ROCK ISLAND

The original Rock Island Railroad, chartered in 1847,[646] was
completed between Chicago and Rock Island in 1854. Construction was
continued from Rock Island to Council Bluffs across the state of Iowa,
under the charter of the Mississippi & Missouri, until 1866, when this
company was merged with the original Rock Island Railroad Company,
and after 1866 under the Rock Island charter until the extension was
completed in 1869. Unlike the Atchison, the Rock Island passed through
a fairly well-settled territory, which was at the same time one of the
most fertile in the United States. In 1870, according to the census
returns, Iowa produced 28,708,312 bushels of spring wheat out of a
total for the United States of 112,549,733 bushels, more than any other
state in the Union; while Illinois in its yield of winter wheat was
surpassed by Indiana and Ohio alone. Of Indian corn Iowa and Illinois
together produced 198,856,460 bushels against 562,088,089 for all other
states combined. Manufactures were well begun, and even mining had
attained a considerable development, particularly in the extraction
of bituminous coal in Illinois. Naturally the road was prosperous;
gross earnings increased from $3,154,236 in 1866 to $5,995,226 in
1870, and to $9,409,833 in 1879; while net earnings attained the very
considerable sum of $4,548,117 in 1879, being 48 per cent of the gross
receipts. At the same time the capitalization was very moderate, due to
the relatively level character of the country through which the road
ran, and, not less important, to the absence of speculative financial
operations in the course of its construction. To build 1231 miles had
cost in 1879 but $35,664,200, of which $4,702,202 had been supplied
from earnings; leaving a total of bonds and stocks of $30,962,000, or
$25,151 per mile. Fixed charges were, therefore, low. In 1875, when
net earnings were $3,853,676, interest on bonds, taxes, and all other
necessary disbursements took but $1,065,395; and in 1879 the payments
were markedly less. Is it strange that the troubles of the road came
from too great earnings rather than from too small, and that instead
of striving to maintain solvency the directors had to seek ways and
means for concealing or getting rid of earnings without arousing the
hostility of legislators to whom 10 per cent dividends seemed high, and
anything over 10 per cent proof of extortion? Between 1866 and 1876
four cash distributions of 10 per cent were made to stockholders, five
of 8 per cent, one of 8½ per cent, and one of 7½ per cent. The dividend
for 1879 was again 10 per cent, that of 1878 8 per cent, and that for
1879 9½ per cent. Meanwhile large sums were carried to surplus. The
balance, after all disbursements, never after 1873 fell below $665,000,
and in 1879 was nearly equal to the dividend declared; that is, while
distributing $1,993,086, or 9.5 per cent, the road earned, over and
above charges, $3,947,065, or 18.8 per cent.

It was inevitable that some attempt should be made to increase the
distribution to stockholders; and the most obvious method was the one
adopted, viz., a watering of the stock. The plan devised in 1880 was
as follows: It was proposed to consolidate various branches of the
railroad company, hitherto operated as separate corporations, with
the main line; and to do this through the formation of a new company,
which should exchange its stock for the stock of the previously
existing corporations in the ratio of two to one. Practically all
the stock retired was owned by the Chicago, Rock Island & Pacific
Railroad Company, so that the only increase in stock outstanding came
through the distribution to the stockholders of the parent company. In
March the executive committee of the Rock Island passed the following
resolution: “Resolved, that the proposition to consolidate the capital
stock, property, rights, franchises, and privileges of the Chicago,
Rock Island & Pacific Railroad Company with the capital stock,
property, rights, franchises, and privileges of the Iowa Southern
& Missouri Northern Railroad Company, the Newton & Monroe Railroad
Company, the Avoca, Macedonia & Southwestern Railroad Company, and
the Atlantic & Audubon Railroad Company into a consolidated Railroad
Company, with an authorized capital of $50,000,000, and such powers as
shall be assumed in the articles of consolidation, be submitted to a
vote of the stockholders of this company at their annual meeting.”[647]
Of the roads named only the Iowa Southern & Missouri Northern was of
importance, extending 270 miles from Washington, Iowa, to Leavenworth,
with branches which raised its total to 347 miles. This company had
been organized as the Chicago & Southwestern Railroad Company, and
the main line had been completed in 1871. The Chicago, Rock Island &
Pacific Railroad Company had guaranteed its $5,000,000 main-line bonds,
with a provision that it could demand foreclosure if called upon to
pay either interest or principal, and in return had secured a lease in
perpetuity. The road had been sold under foreclosure and reorganized in
1875 as the Iowa Southern & Missouri Northern, and had issued its stock
to the Rock Island in return for money advanced by that company, the
stock to be held in trust to 1926, and then to become the property of
the lessee. The other roads did not together possess more than 80 miles
of line, so that the operation was a genuine case of stock-watering.
The opinion of the stockholders may be inferred from the quotations
of their shares. Between January 2 and June 1, 1880, the quotations
of Rock Island common rose from 149 to 189, with few sales, in
anticipation of the distribution. On June 2 the stockholders formally
gave their approval, and on June 4 the Chicago, Rock Island & Pacific
Railway started on its career.[648] The price of the new stock was of
course less than that of the old. It started at 106½, but by December
it had reached 122¼, and by June the following year had risen to over
141.

This may be called Rock Island’s first reorganization. It doubled the
stock of the road, and increased its indebtedness by the assumption
of the $5,000,000 bonds of the Iowa Southern & Missouri Northern; but
the new stock involved no increase in fixed charges, and the new bonds
a nominal increase only. Instead of being occasioned by too little
prosperity it was caused by too much; and instead of being carried
through after active opposition from many of the interests concerned,
and reluctant acquiescence from the others, it occasioned a rise in
price of the common stock of 27 per cent in six months.

Between this date and 1902 no reorganization occurred. A rapid review
of the period brings out, however, certain interesting features: First,
that the stockholders and the directors were extremely conservative;
second, that this conservatism did not keep the road from sharing in
the expansion of mileage from 1887–9, which was so general in the
Middle West; third, that this expansion decreased the average receipts
per mile, and consequently the rate of dividends, and occasioned a fall
in stock quotations from 140⅞ to 63⅜; fourth, that though weakened
the road went through the panic of 1893 and the subsequent depression
without suspending dividends; and fifth, that the year 1901 saw the
beginning of a new expansion of the system, accompanied by a change
in control and the carrying out of more ambitious plans than had ever
occurred to the men of the previous generation.

The conservatism of the stockholders is shown in the election, year
after year, of the same men to positions of authority. Rock Island
was not a speculative road; the high price of its stock forbade.
Stockholders regarded their shares as permanent investments, and,
satisfied with the returns secured, loyally supported the management
in good times and in bad. Between 1875 and 1897 there were but two
presidents, Mr. Riddle holding the position until 1883, and then giving
way to Mr. R. R. Cable, who, after directing the policy of the company
for fourteen years, served as chairman of the board of directors from
1898 to 1901. Among the five members of the executive committee, if the
reckoning is begun with the year 1881, three had been in office five
years by 1886, one 2 years, and one 1 year, or an average of 3⅗ years.
In 1891 two members had been in 10 years, one 7 years, one 6 years,
and one 1 year, or an average of 6⅘ years; and in 1901 one member had
been in 20 years, one 17 years, one 8 years, one 3 years, and one 2
years, or an average of 10 years. The board of directors showed the
same general tendency. In 1890 seven of the thirteen directors had
served for 9 years, and the average service was 6-3/13 years; in
1897 four of the directors had served for 16 years, and the average
was 9-10/13.[649] It was but natural that men working under these
conditions should have been apt to err on the side of caution rather
than on the side of recklessness; and we find them, therefore, slow
to extend their system, and slow to stretch into new territory where
traffic returns were uncertain, and where the road had to create its
business as it went. At the date of the consolidation the company had
become the owner of 1038 miles and operated under lease 273 miles more,
or a total of 1311 miles. By 1883 this had been increased to 1381; but
in 1887 the total was only 1384.2, showing a total construction of
little over three miles in four years.

This policy had to be abandoned, for other roads were extending their
lines in Iowa and Illinois, and the Rock Island’s share of Western
business tended to fall off with the construction of rival lines
west of the Missouri. As the report of 1889 expressed it, “while the
lines of this company terminated at the Missouri its competitors for
business had extended beyond, reaching in many cases the extreme
western boundaries of population and even further. Thus the volume
of traffic received by the company for carriage to and from the West
was materially affected, while in order to restore the equilibrium
overbalanced by the reduction in rates, the reverse was necessary,
a larger rather than a smaller share of the tonnage to and from
points west of the Missouri was demanded by the situation.” The
directors were forced against their will to take active measures
in self-protection. As early as 1884 a bond issue was approved for
construction from Minneapolis westward to an eventual junction with the
Northern Pacific.[650] Building was to be carried on in the name of the
Wisconsin, Minnesota & Pacific Railroad Company, and the securities
of this company were to be received by the Rock Island as collateral
for the issue which it made.[651] Two years later more extensive plans
were put on foot, and the Chicago, Kansas & Nebraska Railroad Company
was organized to carry out construction west of the Missouri. The
new company had a capital stock of $15,000,000, and then (1887) of
$30,000,000, and an indebtedness in 1889 of $25,141,000 6 per cent
first mortgage bonds; and turned over all of its bonds, and practically
all of its stock to the Chicago, Rock Island & Pacific Railway in
consideration of advances made to it. The Rock Island Company in its
turn reserved the branch-line bonds as collateral, and issued against
them its own 5 per cent collateral and extension bonds; agreeing to
supply all money needed for construction and equipment,[652] and
leasing the new railway at a rental of 30 per cent of its gross
earnings.[653] Under this arrangement 1388 miles were built by 1889
and 276 leased, making a total of 1664.4. In 1889 it was thought more
convenient to consolidate the two systems, so interest was defaulted
on the Chicago, Kansas & Nebraska bonds, and foreclosure proceedings
commenced; resulting in 1891, in spite of protests by municipalities
along the route, in a foreclosure sale and union of the two properties
in name as well as in fact. The collateral bonds of the Chicago, Rock
Island & Pacific now became a direct instead of an indirect lien upon
the Kansas & Nebraska mileage.[654]

Owing to these operations the mileage of the system increased from
1384 in 1887 to 3257 in 1889, and to 3408 in 1891. The greater part
now lay in Kansas, Nebraska, and Colorado instead of in Illinois and
Iowa, while at the same time the addition of the new mileage through
sparsely settled districts decreased the density of traffic and the
gross and net receipts per mile of line. In 1887 the Rock Island was
earning the very high return of $8899 gross per mile operated; in 1891
this had fallen to $5126; in 1887 the net return was $3478 per mile; in
1891 it had fallen to $1484; in other words, the new mileage brought
an increase in traffic, but not nearly so great a traffic per mile as
the Iowa and Illinois lines had enjoyed, while the financing of the new
construction swelled the annual charges from $1,795,351 to $4,775,601,
and even with the larger mileage increased the charges per mile from
$1295 in 1887 to $1400 in 1891. We need not, therefore, be surprised
that the rate of dividends dropped from 7 per cent to 5¾ per cent and
then to 4 per cent; nor that the price of common stock fell from its
high level of 140⅞ in May, 1887, to 63⅜ in March, 1891.

It was in this weakened condition that the Rock Island encountered the
panic of 1893 and the years of depression which followed, and yet,
in spite of the marked decrease in business in the years 1895–6–7, it
continued to pay dividends, and showed no signs of financial distress
except the lowering of its rate to 2 per cent. As a matter of fact
the road was still in these years one of the strongest in the United
States. Its lines were well located, its management was conservative,
and consequently trusted, and its credit was good; so that at a time
when some of the largest systems in the United States were being forced
to the wall, it was enabled to preserve its solvency and even to keep
up fairly liberal expenditures for maintenance of way and rolling
stock. Little new construction was of course indulged in. In 1892 an
extension was begun from Minco, the terminus of the Rock Island in the
northwest corner of the Indian Territory, southwards;[655] in 1893
the southern boundary of the Territory was reached, and the Chicago,
Rock Island & Texas Railway Company was organized to build through
Texas;[656] and in 1894 a combined line was opened to Fort Worth;
but exclusive of the Chicago, Rock Island & Texas, the total mileage
increased by but 360 miles between 1890 and 1900, being an average of
33 miles a year.

In 1901 Messrs. William H. Moore and D. G. Reid were elected directors
in place of Messrs. H. M. Flagler and H. A. Parker, and a new era
in the road’s affairs began. Mr. Moore had not long been interested
in railroad matters. Known as a daring and successful promoter of
industrial companies, he had made large profits out of the organization
of the National Biscuit and Diamond Match companies; had lost almost
equally large amounts in speculation which had followed, and had then
regained a fortune through the organization and promotion of companies
which were absorbed into the United Steel Corporation. In these last
operations he had come into contact with Mr. W. B. Leeds, who, though
originally a railroad man, had acquired wealth through a tin-plate
plant which was afterwards turned over to this same Steel Corporation.
Mr. Moore was apparently in 1901 seeking for an investment. He was too
well acquainted with industrial properties to care to sink his money
in them, while he realized that for obvious reasons good railroad
property was as safe, and might be made as profitable as anything else
to which he could turn. The Chicago, Rock Island & Pacific was at the
time the system most available for his purpose. It was not under the
control of any large New York interests; it had an excellent financial
record; its mileage was so placed as to admit of ready expansion; and,
moreover, it is probable that to a man of Mr. Moore’s speculative
disposition the very low capitalization of the road opened up vistas of
almost indefinite increase.[657] Just when Mr. Moore and his friends
began their purchases, and what price they paid is of course largely a
matter of conjecture: large blocks of stock were, however, undoubtedly
secured in the early months of 1901, during which time quotations
ranged from 116⅞ to 136; and it is probable that the larger part of
the purchases were made nearer the upper than the lower level. During
the following year the Moore party increased their holdings. It has
been said that in April, 1901, Messrs. Moore and Reid were elected
to the directorate. In November, 1901, at a special meeting of the
stockholders, the directors were authorized to elect two new members
to the executive committee, and Messrs. Moore and Wm. B. Leeds were
chosen. In February, 1902, H. R. Bishop, Tracey Dows, and F. E. Griggs
resigned, and Geo. McMurtry, F. L. Hine, and F. S. Wheeler were elected
directors in their place. Mr. McMurtry had formerly been president of
the American Sheet Steel Company, merged in the Moore Steel Combine,
and Mr. Hines, vice-president of the First National Bank of New York,
presumably brought the backing of that powerful institution.[658]
Meanwhile Mr. James H. Moore had been chosen a director, and the Moore
interest had gained control of the executive committee, so that a
majority both of that committee and of the board of directors was
in their hands. The new group of capitalists were not railroad men;
their training had been on the financial side of corporation dealings,
and the bulk of what experience they had had in actual management had
been derived from industrial and not from railroad operations. It was
natural, therefore, that the most striking results from their accession
to power should appear on the financial rather than on the operating
end, and that their ability to manipulate stocks and bonds should prove
more unquestionable than their ability to handle railroad affairs.
Results in the development of the Rock Island system were, however,
attained, and for two reasons: in the first place, the Moores were
able, and above all enterprising men, and untrammelled by traditions
of conservatism, they were quick to see and bold to execute plans made
possible by the admirable location of their 4000 miles of road; in
the second place, they soon had large blocks of securities which they
wished to sell, and were impelled to undertake large operations in the
hope of raising quotations upon the Exchange.

In June, 1901, the stockholders authorized an increase in the capital
stock from $50,000,000 to $60,000,000; stockholders of record June 28,
1901, to have the right to subscribe at par.[659] The proceeds were
to go in part for extension from Liberal, Kansas, to El Paso, Texas,
and in part for a new depot and elevation of tracks in Chicago, and
for the improvement of the physical condition of the road. This El
Paso extension plan was not new, since in December, 1900, the Chicago,
Rock Island & Mexico, and the Chicago, Rock Island & El Paso had been
incorporated to build a line from Liberal, Kansas, to Santa Rosa, New
Mexico; there to connect with the El Paso & Northeastern, and to afford
a through route to the Pacific coast and into Mexico. The other plans
were, however, new. In April, 1903, the Chicago, Rock Island & Texas
filed an amendment to its charter providing for an extension from Fort
Worth to Galveston, 295 miles. The same month the sale of the Choctaw,
Oklahoma & Gulf to the Rock Island was officially confirmed. This
road has been, with one exception, the most important acquisition of
the Moores. It stretches from Memphis, Tennessee, through the Indian
Territory, Arkansas, and Oklahoma, to the border line of Texas, and
furnishes a nearly direct line from those states to the Mississippi
River; while a projected extension to New Mexico will connect with
the Rock Island main lines to the southward, and make it a valuable
link in the through route from El Paso to Memphis and Birmingham. The
Rock Island paid $80 a share for the common stock and $60 for the
preferred,[660] and under the terms of the sale agreed to take at the
same price all stock offered. The premium was very large. Choctaw
preferred had been paying 5 per cent for some years, and the common had
received 2 per cent in 1889, 4 per cent in 1900, and 4½ per cent in
1901, plus 10 per cent in stock; but reckoned on a basis of 120 and 160
respectively, these returns sank to a very modest rate. The property
is a valuable one, but will have to show great development to justify
its purchase price. Payment was made by the issue of collateral trust
4 per cent bonds to the amount of $23,520,000, in return for which
practically all of both issues of stock were deposited. Certain smaller
roads were also bought in. In June, 1902, the stockholders voted to
increase the capital stock from $60,000,000 to $75,000,000; and in July
the directors decided to allow the stockholders to subscribe at par for
$8,235,000 of the new issue in amounts equal to 12½ per cent of their
holdings;—the new stock to take up shares of the Burlington, Cedar
Rapids & Northern, the Rock Island & Peoria, and the St. Louis, Kansas
City & Colorado.[661] The first of these roads connected the Rock
Island system with Minneapolis and St. Paul.[662] The Rock Island &
Peoria was a short line in the state of Illinois. The St. Louis, Kansas
City & Colorado was to afford, when finished, a more direct route
between the important cities of St. Louis and Kansas City.

This is where matters stood when the reorganization plan of August,
1902, was brought forward. There had been a refunding put through
in 1897 whereby some simplification of bond issues had been
secured;[663] but this scheme of 1902 was for a different purpose and
differed radically in the methods employed. Its explanation is to
be found in the character of the men in control. We have seen that
Mr. Moore had made his reputation in the speculative promotion of
industrial combinations, that he had entered Rock Island in search of
an investment, and that he had thrown himself into the extension of
the system in part because he saw the opportunity for development,
in part because he hoped to pave the way for profitable manipulation
of the stock. The time he had awaited seemed now to have arrived.
His projects had caught public attention, comment on the whole had
been favorable, and the price of his shares was at a high level;
all indications pointed to the probable success of a scheme of
stock-watering on an enormous scale. At the same time Mr. Moore was too
well pleased with the position he had attained to wish to sacrifice
it by the sale of his holdings; and his desire was, therefore, to
devise an arrangement whereby the stock of the Rock Island should be
inflated and large blocks sold to the confiding public, while the
control should remain where it had been before,—in the hands of Mr.
Moore and his followers. It is to be noticed that there was no call
for a reorganization by the creditors of the road, and no question
of a default in interest, or even of a cessation of dividends upon
the common stock; nor, on the other hand, were earnings so great that
the managers felt it unwise to distribute them. The reason for the
reorganization was entirely the financial ambition of the Moore group
and the chance which its members saw of making larger profits than the
earnings of the property would ever bring.

With these objects the following plan was put through. Instead of one
Chicago, Rock Island & Pacific Company the Moores now proposed to have
three companies, of which one was to operate the railroad, one was to
hold the stock of the operating company, and one was to hold the stock
of the company which held the stock of the operating company. That is
to say, the Chicago, Rock Island & Pacific Railway Company was left
undisturbed, while in Iowa a Chicago, Rock Island & Pacific Railroad
Company was formed to hold the stock of the Railway Company, and in New
Jersey a Rock Island Company was organized to hold the stock of the
Railroad Company, and of such acquisitions as might afterwards be made.
The retention of the Railway Company made unnecessary the consent of
creditors, for the lien and interest rate of outstanding bonds remained
the same as before; the formation of the Railroad Company served
apparently to meet legal requirements; and the organization of the Rock
Island Company seemed likely to make more easy the purchase of parallel
and competing lines. But the great advantage of the new companies lay
in the opportunities for stock inflation which they presented, together
with the lessening of the amount of capital required for control.
This appears plainly in the following: The old Railway Company had a
capital stock of $75,000,000; the new Railroad Company issued stock
to the amount of $125,000,000 and 4 per cent bonds to the amount of
$75,000,000. The Rock Island Company issued common stock to a total
of $96,000,000 and preferred stock to a total of $54,000,000; and the
aggregate, excluding the undisturbed bonds of the Railway Company,
footed up to $425,000,000 instead of to $75,000,000 as before. From
this total must be deducted $200,000,000, which represented issues of
stock by one company to another, and $21,000,000 Rock Island Company
stock and $1,500,000 Railroad Company bonds reserved for future
extension, leaving a net increase from $75,000,000 to $202,500,000.
This involved some increase in fixed charges, since 4 per cent on
$75,000,000 became obligatory; but the true significance lay in the
inflation of principal rather than in the increase of interest charges,
opening as it did an opportunity for great profit to the managers
in the sale of the new securities. An incidental result was the
transformation of the Rock Island shares from investment securities to
media for speculation. At the same time the investment required for
control was diminished. $75,000,000 of Railway stock was exchanged for
$75,000,000 Railroad bonds, $96,000,000 Rock Island Company common
stock, and $54,000,000 Rock Island Company preferred stock. Of these
the bonds obviously had no voting rights. To both the common and
preferred stock the right to vote was given, but in unequal degrees.
“Until the number thereof shall be increased,” read the certificate of
incorporation of the Rock Island Company, “the number of directors
shall be nine. There shall be five classes of directors. The first
class shall contain a majority of the whole number of the directors as
fixed at any time by the by-laws…. The holders of the preferred stock
shall have the right, to the exclusion of the holders of the common
stock, to choose directors of the first class….” In other words, to
the preferred stock, which constituted a minority of the whole, was
given the right to elect a majority of the board of directors; so that
whereas in the old Railway Company 51 per cent of $75,000,000 common
stock, selling at from 120 to 179, had been required for control, in
the new combination of companies 51 per cent of $54,000,000 Rock Island
Company preferred stock, selling at 83½, was sufficient to the same
end, in spite of a doubling of the stock outstanding.

To repeat: Two new corporations were formed, of which the Chicago,
Rock Island & Pacific Railroad Company of Iowa issued $125,000,000
stock to the Rock Island Company of New Jersey, and in return received
$127,500,000 Rock Island preferred and common stock. With this stock,
and with $75,000,000 of its own bonds, the Railroad Company purchased
the $75,000,000 stock of the Chicago, Rock Island & Pacific Railway
Company, paying for every $100 in shares

$100 in Rock Island Company common stock;
70 in Rock Island Company preferred stock; and
100 in its own 4 per cent bonds.

The Railway shares acquired were pledged for the Railroad bonds, and
from them came the total income of the Railroad Company; and dividends
upon the Railroad shares, together with dividends upon shares of other
companies which it might chance to own, constituted the total income of
the Rock Island Company. After thus receiving indirectly the earnings
of the Railway Company through two sets of dividends, the Rock Island
Company paid dividends on its own shares, which were held by the
public; the preferred stock being entitled to 4 per cent from 1903 to
1909 inclusive, to 5 per cent from 1910 to 1916 inclusive, and to 6 per
cent thereafter.

Other provisions were as follows: The Rock Island common stock might
be increased from time to time according to law, but the amount of the
preferred stock could not be increased except with the assent of the
holders of two-thirds of the entire preferred stock and two-thirds of
the entire common stock at the time outstanding, given at a meeting
called for that purpose. Preferred stock was to be preferred as to
principal as well as to interest; it had the right, as has been said,
to elect a majority of the board of directors, but this right could
be surrendered by the affirmative vote of the holders of two-thirds
in amount of the preferred stock at the time outstanding at a special
meeting of the holders of the preferred stock called for that purpose.
A Finance Committee might be appointed from and by the directors which
should have such powers as the directors and stockholders should choose
to give it, and which should have all the powers of the directors when
the board was not in session. The directors might accumulate working
capital, but no reservation for working capital should be made in
any year out of the surplus or net profits of such year until after
the payments for such year of the dividends on the preferred stock
of the company. The directors might also use the working capital in
purchasing or acquiring the shares of the capital stock of the company
as they might deem expedient, but shares so purchased might be resold
unless retired for the purpose of decreasing the capital stock of the
company.[664] This last provision aroused so much criticism that the
directors gave up the right of dealing in the shares of their own
company by resolution of November 5, 1902.

The important features of this reorganization were, as has been
indicated, those in connection with the inflation of the capitalization
and with the control of the property. In this connection it may be
asked, first, whether the Moores made a profit by the deal; second, how
large an investment they have had to keep in the property in order to
retain control; and third, what cost to them this investment represents.

On January 2, 1902, Chicago, Rock Island & Pacific Railway Company
common was quoted at 154. On February 1 it was 162¼, on April 1, 179,
on July 1, 172½, on August 1, 190, on October 1, 200, and on November
1, 199½. It is safe to assume that the rise from 172½ to 200 was due
to the publication of the plan, and it may be that some of the earlier
increase in value was owing to purchases by insiders, or by people
who had obtained some inkling of what was being considered; but a
comparison of the aggregate value of the securities given for the
railway common stock on January 3, 1903, with the price of the stock
on July 1, 1902, shows that the former exceeded the latter by 22.3
points, with the error tending toward an understatement of the excess.
That is, for every $172½ invested in July, 1902, the Moores, and other
stockholders with them, held securities worth $194.8 in January of
the following year. During 1903 the Rock Island securities fell with
others upon the market, till on January 2, 1904, the aggregate value of
the stocks and bonds in question was only $132.2; but the decline was
temporary, and by January 3, 1905, recovery to $176.6 had taken place.
The operations therefore did result in a chance for large profits, and
gave renewed evidence that the public demand for stocks and bonds does
not fall off proportionately to an increase in their volume.[665]

It is obvious that neither before nor after the reorganization could
the Moores have sold all their holdings and yet have kept control.
Starting again with the price of 172½ for Chicago, Rock Island &
Pacific Railway common on July 1, 1902, it may be calculated that
the cost of a majority of the issue then footed up to $64,687,672.
If this had been carried on margin, and the brokers had demanded on
every share a deposit of $40, with $40 more instantly available if
needed, the total investment required for control would have been
$15,000,040, with as much more held in readiness for any emergency. On
January 2, 1903, Rock Island preferred stock was selling at 83½, and
the cost of a majority of the whole issue would have been $22,545,083;
which, if carried on margin with a deposit of $20 a share, would have
represented an investment of $5,400,020, with as much more in reserve.
In other words, while all went well, less than $11,000,000 sufficed
to control properties with a total mileage of 7718 miles of line,
a bonded indebtedness of $201,660,475, and an outstanding capital
stock of $118,249,007. It is of course improbable that the Moores in
1903 carried all, or even a large part of their holdings on margin;
supposing, therefore, that all of their stock was bought and paid for,
the fact still remains that with $22,545,083 they were able to control
a system capitalized at $319,909,482.

In examining the cost to the Moores it is at once to be said that these
gentlemen did not pay 172½ for their old Railway stock. What they did
pay is of course uncertain. It is known that much of their holdings
was acquired in the early months of 1901, when prices ranged from 116⅞
to 136. An average of 140 would represent a conservative estimate of
what they paid, at which price a majority of the $75,000,000 would have
cost $52,500,140. In return for this stock, at the prices of January 2,
1903, they obtained

$18,375,049 in Rock Island Company common stock,
21,918,808 in Rock Island Company preferred stock, and
32,765,712 in Chicago, Rock Island & Pacific Railroad Company
4 percent bonds.

Since the preferred stock sufficed for control, there were left
$18,375,049 of Rock Island Company common, and $32,765,712 of Railroad
Company bonds, or a total of securities with a nominal market value of
$51,140,761. Deducting this from the original investment, which has
been estimated at $52,500,140, there is left $1,359,379 to represent
the actual cost to the Moore crowd of control of the great Rock Island
property. Beneath all of these figures lies, of course, the erroneous
assumption that it would have been possible to unload large blocks
of securities upon the market without causing a break in price; and
yet, though large deductions must be made on this account, the figures
are eloquent of the skill with which the Moores have manipulated Rock
Island issues, and of the slender basis on which their control rests.
It has been truly said that the question is raised anew as to what is
legitimate in corporate finance.

All this is very different from anything described before; and so far
as motives go, the two Rock Island reorganizations stand by themselves.
In the matter of methods some similarities appear. The great increase
in capitalization resting on the Rock Island system was accomplished
mainly by an inflation of stock, not of mortgage bonds, and involved a
comparatively slight increase in fixed charges; the Rock Island Company
closely resembled other holding companies in its method of operation,
and seemed likely to offer some facilities for the consolidation of
competing lines; and though the extraordinary privileges given the
Rock Island preferred stock have perhaps never been paralleled in
degree, the practice of granting such stock preferential treatment in
other things than dividends is not unknown. On the whole, however,
this kind of reorganization stands apart, and is rather instructive as
showing what may be done in the handling of corporation securities than
in indicating any sound principles on which bankrupt roads may proceed.

The reorganization plan aroused sharp criticism both from Wall
Street[666] and from the wider public, but met no opposition sufficient
to prevent its being carried through. In September Attorney-General
C. W. Mullen, of Iowa, in an opinion filed with the Governor of that
state, held that the acts of the new Iowa corporation of the Rock
Island, _i. e._ the Chicago, Rock Island & Pacific Railroad Company,
were not outside the powers conferred by statute.[667] The Governor,
in concurring with the opinion from a legal point of view, added, “the
thing done is neither a merger nor a consolidation. Not a mile of track
nor a dollar in value is added to the Rock Island property. It is
simply a new device for watering securities; it is for the next General
Assembly to say whether it is wise to permit our laws to so remain
that such things are possible.”[668] The various corporations were,
therefore, organized, and the various issues of stocks and bonds put
forth.

During the past four years the events which require mention are four:
First, the acquisition of the St. Louis & San Francisco; second, the
connection of the Rock Island with the Gulf; third, the temporary
control of the Chicago & Alton; and fourth, the issue of a new
refunding mortgage.

In October, 1903, the Rock Island operated 7123 miles of line. Its
tracks stretched southwest from Chicago to Santa Rosa, New Mexico,
west from Memphis to Tucumcari, and northwest from Rock Island,
Illinois, to Minneapolis and St. Paul, and to Watertown, South Dakota.
This extensive mileage surrounded, however, instead of occupying, a
large territory in Missouri, Kansas, Indian Territory, and Arkansas,
and could claim no share in the vast traffic passing up and down the
Mississippi Valley. One of the first acts of the Moores was to remedy
this defect. In May, 1903, the Rock Island made a formal offer to
purchase any and all shares of the St. Louis & San Francisco Railroad
Company, providing $22,500,000 in par value should accept, at a rate
of $60 par value in the common stock of the Rock Island Company and
$60 par value in a new issue of 5 per cent gold bonds of 1913 of the
Chicago, Rock Island & Pacific Railroad Company, for each $100 par
value of Frisco common stock deposited; the new bonds to be secured by
the stock acquired. This Frisco Company, it will be remembered, was the
same that had previously been acquired and given up by the Atchison,
Topeka & Santa Fe. Since that time it had greatly extended its mileage,
had gained control of the prosperous Chicago & Eastern Illinois, with
entrance into Chicago, and was altogether more valuable than it had
been before. In relation to the Rock Island it possessed precisely
the mileage which was required. It connected the latter’s terminus at
Chicago with the terminus of the Choctaw, Oklahoma & Gulf at Memphis;
it traversed Southern Illinois, Southern Missouri, Southeastern
Kansas, and Indian Territory, to say nothing of lines in Oklahoma and
in Texas; and by means of a line from Memphis to Birmingham it gave
entrance into the heart of the South. In brief, it filled the gaps in
the southeastern part of the Rock Island system, and afforded a solid
foundation for further expansion. Good authorities consider the price
which the Rock Island gave for the Frisco to have been too high. It is
certain that the Frisco stockholders jumped at the chance. By June 1,
1903, the necessary $22,500,000 worth of stock had given their consent
and only technical details remained to be carried through.[669]

With the St. Louis & San Francisco under its control the Rock Island
could make a final advance to the Gulf. An attempt to complete a road
through Texas occurred simultaneously with the Frisco purchase in
1903. The Moores, that is, arranged with the Southern Pacific for the
purchase of a half-interest in the Houston & Texas Central, from Fort
Worth to Houston and Galveston, with a branch to Austin, Texas; the
Houston, East & West Texas, extending north from Houston to Shreveport,
Louisiana; and the Texas & New Orleans, from Dallas to Sabine Lake
on the Gulf of Mexico. As a part of the agreement the presidents of
these lines were to be selected by the Rock Island Company.[670] This
would have established a line to the coast in a very satisfactory
manner. Connection between Dallas and Fort Worth was to be completed
in December, 1903, and from this point the two lines of the Houston
& Texas Central and the Texas & New Orleans would have furnished
direct outlets to the Gulf. The scheme did not go through, because
the Texas Railroad Commissioners pronounced the contracts contrary to
the state constitution, in that they amounted to a consolidation of
the corporations concerned, and to the establishment of a community
of interest between the Rock Island and the Southern Pacific, which
would preclude competition between them in respect to their Texas
business.[671] The Rock Island was at first disposed to test part of
the decision in the courts.[672] It later decided that discretion was
the better part of valor, stopped the transaction, and cancelled the
stock which it had issued as part of the purchase price.[673]

What the company could not do in Texas it could do, however, in
Missouri, Louisiana, and Arkansas. As early as November, 1902, the St.
Louis & San Francisco had purchased the entire capital stock of the
St. Louis, Memphis & Southeastern Railroad, a line which was opened
from St. Louis in 1904 to a junction with a branch of the Frisco above
Memphis. From Memphis the Kansas City, Memphis & Birmingham stretched
southeast through Mississippi into Alabama. These roads formed a basis
for extension which was practicable though less convenient than the
western route. Accordingly, in 1904, trackage agreements were concluded
which gave to the Rock Island system:

(1) Trackage rights over the Mobile & Ohio and the New Orleans &
Northeastern between Tupelo, Mississippi (on the Kansas City, Memphis &
Birmingham), and New Orleans, Louisiana.

(2) Trackage rights over the St. Louis, Iron Mountain & Southern and
the Texas & Pacific from a point opposite Memphis, Tennessee, to a
point opposite Baton Rouge, Louisiana.

(3) Trackage rights over the Yazoo & Mississippi Valley between Baton
Rouge, Louisiana, and New Orleans, Louisiana, and over certain tracks
in the latter city.

This afforded alternative routes of considerable directness from
Memphis to the Gulf, while from the junctions of the Frisco with the
Southern roads freight could be sent north to St. Louis and Chicago
over the Rock Island system’s own rails. Arrangements were made for the
construction of terminals in New Orleans by a subsidiary company whose
stock was to be owned and whose bonds were to be guaranteed by the
Southern and the St. Louis & San Francisco companies.[674]

At the present time the Rock Island is reaching south at two points
other than those so far mentioned. Under the name of the Rock Island,
Arkansas & Louisiana Railroad Company,[675] it has built almost due
south from Little Rock, Arkansas, while from New Orleans to Houston
it has completed a line which connects at Eunice, Louisiana, with the
Rock Island, Arkansas & Louisiana, and at Houston with the Trinity &
Brazos Valley Railway.[676] This last line runs from Houston to Fort
Worth and Dallas, Texas, and is controlled by a half-interest in its
capital stock. The Rock Island is thus in fair shape to share in the
south-bound grain movement from Kansas, Nebraska, and the Dakotas,
and to take a part in the north and south business of the Mississippi
Valley. There is no question but what the company is making a bold
bid for an enormous traffic, and that failure will not be due to any
narrowness of view.

About the time that it was struggling to reach the Gulf the Rock
Island took hold of the Chicago & Alton in the north in order to have
another and a more direct line between Kansas City and Chicago. A
strong minority interest had previously been bought in the Alton by
Mr. Harriman, and a board of directors had been elected. In 1904 the
Rock Island bought within a few hundred shares of absolute control,
and since the classification of the board prevented the displacement
of its opponents for two years, arranged a compromise. Between them
the Harriman and the Rock Island interests deposited a controlling
number of Alton shares with the Central Trust Company of New York, to
be held in a voting trust. Each of the rival interests was to have five
directors, and the odd director was to be in alternate years first a
Harriman and then a Rock Island man.[677] The Rock Island was, further,
to have an option on the Harriman holdings for two years. It was an
unfortunate time to buy. Mr. Harriman had previously displayed his
splendid dividend producing ability in Alton finance, and the road was
short of money. Market conditions were unfavorable, bonds were hard
to sell, and, after all, the Alton was not of vital importance to the
Rock Island, although it opened up new territory of some considerable
importance. By 1907 it seems that the Moores had become tired of
their bargain. In June of that year they served notice on the Union
Pacific that the compromise agreement of 1904 was illegal and should
be abrogated;[678] and shortly after they sold their holdings to the
Toledo, St. Louis & Western.[679]

All in all the growth of the Rock Island has been astounding. Instead
of the limited number of 7123 miles which the system possessed in 1903,
or the 3819 of 1901, it comprises 14,270 miles of line operated in
1907. Gross earnings are $112,464,000 in 1907 as against $25,365,000
in 1901; net income $40,828,000 instead of $8,901,000; capitalization
about $525,000,000 instead of $118,081,000. In fact, the very size
of the system and the diverse nature of its interests make the
economical management of the whole almost beyond the capacity of any
one man. The Rock Island handles traffic from the West and South to
Chicago, St. Louis, and Birmingham, and connects with the trunk lines
to the Atlantic coast; it is also striving to receive and care for
the constantly increasing business from the Northwest to the Gulf.
It reaches into Mexico; it extends into Colorado, and sends branches
into the Northwest; while at the other end it connects Kansas City,
Memphis, and St. Louis by a triangle of lines. It was remarked a year
ago that a contrast between the operations of the Rock Island and of
the Atchison lines in the Southwest disclosed what might be called
demoralization on the part of the former, and it is in the multiplicity
of its operations that the cause must be sought.

It is to be expected, therefore, that the financial position of the
company should not be secure. Operating expenses, fixed charges, and
taxes absorbed 87 per cent of gross income in 1907 and 89 per cent the
year before. We must not be blinded by the magnitude of the reported
figures. Although $9,476,397 were carried to surplus in the year ending
June 30, 1907, and $5,568,092 were paid out in dividends, these two
items together comprise only about 13 per cent of gross income, and a
bad year might readily see a decrease sufficient to sweep this margin
away. Unlike the Union Pacific and the Northern Pacific, moreover, the
Rock Island has not made consistently heavy improvement expenditures
from income. Less than $40,000 was deducted by either the Frisco or
the Rock Island & Pacific Railway in 1905 or in 1907; less than half a
million in 1904; a little over two millions in 1903 and in 1906. And
this in spite of the fact that the mileage of the Rock Island system
is greater than that of any other road which this study has taken up.
The fate of the company’s refunding mortgage of 1904 probably testified
as much to the distrust of the Moore group of financiers and of the
soundness of the property which they control as it did to the general
financial uneasiness of the time. This proposition for a refunding
mortgage was first framed in July, 1903. It then comprised an issue
of $250,000,000 4 per cent bonds, to be used for the refunding of
outstanding obligations, future enlargements and construction, purchase
of bonds and stocks of other companies, and for the reimbursing of the
company for advances already made. Subscriptions were sought in New
York in vain. Whereas the project was to have come up at a meeting of
the stockholders on October 8, the managers obtained an adjournment
of this meeting until January without action, and before that month
arrived announced an indefinite postponement of operations. On March
21 the stockholders voted on and approved a modified version of the
original scheme, whereby $163,000,000 instead of $250,000,000 were
authorized, of which $15,000,000 were to be issued at once, and
$82,025,000 were to be reserved for retiring certain outstanding
obligations. It proved no easier to secure subscriptions to this than
to the previous plan, and in April $5,000,000 4½ per cent notes were
issued instead and taken by the First National Bank of New York, which
was already closely identified with the company. Not until November,
1904, after fourteen and one-half months of persistent effort, was a
firm of bankers found to take the refunding issue. $25,108,000 were
then sold to Speyer & Co. Mr. Speyer became a director of the Rock
Island and entered the finance committee, while the proceeds of the
sale went to reimburse the treasury for capital expended, and to
provide for the payment of obligations maturing in 1905. Since this
time other blocks of the bonds have been sold.

It is thus evident that the Rock Island has not regained the position
which it held prior to the operations of Mr. Moore and of his friends.
The recent developments have done two things: they have piled upon
the company a mass of excessive capitalization; and they have
transformed it from a moderate sized railroad with a clearly defined
flow of traffic into a great system sprawled over the Central West
and handling at least three different currents of business. Neither
one of these changes alone can account for the present condition of
the road. Together they have made it what it is. It is only fair to
say that large sums from capital account are being spent upon the
property and that the managers announce an intention of bringing it
up to the highest standard of physical condition. Over $4,000,000
were appropriated for additions and improvements in 1907, and nearly
$3,500,000 in 1906, besides still greater sums for construction and
equipment. Heavier rails have been laid down, bridges have been
strengthened, equipment increased and improved. Meanwhile maintenance
charges have not been unduly low, though not so high as on some other
Western roads. It is true, nevertheless, that the Rock Island has lost
its former stability and must await a period of lessened earnings with
serious apprehension.