PREFACE

It sometimes happens that experiences long since past seem to be repeated, and that knowledge apparently forgotten proves again of service. This is illustrated by the subject of railroad reorganization. In the years between 1893 and 1899 an imposing group of American railroads passed into receivers’ hands. In 1893 alone more than 27,000 miles, with an aggregate capitalization of almost $2,000,000,000, were taken over by the courts, and in the following years the amount was largely increased. Foreclosure sales aggregated 10,446 miles in 1895, 12,355 in 1896, and 40,503 between 1894 and 1898. Among the more important failures were those of the Richmond & West Point Terminal, the Reading, the Erie, the Northern Pacific, the Atchison, and the Baltimore & Ohio;—to say nothing of the Norfolk & Western, the Louisville, New Albany & Chicago, the Ann Arbor, the Seattle, Lake Shore & Eastern, the Pecos Valley, and many other smaller lines.

The railroads which failed between 1893 and 1898 were subsequently reorganized. In order to restore the equilibrium between income and outgo the companies turned to their creditors, and demanded the surrender of a part of the rights of which bondholders were then possessed. This demand the creditors were forced to concede. Some of them yielded without legal compulsion, assenting to “voluntary reorganizations”; some insisted upon the sale of the property securing their loans, but without escaping the loss which fell upon their more pliant associates. Much injustice to individuals came to light at this time. Men who had invested in good faith were obliged to sacrifice their holdings through no fault of their own. The savings of years were swept away. The demand of the railroads was one, nevertheless, which the courts supported, and rightly. The companies could not be operated unless the creditors were deprived of part of their legal rights. At the same time, these rights no longer had a material basis on which to rest, and their surrender meant but the recognition of a loss which had already taken place.

Most of the reorganizations were completed by the year 1899. Since that date the improvement in railroad earnings has been marvellous.vi Gross earnings from operation were $1,300,000,000 in 1899, they were $2,300,000,000 in 1906, the last year for which the figures of the Interstate Commerce Commission are at present available. Total income, after the deduction of operating expenses, was $605,000,000 in 1899, and $1,046,000,000 in 1906. It is not to be wondered at that the distress of the years 1893–9 has not been duplicated during the years 1900–7. On the contrary, weak roads have had opportunity to strengthen their positions, and strong ones have spent enormous sums for improvements, and have declared liberal dividends besides. In no year save 1905 has the new mileage put into receivers’ hands been greater than 800 miles, and in but one has the mileage sold at foreclosure equalled that figure. Operating expenses have increased because the amount of business has exceeded the ability of the railroads to handle it. Equipment has been so inadequate as to provoke drastic legislation by the legislatures of many states; yards and terminals have been crowded until a prominent railroad officer has declared the expenditure of over five billion dollars to be necessary to restore the equilibrium between facilities and traffic.

These conditions have caused the earlier problems of failure and reorganization to be lost to view. Nevertheless, the financial panic of October, 1907, and the recession in activity which has become more and more apparent since that time, have again brought these problems forward. The Seaboard Air Line, one of the important railroad systems of the South, failed on January 5, 1908. The Chicago Great Western followed three days later. The Detroit, Toledo & Ironton, the Chicago, Cincinnati & Louisville, the International & Great Northern, the Western Maryland, and the Macon & Birmingham have since been put in receivers’ hands. In all, the operation of 5938 miles of railroad, with a capitalization of nearly $415,000,000, and total liabilities of $462,000,000, has been taken over by the courts during the first ten weeks of 1908. Whether this is but the beginning of still more extended trouble it is of course impossible to say. There are a number of weak lines in the American railroad system, and the difficulty in obtaining credit is bound to reveal weaknesses where they exist. At present new loans have for some months been difficult to obtain, and even strong railroads have resorted to the issue of short time notes. The Erie, indeed, escapedvii bankruptcy on April 8, 1908, only through the timely aid of important bankers who took up its maturing notes. This points to serious consequences for the weaker lines. It is true, on the other hand, that American railroads are generally in better financial and physical condition than they were in 1893. It is not probable that any railroad collapse will be so widespread now as it was then. Whether this be so or not, the failure of nearly 6000 miles of railroad in ten weeks invests reorganization problems at present with an importance which they have not had for ten years. How, it will be asked, shall the financial operations necessary to reorganization be performed? What methods shall be adopted, what dangers avoided, and what results expected?

The experience of earlier years will provide answers to many of the questions asked in 1908. In the hope, therefore, that a study of railroad reorganization, on which the author has been intermittently engaged during the last six years, will prove of service, the following pages have been published. They discuss in some detail the financial history of the seven most important railroads which failed from 1892–6, and that of one railroad, the Rock Island, which was reorganized in 1902; and summarize in a final chapter the characteristics of the various reorganizations in which these roads have become involved. In some respects the history of each road considered is peculiar unto itself. The Reading had coal to sell, the Atchison did not. The Southern ran through a sparsely settled country, the Baltimore & Ohio through a thickly settled one. The Erie has never recovered from the campaigns of Gould, Drew, and Fisk from 1864–72, the Northern Pacific was not opened until 1883. In other respects, however, the roads have had much in common. Excepting only the Rock Island, each of them has found itself at one time or another unable to pay its debts, and has had to seek measures of relief. The problems of the different companies at these times have been strikingly alike. However caused, their financial difficulties have been expressed in high fixed charges, and, usually, in excessive floating debts. Greater annual obligations have been assumed than the roads could meet, and current liabilities have accumulated while pressing demands have been satisfied. To this state of affairs the remedy has been sought in comprehensive exchanges of old securities for new. The exchanges, it is true, haveviii been carried out in different ways, and the collateral expedients employed have not been the same. To similar problems different solutions have been applied. It is possible, for this very reason, for a careful study of the alternative reorganization methods which have been developed to point out some policies which have been dangerous, and to make clear others which are both just, and likely to be successful. Such a study also throws light upon the history of the companies upon which it is based.

For the way in which the different roads have been handled, the reader is referred to the text. The order of treatment is very roughly determined by geographical location; that is, the Eastern roads are first considered, then the Southern, and then the Western. Each chapter, except the last, should be examined as a “case” in reorganization experience, and as part, therefore, of a united whole. No one has been so continuously with his work as the author himself, and no one can more keenly realize its defects. It is offered as a contribution in a field in which very little has as yet been done, and it is hoped that it will prove of value to those concerned with reorganization plans, as well as to those interested in the development of corporation finance during the last generation.

Without the unselfish and intelligent assistance of the writer’s Mother, the preparation of this book would have been long delayed. To her, first of all, thanks are due. To Professor William Z. Ripley, of Harvard University, should be made warm acknowledgment of his constant interest and helpful suggestions. To the Carnegie Institution the author is indebted for grants in aid of research in this special field. Grateful acknowledgment should also be made of gifts by friends of the University to cover the expenses of publication.