and bondholders, and that
securities to the amount of more than $13,000,000 represented surplus
earnings and water. At the time of the consolidation of the Hudson River
and New York Central railroads the capital stock of the two roads had
grown to $44,800,000. Under the consolidation agreement the stock was
fixed at $45,000,000. The new company also assumed all the bonded and
other indebtedness of both roads. If the consolidation manipulators had
paused here, the capital of the new company would have been somewhat
less than $60,000,000, or more than three times the cost of the
property. But the road was, under existing rates, capable of earning
dividends on a much larger capital, and this emergency was met by the
issuance of consolidation certificates to the amount of $45,000,000. The
total capital of the road was thus increased to and made to pay
dividends on over $103,000,000, while the total cost of the road and its
equipment, as claimed by the company in 1870, was less than $60,000,000,
their estimate being based upon assumed consolidation values and the
expenditures made from surplus earnings. During the same year the gross
earnings of the company were $22,363,320, and their net earnings
$8,295,240. In 1880 the gross earnings had increased to $33,175,913,
and the net earnings to $15,326,019. The company was able to declare in
that year 11.82 per cent. dividend on its $89,500,000 of fictitious
stock. In 1890 its gross earnings were $37,008,403, or $26,050 per mile,
while its total net earnings were $12,516,273. The gross earnings have
largely increased during the years 1891 and 1892. It is safe to say that
$2,000,000 per annum would pay very liberal interest and dividends on
the amount of money expended upon the construction of the New York
Central and Hudson River Railroad from the proceeds of its bonds and
stocks. By the creation of fictitious values the managers of the company
have attempted to impose an exorbitant tax upon the commerce and travel
of the country for all time to come. The Government guarantees an
inventor a monopoly only for a limited space of time, upon the
expiration of which his invention becomes the common property of the
people; but railroad managers endeavor to collect, under the protection
of our laws, an exorbitant royalty from our people forever.
The case of the New York Central and Hudson River Railroad Company is
only one of the innumerable instances of stock watering in the history
of American railroads. Indeed, it can be shown that stock-watering
reached a still higher degree of development in the case of the Erie
road. It has been demonstrated that the actual original cost to the
stock-and bondholders of the New York Central Railroad Company, which
was, with its branch lines, 593 miles long, did not, including the
Athens branch, exceed $10,000,000. Its cost to its owners, in 1869,
including the bonuses, premiums, commissions and fictitious equalization
values of several transfers, was reported by them to be only
$37,600,000, or about $63,400 per mile. At about the same time the main
stem of the Erie Railway, extending from New York to Dunkirk, a distance
of 459 miles, was represented by a capital of $108,807,687, or $237,000
per mile. Considering the inferiority of this road to the New York
Central, we are forced to the conclusion that nearly 85 per cent. of the
capital of the road represented water, or, in other words, that the
commerce of the United States was taxed to pay dividends on about
$90,000,000 of watered securities. In 1863 the Erie Railroad had
outstanding $11,437,500 of common stock. In 1864 this had been increased
to $15,693,000, in 1868 to $37,765,000, and in 1869 to $70,000,000. Not
one-tenth of this enormous increase of capital was ever expended on the
property of the road. The stock was sold at from 20 to 40 cents on the
dollar, and the proceeds disappeared in the hands of its managers. To
what extent this freebootery was carried will probably never be known.
An idea of the rottenness of the Erie management may be had from the
fact that the courts at one time ordered its president to restore to the
company $9,000,000 of diverted securities, which order was complied
with. Vast private fortunes were amassed by nearly all the men who
directed the affairs of the road, and the mismanagement became in time
so notorious that the legislature of the State of New York was appealed
to, to remove the directors of the road for the protection of its
stockholders, and to reduce the capital stock of the company to the
amount actually paid for it. This movement failed, however, because it
was opposed by the very stockholders whose interests were supposed to
have suffered by directorial mismanagement. They preferred to continue
to draw dividends on the face value of stocks which they had purchased
at 20 cents on the dollar. The capitalization of the company has since
been increased to $163,679,825, and it is by no means a secret among
those familiar with railroad values that the bonded indebtedness of the
Erie road represents alone many millions more than the total amount that
was ever invested in the property.
The principal competitor for through traffic of the two companies whose
financial operations we have just reviewed is the Pennsylvania Central
Company. It has often been asserted by the managers and friends of this
company that its capital is free from water; but this is not true. In
1864 a dividend of $4,130,760 was made out of the surplus earnings of
the road. This dividend was payable in capital stock and was equal to 30
per cent. of the then outstanding capital. Similar surplus dividends,
each equal to 5 per cent. of the company's outstanding stock, were
declared in 1867 and 1868. The people were thus taxed to pay dividends
on a capitalized surplus which had been derived from excessive charges
previously imposed on them. I shall not attempt here to determine
whether the capital represented by the Pennsylvania Railroad Company has
been honestly invested. A committee of Congress has expressed the
opinion that the capitalization of its main line exceeds the amount of
the actual cost of the property by more than eleven million dollars.
There is, however, a system of inflation practiced by the Pennsylvania
Railroad Company which is simply a new form of bond and stock watering.
More than one-half of the capital of this company has been invested in
the stocks and bonds of other corporations. In 1891 the amount so
invested was $154,319,240, and the income derived from it $4,852,181.
This does not only cause the stocks and bonds of certain companies to be
counted twice, but exacts a double tax from the commerce of the
country, interests and dividends upon the same capital being paid both
to the bond- and stockholders of the Pennsylvania Central and to the
bond-and stockholders of the roads in whose securities it has made
investments. The income of the company is thus swelled far beyond the
amount which the traffic reports indicate. It will be seen that, to
perpetuate extortionate rates, this process of manifolding securities
might be continued indefinitely.
The cost to its stock-and bondholders of the Baltimore and Chicago line
of the Baltimore and Ohio Railroad, which has a length of 795 miles, was
estimated by the company's officers at about $57,000,000. The actual
cost of this road, owing to its expensive mountain grades, was probably
greater than that of any of the other through lines between the
sea-coast and Chicago, but there can be no doubt that the capitalization
of this road represents from one-half to one-third pure water. At the
time of the completion of this road to Chicago the surplus earnings of
the company, after the payment of interest and dividends, amounted to
over $29,000,000. This had been charged to "profit and loss" and used in
the construction of branch lines. Thus an amount equal to more than half
of the reported cost of this line had at the time of its completion been
returned to its owners in other railroad values.
The Select Senate Committee on Transportation Routes to the Seaboard in
1874 estimated the excess of the capital over actual cost of the Erie
road, from New York to Dunkirk, at $68,807,000; that of the New York,
Lake Shore and Michigan Southern line to Chicago at $115,188,137, and
that of the Pennsylvania and Fort Wayne line to Chicago at $11,290,374.
If this estimate was correct the entire over-capitalization of these
lines, on which the commerce between the West and the East was forced to
pay a dividend of 8 and 10 per cent. per annum, was no less than
$195,000,000. The committee assumed the actual cost of these roads to be
$182,000,000, or about $78,000 per mile. They based their estimate upon
the cost of the main branch of the Baltimore and Ohio, as reported by
their officers, supposing it to represent the actual outlay made by its
stock-and bondholders. Various revelations which have since been made to
the public, as to the real cost of railway construction, justify the
belief that the estimated cost of $78,000 per mile for those roads is
far too high. Mr. Henry Poor, several years ago, estimated the average
cost of the roads of the United States at $30,000 a mile. Making
allowance on one hand for Mr. Poor's tendency to favor the railroad side
of the question, and on the other hand for the more expensive grades,
double tracks and better terminal facilities of these trunk lines,
$50,000 per mile may be considered a fair estimate of their average
cost. Upon this basis the total cost of the three lines in question
would amount to $116,450,000, and the excess of their capital over
actual cost would be the enormous sum of $261,000,000, or 325 per cent.
of their actual cost, and probably not less than 400 per cent. of the
original cost to their stock-and bondholders. The capital of these
companies has since been considerably increased, to enable their
managers to increase their dividends, and with it the tax levied upon
the commerce of the country.
These are only a few of the many instances of stock watering that might
be mentioned. In fact, there are to-day very few railroads in the United
States that are entirely free from it. It is a notorious fact that the
stock of a large number of railroad companies represents little or no
value, having either been sold at a mere nominal price or been donated
as a premium or bonus to those who purchased a large amount of the
company's bonds. In recommending, in his December, 1891, annual message,
Government aid for the Nicaragua Canal, President Harrison said: "But if
its bonds are to be marketed at heavy discounts and every bond sold is
to be accompanied by a gift of stock, as has come to be expected by
investors in such enterprises, the traffic will be seriously burdened to
pay interest and dividends." It is not difficult to surmise to what
enterprises the President referred. It has for many years been a
well-settled principle among railroad incorporators that no larger
assessments should be made upon the stockholders than is necessary to
float the company's bonds. A company, for instance, is organized with a
capital stock of, say, $1,000,000. Five per cent. of this sum, or
$50,000, is paid into defray preliminary expenses. The road is then
bonded for perhaps $2,000,000, but as the bonds are sold for only 80 per
cent. of their face value and as the incorporators allow themselves 5
per cent. for the negotiation of the bonds, only $1,500,000 is realized
for the construction of the road. The incorporators now vote to
themselves a contract to construct the road for $1,500,000 and at once
sublet it to a contractor who is ready and anxious to build the road for
$1,200,000. The incorporators thus realize $1,000,000 worth of stock, a
portion of which is unloaded upon unsophisticated investors, and
$300,000 in cash, at an outlay of $50,000; and the road, which cost
$1,200,000, is made to pay interest and dividends on a total capital of
$3,000,000, and this is subsequently watered indefinitely if the road
proves profitable or a consolidation with some other road justifies the
belief that its earning capacity might be increased. Nor is this an
overdrawn picture. On the contrary, instances might be cited where only
one-half of one per cent. of the company's stock was paid in by the
shareholders.
In the days of inflation such transactions did not seem to seriously
affect railroad securities. Even when they were no longer a secret to
the public, stocks and bonds sold readily, because, owing to the large
earnings of the roads, this class of investments was unusually
productive.
In 1868 the earnings of the railroads of Massachusetts averaged $15,400
a mile, and were equal to 38 per cent. of the total reported cost of all
the lines of the State. The Chicago, Burlington and Quincy earned
$15,386 per mile in 1867, and paid a 15 per cent. dividend. Its stocks
were quoted 100 per cent. above par. In 1867 the Lake Shore Railroad
earned more than 50 per cent., and the Terre Haute and Indianapolis even
as much as 57.2 per cent. of the amount of its cost. Previous to the war
the inflation of railroad securities was, as a rule, confined to the
stock. Where roads were bonded for more than the cost of construction it
was, with but very few exceptions, done to make their capital to
correspond with their earning capacity, or rather to divert public
attention from the fact that the rates in force had outlived their
reasonableness. It was reserved to the Union Pacific and the Central
Pacific companies to bond their roads from the beginning to an amount
equal to twice their actual cost, or, in other words, to virtually
receive them as a present from the Federal Government, bond them for all
they were worth, and, in addition, issue stock to an amount largely in
excess of the cost of construction, and then try to earn interest and
dividends on the whole amount of securities issued. The history of
these companies forms so interesting and instructive a chapter in the
railroad annals of America that a short synopsis of it may not seem out
of place here.
The charter of the Union Pacific Railroad Company was granted by
Congress on the first day of July, 1862. Shortly after the beginning of
the War of the Rebellion it was made to appear to the country that a
transcontinental road was a national necessity; that without it we could
not hope to retain long the Pacific Coast. It was also very plausibly
argued that the political benefits to be derived by the country from the
construction of such a road, as well as its great length and
extraordinary cost, made it the duty of the nation to aid liberally its
enterprising and patriotic promoters in the prosecution of their
gigantic task. In those stirring times few people were inclined to
question the motives of those who advocated what appeared to be
patriotic measures, or to be penurious in the expenditure of public
funds when the public weal seemed to demand such expenditure.
The Union Pacific Railroad charter, which in substance was passed by
Congress as it had been drafted by the promoters of the enterprise, gave
to the new company the right of way through the public lands, and
authorized it to take, from the lands adjacent to the line of its road,
earth, stone, timber and other materials for its construction. It
further granted to the company every alternate section of land to the
amount of five alternate sections per mile on each side of its line,
excepting only those lands to which preemption or homestead claims
attached at the time when the line of the road should be definitely
fixed. In addition to these donations the United States issued to the
company subsidy bonds in an amount equal to $16,000 per mile for the
distance from the Missouri River to the eastern line of the Rocky
Mountains, $48,000 per mile for a distance of 150 miles through the
Rocky Mountains, and $32,000 per mile from the western base of the Rocky
Mountains to the terminus of the road. Similar franchises were at the
same time given to the Central Pacific Railroad Company, a corporation
which had previously been chartered by the State of California. Besides
its grant of right of way, land, timber, etc., this company received
subsidy bonds at the rate of $16,000 a mile for a distance of 7.18 miles
east of Sacramento, of $48,000 a mile for 150 miles through the Sierra
Nevada, and of $32,000 a mile for the distance from the eastern base of
that mountain range to its junction with the Union Pacific. The charters
of the two companies provided that, to secure the repayment to the
United States of the amount of those bonds, they should _ipso facto_
constitute a first mortgage on the entire lines of the road, together
with their rolling stock, fixtures and other property. The franchises
and donations thus granted by Congress were most valuable; in fact, the
latter were alone sufficient to build and equip the roads. In spite,
however, of the liberal grants and in spite of the urgent necessity of
the roads in those years of national trial, both of these enterprises
made very slow progress. Their promoters were men of small means, and
the capitalists to whom they appealed for help failed to realize the
value of the franchises. No doubt when these men first engaged in their
cause they expected to encounter serious obstacles in Congress,
supposing that that august body would consider the proposed measure with
much deliberation and to act upon it with still more circumspection.
Their success greatly surprised them. They made the discovery that
members of Congress could be imposed upon as easily as private
citizens, and when they fully realized how readily their demands had
been granted, they were greatly provoked at themselves because they had
not asked for more.
According to a story told by my old friend Mr. J. O. Crosby, an
experienced member of the brotherhood of tramps late one afternoon
chanced to stroll into the city of Alton. Having no visible means of
support, he was picked up by the police and brought before the Mayor to
give an account of himself and to be dealt with as that dignitary might
see fit. The tramp, a printer by profession, and by no means a tyro in
meeting such emergencies, so managed to impress the Mayor with his
superior accomplishments that the latter concluded it would be a good
investment, both for himself and the city over which he presided, to
offer the genial stranger a contribution to his traveling fund, upon the
condition that he would no longer than absolutely necessary molest the
city with his presence. He accordingly told the intercepted tourist that
while it had been for years the policy of the city and its officials to
entertain all tramps found within the limits of Alton for thirty days at
the city jail in exchange for a fair amount of labor, he would, in
consideration of the apparent fact that he was of better metal than the
average tramp, make an exception in his case, and would, even at the
risk of being censured for it by his constituents, hand over to him five
dollars from the municipal funds if he would agree to leave the city
early next morning. The tramp gladly accepted the proposition,
replenished his empty purse with the proffered bounty and withdrew from
the City Hall, to take a stroll through Main Street. The city seemed to
him as prosperous as the Mayor had shown himself liberal. It occurred to
the itinerant typographer that its treasury would not have been the
worse off for a ten-dollar levy, and he hastily returned to the Mayor's
office to plead for a larger donation. The Mayor, not disposed to argue
the question, handed him another five-dollar bill and improved the
opportunity to remind him of his previous promise and to give expression
to the hope that as a gentleman of honor he would now discharge his
obligation. The tramp fairly overwhelmed His Honor with assurances of
good faith and bade him an affectionate good-by. The next rising sun
found him on his onward journey. His route led through Alton on the
Hill, a portion of the city which he had not seen before. He viewed with
surprise the many fine residences and other evidences of opulence which
this part of the city contained. He passed on in a pensive mood until he
reached the summit of the hill, which commanded a fine view of the
entire city. Here he turned to cast a farewell glance over the town
ruled over by the most generous mayor that it had ever been his
privilege to meet. As he beheld before him the fine homes and beautiful
yards, and below in the valley the lofty church-steeples, the many
school-houses, the massive business blocks, the long and well-paved
streets and the spacious and shady parks, an expression of mingled
surprise and disappointment stole over his face. He thrice slapped his
wrinkled brow and then hurriedly retraced his steps down the hill. When
the chief magistrate of Alton came to his office that morning, he met
the irrepressible tramp anxiously waiting for him at the door. "Mr.
Mayor," said the wily extortioner, "I acted very hastily yesterday when
I accepted your second proposition. You have here a much larger town
than I ever supposed. I have been constrained to take our last agreement
into reconsideration, and I shall not leave this point until you add
another five dollars to your consideration. You can certainly better
afford to do that than to throw away thirty days' board and the ten
dollars which you have already paid me besides."
The diplomacy of the Union Pacific and Central Pacific railway companies
was the same as that of the Alton tramp. They had found Congress as
generous as the tramp had found the Mayor of Alton, and now reproached
themselves for their modesty and resolved to bring the pliability of
Congress to a severer test. They again appeared before that body in 1864
and asked that their charter be so amended as to grant to them ten
alternate sections instead of five on each side of the road, and also
all the iron and coal found within ten miles of their track, which had
previously been reserved by Congress. And in addition to this they asked
that they be authorized to issue their own mortgage bonds on their
respective roads to an amount equal to the bonds of the United States,
and that the lien of the United States bonds be made subordinate to the
lien created by the companies' bonds. By the act of Congress, July 2,
1864, all these demands were granted, and the two companies were thus
virtually presented with their roads and were at the same time given
permission to mortgage this gift of the people and divide the proceeds
among their shareholders, many of whom had received their stock chiefly
in consideration of their influence in and out of Congress. The
contribution of the United States to these companies on account of their
main lines has not been far from $80,000,000, of which over $52,000,000
was paid in bonds, and the remainder in lands, which aggregated about
23,000,000 acres. The whole line from Council Bluffs to Sacramento is
1,780 miles long. It will thus be seen that the national contribution
was about $45,000 per mile, besides the right of way and all timber,
iron and coal found within ten miles of the road. There is no doubt that
this contribution was equal to, if it did not exceed, the actual cost of
the road. There has been an erroneous impression abroad which has
likened the Pacific road to those wonderful and very expensive lines
which cross the Andes and the Alps. Those who have not crossed the
continent can hardly believe that the construction of this line was
neither more difficult nor more expensive than that of any of the
numerous railroads crossing the mountain ranges of the East, but such is
the fact.
Starting from Omaha, the Union Pacific follows for nearly 500 miles, or
almost half of its entire length, the valley of the Platte River. A
better route for a railroad cannot be found upon the western continent.
There are between Omaha and Cheyenne but three bridges worthy of the
name. The Platte Valley is almost straight, rising toward the west at a
nearly uniform rate of about 10 feet to the mile. Grading was
practically unnecessary, and the work of construction consisted of
little more than the laying of the ties and track. From the base of the
mountains at Cheyenne to their summit is a distance of about thirty-two
miles, the difference in altitude between the two points being less than
2,200 feet. The average grade is therefore about 68 feet to the mile,
and nowhere are the grades heavier than 80 feet to the mile. There are
heavier grades than these in the prairie State of Iowa, and the mountain
grades of a number of Eastern roads exceed those of the Union Pacific by
from 30 to 40 feet to the mile. The rise is, if not uniform, at least
gradual, and the construction of even this portion of the road required,
therefore, neither great engineering skill nor any unusual expenditure
of money. The road now crosses a plateau which extends almost to the
terminus of the Union Pacific at Ogden, and a very large portion of this
is as favorable for a roadbed as the average railroad territory of the
country.
The route of the Central Pacific presented to the engineer no great
obstacles between Ogden and the State line of California, the only
elevation of any note to be surmounted being the Humboldt Mountains in
Nevada. Their highest point, Humboldt Wells, is 221 miles west of Ogden,
and has an elevation of 5,650 feet above the level of the sea, while
that of Ogden is 4,320 feet. Upon an average the grades of this portion
of the road do not differ from those found in the Mississippi Valley.
The portion of the Central Pacific Railroad which traverses the Sierra
Nevada is the most expensive of the whole line, but the cost of
construction did not, even on this division, exceed the amount
contributed for it by the Federal Government; for the statement is made
upon good authority that a few of the leading promoters of the road
built the first western section of twenty miles with their own capital,
of less than $200,000, and a loan from the city of Sacramento and Placer
County, amounting to $550,000, and then drew $848,000 Government
subsidy, or more than enough to build the second section and draw
another installment of the subsidy; and that they repeated the operation
until the whole line was completed. These men were in such haste to
realize the profits which their undertaking promised them that they did
not even take sufficient time to make a proper survey of their line. Had
they done so, a great saving, both in the construction and in the
subsequent operation of the road, might have been effected. It is now
well known that a route could have been found through the Sierra Nevada
Mountains, not far distant from the route chosen, which would have saved
800 feet in elevation and at least 25 per cent. in the expense of
grading.
It is certainly safe to say that if less than forty thousand dollars a
mile was sufficient to construct the road through the Sierra Nevadas the
Federal contribution of $50,000,000 for the entire line, from Omaha to
San Francisco, left, after the completion, a respectable surplus, either
to the companies or those of their members who had the construction
contract, and that the $75,000,000 of capital stock and the $55,000,000
of first mortgage bonds which the two companies issued were a gigantic
dividend to the stockholders, for which, practically, no consideration
was given.
The companies might well have been satisfied with the Government's
generosity, but their success in imposing upon Congress stimulated their
greed. The act of 1864 provided that the charge for Government
transportation over these roads should be applied to the liquidation of
its bonds, and that after the completion of the lines five per cent. of
their net earnings should likewise be so applied. When the Secretary of
the Treasury, under the law, refused to pay them the amount earned by
Government transportation, and in addition to this demanded the five per
cent. of their net earnings in liquidation of their debt, the companies
applied to Congress to again amend their charters so as to relieve them
for the time being from any direct payment of either principal or
interest of the Government bonds, and to make it the duty of the
Secretary of the Treasury to pay to the companies in money one-half of
the compensation allowed to them by law for services performed for the
Government. And again Congress responded to their demands, granting
them, by a rider to the army appropriation bill, passed March 3, 1871,
all the relief asked for. Owing to the policy of the managers of the
Pacific line to pay as little of the interest on the Government subsidy
debt as is absolutely necessary to prevent foreclosure proceedings, the
unpaid interest has accumulated until it now almost equals the amount of
the original indebtedness. The last report of the Commissioner of
Railroads shows that the total indebtedness, principal and interest, to
the United States of the Pacific railroad companies, was $114,490,000 on
July 1, 1892. The Commissioner seems to be of the opinion that the Union
Pacific Company will not be able to pay the subsidy bonds at maturity,
and he urges that some step be taken in the matter by Congress, whether
it be to extend the loan, which will mature within the next six years,
or to sell the road. The managers of the Pacific roads and their friends
ask an extension of the Government subsidy bonds for fifty years, and a
reduction of interest from 6 to 2 per cent. If Congress continues to be
servile to these interests, the Pacific railroad lobby will secure just
such legislation as they demand.
At the time the Pacific roads were built the people of the United States
had no adequate knowledge of the topography of the Territories, and the
promoters of the road for a while found it a difficult task to convince
capitalists that the investment would be a safe one. That they knew the
value of the projected road was shown by the contest between the Central
Pacific and the Union Pacific for mileage. For a distance of over 200
miles the two companies graded roads side by side in contest for the
Government subsidy.
The promoters were even disappointed in the cost of the roads, as Mr.
Sidney Dillon states in an article published in the August number of
_Scribner's Magazine_, 1892, in which he says:
"At the end of 1867 the road was completed to the top of the
mountains and nearly half way to Salt Lake City. The cost of
building over the mountains was so much less than we had
expected that the construction company found itself with a
surplus from the proceeds of the subsidy bonds. This was
imprudently distributed in dividends."
The United States Government could parallel to-day the line of either
road for less than the amount of its first mortgage bonds, and its
subsidy bonds are therefore nearly worthless.
Mr. Clews, in his "Twenty-Eight Years in Wall Street," says:
"After the Thurman bill had been sustained by the Supreme
Court Mr. Gould had a plan to build a road from Omaha to
Ogden, just outside the right of way of the Union Pacific,
and give that road back to the Government. It would give
others 'a chance to walk.' The Government tried to squeeze
more out of the turnip than was in it. For $15,000,000 a
road could be built where it had cost the Union Pacific
$75,000,000."
It may be admitted that the Pacific roads, even at an extravagant cost,
have proved a good investment for the country, yet their history
reflects severely on the statesmanship of those members of Congress
whose duty it was to properly protect the interests of the nation at
that time. They were unequal to their task.
The Great Northern Railway Company has just completed its road to the
Pacific Coast. Its line is very direct, and it has unusually light
curvature and low grades, which will enable it to be operated more
cheaply than any Pacific line yet constructed. Much of its route is
through a rich and productive country, insuring to it a heavy local
business.
The following statistics concerning it are given in the _Railway Age_:
Total mileage, December 18, 1890 2,850
Average bonded debt per mile $18,636 75
Average stock per mile 7,015 67
Total 25,652 42
Interest charges per mile 1,005 76
Dividend charges per mile 420 94
A comparison of these figures with those corresponding of other
transcontinental lines is instructive, and is commended to Congressmen
who have to deal with the Union Pacific and Central Pacific questions.
Stock and bond inflation, it may confidently be asserted, has created
from five to six thousand millions of dollars of fictitious railroad
capital. In 1890 the average liabilities of the railroads in the United
States, including the capital stock and the funded and unfunded debt,
were $63,600 per mile. According to Mr. Poor's estimate of the average
cost of American railroads per mile, more than 50 per cent. of this vast
sum is pure water. But, as has been stated before, Mr. Poor is partial
to the railroad interest, and his estimate of $30,000 a mile is too high
for the time at which it was made. Furthermore, railroad building has
since then been materially cheapened. Tens of thousands of miles of road
have been built in recent years that did not cost to exceed $10,000 a
mile. Very recently the Union Pacific Railroad Company proved, before
the Board of Equalization at Salt Lake City, by the testimony of
engineers, that the average cost per mile of the Utah Central line was
only $7,298.20, itemized as follows:
Engineering $ 300 00
Grading 5-ft. fill, 18,480 yds. 2,310 00
Ties, 2,640, at 30 cts. 792 00
Rails, 82 tons 1,845 00
Splices 12 00
Bolts 24 00
Spikes 142 20
Track-laying 600 00
Bridges 200 00
Station-building 100 00
Fences 150 00
Right of way 720 00
---------
$7,298 20
In a recent article Mr. C. Wood Davis states that "many auxiliary lines
have been built at costs ranging from $8,000 to $15,000 per mile, and
capitalized at two, three, four, and even five times their cost, as in
the case of the 107 miles of the Kansas Midland, costing, including a
small equipment, but $10,200 per mile, of which 30 per cent. was
furnished by the municipalities along its line. Yet, with construction
profits and other devices, this road shows a capitalization of $53,000
per mile."
And that "the Missouri Pacific line from Eldora to McPherson, Kansas, a
comparatively expensive prairie road, being located across the line of
drainage, cost much less than $10,000 per mile, as have thousands of
miles of other prairie roads."
It is safe to say that $25,000 is a liberal estimate of the average cost
per mile of American roads to the stock-and bondholders, and that their
capitalization represents $38,000 of water per mile. The total net
earnings of the railroads of the country were $341,666,639 in 1890, and
$356,227,883 in 1891, upon an actual investment of only about
$4,250,000,000. This is a return of about 8-1/2 per cent. and shows the
force of Mr. Poor's statement that, if the water were squeezed out of
railroad securities, no better-paying investment could be found in the
country.
We often see references to the fact that no dividends are paid upon a
large portion of railroad stocks, but there is no reason why dividends
should be paid upon many of them, as they represent no capital whatever
that has gone into the road. It is probable that not to exceed ten cents
on the dollar upon an average was originally paid for these stocks, and
the $80,000,000 distributed annually as dividends upon them does not
vary much from fifteen to twenty-five per cent. upon the amount actually
invested in them.