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BALTIMORE & OHIO 1

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

ERIE 34

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

PHILADELPHIA & READING 75

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

PHILADELPHIA & READING 118

Difficulties of the Coal & Iron Company--McLeod's policy of extension-- Collapse of this policy--Failure of company--Summary of subsequent history.

THE SOUTHERN 146

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

ATCHISON, TOPEKA & SANTA FE 192

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

UNION PACIFIC 220

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

NORTHERN PACIFIC 263

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

ROCK ISLAND 311

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

CONCLUSION 334

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

RAILROAD REORGANIZATION

BALTIMORE & OHIO

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

The Baltimore & Ohio Railroad was the first important railway company to be incorporated in the United States. It was designed to aid the city of Baltimore in securing the Western trade, and not only private citizens but the city of Baltimore and the state of Maryland early subscribed to its stock. When in the course of construction it became expedient to extend into Virginia, the city of Wheeling and the state of Virginia likewise subscribed, though the action of the latter was subsequently withdrawn. As a result the funds required for first construction were obtained from the sale of stocks instead of bonds. In 1844, seventeen years after the granting of the charter, the annual report showed ,000,000 in stock as against 5,000 in 6 per cent bonds; while in 1849, though the loans had been increased, they yet stood in the proportion of one to two.

On December 1, 1831, the first train was run over the line, then 72 1/2 miles in length. The early history of the road does not much concern us. It was one of steady growth, not through an unsettled territory, as with our Western roads, but through a country the industries of which were already established. Tracks led, not into prairies, but to populous cities; and the future of the company, once the initial difficulties should have been overcome, was at no time uncertain. Thus extension to Cumberland increased the gross receipts from 6,492 to 5,235, and that to Wheeling in 1853 likewise brought a great increase in traffic.

The Civil War bore upon the Baltimore & Ohio heavily because of the peculiar location of its mileage. On May 28, 1861, possession was taken by the Confederates of more than one hundred miles of the main stem, embracing chiefly the region between the Point of Rocks and Cumberland. Government protection was temporarily restored in 1862, but raids occurred until the end of the war. Each time the Confederates occupied the line they tore it up, and as soon as they retired the company hastened to make repairs. The road did not default. A portion of the track yielded a revenue from first to last, and presumably the Government paid generously for the transportation of its troops.

It was after the Civil War that the real history of the road began. The key-note was competition;--competition of the fiercest sort between parallel lines from Chicago to the seaboard, intensified by the rivalry of the great seaboard cities, and involving traffic in both directions. The decade 1850-60 had seen the extension of Eastern roads to Western connections. In 1851 the Erie had reached Lake Erie; in 1853 the New York Central and Lake Shore, and in 1855 the Pennsylvania and Fort Wayne had opened continuous routes from the Atlantic to Chicago. In 1857 the Baltimore & Ohio had obtained connection with Cincinnati and St. Louis; and in 1858 the Grand Trunk had arrived at Sarnia on its way from Portland to Chicago. After the Civil War there was both consolidation and extension. The New York Central was united with the Hudson River, and the Pennsylvania leased the Pittsburgh, Fort Wayne & Chicago in 1869. The Baltimore & Ohio reached Chicago in 1874, and the lines which in April, 1880, were consolidated into the Chicago & Grand Trunk were completed between Port Huron and Chicago in February of that year. The completion of these through routes opened the way for very bitter competition. Five independent lines struggled for Chicago business, and all of them were prepared to cut rates deeply in order to test their rivals' strength. In particular the Baltimore & Ohio was aggressive. "At the time of its opening," said Mr. Blanchard before the Hepburn Committee, "it was heralded all over the Northwest as a 'Relief for the Farmer,' 'the Grangers' Friend,' and all other sorts of headlines were put into the Chicago and Northwestern papers; and President Garrett's public utterances, and those to his Board, were filled with enough statements to show what he intended to do.... I heard him that upon the completion of his lines, like another Samson, he could pull down the temple of rates upon the heads of these other trunk lines."

Under these circumstances a dispute between the Baltimore & Ohio and the Pennsylvania in 1874 over the former's connection with New York had far-reaching consequences. The Pennsylvania refused to carry Baltimore & Ohio cars over its line north from Philadelphia, and as a retaliatory measure the Baltimore & Ohio reduced passenger fares from Washington and Baltimore to Western points from 25 to 40 per cent. The reduction in rates thus begun inaugurated the first of the great railroad wars. The cuts soon extended to east-bound passengers and to freight, and forced corresponding cuts on the Pennsylvania, the Lake Shore & Michigan Southern, the Michigan Central, the New York Central, and the Erie. Rates on fourth class and grain from Chicago to New York, which had been 60 cents per 100 pounds in December, 1873, and 40 cents in December, 1874, fell to 30 cents in March, 1875. Rates on special, or sixth class, went as low as 12 cents from Baltimore and Philadelphia to Chicago. Passenger fares from Chicago to Baltimore and Washington were reduced from to , to Philadelphia from to , to New York from to , and to Boston from to . The New York Central and the Erie quoted fares from New York to Chicago of and to St. Louis of , and the Baltimore & Ohio replied by a cut to .25 to Chicago. In April, 1875, the Baltimore & Ohio cut freight rates from Cumberland to Baltimore over 50 per cent on the four regular classes, and the Pennsylvania at once announced still greater reductions.

The effect of this warfare on railroad revenues was sufficiently serious to cause the Baltimore & Ohio to recede somewhat from its independent position and to enter into negotiations with the Pennsylvania; but the terms of the resulting agreement proved unsatisfactory to the other trunk lines, and no general pacification was obtained. Late in 1875 rates nevertheless generally advanced, and in December a general agreement was concluded, followed by a general increase. This agreement was again hopelessly disrupted by the following April, when cuts in east-bound rates followed each other with rapidity. The published rates on grain, which had been 45 cents at the beginning of March, 1876, fell to 40 cents on March 7, 35 cents on April 13, 22 1/2 cents on April 25, and 20 cents on May 5. In June rates on west-bound freight fell to 25 cents first class to Chicago, and 16 cents fourth and fifth class, actual rates going much lower; and it was possible to travel from New York to Chicago first class for .

The years following the agreement of 1877 were marked by low and fluctuating rates, extensive cutting under the published schedules, and frequent attempts at pooling and at apportionment of traffic. At a meeting at Chicago on December 19, 1878, tariff rates were agreed upon by all lines, but the existence of time contracts depressed receipts for months thereafter. Another meeting on May 8 was followed by sharp competition. In June an agreement to raise rates was made, but proved unsatisfactory owing to long time contracts. "During the period between December 18, 1878, and July 5, 1879," said Mr. King in a letter to the Trunk-Line Arbitrators on July 17, 1879, "the Baltimore & Ohio Company has practically been out of the market, on account of the low rates by the Northern lines. It has not secured enough east-bound freight to give return loads for the small west-bound traffic sent over its lines to that city, and has repeatedly moved its cars empty from Chicago to other points on its lines east of that city."

From 1875 to 1885 the trunk lines to the Atlantic ports were thus engaged in active competition. What was the effect of this upon the Baltimore & Ohio? This road was highly prosperous in 1875. Dividends of 6 per cent and 10 per cent were being paid. The capitalization was small, and the management conservative. During the ten years following 1875 the rate of dividend was not materially decreased. In 1876 10 per cent was paid. In 1877 the old 8 per cent rate was restored, and the following year the distribution was made in stock instead of in cash. After the agreement of 1878 one-half year's dividend was paid in cash; and in 1879 9 per cent cash, and in 1880 10 per cent cash was declared, this rate enduring until 1886. But although dividends were maintained, the effect of the railroad wars appeared in the slowness with which net earnings increased. A comparison of the net returns of 1884 with those of 1874 reveals a gain of 40 per cent, on a mileage 27 per cent greater; but the figures for 1885 show an increase of less than 2 per cent over those for 1874, while the totals for 1884 were not again equalled until 1900. Meanwhile more bonds had been issued, and the percentage of fixed charges to net earnings had increased from 16 in 1874 to 63 in 1884. In other words, money was borrowed to put into the road which did little more than keep the net earnings from declining. In that same time the stock increased ,900,000, and according to the profit and loss account ,559,636 were put into the property, making a total of ,743,092 ; the only result of which was the building of 313 miles of line, and the securing of an increase in net earnings for 1884, which was swept away the following year.

In 1884 the elder Garrett died, and his son Robert was elected to succeed him. The old policy of independence and competition was continued, the objective point being now an entrance into New York. "When in 1885 the other trunk lines harmonized their differences, ..." said the Chronicle, "the Baltimore & Ohio ... pursued its policy of aggression.... The road must reach Philadelphia ... nay, must push ... on to New York.... Instead of seeking to avoid rivalry, its every effort seemed to encourage it. Rates were reduced, concessions made to shippers and travellers, the one idea apparently being to get traffic no matter what the cost." The necessity of a secure New York connection had been impressed upon the company in the course of the rate wars. The first step was to be actual construction to Philadelphia, the second, construction or traffic agreements from Philadelphia to New York. Bonds were issued in April, 1883, for construction of a so-called Philadelphia branch from Baltimore to the northern boundary of Cecil County, Maryland, there to connect with the Baltimore & Philadelphia Railroad, which was being built through Delaware and Pennsylvania to Philadelphia. Entrance into Philadelphia was secured over the Schuylkill River East Side Railway, a corporation organized under the laws of Pennsylvania and doing business in the city only. The distance was approximately ninety-nine miles; the cost was later asserted to have been ,000,000. Beyond Philadelphia the Baltimore & Ohio relied on an agreement with the Philadelphia & Reading for trackage to Bound Brook, New Jersey, and on a traffic contract with the Central of New Jersey for its line from Bound Brook to Elizabeth. Terminals on Staten Island were secured by purchase of a controlling interest in the Staten Island Rapid Transit Company, and connection between Elizabeth and the Island was obtained by new construction. The strength of this route was in its directness and in its independence of trunk-line control; its weakness was in its excessive cost between Baltimore and Philadelphia, and in its reliance upon traffic contracts north of the latter city. A proposition was advanced to unite the Baltimore & Ohio, the Philadelphia & Reading, and the Central of New Jersey with the Richmond Terminal System. This, however, fell through, and the possibility still existed that the Baltimore & Ohio might some day construct a line of its own from Philadelphia to New York.

Pending the completion of the preceding arrangements rate conditions remained naturally unsatisfactory. The Pennsylvania objected to the paralleling of its Philadelphia-New York branch, and refused to allow temporary use of that line by the Baltimore & Ohio while the latter's independent connections were being established. Freight rates were slowly and painfully raised after the conflict of 1884-5, and did not regain a high level. In 1886 the Baltimore & Ohio was forced to reduce its dividends from 10 to 8 per cent. The following year it cut to 4 per cent, and in 1888 no dividend at all was declared. The surplus on the year's operations, which had not since 1878 fallen below ,000,000, dropped to 0,819 in 1885, and to ,259 in 1886. As dividends decreased, the funded debt increased, the percentage of fixed charges to net income rose from 63 to 89, and the floating debt attained the portentous amount of ,148,007. The only item which did not grow was net earnings. There was nothing occult in the situation. Every one was well aware that the competition to which the Baltimore & Ohio had been subjected had been severe, and that the cost of its New York extension had been large. In 1887 the bonds outstanding were ,868,201, the stock ,792,566, and the accumulated surplus ,083,720, or a total of 4,744,487. This stood for the sums invested in the property. Net income on the other hand was ,994,721; so that on an investment of over 0,000,000 but 4 per cent was being obtained to cover interest, improvements, and whatever dividend might be declared.

That no general apprehension was felt by investors before 1887 was due to the great prestige which the Baltimore & Ohio enjoyed. The long series of dividends counted heavily in favor of the road. The enormous accumulated surplus, said to have been invested in valuable improvements and extensions; the enterprise of the company in making extensions; the large volume of business; and the confident statements of the president, all conspired to prevent a too keen analysis of the business returns. Relief of two sorts was nevertheless required. In the first place the floating debt had grown so large that some means of paying it off was necessary; in the second place the road needed a sufficient reduction in fixed charges to restore some of the margin of non-mortgaged earnings which had been so great a safeguard in the early days. Only the first of these requirements was met. Cash the road had to have; the existing fixed charges, it was thought, it could endure if only some abatement of the intensity of trunk-line competition could be obtained.

The method chosen for raising cash was the sale of bonds. In September, 1887, J. P. Morgan & Co. announced that a preliminary contract had been entered into between the Baltimore & Ohio Railroad Company and J. S. Morgan & Co., Baring Bros. & Co., and Brown, Shipley & Co., of London, and their allied houses in America, for the negotiation of ,000,000 Baltimore & Ohio Consolidated 5s and of ,000,000 preferred stock, for the purpose of paying off the entire floating debt, and of placing the company upon a sound financial basis. The consolidated bonds were to be part of an authorized issue of ,600,000, of which ,423,000 were to be reserved to retire the main stem mortgage indebtedness when it should fall due, and ,177,112 were to be exchanged for securities in the company's sinking fund, the freed securities to be used to pay the floating debt in part. In case this exchange should not be made, ,500,000 of the issue might be sold direct, and the syndicate before mentioned agreed to take ,000,000 of this amount and to place ,000,000 in preferred stock on condition:

That the statements of the company should be verified;

That the management of the company should be placed in competent hands, satisfactory to the syndicate;

That satisfactory contracts should be made between the Baltimore & Ohio and other roads for New York business, which should remove all antagonism between them on the subject, and should ensure the permanent working of the first-named in entire harmony with the other trunk lines, besides avoiding the construction, or the threat of construction, of expensive lines north and east of Philadelphia.

Annual payments to the Baltimore & Ohio sinking funds were to be made in the future in consols instead of in cash.

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

With temporary financial requirements provided for, President Spencer was enabled to achieve some much-needed reforms. At a meeting of the directors on March 14 a complete reorganization of the service was authorized, with changes and transfers affecting employees from the first vice-president down. Later a committee of mechanical experts was organized "to examine thoroughly all the shops, shop tools, etc., of the entire Baltimore & Ohio system, and to report on all the improvements needed." The form of the annual report was improved. The much-quoted surplus, which had proved such an unreliable support, was cut in two by the writing off of bad investments, the marking down of the price of securities, and the like; and, finally, a committee was appointed to make a general examination of the financial as well as the physical condition of affairs. "Great anxiety," said a resolution of the directors, "exists in the public mind as to the financial condition and the value and earning capacity of the road and property ... it is due to all interests that a full, frank, and complete statement of its affairs should be made public." So far as lay in his power President Spencer, and through him the syndicate, tried to secure a real and permanent improvement in the condition of the road, and to gain, through increased efficiency in operation, the margin which the refusal to cut down fixed charges had denied. The failure of the attempt may be ascribed to the continuance of the Garrett family in power. Any irregularities or mistakes which had taken place in the past reflected on the Garretts, so that it was to their interest to stifle investigation. Moreover, any change in policy for the future implied a criticism of their acts to which they were reluctant to accede. In 1888 the Garrett holdings amounted to from 50,000 to 60,000 shares out of a total of 150,000 shares, or, deducting 32,500 shares held by the city of Baltimore, which were not entitled to vote, to about one-half of a total of 117,500 shares. This gave undisputed control. The effect was seen in the annual election in November. Of 12 old members of the board only 5 were re?lected, and of the 7 dropped 3 formed part of the investigating committee engaged in securing "the full, frank, and complete statement of the company's condition" promised at an earlier date. The same month President Spencer was ousted and Mr. Charles F. Mayer was elected in his place.

This revolution was fatal to any radical reform, so that during the next seven years the condition of the Baltimore & Ohio improved but little. Net income grew, it is true, up to the panic year of 1893, but fell so sharply after that that the reported figures for 1895 exceeded those of 1888 by but ,283,843, and even this gain was practically wiped out during the following year. Meanwhile fixed charges grew from ,550,972 in 1888 to ,934,052 in 1895, and to ,303,781 in 1896; an increase which transformed the profits of the company the following year into a deficit. A comparison of the balance-sheets of 1888 and 1895 shows an increase of ,207,434 in stock, of ,261,000 in funded debt, and of ,554,939 in floating debt. These changes were offset mainly by increases in bonds and stock owned, or in the hands of trustees, by advances to subsidiary lines, and by a reduction of ,080,000 in bonded debt secured by collateral or by mortgage on the main line. During this time dividends were nevertheless steadily paid on the preferred stock, and, beginning in 1891, upon the common stock as well. The liberal tendencies of the management were also evinced by a 20 per cent dividend upon the common stock, declared in 1891 to compensate shareholders for expenditures in betterments and improvements of the physical condition of the property. It will be seen how different this was from the policy of retrenchment and economy which had been inaugurated by President Spencer, and which might fairly have been expected from a corporation barely escaped from bankruptcy.

Traffic conditions from 1887 to 1893 were very far from satisfactory. The difficulties between the Baltimore & Ohio and the Pennsylvania were indeed patched up, and the opening of the former's lines to New York rendered it independent of other trunk-line connections; but frequent charges of rate cutting were made in 1887, and a war in dressed-beef rates was inaugurated by the Grand Trunk in November of that year. In 1888 rates were pretty much demoralized. Published rates on grain dropped from 27 1/2 cents in January to 20 cents in October. Emigrant rates from New York to western points became the subject of active competition; and, most important of all, the dressed-beef controversy was pushed till it developed into a war of the most active kind. The trouble here was started by cuts on dressed beef by the Grand Trunk. In May other lines retaliated by cuts in live-stock rates; by July 14 published rates on cattle from Chicago to New York were 5 1/2 cents per 100 pounds, and on dressed beef and hogs 7 cents. In November the New York Central extended the contest by a general reduction in west-bound rates. These struggles, though terminated for a time by an agreement of February, 1889, seriously diminished railway revenues, and prevented the rapid growth which the general prosperity of the country might have occasioned. In fact, the Erie management stated in their annual report for 1888 that their company had retired altogether from certain classes of through business for a time during the preceding twelve months, owing to the unremunerative level of rates. Conditions during the greater part of 1889 were better, and during the following three years constant attempts at agreement and arbitration, joined with a considerable volume of business, prevented a long continuance of any difficulties which arose.

It was perhaps traffic conditions such as we have described which led the Garrett family to favor a community of interest scheme which should improve the Baltimore & Ohio connections with the West. In June, 1890, Mr. E. R. Bacon formed a syndicate to control the stock of the Baltimore & Ohio Company. Acting in harmony with the Garrett family, the syndicate was made up of Philadelphia, New York, Baltimore, and Pittsburg capitalists, including the Richmond Terminal, Pittsburgh & Western, Northern Pacific, and Reading interests. The plan was to establish a community of interest between a vast network of lines reaching from the Atlantic to the Pacific, and from New York to the Mississippi. "The buyers," it was said, "came in simply as investors without condition that their other properties would be benefited, although it was of course intimated that something was to be done." They were required to pool their stock for three years, and to give an irrevocable proxy for that period to President Charles F. Mayer. The amount of the syndicate purchase was 45,000 shares, of which 32,500 were obtained from the city of Baltimore, and 9686 from the state of Maryland; and the purchase brought the incidental advantage of removing city and state from any direct interest in the road. The preferred state stock the syndicate later exchanged for common stock owned by the Johns Hopkins University. The purchase once made, the pool was formed on well-known lines. The stock was deposited with a trust company, trust certificates were issued, and proxies transferred to Charles F. Mayer. The shares to be deposited were limited in amount to 110,000; the actual amount put in was 89,750. The results of the agreement were less sensational than the forecasts made. It undoubtedly did much to promote friendly feeling among the roads concerned. When, in 1891, the Baltimore & Ohio was compelled to vacate the Chicago terminals of the Illinois Central, which it had occupied for years, it was able to make prompt arrangements with a corporation controlled by the Northern Pacific for the use of its facilities both for passengers and for freight. But the influence of the Garrett family was not lessened, and inasmuch as the main competitors of the Baltimore & Ohio were not included there was no check to competition, and earnings showed no striking change.

Matters stood thus at the beginning of 1893. No progress had been made toward restoring the Baltimore & Ohio to a permanently stable condition, and the prosperity which its reports declared was fictitious only. The reorganization to which bondholders had refused to submit in the comparatively prosperous times of 1888 was compelled by the depression following the panic of 1893. In 1894 earnings fell off. The gross earnings for the year ending June 30, 1893, were ,214,807, and the net income ,210,666; the following year the same items were ,502,662 and ,719,830. The directors reduced the dividend and called attention to the losses incurred through protracted strikes in the coal and coke industry. The following January President Mayer stated that the fixed charges, including the car trusts, sinking funds, etc., due January 1, amounting to nearly ,000,000, had been paid without borrowing one dollar. "I name this fact especially," said he, "because it is not unusual for us to make a loan for the unusually heavy payments January 1. I doubt if the Baltimore & Ohio has owed so small a floating debt for twelve or fifteen years, perhaps longer, and it never had the large volume of stocks and bonds it now has, something over ,000,000, not put down at their face value but rather at their market value, or far below their intrinsic value. I can safely say the road has not been in so strong a position as now for at least fifteen years."

It required more than confident statements by the managers, however, to demonstrate the secure position of the road; and this all the more because the acts of these gentlemen belied their public assertions. Dividends on the common stock were passed in 1895, and again in 1896. The ratio of charges to earnings, according to the company's reports, rose from 75 per cent of net earnings in 1894 to 80.2 per cent in 1895, and to 98.2 per cent in 1896; that is, less than 2 per cent of the net earnings of ,300,000 was admitted to be available for dividends on ,000,000 of stock. Some relief was evidently necessary. In January, 1896, it was announced that arrangements had been made with a strong syndicate to provide for all immediate financial requirements; but the appointment of receivers in February could scarcely have come as a surprise. During the two weeks just before the failure Mr. J. K. Cowen, who had succeeded Mr. Mayer in the presidency, spent a great deal of time in New York trying to borrow money to meet the pressing demands. On his eventual failure and return to Baltimore the directors felt that a friendly receivership was the only resource.

The much-heralded report came out in December, having been withheld since the previous March for fear of the effect on the company's securities; and so far from sustaining the management, it contained charges of irregularity almost as sensational as those made against the Atchison at an earlier date. The books of the company, according to Mr. Little, were in error to the amount of ,204,858. During the period of seven years and two months which his report covered he found:

Deducting these sums from the annual income returns of the company, he found that but 1,447 had been earned which had been properly applicable to dividends, whereas ,269,008 had been declared in the seven years, of which ,312,089 were cash and ,956,920 stock. Earnings had been increased by the most arbitrary of book-keeping devices. In 1892 the value of the Western Union stock held in the treasury since the sale of the Baltimore & Ohio telegraph lines in 1888 had been written up 8,038, and the stock of another company, the Consolidated Coal Company, had been written up 4,300. Not only had advances to branch lines been entered as assets, but the interest on these advances had been credited to income, the only basis being that it was hoped that such interest would some day be paid; and on the other side of the account, charges against operating expenses had been charged to profit and loss on the same principles by which the Garretts had rolled up their fictitious surplus of 1888. Turning to the capital account, Mr. Little showed an increase in liabilities from 1888 to 1895 of ,180,000, not including ,481,835 representing chiefly the company's endorsements of notes of its subsidiary roads which stood here for the first time revealed. This money apparently had been put into the property, and yet Mr. Little's corrected figures showed net earnings to be actually smaller in 1895 than in the earlier years. Criticisms of the report attached themselves mainly to the last items treated. That the extensive endorsement of branch-line notes, absent as any mention of the practice was from the annual reports, was most misleading and unsound, nobody could deny; but the broad question of what charges during the seven years should have been paid out of income, and what not, gave rise to lively discussion. Severe strictures on Mr. Little's statements were made by Patterson and Corwin, two accountants appointed to re-examine the books of the company. "It would appear," said they, "that Mr. Little has made some curious errors, and has been strikingly inconsistent." Nevertheless the more damaging of the latter's accusations seem to have been accepted, and the Baltimore & Ohio took its place with other American corporations, the managements of which have indulged in secret juggling with the books.

Pending Mr. Little's report, reorganization was of course delayed. The receivers were then in control, and under their direction a vigorous policy of improvement was carried out. The rolling stock of the system was found to be insufficient to handle its business, and the motive power was in similar condition. All testified to the consistent desire of the old management to employ every device which might contribute to greater apparent earnings. Contracts for 5000 freight cars were let as early as May, 1896, to be paid for in receivers' certificates, and bids for 75 locomotives were at the same time received. During their whole administration the receivers purchased over 28,000 freight cars, 216 locomotives, 123,000 tons of rails, besides ties, ballast, new steel bridges, and miscellaneous improvements of various sorts. On the financial side they had to resist an attempt to compel payment of dividends on the preferred stock. The case dragged on through 1897 and 1898, and was finally decided in favor of the company.

After the publication of Mr. Little's report there remained no serious bar to reorganization, while the needs to be met were more apparent than ever before. If the proportion of charges to earnings had been too heavy on the management's own showing, how much more burdensome was it when the reported earnings had been proved too high, and the reported liabilities too low! The first step after the appointment of receivers had been the springing up of reorganization committees. The two most prominent were the Fitzgerald Committee, representing the directors, and the Baltimore Committee. There were besides committees representing the 5 per cent bonds of the loan of 1885, the consolidated mortgage 5s, the 6 per cent bonds of 1874, the preferred stock, and others. These were all to some extent antagonistic. It was hoped to secure a reorganization without foreclosure, but to provide against all contingencies a bill was introduced and passed through the Maryland legislature, permitting a new company to succeed, after reorganization, to the property of the Baltimore & Ohio system.

These were to be parts of larger amounts authorized but not issued. Thus the authorized amount of prior liens was ,000,000, of which ,000,000 were to be reserved, and to be issued after January 1, 1902, at the rate of not exceeding ,000,000 a year, for enlargement, betterment, or extension of properties covered by the prior lien mortgage; or for the acquisition of additions thereto. The authorized amount of first mortgage 4s was 5,000,000. Since the prior liens matured in 1925, and this mortgage not till 1948, ,000,000 were reserved for retirement of the prior issue. ,000,000 were further put aside for the new company; ,000,000 for the retirement of the Baltimore Belt Line 5s, and ,000,000 for enlargements, betterments, or extensions, etc., at a rate not exceeding ,500,000 a year for four years, and not exceeding ,000,000 a year thereafter. The reserves from these two mortgages, therefore, made liberal provision for new capital requirements. All of the common stock authorized was to be issued at once; but besides the ,000,000 preferred stock before mentioned, ,000,000 preferred were to be held in reserve for the new company.

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