NORTHERN PACIFIC

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.

The Northern Pacific Railroad Company was chartered in 1864, and failed
in 1875 and in 1893. Besides these bankruptcies it has been in frequent
financial difficulty, and on the whole furnishes an instructive chapter
in a study of reorganizations.

The Act of July 2, 1864,[542] empowered the Northern Pacific
corporation to build a line from some point on Lake Superior, in the
state of Minnesota or Wisconsin, westerly on a line north of the
45th degree of latitude, to a point near or at Portland, Oregon. It
provided for organization on subscription for 20,000 shares out of an
authorized capital of 1,000,000 shares with 10 per cent paid in, and
granted forty alternate sections of public land per mile throughout
the territories, and twenty alternate sections throughout the states
across which the road should pass. This liberal donation was influenced
in part by the fact that the value of lands in the Northwest was then
low, and in part by the refusal of any money subsidy. The Government
was to issue patents on the completion of stretches of twenty-five
miles built in “good, substantial, and workmanlike manner,” and was to
survey lands for forty miles on each side of the line[543] as fast as
the construction of the road should require. The company was to begin
work within two years and was to finish the line within twelve years,
and it was provided that in case of non-fulfilment of these conditions
Congress could do “any and all acts and things which (might) be needful
and necessary to insure a speedy completion of the road.” A section
which gave trouble till amended forbade the issue of mortgage or
construction bonds, or the making of a mortgage or lien upon the road
in any way except by the consent of the Congress of the United States.
The company was to obtain the consent of the legislature of any state
before commencing construction through it, and finally the Act was to
be void unless bona fide subscriptions of $2,000,000 to the stock, with
10 per cent paid in, should be obtained within two years.

A project so daring as the construction of a railroad through the
unsettled Northwest not unnaturally found it difficult to obtain
financial support. The capitalists who at first undertook the work were
unable to carry it through.[544] In 1869 and 1870 two developments
occurred: the prohibition of bond issues contained in the act of
incorporation was removed, and Jay Cooke became interested in the
building of the road. Both facts were of far-reaching importance. Mr.
Cooke was one of the foremost financiers of his time. He was a man of
great personal energy, large fortune, and extensive personal following,
and was admirably adapted to the promotion of the work in hand. The
removal of the prohibition upon bond issues made it possible, with
his support, to secure some funds from a mortgage issue and to allow
construction to begin.

In 1869 Jay Cooke & Company were appointed financial agents of
the Northern Pacific Railroad Company. On July 1, 1870, issues of
$100,000,000 in 7.3 per cent first mortgage bonds and $100,000,000
in stock were authorized. The bonds were to be sold to the agents
at 88; the bulk of the stock was to go to the agents as bonus or to
the syndicate interested with them. The same parties agreed to raise
$5,000,000 in cash within thirty days, in order to commence the
building of the line. This made a fair start possible, and by May,
1873, over five hundred miles had been completed. The situation was
nevertheless a difficult one because of the reluctance of capitalists
to invest in the new first mortgage bonds. In 1870 extensive plans
were made to interest the European markets, but all in vain because
of the outbreak of the Franco-Prussian war. In America a similar
campaign was not much more successful.[545] The high price asked
for the bonds,[546] the uncertain nature of the enterprise, the not
altogether ill-founded rumors of extravagance and mismanagement of
the construction actually under way, the presidential election of
1872, all hindered rapid sales. Failure to sell bonds meant financial
stringency for the Northern Pacific. Operating expenses were high, and
the interest on outstanding indebtedness was considerable. On the other
hand, earnings were very small. No through business could be secured
till the completion of the road at least to the Snake River, and local
traffic was yet to be developed. As a result, the company borrowed more
and more from Jay Cooke & Co., and that firm soon found itself heavily
involved.

On September 18, 1873, Jay Cooke & Co. closed its doors. The shock to
the railroad was great. The quotations of first mortgage bonds dropped
from par to about 11. For a time the company struggled on. In December,
1873, a funding of interest was carried through, whereby all coupons
up to and including that of January 1, 1875, were made exchangeable
for five-year 7 per cent coupon bonds, convertible into the company’s
first mortgage bonds at par, and into the company’s lands at 25 per
cent off from the regular prices.[547] In April, 1874, settlement was
made with Jay Cooke & Co. by the transfer of the railroad’s first
mortgage bonds and other securities.[548] These measures offered only
temporary relief. Business was at a standstill throughout the country.
Gross earnings for the year ending June 30, 1874, were reported to
be $988,131, while $30,780,904 7.3 per cent bonds had been issued,
and the floating debt stood at $777,335. The Northern Pacific was not
only unable to meet its fixed charges, but was in default by a margin
which it was hopeless to attempt to overcome. The original project had
completely failed; and the only means of continuing the enterprise
seemed to lie in a government guarantee of the railroad’s bonds, or in
a reorganization so drastic as to sweep away fixed charges and to give
the company a fresh start.

In May, 1874, the first plan was tried. A bill was introduced into
Congress providing that the company should be authorized to issue
its 5 per cent thirty-year bonds for $50,000 per mile on its entire
line, complete and incomplete, and that on completed sections of
the road twenty miles long it should deliver its 7.3 per cent bonds
at a rate of $50,000 per mile, receiving in return $40,000 of the
5 per cent bonds with interest but not principal guaranteed by the
Government, which should hold the difference of $10,000 as a reserve
fund. Holders of outstanding 7.3 per cent bonds were to have the right
of exchanging their bonds for new 5s on the same terms.[549] In return
for the guarantee the railroad was to surrender to the United States
Government its entire land grant, to be sold under the direction of the
Secretary of the Interior, and to turn over semi-annually its entire
net earnings. The Government was to have the right in addition to sell
the Northern Pacific 5 per cent bonds whenever the combined yield of
the land grant and the net earnings should not equal the interest
guaranteed. Finally, Congress was to have power to fix fares, etc.,
provided that the government control did not impair the security of
the bonds. In brief, the capitalists who had involved themselves in
Northern Pacific affairs were ready to surrender their whole enterprise
to the Government if the Government would carry it through. But
Congress was so little willing to take the responsibility that the bill
never came to a vote.

Early in 1875, while the application for government aid was still
pending, the directors called a general meeting of the bondholders.
When it assembled President Cass made a statement of the financial
condition of the company. The outstanding debt, said he, was
$30,441,300. Of the 7.3 per cent bonds issued as collateral for
floating debt, mostly in 1875, there had been pledged $1,780,300 at the
rate of from twenty-five to forty cents on the dollar. The interest on
land warrants, bonds, and scrip given in funding of coupons amounted
to $732,632. The floating debt was $634,758, of which $150,000 were
arranged for settlement within a few days; and $250,000 were due to
directors for money advanced to finish the Pacific section after the
failure of Jay Cooke & Co. in 1873. The total net earnings to date had
been $124,056, and the capital stock was $25,497,600. By this report
it seems that some slight advance had been made since June, 1874, but
in no measure which afforded any hope for the continued solvency of
the company. Most instructive were the figures for the floating debt,
which in less than five years had increased to a sum more than five
times the net earnings for the whole period. After some discussion the
bondholders elected a committee of seven to report at a future meeting.
The committee recommended a receivership, the directors did not oppose,
and on April 16 General Cass was appointed receiver, resigning his
position as president to accept.

By this time hope of government aid had vanished, and no time was lost
in accepting the alternative of a drastic reorganization. Late in May
the bondholders’ committee reported a plan which was considered by the
bondholders at subsequent meetings. The principle was simple, and the
means sufficient. The company had earned .4 per cent on its funded
debt:—_ergo_, the funded debt was to be swept away. Fixed charges had
been heavy:—they were now to be completely removed. Scarcely less
would have met the needs of the situation, but the merit in refusing
to tinker and experiment was considerable. In more extended shape the
plan was as follows: Reorganization was to be carried out through
foreclosure, and a committee of six was appointed to take charge. All
outstanding bonds were to be replaced by preferred stock, and all
common stock was to be exchanged for new common stock. Floating debt
was to be likewise exchanged for preferred stock, which was to be
issued to the amount of $51,000,000 for the following purposes:

(_a_) To retire the principal of the outstanding 7.3 per cent bonds,
and the interest to and including July 1, 1878, at 8 per cent, currency.

(_b_) To retire the land warrant bonds, principal and interest, to and
including January 1, 1875.

(_c_) To pay the floating debt not protected under the existing orders
of the court.

(_d_) Generally for the purpose of carrying the plan into effect.

Preferred stock was to have all rights and privileges of common stock,
with the right to vote, and was to be entitled to 8 per cent out of
net earnings before anything should be paid on the common, and to
one-half the surplus after 8 per cent should have been declared on
both preferred and common.[550] It was to be convertible at par into
any lands belonging to the company, or thereafter to belong to it, east
of the Missouri River in the state of Minnesota or the territory of
Dakota, until default should occur in some of the provisions of the new
first mortgage bonds, and the proceeds of all sales of such land were
to be used in extinguishing the stock. Common stock was to be issued
to the amount of $49,000,000, and was to be given to old stockholders
share for share. To provide the means to complete and to equip the road
there were to be issued first mortgage bonds not to exceed an average
of $25,000 per mile of road, actually completed and accepted by the
President of the United States, to be secured by a first mortgage on
the whole line of road, constructed or to be constructed, and on the
equipment, property, lands, and franchises, including the franchise
to be a corporation, subject only to the right of the holders of the
preferred stock to convert their stock into lands. The principal was
to be payable in forty years, and the interest and sinking fund might
be made payable in gold. No other bonds were to be issued except
on a vote of at least three-quarters of the preferred stock at a
meeting specially held in reference thereto on thirty days’ notice.
Subsequently it was resolved, and the resolution incorporated in the
plan, that the holders of the common stock should have no voting power
until on and after July 1, 1878, and that no assessment should be
levied upon bondholders; but that the cost of purchase and the expense
of foreclosure and other proceedings should be paid out of the assets
and the income of the company.[551]

Applying to this plan the same tests to which all other plans have been
subjected, it appears that from the point of view of the corporation
it left little to be desired. The general depression throughout the
country and the needs of the Northern Pacific Railroad in particular
were so great that for once, in the conflict of interests between the
bondholders and the corporation, the latter had all the advantage on
its side. As a matter of fact, had any attempt been made in this case,
as so frequently in others of recent years, to unite in the exchange
of new securities for old a bond and a stock as an equivalent for an
outstanding bond, instead of giving stock only, the rate of interest
on the new bond would necessarily have been so low as to deprive the
combination of its attractiveness. That resource was not had to an
income bond was perhaps due to the absence of English investment in
the road. The wise course was the one pursued:—namely, to retire
bonds with a fixed lien on earnings by stock which represented
ownership in the enterprise, and which could claim dividends only when
earned. The floating debt was not retired by an assessment but by new
securities. This again, all things considered, was wise. The existing
stock represented so little actual investment in the property that
holders would doubtless have refused to pay an assessment, and would
have surrendered their certificates instead; while it would have been
both difficult to collect an assessment on the depreciated bonds, and
hard to convince bondholders of the justice of a demand for such a
contribution, so long as the stockholders were let off unscathed. On
the other hand, whether or not an assessment would have yielded cash,
the issue of stock for floating debt did not increase the fixed charges
of the road, and was not, therefore, fundamentally unsound. Liberal
provision was made for future capital requirements, and the only
provision to which exception could have been taken was the limitation
of bond issues to the moderate figure of $25,000 per mile except with
the consent of three-quarters of the preferred stockholders. On the
whole, the plan put the company fairly on its feet, presented it with
all the work which had been accomplished, and bade it attempt again
the project in which its failure had previously been so complete. The
danger of future bankruptcy lay in this fact only: that a large section
of the road was yet uncompleted, and through business was non-existent;
that the Northwest was still unsettled, and the local business was
small; in short, that so much was yet to be done that the company, with
all the advantages which it now possessed, might fail again for the
same reasons which had led it into bankruptcy before.

The plan was first reported on May 20,[552] and was laid before
the bondholders on the 30th of June. There was some protest that
it proposed giving away the property of the bondholders, and the
additional sections before mentioned, concerning the expenses of the
reorganization and the voting power of the common stock were added. By
August nearly two-thirds of the bondholders had assented.[553] By May
a decree of sale had been obtained, which was modified in August so
as to give bondholders priority over claims of directors for advances
made; and on August 12 all the property of the company, except the
patented and certified lands,[554] with all its rights, liberties, and
franchises, was sold at public auction and bought in by a purchasing
committee for $100,000.[555] No upset price was set by the Court; and
it was surmised that the bid was purposely made low in order to force
non-assenting bondholders to accept the new stock. The new corporation
was organized in October, 1875, by the election of Mr. Chas. B. Wright
of Philadelphia as president, and with the denial of a petition to set
aside the sale the reorganization may be said to have been concluded.

For fourteen years the company was now to be free from talk of
further reorganization, and not until 1893 was there to be another
receivership. During this time the mileage, owned or controlled, was to
be made continuous from the Pacific coast to Chicago, and the Northern
Pacific was to mount high among American railroads in its extent and in
the volume of its business. In 1875 the completed mileage was, roughly,
550 miles of line; in 1893 it was 5431.92, and reached from Ashland,
St. Paul, and Minneapolis on the east to Portland, Olympia, Tacoma,
and Seattle on the west. In the former year the gross earnings were
$414,722 and the net $97,478; in the latter the totals were $23,920,109
and $11,416,283. At the same time the fixed charges rose from nothing
to $14,311,430, and the bonds outstanding to $133,545,500, besides
$15,349,000 of bonds of subsidiary companies guaranteed. It appears,
therefore, that the promoters were successful in raising funds for the
completion of their enterprise, although their road suffered at first
from the thin population of the Northwest and the lack of a through
connection, and then from the competition of other transcontinental
lines.

From the reorganization to 1879 very little was done in the way of new
construction, owing to the general financial depression. Efforts to
get the time allowed for completing the road extended failed, however,
and it became necessary to resume in order to keep Congress contented
and to avoid a forfeiture of the land grant. In 1878 a small loan was
placed, and the following year one for a somewhat larger amount; and
with the funds so secured construction was vigorously pushed. More
liberal provision was made in 1880–1, when successful negotiations were
carried through for the sale to a syndicate of $40,000,000 general
mortgage 6 per cent railroad and land-grant bonds, to be issued at
the rate of $25,000 per mile of finished road only, and to be secured
by a mortgage on the entire property of the company except the lands
east of the Missouri River, which were pledged for the redemption
of the preferred stock. Provision was made for a reserve of these
bonds sufficient to retire the prior issues before mentioned.[556]
Under the agreement the syndicate took $10,000,000 at once and had
an option of taking $10,000,000 per year in each of the next three
years. The reported price was 90 for the first $10,000,000 and 92½ for
the rest. As a matter of fact, the whole $40,000,000 had been turned
over by the end of 1883, and though the effect on the company is seen
in the increase in its bonded indebtedness from $3,881,884 in 1880
to $39,522,200 in 1883, and in its fixed charges from $334,482 to
$2,478,939, it was meanwhile supplied with cash, and was enabled to
advance toward the completion of the 1000 miles of line which remained
unbuilt. The financial embarrassment which was felt in 1882, in spite
of the syndicate contract, was due to an unforeseen cause. According
to the statements of the company, it was felt necessary, in order
to avoid waste of time and money, to build simultaneously from both
ends of the line, and to start all the heavy work on the entire route
at once. “This involved the shipment of millions of dollars’ worth
of track material, motive power, and rolling stock to the Pacific
coast many months before their actual use on the road; and on the
line east of the Rocky Mountains very large expenditures of cash a
long time before the works resulting from them could become parts of
finished road.”[557] The expenses were immediate;—the delivery of
bonds to the syndicate could take place by the terms of the contract
only after the completion of finished sections of road, so that great
stringency easily occurred between. The trouble was only temporary,
and was tided over with the help of the syndicate and of the Oregon &
Transcontinental Company, a corporation of which we shall presently
speak.

As the Northern Pacific pushed into the Northwest, and at the same
time vigorously occupied itself in filling the gap between the ends of
its main line, it came into contact with a combination of Northwestern
companies known as the Oregon Railway & Navigation Company, of which
Henry Villard was at the time in control. This corporation owned a line
of steamboats running on the Willamette and Columbia rivers in Oregon,
together with an ocean line connecting Portland and San Francisco.[558]
In connection with the water routes a narrow-gauge road had been
built up the left bank of the Columbia River to a connection near the
mouth of the Snake River with an existing narrow-gauge road to the
town of Walla Walla in Southeastern Washington; and this narrow-gauge
was being widened, in 1880, to standard. This was the very territory
through which the Northern Pacific expected to make its connection with
the Pacific coast; and in 1880 it had passed the Rocky Mountains and
had reached the confluence of the Columbia and the Snake. On October
20, 1880, a contract was signed between the Northern Pacific and the
Oregon Railway & Navigation Companies whereby the former, among other
things, consented to a division of territory with the Snake and the
Columbia rivers as the dividing-line; in return for which the latter
agreed to complete a standard-gauge road within three years from the
western end of the Northern Pacific, at the mouth of the Snake River,
to Portland, and to grant the Northern Pacific the right, without
the obligation, to run its own trains over it at a fixed charge per
train mile. It will be remembered that the Northern Pacific was not at
this time too easy in its finances, so that it was quite willing to
secure connection with the coast without outlay of its own. Soon after
the execution of the contract, however, the $40,000,000 loan earlier
described was arranged for, and Mr. Villard feared that the road would
build its own connection with Portland now that the means seemed to be
at hand. To prevent it he conceived no less a plan than that of forming
a new company which should purchase and hold a controlling interest
in both the Northern Pacific and the Oregon Railway & Navigation
Companies.[559] This was done, and the new corporation, known as the
Oregon & Transcontinental Company, for a long time played a prominent
part in Northern Pacific affairs;[560] aiding it in the construction of
the main and branch lines, and time and again advancing money when the
road was in straits.[561]

The formation of the Oregon & Transcontinental Company put Mr. Villard
in control of the Northern Pacific. Mr. Villard’s financial strength
in later years was due mainly to the support of German interests,
notably the Deutsche Bank of Berlin; but his hold on the bank and on
his followers was partly due to his real ability and resourcefulness,
and partly to his confident predictions of results which sometimes he
was but frequently was not able to attain. One of the company’s first
acts after his appearance was the declaration of a scrip dividend upon
the preferred stock. The question had been raised in the course of
his fight for control, and he perhaps felt it incumbent upon himself
to show the sincerity of his contentions; at any rate, the annual
report for 1882 contained a statement that the surplus earnings since
1875 had been used for construction instead of being distributed as
dividends, and that the sum of $4,667,490 was therefore properly due
to the preferred stock. On the strength of this the directors resolved
that a dividend of 11.1 per cent be declared, for which there were
to be issued obligations of the company bearing 6 per cent interest,
payable at the end of five years, but redeemable after one year at the
pleasure of the company upon thirty days’ notice, in amounts of not
less than 20 per cent to each holder. The policy thus initiated was
plainly non-conservative and unsound. It may be true that as a general
principle new construction should be paid for out of capital rather
than out of income account, yet this is subject to qualifications; and
the Northern Pacific had been and was in so precarious a condition
that not a dollar of its resources could safely have been alienated.
The sequel came in 1883 when the annual report admitted that there
had been an excess of expenditures on account of construction and
equipment of $7,986,508 over the cash receipts from the proceeds of the
$40,000,000 general mortgage bonds, sales of preferred stock, and other
sources;[562] and when by October of the same year the deficit had been
increased to $9,459,921, and a circular from President Villard stated
the additional cash requirements to amount to $5,500,000.[563]

Relief had to be sought in an increase of indebtedness. On October 6,
1883, the directors authorized a second mortgage for $20,000,000 upon
the property, subject to the consent of three-fourths of the preferred
stock, and in a circular explained that they had accepted a proposition
of Drexel, Morgan & Co., Winslow, Lanier & Co., and August Belmont &
Co. to take $15,000,000 of the issue at 87½, less 5 per cent commission
in bonds, with a six months’ option to take $3,000,000 more on the
same terms. The stockholders assented,—they could do nothing else,—
a suit for an injunction was denied, and the syndicate exercised its
option. The result was an increase in bonds issued from $39,522,200 to
$61,635,400, of which the greater part was accounted for by the new
mortgage.

By August 22, 1883, the gap in the Northern Pacific main line had been
filled up, and on September 8 the formal opening occurred. The mileage
in operation was then 2365, of which 1952.5 was main line and 412.8
branches, and the rapid construction of the last 1000 miles had done
credit to most of those concerned. The total capitalization per mile
was $59,304, of which less than one-third represented bonds; and though
the following year this percentage was increased, the proportion of
mortgage to total issues remained considerably under one-half. This
showing was very favorable, and accounts for the success with which
the Northern Pacific withstood the panic of 1884. With the completion
of its through line, moreover, earnings increased so materially as to
cover the interest on the new bonds; and though the road was never to
enjoy a monopoly of transcontinental traffic, in February, 1883, it had
concluded an agreement with the Union Pacific concerning through rates
and a division of territory, and a period of prosperity was hoped for.
Meanwhile the Oregon & Transcontinental Company had been hard hit by
the decline in Northern Pacific stock, due to the publication of the
construction deficit. The straits of his company affected Mr. Villard;
and in spite of the relief afforded by the Northern Pacific second
mortgage he “became conscious that neither himself nor the Oregon &
Transcontinental Company could be saved.”[564] On January 4, 1884, the
directors accepted his resignation, and soon after Robert Harris, then
vice-president of the Erie, was elected to fill his place.[565]

The years immediately following the issue of the second mortgage and
the completion of the road were not uneventful, although it is not
necessary to describe them at length. The insolvency of the Oregon &
Transcontinental, and continued disputes between it and the Northern
Pacific over an adjustment of the two companies’ financial relations,
made some other means of binding the Oregon Railway & Navigation
with the Northern Pacific seem advisable, and a lease of the former
company to the latter was discussed. In July, 1884, an arrangement
was said to have been actually arrived at on the basis of a guarantee
by the Northern Pacific of 6 per cent on the Navigation stock for two
years, 7 per cent for three years, and 8 per cent in perpetuity; but
the interest was very high, and an injunction helped to prevent a
consummation at the time. In 1885 the idea of a joint lease by the
Northern Pacific and Union Pacific railroad companies came to the
front. The Oregon Railway & Navigation was serving as the Northwestern
outlet for both of these roads, and such a contract would have greatly
simplified the competitive situation, besides taking away from the
Navigation Company the power to exact an excessive pro-rate because of
its double connection.[566] During the next few years negotiations were
almost constantly in progress. In 1887, however, the Navigation Company
was leased to the Oregon Short Line with a Union Pacific guarantee; and
upon the failure of renewed negotiations Mr. Villard, who was again in
power, sold the Oregon & Transcontinental Company’s holdings of Oregon
Railway & Navigation Company stock at a “satisfactory” price. This
consummation was less unfavorable to the Northern Pacific because of
its completion of a line of its own to the Pacific coast.[567] From now
on the Oregon & Transcontinental Company existed only as a means of
obtaining financial assistance for the Northern Pacific, and for making
more easy the control of that company’s stock.[568]

While these operations were going on the Northern Pacific once more
found it advisable to increase its indebtedness, and added a third
mortgage of $12,000,000 to the first and second mortgages which already
have been described. Of the issue $8,000,000 were at once taken by a
syndicate, and the $4,000,000 remaining were early disposed of to the
same parties. The mortgage was said to be for the purpose of completing
new work and for paying the floating debt; it also assisted in the
redemption and refunding of the dividend scrip which had been issued to
preferred stockholders in 1883; and the payment of $3,073,321 of this
in cash, besides the extension of $1,567,500 more, now took place. The
extended scrip was to be payable in 1907, to bear 6 per cent, and to
be redeemable on thirty days’ notice on any interest day on or after
1892; and up to January 1, 1893, holders had the option of converting
it into third mortgage bonds.[569] The third mortgage itself required
the consent of three-quarters of the preferred stockholders, but this
there seems to have been little difficulty in securing.

The years 1886–9 saw also a considerable extension of branch and other
construction. It was a time of great general activity. In another
place the large additions to the Atchison system have been described;
at the same time the Union Pacific grew from a system of 5825.6
miles in 1886 to one of 6996 in 1889, adding over 1100 miles; the
Chicago, Rock Island & Pacific increased from 1384.2 to 1592.7; the
Chicago, Burlington & Quincy from 4036 to 5140.8; and the St. Paul,
Minneapolis & Manitoba from 1509.4 to 3030.1. Meanwhile the Northern
Pacific added 656.8 miles, or an average of 219 miles a year.[570] In
the far Northwest the great tunnel through the Cascade Mountains was
nearly completed by May, 1888; and by the end of the following year
a continuous line of road was in operation from Ashland, Wisconsin,
to Portland, Oregon, which was of particular service in view of the
difficulties with the Oregon Railway & Navigation Company, and was the
reason for the willingness of the Northern Pacific to surrender control
of that connection.[571] In 1888, also, negotiations were carried on
with the Canadian Government for an extension into Manitoba; and the
same year the Cœur d’Alene Railroad & Navigation Company was purchased,
comprising a steamship and narrow-gauge line in Northeastern Washington
which extended through the mining region of the same name.[572]
Generally speaking, the Northern Pacific retained its character as a
single-track transcontinental route with but few branches. Where it did
expand was on the east, where it reached Duluth, Ashland, Superior,
St. Paul, and Minneapolis, and on the west, where it joined Wallula,
Portland, and Tacoma. The principal other branches were the ones
mentioned: namely, those to Winnipeg, and to the mining districts in
Montana and Washington.

In spite of its moderation the Northern Pacific was not
over-prosperous. Its passenger earnings remained small, being scarcely
greater in 1888 than they had been in 1884; and while its freight
earnings increased from $7,867,367 in 1884 to $10,426,245 in 1888, and
to $15,600,320 in 1889, this was so far offset by increased operating
expenses that the increase in net earnings from both passengers and
freight was only $2,223,194. Construction meanwhile caused an increase
in funded indebtedness outstanding of $15,202,000, to say nothing of
$20,981,000 of branch-line bonds which the road by 1889 had guaranteed;
and the floating debt began to grow uncomfortably large.[573] At the
same time, if Mr. Villard is to be believed, officials in charge of the
operation of the road were eager for appropriations for the improvement
of the track, the replacement of wooden by metal bridges, additional
motive power and rolling stock, enlargement of terminal facilities,
and the purchase and construction of new lines. The truth was that the
problem of getting the road built had been more important than that of
how it was to be built; so that much work had been done in a hasty and
imperfect manner which it was now advisable to renew.

Since, then, there was need for additional capital, while it was unsafe
to increase the fixed charges of the road, the managers felt called
upon to devise a scheme whereby these circumstances should both, at
least in appearance, be met. Their solution was the proposal of a large
refunding mortgage to retire as soon as possible existing mortgages,
and to provide a balance which could be spent upon the line. If, they
argued, bondholders could be induced to accept new 4 per cent or even
5 per cent bonds in exchange for their 6 per cent securities, the road
would be free to issue new additional bonds until the margin of charges
so obtained should have been taken up. The plan was worthy of its
ingenious promoter, Mr. Villard, and will be criticised in the proper
place.

On September 19, 1889, the managers issued a circular to the preferred
stockholders. “In the opinion of the Directors,” said they, “the
time has come to make new financial provision on a liberal scale
for the growing needs of the Company.” Then followed a statement of
gross earnings. “A further corresponding increase may be expected
in the present fiscal year, which will bring the gross earnings up
to $23,000,000 or $24,000,000…. But the Company could not in the
past, and will not be able hereafter, to take full advantage of this
auspicious situation without further large investments of capital.
Secondly.—The prosperity of the road attracts competition…. The
Company must be prepared to build additional feeders wherever and
whenever the local developments warrant, and the danger of hostile
occupancy appears…. Another strong [motive] lies in the Company’s
ownership of a large land grant, the benefits of which cannot be fully
realized without the promotion of settlements through the construction
of branch lines. The Board is also of opinion that the time has come to
make such provision, that the Company may take advantage of its high
credit to effect a reduction of fixed charges.”[574]

It was proposed to issue a $160,000,000 one hundred-year consolidated
mortgage, bearing interest not to exceed 5 per cent, to cover the
entire Northern Pacific Railroad, together with its equipment, land
grant, branch lines, and securities of branch lines. This was to be
applied as follows:

For the retirement of $77,430,000 outstanding
first, second, and third mortgage bonds $75,000,000

For the retirement of the existing $26,000,000
branch bonds 26,000,000

For additional branches at a rate per mile not
over $30,000 20,000,000

For enlargement of terminals and stations,
additional rolling stock, betterments and
renewals, and other expenses not properly
chargeable to operating expenses 20,000,000

For premiums on bonds exchanged 10,000,000

For general purposes 9,000,000[575]

Only a portion of these securities was, therefore, to be issued at
once. The provision for enlargement of terminals, etc., was likely
to call for early issues, as might a portion of that reserved for
new branches and for general purposes. It was expected that a certain
amount of branch-line bonds could be retired without much delay. On
the whole, the bonds immediately put forth were not expected to exceed
$15,000,000; though there was nothing in the plan to prevent a greater
issue. The interest rate was “not to exceed 5 per cent.” That this
wording was deliberately adopted is shown by the terms of the mortgage,
which expressly gave to the company the power to issue the new bonds,
from time to time, bearing such a rate of interest as the managers
might think advisable up to 5 per cent. It was understood that the
issue was to be in three classes, one of $57,000,000 to bear 5 per
cent, one of $23,000,000 to bear 4½ per cent, and one of $80,000,000 to
bear 4 per cent; and on this basis it was thought that fixed charges
would be reduced $2,000,000, to which would have to be added interest
on bonds issued in excess of those previously outstanding.[576] The
reserve of $10,000,000 for premiums shows that in the opinion of the
directors the offer of substantially more than par in new bonds was
necessary in order to induce exchanges of old bonds for new. To prevent
careless use of this reserve it was provided that the $10,000,000 in
bonds could be used to pay premiums only upon the affirmative vote of
at least nine members (out of thirteen) of the board, and when in the
opinion of the trustees, expressed in writing, a saving of interest to
the company could be effected.

Not the least important part of the plan was that designed to gain
the preferred stockholders’ approval. It will be remembered that by
the terms of the reorganization of 1875 the consent of three-quarters
of these stockholders was necessary to validate any mortgage after
the first mortgage then proposed. The increase in indebtedness now
suggested threatened to postpone indefinitely dividends on the
preferred, and could not be expected to be welcome. In consequence, the
directors offered three distinct inducements: first, a promise of a
distribution to the preferred stockholders of sums which had been taken
from earnings and spent on the property to date; second, a promise
of early and regular dividends in the future; third, a preferential
right of subscription to the new bonds. By resolution of August 21,
1889, they therefore definitely declared in favor of the distribution
of a sum equal to the earnings which should be found to have been
applied in earlier years to the capital requirements of the property.
An investigation was made, the amount was officially declared to be
$2,844,430, and an equivalent amount of new bonds at 85 was set aside
to cover it. For the future Mr. Villard and his associates announced a
determination to begin dividends at the rate of 4 per cent, the first
to be paid January 1, 1890; and declared that thereafter dividends
would be paid out of the current net earnings, or, if these should
be insufficient, out of a reserve fund until the net earnings should
justify a larger distribution. Finally, it was provided that the common
and preferred stockholders should be given the privilege of subscribing
to the new bonds at 85 to the extent of 15 per cent of their holdings.
That these concessions attracted attention was shown by the action
of the preferred stockholders in calling for an actual distribution
as soon as possible of the amounts deducted from earnings in past
years. On October 17, 1889, they passed a resolution recommending
to the incoming board of directors “to take into consideration the
distribution of the whole amount due to the Preferred Stock, under the
plan of reorganization, as soon as the Company shall be financially in
a proper position to do so;”[577] and again the following year they
resolved “that the incoming Board of Directors be … requested to set
apart the additional earnings in … consolidated bonds … and to
(consider) the question of either increasing the … dividend above 4
per cent or of declaring an extra dividend to the preferred stock.”[578]

All things considered it is improbable that the refunding plan could
have been put through without the promise of dividends to the preferred
stock, but it remains unfortunate that such promises had to be made.
The money which had been put into the road had been of necessity so
invested to preserve the solvency of the company. In a sense it had
increased earning power, but not all expenditures which affect earnings
may be charged to capital. In the first place, if earnings are below
fixed charges, or are constantly tending to fall below, sums put into
the property merely assist the company to keep its head above water,
and are not a sound basis for an increase in indebtedness; and in the
second place expenditures which serve to _preserve_ earnings may not
be charged to capital account, even when the method of preservation is
the construction of branch lines, and still less when the method is
the improvement of the existing plant. If, then, as was the case, the
earnings claimed by the preferred stockholders had gone to preserve
the solvency of the company, and to defend it against competition, the
arguments of these stockholders in 1889 did not hold good.

As for the plan itself, it was simply a method for providing new
capital, and should be judged as such. Its refunding provisions were
mainly misleading. It proposed to secure a reduction in fixed charges
by the exchange of bonds bearing 5 per cent or less for bonds bearing 6
per cent, but how the reduction was to be accomplished was not clear.
The maturity of the bonds to be retired was remote, and the assured
reduction was therefore also remote. The first mortgage had been issued
in 1881, and ran for forty years; the second dated from 1882 and was
to mature after fifty years; and the third, which had been issued
only the year before, was not redeemable until 1937. The Missouri
division and Pend d’Oreille mortgages matured somewhat earlier,[579]
but had nevertheless a considerable time to run. The mortgage issues
would therefore not soon fall in of themselves. Secondly, bondholders
would evidently not consent voluntarily to surrender old unexpired
bonds without such a premium in new bonds as would make their annual
return approximately the same. Something they might concede in view
of the more remote maturity of the new issue and the somewhat more
inclusive character of its mortgage lien, but not enough to create any
considerable saving.[580] The new issues for improvement of the road,
moreover, involved an _increase_ in the annual interest payments; which
we must not, perhaps, condemn offhand, for the raising of capital
was in some measure forced upon the company, but which is important
in considering the railroad’s financial condition and prospects. The
fact was that the Northern Pacific was not self-supporting; it had
been obliged to issue $20,867,000 bonds of its own and to guarantee
$20,981,000 besides, between 1884 and 1889, in order to secure an
advance of $2,462,288 in annual net income during a period of rapidly
increasing prosperity; and it was now obliged to increase this
indebtedness in the attempt to maintain its solvency for the future.

Between 1889 and the end of 1892 business increased, and net earnings
at first gained more rapidly than did fixed charges. Mr. Villard was
again supreme in the management, and actively directed financial
operations until his departure for Europe in 1890. The most important
operation conducted was the lease of the Wisconsin Central, whereby
the eastern terminus of the Northern Pacific system was transferred
from St. Paul and Minneapolis to Chicago. The directors who were
elected with Mr. Villard in 1887 controlled the Wisconsin Central and
the Terminal Company, which had been formed to secure an entrance for
that road into the Lake city.[581] Perhaps because of this financial
interest, the conviction seems to have crept over them that the
Northern Pacific would do well to make connection with the trunk lines
at Chicago, instead of stopping further west; and they brought the
subject up in 1889, and again in 1890. On July 1, 1889, a traffic
contract went into effect, under which the Northern Pacific obtained
the use of the Wisconsin Central lines in consideration of the business
which it should turn over to them. Certain provisions imposed on both
roads a share of the operating expenses whenever the proportion of
operating expenses to gross earnings was greater than 65 per cent, and
which gave both a profit whenever the proportion fell below this level.
The Wisconsin Central retained entire and absolute control of its own
property, except that the Northern Pacific was to share in the profits
of the subsidiary Terminal Company whenever these profits should be
more than $800,000.[582] This was considered unsatisfactory, because
the Northern Pacific had no control of the Central’s operation; and
on April 1 of the following year a new contract gave to the former a
lease of all the lines owned and controlled by the Wisconsin Central
Company and the Wisconsin Central Railroad Company between St. Paul
and Chicago for 999 years; including terminal facilities at Chicago
held by the Chicago & Northern Pacific Railroad Company, a subsidiary
corporation.[583] “It was deemed by the Board,” said the annual report,
“as of the utmost importance that your road should have access to the
city of Chicago by a line in its own ownership and possessed with
terminal facilities which it could control and have possession of.
The whole subject was most carefully considered by the Board, and
the contracts and leases were adopted after deliberate and careful
consideration.”[584] The advantage of this lease to the Wisconsin
Central lay in the large volume of traffic which the arrangement
secured to it; that to the Northern Pacific was more doubtful.
Connection with Chicago was desirable, but it was to prove difficult to
operate the Wisconsin Central for 65 per cent, and the acquisition was
to arouse the hostility of all the other roads between Chicago and St.
Paul. We shall see that the lease was presently given up and that the
attempt to make Chicago the eastern terminus was for the time abandoned.

The year 1891 was a good one, but during the following twelve months
the situation changed for the worse. Most noteworthy was an increase
in fixed charges of over $2,000,000, due in part to an increase in the
funded indebtedness, but more largely to an increase in rentals paid.
This increase brought charges above total net income, and shows how
serious the position of the company had become. In fact, the company’s
repeated issues of bonds had failed so completely to put it in a stable
position that in but three of the nine years from 1884 to 1892 was a
surplus greater than $500,000 above fixed payments secured, while the
operations of two of these same years resulted in a deficit.

The first admission by directors that the road was in difficulty
consisted in the passing of the preferred stock dividend for March 31,
1892. That this action did not deprive the holders of all return was
due to the previous conversion of the consols formerly reserved into a
trust for ten years on which to draw whenever the road should be unable
to pay the usual dividends. The directors therefore added to their
declaration of suspension a resolution that the “time, manner, and
method of the distribution of so many of the $3,347,000 of consolidated
bonds set aside for the benefit of the preferred stockholders as may be
necessary to supply the deficiency, if any, in this or any subsequent
fiscal year, between the amount of net earnings and 4 per cent on
the preferred stock, be submitted to preferred stockholders at the
annual meeting in October next.”[585] Not unnaturally stockholders
were alarmed. At the annual meeting in October an investigating
committee was appointed,[586] and proceeded to a careful examination
of the property accompanied by certain officers of the road. The
committee was not friendly to the management. Its preliminary report
announced that the physical condition of the system was good, but its
later criticism of the company’s financial condition was severe. In
the words of the London _Standard_ “there has been no such scathing
arraignment of Directors since the exposures of the Erie Railway.” The
committee stated that the bad condition of the property was due to the
reckless financial methods of the directors. It alleged that officers
had held dual positions, and had subordinated the interests of the
Northern Pacific Company to those of the Wisconsin Central, relieving
themselves at the expense of the former road. It commented upon the
unprofitable character of certain of the other branches. The floating
debt, it maintained, had been financed by Mr. Villard personally at
double the current rates of interest, and it recommended litigation
in default of some assurance that the policy of the company should
be changed.[587] In reply the directors issued a lengthy statement
taking up the charges in detail. The policy of building branch lines,
said they, was imperatively necessary in order to develop business.
Although some of the branches had not earned their fixed charges, yet,
if they had been credited with 60 per cent of the gross earnings on
business which they had brought to the main line, they would have shown
a good profit. The policy of branch-line construction had met with the
unanimous approval of successive boards of directors, and had been
ratified by the stockholders in 1886; and in this connection the reply
defended specifically the acquisition of the Wisconsin Central and
other lines. The carrying of the floating debt by officials interested
in the property, instead of being subject to criticism and censure, was
entitled to the highest commendation.[588]

It is difficult to pass with justice upon the conflicting contentions
above outlined. However, writing in 1905, long after his retirement
from Northern Pacific affairs, Mr. Villard expressed himself as
follows: “In 1891 Mr. Villard … made … his last official tour of
inspection of the main line and principal branches of the Northern
Pacific…. The most alarming impression of all made upon him was the
revelation of the weight of the load that had been put upon the company
by the purchase and construction of the longer branch lines in Montana
and Washington, which he then discovered for the first time. There
was the Missoula branch to the Cœur d’Alene mines; the Cœur d’Alene
Railway & Navigation, a mixed system of steamboats and rail lines; the
Seattle, Lake Shore & Eastern; and the roads built into Westernmost
Washington; representing a total investment in cash and bonds of not
far from $30,000,000, which together hardly earned operating expenses.
The acquisition and building of these disappointing lines had in a
few years absorbed the large amount of consolidated bonds set aside
for construction purposes, which had been assumed to be sufficient
for all needs in that direction for a long time.”[589] No man should
have known the real profitableness of these extensions better than Mr.
Villard; and the circumstances of his account give it special weight.
The admitted fact that in several cases the managers of the Northern
Pacific voted as directors of that corporation to buy property from
themselves as whole or part owners in other enterprises also excites
distrust, and this feeling is strengthened by the unsatisfactory
financial condition in 1893 of the Northern Pacific system as a whole.

Even before the report of the investigating committee the directors
had been busy with the floating debt. This amounted to $9,918,000 late
in 1892, according to the treasurer’s statement. In February, 1893,
it was decided to cancel it by the sale of the stock of the St. Paul
& Northern Pacific held in the treasury, but this aroused violent
opposition. The St. Paul & Northern Pacific ran, it will be remembered,
from Brainerd to St. Paul and Minneapolis, and had formed the eastern
terminus of the Northern Pacific system until the acquisition of the
Wisconsin Central. It was justly considered an extremely important
section of the main line, and the possible loss of its control was
regarded as disastrous.[590] Dissuaded from their first purpose, the
directors considered the issue of a collateral mortgage sufficient in
amount to relieve all pressing necessities, and proposed to utilize
in this way treasury securities which it would have been unwise to
sell. At the same time the stockholders’ committee had much the same
idea in mind, and wrote to President Oakes in March, and again in May.
“Referring to my letter to you of March 15,” said Brayton Ives, “I beg
to say that the financial plan therein referred to contemplates the
creation of a collateral trust in which shall be placed $10,000,000
Northern Pacific consolidated 5s, $3,000,000 Chicago & Northern Pacific
firsts, and all of the St. Paul & Northern Pacific stock belonging to
the Northern Pacific Company, estimated at $7,000,000. Against these
securities it is suggested that notes to the extent of $12,000,000 be
issued, bearing 6 per cent interest, and payable in five years, or
before, at the pleasure of the company, provision being made at the
same time for the increase of the amount of the notes to $15,000,000
on the deposit of additional collateral securities satisfactory to
the underwriters. I am happy to be able to repeat the belief already
expressed, that if the board of directors will allow the underwriters
to name seven directors of the company the entire amount of notes
will be subscribed for without delay.”[591] This plan was backed by
responsible houses, including the Mercantile Trust Company, Kuhn, Loeb
& Co., the Equitable Life Assurance Company, and others, who agreed to
take $7,000,000 of the new bonds at 95, less 1½ per cent commission.
The directors paid no attention to Mr. Ives’s letter, and his offer was
subsequently withdrawn.

The directors’ own scheme was dated May 1, 1893. It provided for a
collateral five-year 6 per cent mortgage to the amount of $15,000,000,
of which $12,000,000 were to be issued at once. There was to be a
committee of five which should take charge of the issue, and which
might sell the collateral before the maturity of the notes at certain
minimum prices or over. Until all the notes should have been paid the
railroad company agreed not to undertake the construction of any new
lines without the consent of the committee, or to purchase or lease any
railroad or navigation lines, or to guarantee, endorse, or purchase the
bonds or other obligations or stocks of other companies. The committee
was to have the voting power on the underlying stocks, and might
direct the trust company to waive any default of the railroad company
in payment of interest. The railroad company might call in the notes
before maturity, after May 1, 1896, and pay them off at par and accrued
interest.[592] This, it will be seen, did not differ in essence from
the scheme proposed by Mr. Ives:—the real contest was between parties
and not between plans. In June, Mr. Villard resigned his position as
director and chairman of the board, and J. D. Rockefeller was elected
a director. Somewhat earlier, but doubtless in anticipation of this
action, a syndicate agreed to underwrite the collateral issue, subject
to the stockholders’ right of subscription;[593] and by the end of the
year $10,275,000 of the collateral notes were outstanding, of which
the bulk had been taken by the syndicate.[594] The whole device was
very similar to that employed by the Union Pacific in 1891. It was not
designed as a permanent remedy for anything, but served to postpone a
reckoning to what was hoped would be better times. As a matter of fact
its effect was very small.

Receivers for the Northern Pacific Railroad Company were appointed
August 15, 1893, on a petition alleging that the company was insolvent
and had no funds to meet payments coming due on September 1, October
1, November 1, and December 1. The company in its answer admitted the
facts, and the United States Circuit Court at Milwaukee, Wisconsin,
put Messrs. Henry C. Payne, Thomas F. Oakes, and Henry C. Rouse in
charge of its affairs.[595] Receivers were rapidly appointed for most
of the branch lines, the intent being to put all these properties in
separate hands.[596] The receivers of the main line had nothing to
do with the branches, although in November they were authorized to
enter into temporary traffic agreements with them. In regard to the
Wisconsin Central, application was early made to compel the Northern
Pacific to carry out the provisions of the lease; but Judge Jenkins of
the Milwaukee court granted the receivers until September 15 to decide
whether or not they desired to continue, and upon their negative reply
authorized a surrender. The accounts submitted, he said, showed that
since the lease had gone into effect the Chicago & Northern Pacific had
been operated at a loss to the Northern Pacific of $1,304,169 and the
Wisconsin Central at a loss of $1,142,316; although business during the
three years in question had been generally prosperous. In accordance
with the decision the property was turned over to the Wisconsin
Company on September 26, 1893, and the Northern Pacific for a time gave
up the idea of a Chicago terminus. Of the other leases those of the St.
Paul & Northern Pacific and of the Cœur d’Alene Railway & Navigation
Company were at this time approved by the court, and the receivers were
authorized to make the necessary payments.

The failure of the Northern Pacific was the signal for still more
active and bitter personal struggles between opposing factions than
had before occurred. The opposition, led by Brayton Ives and August
Belmont, endeavored to get control of the company through the annual
election on October 19, and to procure the removal of the appointed
receivers. They displayed the greatest bitterness toward Mr. Villard,
and held him responsible for the position in which the company was
placed. Villard’s “remarkable qualities,” wrote Ives, “have been of
advantage only to himself…. The syndicate composed of Villard, Colby,
Abbott, and Hoyt, and their friends made millions [by the Wisconsin
Central deal] and the Northern Pacific has suffered and is suffering a
corresponding loss.”[597] Circulars were sent out asking proxies, and
August Belmont, J. Horace Harding, Brayton Ives, Donald Mackay, and
Winthrop Smith were appointed a committee to receive proxies as they
came in. On the other side the directors appealed to the stockholders,
reminded them that though the company had failed while they were in
office it was also during their term that it had reached its greatest
prosperity, and took the cautious step of amending the by-laws so as to
shorten the term of future boards from three years to one. Conditions
were against the management, and the result of the election was a
complete victory for the Belmont-Ives party, which was followed up by
the choice of Mr. Ives for president. The real results were less than
might be supposed, for the operation of the railroad and the control of
its funds were to be in the hands of the receivers and not in those of
the officers of the road. On January 20 President Ives filed a petition
in the Milwaukee Federal Court for an order directing the receivers to
surrender the seal, books and papers and stock certificates, and to pay
over sufficient money to enable the president to rent rooms and pay the
salaries of the auditor, secretary, and treasurer.[598] The petition
was denied, and the elected officers were left in an anomalous position.

In other matters the opposition lost no time in appealing to the
courts. Previous even to the election two actions had been begun
against Henry Villard: the one in September by John Swope of
Philadelphia to compel Henry Villard and others to restore stock and
bonds obtained as a result of an illegal conspiracy:[599] the other
a petition in October by the Northern Pacific Company to force the
receivers to bring suit against Messrs. Villard, Hoyt, and Colby to
recover nearly $2,600,000 alleged to have been made unlawfully through
Northern Pacific deals.[600] The complaints were in the main the same
as those which had been made by the investigating committee, and
charged, _inter alia_, that Villard had secured a profit to himself
by bringing about the purchase of the Chicago terminal properties by
the Northern Pacific. Mr. Villard swore that his whole interest in the
transaction had been as officer and stockholder and securityholder
of the Northern Pacific Company,[601] and the receivers professed
themselves ready and willing to bring suit, provided they were
furnished with the information and evidence wherewith to prosecute
the same.[602] The Court reserved the Ives motion for further
consideration, and the following year directed the receivers to bring
suit; but the litigation was eventually dropped.[603]

In December, 1893, the Ives faction filed a petition for the removal of
the receivers. The charges were in part similar to those of the Swope
suit. It was asserted that at the time the receivers were appointed
the road had practically had no hearing; that its managers had in
less than a year burdened it with the interest of $60,000,000 for
properties which were of no value to it, but in many of which they
were personally interested and out of which they made large profits,
and that when insolvency was produced by this fraud they had put the
road in the hands of receivers nominated by them for the purpose, with
the effect of perpetuating the same control which had brought the
bankruptcy. Specific charges were made against Oakes, Villard, and
Roswell C. Rolston, president of the Farmers’ Loan & Trust Company;
no charges were made against Receivers Payne and Rouse, but their
removal was asked for because they happened to be in the company of
and presumably in the interest of Mr. Oakes. Besides this, finally, it
was alleged that separate receivers had been unnecessarily appointed
for branch lines, and that the expense of administering the affairs of
the company had been enormously increased.[604] The receivers filed
lengthy answers on February 3; Receiver Oakes in particular answering
every charge specifically, filing exhaustive documents in proof, and
maintaining in general the value of the branch properties and his
innocence of unlawful profits.[605] The court on the whole inclined
to his view. On April 14 Judge Jenkins handed down his decision,
dismissing the petition for the removal of Messrs. Payne and Rouse, and
holding Mr. Oakes’s conduct to have been above investigation except in
three instances, to examine which a master was appointed.[606] In the
course of his decision Judge Jenkins concluded that the branch lines
in question, though unprofitable for a while, were necessary to the
system; and that in particular the branches in Washington, Oregon,
Montana, and Idaho were built as feeders, and owing to the sparsely
settled district were necessarily built for the future. If Mr. Oakes
were to be removed on these charges, said he, then it would make
the entire board of directors of the company at that time liable to
impeachment.[607] Mr. Cary, the master, reported that Mr. Oakes had had
no pecuniary interest and no personal advantage or gain from any of
the matters referred to him for investigation. Mr. Villard was said to
have made unlawful gains in the acquisition of the Northern Pacific &
Manitoba Company to the extent of $363,494, but Mr. Oakes did not know
that Mr. Villard was so interested, and was not bound to take notice
to prevent such gains.[608] In consequence, Judge Jenkins in October
granted a motion to dismiss the petition for the removal of Oakes as
receiver,[609] and the incident was closed.

It thus appears that Mr. Ives and his friends obtained but little
satisfaction in the courts up to this point. They were unable to
force the receivers to turn over any share of the Northern Pacific’s
earnings, and they were equally unable to remove the receivers from
office. So long as the road should remain in the receivers’ hands their
authority seemed destined to be nominal, and they were thus spurred on
by their own private interests to make some attempt at reorganization.
At the same time their opponents, as bondholders, were not unwilling
to receive some interest on their bonds, and succeeded in this, as in
other matters, in drawing substantial control into their own hands.
The year 1894 was a bad one and made the importance of a reduction in
fixed charges loom large. Passenger earnings decreased from $5,917,054
to $3,960,772, and freight earnings from $17,017,630 to $11,418,692;
while in spite of attempted economies by the receivers, net earnings
decreased by almost the same absolute amount.[610] Cuts in wages were
inevitable, and a serious strike aggravated the situation. It became
necessary to borrow money from the Adams Reorganization Committee, of
which more will be said later, and to issue $5,000,000 in receivers’
certificates to pay off $5,000,000 already authorized in 1893. On
September 8 formal announcement was made that the receiverships of
the twenty-four branch lines of the Northern Pacific system were
to be terminated, and that the trustee was to undertake the legal
management of all the lines for a stated sum per annum; while the
general receivers, Messrs. Oakes, Rouse, and Payne, were to operate
the separated lines under a fair traffic agreement. It was figured
that $64,000 per annum would be saved; and further economies were made
in the cost of the administrative staff at New York. The relief was
insufficient. Net earnings for 1894 were $5,506,007, and fixed charges
were $12,004,985, and the need of a reorganization was impressively
shown.

The work of devising a reorganization plan was done in the various
bondholders’ committees. Late in 1893 a committee of consolidated 5
per cent bondholders had been formed, with E. D. Adams as chairman and
General Louis Fitzgerald as vice-chairman; which declared itself to be
independent, but was regarded as affiliated with the former managers
of the road. In March, 1894, this committee announced that, having
received responses from the holders of a majority of the consolidated
bonds, it had prepared an agreement and had secured its acceptance by
the German bondholders. All consolidated bondholders were requested
to deposit their securities with the Mercantile Trust Company, which
would issue engraved certificates of deposit, which the committee would
endeavor to have listed on the Stock Exchange. Mr. Ives was opposed to
any step toward reorganization of this sort, and objected particularly
to the composition of the committee; he therefore asked bondholders to
withhold their acceptance of the agreement, and gave various reasons
to lend weight to his request. In April, as a counter-move, he invited
bondholders to send in their names and addresses to him, together
with the amount of their holdings, saying that this action would not
commit the bondholders, and was desired only to enable the company to
furnish information respecting its affairs, and, when the proper time
should arise, to confer about a reorganization plan. The rapid falling
off in earnings soon imperilled the interest of the second and third
mortgage bonds, superior to the consolidated mortgage. In July the
Adams Committee appealed to the holders of these issues, and secured
a considerable number of deposits. Henceforth it planned to act as a
general reorganization committee. On the other hand a committee headed
by Johnston Livingston competed for deposits of the second mortgage,
and one headed by C. B. Van Nostrand for deposits of the third mortgage
bonds. It was urged that holders of the earlier issues should not
deposit with the consolidated committee, because its interest lay in
cutting down prior liens; whereas the Van Nostrand Committee declared
that the road could earn the interest on the third mortgage, and that
these bonds should not accept less than par and interest in cash.
Nevertheless the Deutsche Bank’s London agency announced in September
that it was prepared to receive second mortgage, third mortgage, and
consolidated bonds on behalf of the Adams Committee, and to forward the
same to New York for deposit. Various rumors were afloat at this time
concerning reorganization, and suggestions were made for converting the
third mortgage bonds into 5 per cent income bonds and the consolidated
bonds into preferred stock;[611] but the only result was to stir up
protests from the third mortgage bondholders, who still insisted in
August that earnings were more than sufficient to pay the interest on
all prior liens. Late in the year there was talk of selling the road
under foreclosure of the second mortgage, but this too came to nothing.

Meanwhile the operation of the road went on. Receiver Rouse reported
on the condition of the property in January, 1894. He estimated that
$10,000,000 would be required to bring the permanent way into the most
effective condition for economical operation. Exceptional causes,
said he, had contributed to make the earnings for the previous three
years exceptionally large, and this fact, together with the prevailing
depression, the competition of the Great Northern, and reduced rates,
would decrease the gross earnings in the immediate future at least 27
per cent. Although Mr. Rouse believed in the value of the Northern
Pacific’s branch lines, his report was not encouraging.[612] In
September, on the approach of the annual election, President Ives
issued a long circular. The serious decrease in the earnings of
the road, he said, had affected for the worse the position of the
stockholders, and these holders should understand that no one of the
reorganization committees was working for their interest. He announced
the appointment of a committee to receive proxies, and revealed the
embarrassment of the management by a request for contributions of
$12.50 per hundred shares in order to pay the expenses of the officers.
So far as the officers should have any voice in the matter, President
Ives assured the stockholders, contributions should be credited on any
assessments which might be made thereafter. On the day of the election
no opposing ticket was presented, and the Ives party were reëlected
to their positions. This is where matters stood at the beginning of
1895. The hostility of the opposing committees was in no way abated;
but the Adams Committee had secured deposits of nearly $21,000,000 of
the consolidated mortgage bonds, $1,000,000 more than a majority of the
third mortgage bonds,[613] and $3,000,000 less than a majority of the
second mortgage bonds, and with the hearty support of the Deutsche
Bank was steadily strengthening its position.[614]

In May, 1895, the Adams Committee reorganization plan came out and
marked the first serious suggestion for a rehabilitation of the
property. It proposed a sale, under foreclosure, of the old company
and the formation of a new company under special arrangements for this
purpose. The new company was to issue $100,000,000 in shares, and a
maximum of $200,000,000 in gold bonds free from taxation, secured by
a mortgage lien on the whole Northern Pacific system, including the
St. Paul & Northern Pacific Railway, and bearing interest partly at
4 per cent and partly at 3 per cent, all under the same mortgage.
A sufficient amount of these bonds was to be reserved to replace
the existing first mortgage, besides a further amount to acquire
independent branch lines or for new construction at a maximum charge
of $20,000 per mile. The principal and interest of the new bonds were
to be guaranteed unconditionally by the Great Northern Road, in return
for which the Great Northern was to receive one-half of the stock of
the new company. The new board was to consist of nine directors, of
whom four were to be nominated by the Northern Pacific Reorganization
Committee. Each $1000 Northern Pacific second mortgage bond was to
receive a $1125 new Northern Pacific guaranteed bond; each $1000 third
mortgage bond a new $1000 3 per cent guaranteed bond, and at least $250
in shares; each $1000 5 per cent consol at least $500 in new 3 per cent
guaranteed bonds and $300 in shares. Overdue coupons of the second
mortgage were to be paid in cash at the rate of 5 per cent annually,
those of the third mortgage at 4 per cent, and those of the consols to
be adjusted at the rate of 2½ per cent in new 3 per cent bonds. The
floating debt of the receivership was to be paid by an assessment of
about $11,000,000 on the old stock. The reorganization and the raising
of the necessary working capital were to be secured by a syndicate
headed by J. P. Morgan & Company and the Deutsche Bank.[615]

Briefly stated, this plan proposed to decrease somewhat the funded
debt, while reducing also the interest rate from 6 and 5 to 4 and 3
per cent. The reduction in fixed charges which would have ensued it
is impossible to estimate without further details. The amount which
bondholders were asked to give up was, however, considerable, and for
this compensation was variously given in new bonds and in new stock.
The floating debt was not to be funded, but was to be paid off by
the commendable method of an assessment; and provision was made for
working capital, although at what cost in profits to the syndicate
was not stated. But more important than the details of the plan was
the guarantee of the new issues by the Great Northern Company for
which it provided. The question of consolidation between the Northern
Pacific and the Great Northern was said, on what purported to be good
authority, to have originated on the side of the Northern Pacific among
men to whom an alliance seemed necessary to the prosperity of the
latter road.[616] Mr. Hill was said to have been at first reluctant,
and to have consented only on condition that a majority of the Northern
Pacific stock should be placed within his hands. It can scarcely be
supposed, however, that he did not welcome such a union; and the
petition of the Northern Pacific receivers for the cancellation of
contracts with the Great Northern and the Minneapolis Union railway
companies[617] made consolidation especially desirable at this time.
To the end of this consolidation the Adams Committee plan was chiefly
framed, and on its execution the adequacy of the plan depended. If
the Great Northern could have been induced to guarantee the principal
and interest of the new Northern Pacific bonds the likelihood of a
default would have been reduced to a minimum, even on the indebtedness
outstanding before the receivership; and a scheme for paying the
floating debt and for providing a certain amount of new capital would
have been all that would have been required. But it is clear that a
proposal for a consolidation of two of the principal lines serving the
Northwest brought the consuming and producing public to an interest in
the Northern Pacific reorganization which they had not felt before.
So long as a reorganization plan dealt merely with exchanges and
manipulation of securities by and among securityholders, the influence
of any settlement on outsiders was very indirect; but when it operated
to reduce competition in a large section of the country the effect
was plain and striking. Certain conservative financiers suggested a
holding company to hold the Great Northern and Northern Pacific stock,
in order to throw some sort of a veil over the proceedings, but Mr.
Hill would not consent.[618] Late in August, 1895, therefore, a bill in
equity was filed to prevent the proposed coöperation, and on September
17 Attorney-General Childs, for the state of Minnesota, brought suit
for an injunction on the ground that the combination was contrary to
the laws of the state and would prevent competition. It was said that
Mr. Childs was supported by the practically unanimous sentiment of the
people of Washington and Montana. The matter came before the Supreme
Court on suit by one Pearsall, a stockholder of the Great Northern, and
this tribunal held that the combination was contrary to the laws of
Minnesota and should, therefore, be enjoined, affirming the principle
for which Mr. Childs contended.[619] This settled the fate of the Adams
reorganization plan; and an entirely new scheme had to be devised.

But while once more progress toward reorganization seemed to have
ceased, sensational developments occurred in the factional conflicts
to which we have already referred. To Mr. Ives, barred from all
participation in the management of the road, denied a salary, and
unable to obtain the removal of the receivers by Judge Jenkins, came
the idea of appealing to another court. It will be remembered that, the
original receivership suit had been instituted in the circuit court of
Milwaukee, Wisconsin, and that that court ever since had been regarded
as possessing primary jurisdiction. Since no compulsion existed on
other courts to recognize this jurisdiction of the Milwaukee court, the
orders of which were supreme in its own district only, and the smooth
working of the receivership was due to a respect for “comity,” it was
possible, as Ives well knew, for any circuit court along the line to
throw existing arrangements into the direst confusion. Relying on this
fact, President Ives sent the General Counsel of the company to present
applications for the removal of the receivers to one court after the
other along the road.[620] In September, 1895, judges willing to take
jurisdiction were found in Seattle, in the far northwestern corner of
the United States.[621] Petition was made in two parts: first, that the
Seattle court take jurisdiction; second, that it remove Messrs. Oakes,
Rouse, and Payne. Judge Hanford of the Federal Court of the Washington
District called Judge Gilbert of the United States Circuit Court to
sit with him, and deciding on the question of jurisdiction first,
according to the request of the receivers, the two judges held that the
principle of comity did not of necessity apply in the Northern Pacific
case because no part of the railroad was within the jurisdiction of
Judge Jenkins’s court, and any court along the road could more properly
and efficiently administer the trust. The court, therefore, directed
the receivers to answer the charges of malfeasance, and to file their
answers in Seattle by October 2; also to file their accounts with
the clerk of the court at Seattle,[622] and to file each a $100,000
bond.[623]

The result was the prompt resignation of the receivers, who in a letter
to Judge Jenkins made their feelings clear. “Your receivers manifestly
cannot administer the trust,” said they, “with justice to the parties
interested, or themselves, if subject to the orders and instructions
as to the general administration from two or more independent
tribunals. We cannot abide, nor can we ask our sureties to abide, the
danger of the differences of opinion between courts, each assuming
to be controlling as to the expenditures of the receivership in the
general administration, in view of the immensity of the interests
involved…. Unless your receivers recognize, as they understand it,
that that honorable court [the Seattle court] is the court of primary
jurisdiction they will of necessity be in contumacy…. Your receivers
are not willing under any circumstances to file an additional bond
in such jurisdiction, nor are they willing to put themselves in a
position to endanger their right to challenge the jurisdiction of that
honorable court.”[624] Judge Jenkins accepted the resignations and
appointed Messrs. McHenry, chief engineer of the Northern Pacific, and
Bigelow, a Milwaukee banker, receivers.[625] The hitherto respected
principle of comity had, however, lost all force. On September 30
Judge Sanborn at St. Paul confirmed Judge Jenkins’s appointments for
the states of Minnesota and North Dakota; on October 1 Judge Hanford
at Tacoma refused to accept the resignation of the old receivers,
but removed them and appointed Andrew F. Burleigh for the district
of Washington; on October 2 Judge Billinger concurred in Burleigh’s
appointment for Oregon; on October 7 Judge Knowles at Helena, Montana,
confirmed the above for the districts of Washington and Oregon, and
appointed Captain J. H. Mills and E. L. Bonner for the district of
Montana; and in the week ending October 26 Judge Beatty appointed
Burleigh receiver for Idaho. The only conservative action was that of
Judge Lacombe in New York, who deferred his appointments as often as
the matter came before him, in the hope that the Western judges would
come to an agreement.

The situation at the end of October, 1895, was as follows: in
Wisconsin, Minnesota, and North Dakota there were two receivers,
Messrs. McHenry and Bigelow; in Montana there were three receivers,
Messrs. Mills, Bonner, and Burleigh; and in Idaho, Washington, and
Oregon there was one receiver, Andrew F. Burleigh. It was a condition
of affairs which could not be endured. In each of the Western States
orders were made compelling all agents or persons connected with the
road to deposit all money collected in that state, and it was at any
time in the power of the receivers in any state to appoint operating
officers distinct from those managing traffic over the other parts of
the line. On January 9, 1896, Judge Gilbert simplified the situation
by retiring Messrs. Mills and Bonner, and by appointing Andrew F.
Burleigh sole receiver for the district of Montana. This reduced the
number of receivers to three, and left Burleigh in control of the
road west of North Dakota, and McHenry and Bigelow in control of the
rest. Application was now made to the Supreme Court of the United
States, and on January 28, 1896, four justices of this tribunal,
acting as justices assigned to the several districts in which the
Northern Pacific Railroad Company had property,[626] decided that
Judge Jenkins’s court for the Eastern District of Wisconsin should
be considered the court of primary jurisdiction, and issued each an
order to this effect to take effect in his particular circuit.[627]
The various circuit judges hastened to conform. On February 21 Judge
Lacombe confirmed the appointment of F. G. Bigelow and E. H. McHenry
as receivers for the Second Judicial District, and similar action had
by then been taken by the judges of the other districts except that of
the state of Washington. There Judges Gilbert and Hanford refused to
discharge Burleigh, although recognizing that the general orders for
the management and control of the railroad property were henceforth to
issue from Judge Jenkins’s court.[628] The judicial strife was thus at
an end. President Ives obtained the removal of the receivers to whom
he particularly objected, but did not overthrow the authority of the
Milwaukee court, nor secure any material gain to compensate for the
great trouble which he caused.

With the receivership tangle straightened out it became possible to
proceed again with the work of reorganization, and on March 16, 1896,
the final plan was published, endorsed not only by the Adams Committee,
but by President Ives and his Stockholders’ Protective Committee, and
by other important interests as well. The feeling had become general
that some action should speedily be taken, and that it was in the
interest of all parties that the factional conflicts which had raged
so long and with so little result should cease. Reorganization was
proposed on the following basis:

(_a_) The abandonment of Chicago as the eastern terminus, and the
limitation of the railway on the east by the Mississippi River and the
Great Lakes;—the bonds and stocks of the Chicago & Northern Pacific
and of the Chicago & Calumet Companies to be sold.

(_b_) The ultimate union of the main line, branches, and terminal
properties through direct ownership by a single company.

(_c_) The reduction of the fixed annual charges to less than the
minimum earnings under probable conditions.

(_d_) Ample provision for additional capital as required in a series
of years for the development of the property and for the greater
facilities necessitated by an increased business.

There were to be issued:

$130,000,000 in prior lien 100-year 4 per cent gold bonds, to be
secured by a mortgage upon the main line, branches, terminals, land
grant, equipment, and other property embraced in the reorganization …
and … thereafter acquired.[629]

$190,000,000 in general lien 150-year 3 per cent gold bonds, with a
lien junior to the previous issue, but covering the same property, of
which $130,000,000 were to be reserved to retire the $130,000,000 prior
lien bonds when they should fall due.

$70,000,000 in 4 per cent non-cumulative preferred stock.

$80,000,000 in common stock.

Generally speaking, the new prior liens were to go for old first and
second mortgage bonds, receivers, certificates, equipment trusts,
collateral trust notes, St. Paul & Northern Pacific bonds, and for
new construction; the new general liens for mortgages junior to the
second mortgage; the new preferred stock as additional inducement to
the exchanges mentioned above, and in part for the retirement of old
preferred stock; and the common stock for old preferred stock (in
part) and common stock. Existing first mortgage bondholders were not,
however, to be forced to give up their old securities. “It is not
sought in any way to enforce a conversion of the present general first
mortgage bonds,” said the plan, “and this offer is made solely on the
belief that on the terms proposed such conversion, while advantageous
to the company, is also manifestly to the advantage of the bondholders
so converting.” There were reserved $4,000,000 of the general liens
for new construction, and $2,500,000 new preferred and an equal amount
of common were set aside under the general head “to provide for
reorganization purposes or available as a treasury asset.” None of the
new bonds were to be subject to drawing or to compulsory redemption
prior to their regular maturity. The proceeds from land sales to an
amount not exceeding $500,000 in any year were to be devoted to the
redemption by purchase and cancellation of the new bonds, purchases
to be made of prior liens so long as these could be secured at not
over 110, after which to continue of the securities next in rank. The
preferred stock was to have a claim for 4 per cent before anything
should be paid on the common stock, and was to participate equally
with the common after 4 per cent had been paid on each. There was to
be a voting trust until November 1, 1901, unless closed out earlier by
the voting trustees, after the expiration of which the preferred stock
was to have the right to elect a majority of the board of directors
whenever for two successive years 4 per cent dividends on their
holdings should not have been paid. No additional mortgage was to be
put upon the property, and the amount of preferred stock was not to
be increased, except, in each instance, after obtaining the consent
of a majority of the whole amount of the preferred stock, given at a
meeting of the stockholders called for that purpose, and the consent
of a majority of such common stock as should be represented at such
meeting, the holders of each class of stock voting separately. During
the existence of the voting trust the consent of holders of like
amounts of the respective classes of beneficial certificates was to
be necessary. There was to be an assessment of $10 on preferred stock
and of $15 on common. Branch lines were to be consolidated with the
main line, but each case was to be dealt with separately, and a fair
basis of adjustment arrived at, for which general lien 3 per cents and
new preferred stock were reserved. There was to be an underwriting
syndicate, formed by J. P. Morgan & Company, and the Deutsche Bank of
Berlin, to the subscribed amount of $45,000,000, to provide amounts
of cash estimated to be necessary to carry out the terms of the plan,
and to furnish the new company with some $5,000,000 working capital
for early use in betterments and enlargements of its property. The
syndicate’s compensation was not stated in the plan, but was to be
“reasonable,” and in addition to it the sum of ¼ per cent of the par
value of all securities deposited was to be paid to J. P. Morgan &
Company and the Deutsche Bank for their respective services as managers
and depositaries. Finally, at the discretion of the managers, the
various properties were to be sold under one of the several mortgages
in default, and a successor company was to be organized.[630]

An examination of this plan shows that the total capitalization
proposed, exclusive of bonds and stock reserved for new construction,
etc., amounted to $311,000,000; of which $161,000,000 were 4 per
cent and 3 per cent bonds and $150,000,000 stock. The reported
capitalization of the Northern Pacific Railroad in 1893 had been
$218,685,631, including the bonds of branch roads guaranteed; but
comparison of this figure with that given by the plan is not fair,
because in 1893 the Northern Pacific property had been owned by
fifty-four distinct corporations, which the reorganization proposed to
consolidate into one. A comparison of the total bonds and stock issued
by the fifty-four corporations with the issue under the reorganization
plan reveals an increase from $271,949,044 to $311,000,000, or 14.3 per
cent. At the same time fixed charges were to be decreased, according
to estimates, from $10,509,690 to $6,052,660; to cover which the
managers reported net earnings of $6,015,846 for the year ending June
30, 1895, and of $7,801,645 for the average of the five years ending
with that date. It will be observed, therefore, that the plan left
no margin between net earnings in 1895 and fixed charges, but relied
upon an increase in earnings for the future to preserve the solvency
of the road. It is, however, only just to say that the net earnings
in 1895 were less than they had been in any year since 1887, with the
exception of 1894, and that a considerable increase was probable.
The large reduction in fixed charges which was to take place was to
be chiefly at the expense of holders of the consolidated mortgage
bonds of 1889. These unfortunate investors received but 129 per cent
in new securities, of which nearly one-half was stock, in return for
a reduction in their fixed annual income from 5 to 2 per cent, the
reason being the inferior character of their mortgage lien. That
securityholders who had consented to exchange their prior securities
in 1889 for the consols then issued in the hope of benefiting the road
should have fared considerably worse than bondholders who had refused
to make concessions is an example of the injustice sometimes occasioned
by successive reorganizations and refundings. Of the other securities
the second mortgage received prior liens and stock sufficient to bring
its return over 6 per cent, providing the road should earn it, and the
third mortgage and dividend certificates received general liens and
stock sufficient to yield something over 5 per cent except in very
prosperous times, when their income would be larger. The underlying
principle in these cases was the union of a security with a fixed
claim on earnings with a security with a conditional claim only. The
first mortgage received no stock, and so was denied participation in
future profits, but in recompense gave up only some .6 per cent in the
annual income received. The collateral trust notes fared nearly as
badly as the consolidated mortgage, but the northwest equipment stock
was paid off in cash. In brief, all securities but the equipment stock
yielded something, and the greatest sacrifices were demanded from the
junior securities. On the other hand, the stock was far from escaping
unscathed. On January 2, 1896, the quoted prices were 3½ for common and
12⅝ for preferred. As against this the plan made assessments of $15 on
common and $10 on preferred;—sums which could obviously be demanded
only because of the probable future appreciation of the shares. A point
in favor of the stock was the fact that the reduction in fixed charges
brought it nearer a dividend; although it must be remembered that
the common stock had to divide any return above 4 per cent with the
preferred.

The other salient points of the plan were the provision for paying the
floating debt, for supplying fresh capital for future additions and
improvements, for consolidation of branch lines with the main stem, and
for a voting trust. The total floating debt in 1895 amounted to over
$20,000,000, of which $4,900,000 consisted of outstanding receivers’
certificates and $8,329,205 of interest matured and unpaid.[631] The
unpaid interest was provided for in the exchanges which have already
been described; the receivers’ certificates were cancelled by prior
lien bonds, and the balance was provided for by assessment. This method
was a sound one. The provision for new construction, betterments,
etc., was liberal, consisting of $25,000,000 prior lien bonds, of
which no more than $1,500,000 were to be issued in any year, and
$4,000,000 general lien bonds, presumably to be used as needed. One
of the great difficulties in the history of the company had been the
lack of necessary capital for needed work upon the line, and it was
well that future requirements were provided for. The consolidation of
the branch lines into the parent company was also wise. “As it [the
Northern Pacific system] now stands,” the committee said, “the system,
in its form of incorporation and capitalization, is a development
without method or adequate preparation for growth. Scarcely any
single security is complete in itself. The main line mortgages cover
neither feeders nor terminals. The terminal mortgages may be bereft
of their main line support. The branch lines are dependent on the
main line for interchange of business and the main line owes a large
part of its business to the branch lines.”[632] The plan contemplated
separate bargains with each branch. Negotiations were carried on
during 1896, and some of the arrangements arrived at were as follows:
The bondholders of the Northern Pacific & Manitoba Terminal and of
the James River Valley Railroad agreed to take 50 per cent in new
Northern Pacific 3 per cent bonds and 50 per cent in preferred stock,
and to allow the Northern Pacific to retain their property.[633]
Bondholders of the Duluth & Manitoba were given 90 per cent in
cash.[634] Bondholders of the Spokane & Palouse received 52½ per cent
cash, 52½ per cent in general 3s, and 25 per cent in Northern Pacific
preferred stock,[635] and Helena & Red Mountain bondholders agreed to
accept 100 per cent in new preferred.[636] A number of the branches
were foreclosed and bought in by the Northern Pacific reorganization
committee, and the net result was an exceedingly beneficial unification
of the system. Finally, the voting trust was designed to secure
permanence in policy during the first years of the new company’s
existence. The idea has been a common, and on the whole a wise one. In
this case the membership represented fairly the interests which had
been prominent throughout the receivership, and consisted of J. P.
Morgan, George Siemans, representing the Deutsche Bank, August Belmont,
Johnston Livingston, and Charles Lanier. The trustees were to fill
their own vacancies, except that the successors of George Siemans were
always to be nominated by the Deutsche Bank.

In the main the plan was a good one, following a sound principle,
and reducing fixed charges to a point which, if not far below the
danger-line, proved low enough in view of the subsequent development in
business. Current opinion was generally favorable, and criticised only
the amount of profits which the syndicate was to secure on the basis
of its large subscribed capital. Mr. Hill of the Great Northern said:
“I think the Northern Pacific reorganization plan will be successful.
The promoters have adopted a conservative policy, and have marked the
interest charges down. We are entirely satisfied to have the Northern
Pacific securityholders run the road, pay its debts, and be charged
with the responsibility of meeting all its proper obligations, rather
than to have it operated by the officers of two or three courts which
are continually contending as to jurisdiction.”[637] By April 23, when
the time for deposits expired, the reorganization committee was able to
announce that it held over 92½ per cent in amount of general, second,
and third mortgage bonds, dividend certificates, consolidated mortgage
bonds, collateral trust notes, preferred stock, common stock, northwest
equipment stock, and Northern Pacific and Montana first mortgage bonds,
and that the plan and agreement was therefore declared operative.[638]
By June a majority of the first mortgage bonds had been secured, and it
was announced that after June 30 the basis of conversion of this issue
would be reduced from 135 to 132 per cent in new 4 per cent prior lien
bonds. On July 24 the Northern Pacific _Railway_ filed its articles of
incorporation at St. Paul, Minnesota, and the next day the sale of the
property took place, in spite of suits by the general creditors and the
preferred stockholders. The sale was in three parcels, and the property
was bid in for $12,500,000 by Mr. Winter, the newly elected president.
After the first sale the company’s lands in Wisconsin were offered and
bid in for $575,000, and two days later the lands west of the Missouri
were bought in for sums aggregating $600,000. Finally, on August 4,
the lands in Washington and Oregon were bought in for $1,705,200 and
$558,000 respectively. The property of the company was turned over
by the receivers to the reorganization committee at midnight, August
31, and on November 7 the final step in the reorganization plan was
taken by the formal authorization by the stockholders of the issue of
$190,000,000 of bonds.[639]

From 1896 to the present time the Northern Pacific has enjoyed a
development scarcely less noteworthy than that of the Union Pacific.
Gross earnings have increased from $23,679,718 in 1898, the first
full year after the receivership, to $68,534,832 in 1907; net revenue
from $13,471,544 to $33,208,840; and mileage from 4350 to 5444. Gross
earnings per mile were $5443 in 1898; they were $12,590 in 1907. The
retirement of the eastern terminus of the system from Chicago to
St. Paul and Minneapolis was accomplished in the course of 1897 by
arrangement for connection with the Chicago & Northwestern instead
of with the Wisconsin Central, and the sale of the certificates of
proprietary interest in the Chicago Terminal Transfer Railroad received
by the Northern Pacific under the Chicago & Northern Pacific plan
of reorganization; while the improvement of the position of the new
mortgages has been vigorously prosecuted by the rapid drawing for
redemption of old first mortgage bonds at 110, and by the calling of
the entire issue of the Missouri division bonds at par and accrued
interest.

In the years following 1897 large sums have been spent for betterments
and enlargements. Some $68,500,000 have been invested from the proceeds
of the sale of prior lien bonds and of miscellaneous assets, and
over $18,000,000 have been temporarily withdrawn from income for the
same purpose.[640] Grades have been reduced, lines straightened, new
branches built, real estate acquired, track relaid and ballasted,
bridges strengthened and renewed, equipment rebuilt and increased in
amount, and other similar betterments undertaken. It is a work which
all the great American systems have carried on, but the Northern
Pacific has surpassed even the Union Pacific in the extent of its
operations. Ordinary maintenance requirements have not meanwhile
been neglected, and in 1906 and 1907 the Northern Pacific set aside
$2,000,000 for depreciation of equipment, which is over and above
the other sums which have been mentioned. The company owned 1255
locomotives on June 30, 1907, of an average weight of 174,000 pounds;
in 1898 it had owned 542 of an average weight of 104,000 pounds. It had
42,000 freight cars in 1907 with an average capacity of over 33 tons;
it had possessed 18,500 in 1898 of an average capacity of 22 tons.
Seventy-five per cent of the main line was laid with track of 72 pounds
or over in 1906, but only thirteen per cent in 1898. In consequence
heavier trains are run,[641] at a less expense per ton, and the net
revenue is correspondingly increased. Even the liberal expenditures
which have hitherto been made are insufficient, however, for present
conditions, and the stockholders have approved a proposal to issue
$93,000,000 of new common stock at par for the purpose of extending the
Northern Pacific’s mileage and facilities.[642]

The endeavor to stimulate traffic to fill the trains has led to
important developments. In order to increase the exchange of
commodities between their territory and the Middle West, to establish
stable conditions on transcontinental business and thereby to secure
back loading for their cars, the Great Northern and Northern Pacific
in 1901 arranged for the purchase of the Burlington system which
connected both their lines with Chicago. The refusal to share their
purchase with Mr. Harriman led to the competitive purchase of Northern
Pacific stock by rival interests, and to the retirement of the Northern
Pacific preferred, but did not prevent the consummation of the
deal.[643] This purchase has been a profitable one. The Burlington has
paid in dividends upon its stock almost enough to cover the interest on
the bonds issued to acquire it, and the indirect effects of its control
have satisfied expectations. Indeed, the east-bound lumber traffic has
so developed that the Great Northern has recently raised its lumber
rates in order once more to equalize east- and west-bound shipments.

The Northern Pacific has been openly dominated by the Hill-Morgan
interests for the last six years, and probably has been under their
control since its reorganization. From the financial as well as from
the traffic point of view its position is secure. The voting trust was
dissolved in 1901 “by reason,” in the words of the trustees, “of the
evidence of financial strength, conservative management, skilful and
profitable operation, superior physical condition of the property,
and the reasonable prospect of continued prosperity.”[644] In 1907,
out of a net income of $33,208,840 only $9,575,183 were paid out for
interest, rentals, and taxes, and $23,473,929 were left for dividends,
improvements, and reserve. This whole sum, which amounts to 33 per cent
of gross income, is available as a protection for the mortgage bonds;
and a considerable portion could be dispensed with without forcing a
decrease in the present rate of dividends.[645] It is likely that the
coming years will see a check in the advance of national prosperity,
but the Northern Pacific is in excellent condition to stand the strain.