UNION PACIFIC

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

The construction of the Union Pacific was made possible by direct
grants of lands and government bonds by Congress. The motive for the
project was military and political as well as economic; on the one hand
California was to be cemented to the Union, and aggression on the part
of England was to be forestalled; on the other a great and fertile
territory was to be opened and an additional market provided for the
products of the East.

In 1862 the first act “to aid in the construction of a Railroad and
Telegraph Line from the Missouri River to the Pacific Ocean, and to
secure to the Government the Use of the same for Postal, Military, and
Other Purposes” was passed.[456]. It created a corporation to be known
as the Union Pacific Railroad Company, with a capital of 100,000 shares
of $1000 each, and authorized it to construct a railroad from the one
hundredth meridian of longitude west from Greenwich at a point within
the territory of Nebraska westward to the western boundary of the
territory of Nevada. It granted the right of way, and in addition five
additional sections per mile on each side of the track, plus a varying
amount of United States bonds per mile, the use and delivery of which
was to constitute a first mortgage on the property of the company. All
compensation for services rendered to the Government was to be applied
to the payment of these bonds and interest thereon; and after the road
was completed, until the bonds and interest should have been paid, at
least 5 per cent of the net earnings of the road was to be annually
applied to the payment thereof. The directors were to be not less than
fifteen in number, of whom two were to be appointed by the President
of the United States. It was hoped that the offer would be sufficient
to attract private capital to the undertaking, and when it failed in
this, the inducements were increased. The Act of 1864 amended that
of 1862. It reduced the par value of the shares of stock from $1000
to $100, and increased their number from 100,000 to 1,000,000. It
increased the land grant from five to ten alternate sections per mile,
and subordinated the government lien to the rank of a second mortgage.
Only one-half the compensation for services rendered for the Government
was required to be applied to the payment of the bonds issued by the
Government. The directors were to be twenty in number, of whom five
were to be appointed by the Federal President.[457]

It was under these main provisions that the Union Pacific Railroad was
constructed. In their final shape they were intended to provide for the
greater part of the cost of construction, while allowing the company
to supply deficiencies by the issue of its own first mortgage bonds.
Capitalization under these conditions would not have been excessive;
the Government’s investment would have redounded unmistakably to its
own benefit, as well as to that of the country, and the corporation
would have looked forward to a long and prosperous career. Three things
interfered to swell the cost of the construction of the road, and with
that its capitalization: First, construction was carried on during a
time of high prices, swollen not only by depreciation of the currency,
but by artificial conditions occasioned by the war; second, the normal
level of the prices paid was raised by the speed with which the road
was completed; third, construction was entrusted to a construction
company, the famous Crédit Mobilier.

In its comparison of the prices of the years 1864–9, with those of
1860, the Aldrich Committee arrived, in 1893, at the following result:

_Metals &
Implements
_Bar Iron _Rails, exc. Pocket _All
_Year_ _Food_ Rolled_ Iron_ Knives_ Articles_

1864 165.8 249.3 262.5 198.0 190.5
1865 216.5 181.1 205.5 218.7 216.8
1866 173.8 167.0 180.7 192.7 191.0
1867 163.9 148.2 173.2 178.9 172.2
1868 164.2 145.8 164.3 167.1 160.5
1869 162.9 139.0 160.9 157.9 153.5

These figures may be divided by the premium on gold, in order roughly
to ascertain gold prices. The index numbers then become:

_Metals &
Implements
_Bar Iron _Rails, exc. Pocket _All
_Year_ _Food_ Rolled_ Iron_ Knives_ Articles_

1864 106.6 160.3 168.8 127.3 122.5
1865 100.1 83.7 95.0 101.1 100.3
1866 124.1 119.2 128.9 137.5 136.3
1867 121.8 110.1 128.6 132.9 127.9
1868 118.6 105.2 118.6 120.6 115.9
1869 120.1 102.5 118.6 116.4 113.2[458]

The tables show that both currency and gold prices were much higher in
1866 than before the war, and that both remained high while the Union
Pacific was being built. Wages were also above the normal, and for
similar reasons. During the war the demand for men and goods of all
kinds was great. After 1865 the country turned with tremendous energy
to industry; and the upward swing, which was unchecked until the panic
of 1873, and which was especially directed toward railroad building,
maintained both wages and prices at an unusual height. Besides this,
American rails were at the time in a period of transition from iron
to steel; and much of the work carried through at such expense had
completely to be done over within the next ten years.

The high prices were made higher by the speed of construction. The
Union Pacific built west from the Missouri River, but at the same
time the Central Pacific was building east from Sacramento, under
similar conditions as to government aid. The two roads were expected to
meet at the western boundary of Nevada; but to encourage their early
completion, the Act of 1862 authorized the road which first reached
the designated point to continue construction, east or west as the
case might be, until junction with the second road should be made.
Since the amount of land granted depended on the mileage completed, the
haste of the companies was feverish. “The Union Pacific Company,” says
Davis,[459] “had its parties of graders working 200 miles in advance
of its completed line in places as far west as Humboldt Wells.” The
Central Pacific had completed 105 miles east of Sacramento by the
autumn of 1867, hauling iron and supplies over the mountains without
waiting for the piercing of its tunnels. No less than 1038 miles of
the Union Pacific, including the difficult stretch over the Rocky
Mountains, were completed by 1869, four years after construction was
commenced. The prize of additional land was thereby secured, but this
land was long unsalable, and the cost of construction was largely
increased.

Finally, large sums were misapplied through a construction company.
The story of the Crédit Mobilier has been so often told that only
brief mention need be made of it here.[460] In 1864 T. C. Durant,
vice-president of the Union Pacific, induced one H. M. Hoxie to bid
for a contract to build from Omaha to the one hundredth meridian.
Hoxie was financially irresponsible, and four days later assigned the
contract to a company composed of Durant and other stockholders of
the Union Pacific. Meanwhile Durant had purchased the charter of the
Pennsylvania Fiscal Agency, a corporation which possessed convenient
powers. Later in 1864 the members of Durant’s construction company
were given stock in the Fiscal Agency, now called the Crédit Mobilier
of America, for the amounts they had paid in, and stockholders of the
Union Pacific were allowed to receive Crédit Mobilier stock for the
amounts they had paid in on their Union Pacific shares. Stockholders of
the Union Pacific thus became also stockholders of the Crédit Mobilier,
and in their former capacity were enabled to vote lucrative contracts
to themselves as constructors of the railroad. Durant’s company
assigned its contract to the Crédit Mobilier. Subsequently it was
found more convenient to assign contracts to certain individuals, who
transferred them to seven trustees, who built the required road with
funds furnished by the Crédit Mobilier, and turned over the profits to
that organization, but the practical result was the same.[461] These
various devices removed all incentive to economy on the part of the
Union Pacific stockholders. Instead of gaining by cheap construction,
they profited by dear; instead of aiming to reduce the cost in every
possible way, they schemed at making the construction contracts as
lucrative as possible to the persons to whom they were assigned. The
advantages to them as stockholders of the Crédit Mobilier outweighed
the disadvantages to them as stockholders of the Union Pacific. The
profits realized by the Crédit Mobilier are still a subject of dispute.
H. K. White figures them as 27½ per cent, or $16,700,000; Davis
says that the profit was safely over $20,000,000; but whereas White
calculates the percentage of profits to the total cost of construction,
Davis insists that a large part of the capital invested was replaced
on the completion of each section of twenty miles by the proceeds of
the government bonds and railway bonds and stock, and that though from
$50,000,000 to $70,000,000 were expended, in all probability not more
than $10,000,000 were sunk at any one time; in which case a profit
of $20,000,000, spread over four years, represents $5,000,000 per
year, or 50 per cent annually on the capital employed. Finally, the
Union Pacific Railway Commission estimated the actual cash profits at
$23,366,320, and remarked that the obligations incurred by the railroad
company represented a very much larger sum, being measured by the bonds
and stock at their par values.[462]

The result of the three factors was a corporation bonded at an
extremely high rate. The cost of road in 1870 was reported to be
$106,245,978, or $102,951 per mile, against which was a capitalization
of $107,907,300, or $104,561 per mile, of which $32,715 per mile was
stock, $26,080 government bonds, and $45,765 first mortgage, land
grant, and income bonds. In 1873 the net earnings were $4,092,032, and
the interest on the funded debt, not including the government interest,
was $3,403,660. In 1874 the figures were $5,291,243 and $3,431,720;
in other words, the corporation started with a heavy handicap, which
its monopoly of transcontinental business at first helped to overcome,
but which grew heavier and heavier as the years went on. During
the seventies, to repeat, the Union Pacific enjoyed generally large
prosperity. The volume of stock outstanding remained the same, the
bonded indebtedness but slightly increased, and the ratio of operating
expenses to receipts declined. The first dividend was paid in 1875;
in 1876 and 1877 8 per cent was declared, in 1878 5½ per cent, and in
1879 6 per cent. In 1880, however, a consolidation took place with the
Kansas Pacific and Denver Pacific railroads, and this operation may
well receive somewhat detailed consideration.

The Kansas Pacific, as well as the Union Pacific, was a creation of
the Acts of 1862 and 1864, which required it to be constructed from
Kansas City westwardly to form a junction with the Union Pacific at a
point on the one hundredth meridian. Later, an Act of July 3, 1866,
authorized it to change its route, and to connect with the Union
Pacific at a point not more than fifty miles westwardly from the
meridian of Denver in Colorado.[463] Like the Union Pacific the Kansas
Pacific was built by means of construction contracts, which resulted
in a total capitalization on its 638 miles of line of $9,437,950 in
stock and $22,651,000 in bonds, or $14,793 and $33,455 respectively
per mile,—high figures in view of the comparatively level character
of the country traversed.[464] The road was not a paying one. It
was poorly built and poorly managed, and running parallel with the
Union Pacific, it had to meet competition of a very bitter kind. The
report of Mr. Calhoun, expert accountant for the United States Pacific
Railway Commission of 1887, showed that the total receipts of the
road from 1867 to 1879 had aggregated $9,220,218, while the bond and
interest account, exclusive of United States interest, had amounted to
$15,745,287; leaving a deficit of $6,525,069, or, including the United
States accrued interest, of $11,330,772.[465] That is, the Kansas
Pacific was in a state of chronic insolvency. In 1874 it was placed
in the hands of receivers, and the following year, by an arrangement
with its creditors, it funded a considerable amount of overdue
interest.[466]

In 1878 a number of securityholders of the Kansas Pacific got together
in an attempt to reorganize that property, to take it out of receivers’
hands, and to “unite in interest the Kansas Pacific and Union Pacific
Railway Companies.” Twelve large securityholders consented to
contribute to a common pool or fund holdings of securities taken at
a fixed valuation, their interests in the pool to be proportional to
the amounts of said securities and stock taken at the value referred
to.[467] For the securities deposited they were to receive stock at a
reduced rate: thus for eight shares of old stock they were to receive
one share of new; for $2000 unsubordinated income bonds they were
to get ten shares, and for $10,000 subordinated income bonds thirty
shares of new stock.[468] The final result would have been to replace
securities with a par value of $17,330,350 by stock with a par of
$4,855,300, and greatly to lighten the burdens upon the road; though
it must be remembered that the $17,330,350 were less than half of the
total volume of securities outstanding, that the payment of interest on
much of these had been optional only, and that no provision was made
for the floating debt.

The scheme fell through, according to Mr. Gould, who was a party to
the agreement, because securityholders outside of the pool refused
to consent to so drastic a reduction of their holdings; and at his
suggestion a consolidated mortgage was substituted for the issues of
stock. This mortgage was for forty years at 6 per cent. The total issue
was to be for $30,000,000, of which $24,000,000 were to be issued at
once for the retirement of earlier bond issues and for payment of
arrears of interest.[469] Like the previous proposition the scheme
contemplated a scaling in the principal of the junior securities, and
the same rates of commutation were retained; but in this case the old
Kansas Pacific stock was withdrawn from the operation of the plan, and
certain reservations were made for other purposes, so that an actual
increase in indebtedness was finally to result, and even the interest
charges were certain to increase.[470] For the time being, however, by
force of the reduction of interest on the funding mortgage in January,
1879, from 10 to 7 per cent, and by the disallowance of some claims for
overdue interest, relief was obtained, while the consolidated mortgage
was duly issued.

The Kansas Pacific ran west to Denver. Between Denver and Cheyenne the
Denver Pacific, 106 miles long, served as a connecting link between
the larger systems. The Denver Pacific stock was held by the Kansas
Pacific, and 29,979 shares of it were pledged in 1877 as part security
for an issue of 10 per cent funding mortgage bonds.[471] The total
earnings of the Denver Pacific from 1870 to 1879 had been $3,122,141;
the expenses had been $1,709,477, and the net earnings from operation
$1,412,664, or an average per annum of $141,266; while for the first
eight years of that time the annual interest charge had been about
$185,000. The only value of the Denver Pacific stock lay in the
control which it secured over a connecting link between Denver and
Cheyenne.[472]

Under the conditions of competition existing between the Union
Pacific, Kansas Pacific, and Denver Pacific, some sort of agreement or
consolidation was both desirable and likely. The Kansas Pacific was
entirely dependent on its competitor for access to western business,
and this was soon perceived to be equivalent to continuous bankruptcy.
Extension to Ogden would have removed the dependence; but this, while
to be dreaded by the Union Pacific, was beyond the power of the
Kansas Pacific for financial reasons, and no capitalist or group of
capitalists before 1878 or 1879 seemed interested in the undertaking.
On the other hand, rates were low, and the very success of its
exclusive policy forced the Union Pacific to meet the competition of a
road which, with no interest charges to pay, was able to cut all rates
to the very verge of the cost of operation.

As early as 1875 there was talk of an agreement whereby the Kansas
Pacific was to give up its claims for a pro rate on its Pacific
business in return for a monopoly of the local business of Colorado,
and in connection with the deal was to acquire the Colorado Central
Railroad on issue of $10,000,000 Kansas Pacific stock to parties
designated by the Union Pacific Company; but this was never carried
out. In 1878, when Gould began to be interested in the property,
a union by means of stock control seemed feasible. Gould’s first
purchases were of bonds, and it was as a bondholder that he entered
the pool of 1878; but with the purchase of the holdings of the “St.
Louis parties,” he and his friends obtained control of a majority
of Kansas Pacific stock. In fact one of the provisions of the pool
was that if on the first day of June, 1878, it should be found that
Messrs. Gould, Dillon, and Ames, all large stockholders in the Union
Pacific, had not a majority interest in said pool, then they should
have an option on such an amount of other interest ratably and for cash
as on the basis of the schedule should give them such an interest;
and though this majority did not necessarily involve a majority of
stock, the operations of the pool aided Gould in the acquisition of
control. The union between the Union Pacific and the Kansas Pacific
thus secured was, however, of the frailest kind; for Mr. Gould at no
time had the permanent interest of either road at heart, and looked
for his personal profit rather in their struggles than in agreement
between them. For this reason, as he bought Kansas Pacific, Gould
sold Union Pacific stock, reducing his holdings from about 200,000 to
about 27,000 shares.[473] In 1879 the situation of the two roads was
thus much the same as before, and the harmony apparent was of the most
superficial kind. One change, however, had taken place to the serious
disadvantage of the Union Pacific; for the Kansas Pacific, although
still badly built and dependent upon its rival for an adjustment of
rates sufficiently favorable to let it into the western business, had
now interested in it a group of capitalists quite capable of financing
an extension to Ogden, and even of securing connections from Kansas
City to the East.

In 1879, doubtless relying upon the strength of Kansas Pacific’s new
backing, Gould proposed to the Union Pacific a consolidation of the
Union, Kansas, and Denver Pacific roads, in which the shares of each
were to figure equally at par. The terms were absurd by every test of
productive capacity which could have been applied. The relative earning
power and annual interest per mile of the three roads at this time were
given by a government accountant as follows:

_Annual Net _Annual Interest
Earnings per mile_ per mile_

Union Pacific $5617 $3185
Kansas Pacific 1602 2295
Denver Pacific 1333 1750[474]

The Union Pacific had reported an annual surplus, the other two roads
an annual deficit; the Union Pacific had not defaulted, the Kansas and
Denver Pacific had done little else; the highest mark which the Kansas
Pacific stock had touched in January, 1879, had been 13, that of the
Union Pacific had been 68½. But the question, as Gould well knew, was
not one of productive but one of destructive capacity, and the means
of coercion which he employed was a demonstration of the ease with
which the Kansas Pacific could be made formidable as a competing line.
In November, 1879, he purchased the Missouri Pacific from Kansas City
to St. Louis; about the same time he bought two minor roads between
the Kansas Pacific and the Union Pacific in Kansas, and announced his
intention of extending the Kansas Pacific to Salt Lake City, there to
connect with the Central Pacific and to form a third transcontinental
route. The story is clearly told in the report of the United States
Pacific Railway Commission.[475] The result was the consent of the
Union Pacific directors to the terms imposed, and the execution of an
agreement dated January 14, 1880, whereby the Union and the Kansas
Pacific, with all their respective assets and liabilities, were put
together at par of their respective capitals,—$36,762,300 and
$10,000,000,—to which was added the capital of the Denver Pacific,
$4,000,000, forming a new company called the Union Pacific Railway
Company, with a capital of $50,762,300, and a bonded indebtedness of
$92,984,624.[476] This corporation was larger in every way than the old
Union Pacific Railroad, except in one particular—earnings above fixed
charges. It had 1821 miles of line instead of 1042; $22,455,134 gross
earnings instead of $13,201,077; $10,545,119 operating expenses instead
of $5,475,503; and yet, since the consolidation was a union of some
strength with a vast deal of weakness, there were few who profited by
it save the holders of Kansas Pacific or Denver Pacific stocks. Those
lucky and skilful individuals saw the quotations of Kansas Pacific
common rise from a high level of 13 in January, 1879, to one of 59 in
June, and of 92½ in December; and the stock which had been a football
in the market thus become of such value that in 1887 Gould was able
to lay before a committee of Congress, in justification of the terms
described, a table which showed for 1880 market prices of Kansas and
Union Pacific stock which were approximately the same.[477]

It was to Gould, as chief owner of Kansas Pacific and holder of
practically all of the Denver Pacific stock outstanding, that the
lion’s share of the profits went; but Mr. Gould was not satisfied
with a harvest on these stocks alone. In the course of his operations
he had become possessed of certain branch and minor roads in whole
or in part. Thus he held $945,887 in bonds of a company known as the
St. Joseph & Western Railroad Company, and 5013 shares of its stock;
$634,000 in bonds of the St. Joseph Bridge Company; and $59,000 in
St. Joseph & Denver Pacific Railroad receivers’ certificates; while
to convince the Union Pacific directors of the wisdom of accepting
his plan of consolidation he had acquired the Missouri Pacific, the
Kansas Central, and the Central Branch Union Pacific railroads.[478]
The earning capacity of none of these lines was large, that of the
Missouri Pacific being the greatest. The St. Joseph & Western had
been sold in foreclosure in 1875, and had continued to be managed
thereafter by a receiver. What value it had was due to the fact that,
as extended to Grand Island, it gave to the Union Pacific an outlet
to the East other than the one at Omaha. The value of the Bridge
Company bonds and of the receivers’ certificates was dependent upon
this same property. The Kansas Central was a narrow-gauge road and
had been sold under foreclosure in April, 1879. The Central Branch
Union Pacific had been designed to join with the Kansas Pacific, but
had been left without western connection when this latter road had
failed to meet the Union Pacific at the hundredth meridian. At the
time of the consolidation, according to the United States Pacific
Railway Commission, “the coupons for six years were in default, and
were retained uncancelled as security for the income mortgage. The
company had never earned sufficient to pay its own coupons, without
taking into account the accruing interest to the United States in any
form.”[479] The Missouri Pacific was more prosperous, but need not here
concern us. Mr. Gould had paid various prices for the above, ranging
from $40 for the St. Joseph & Denver bonds to $238 for the stock of
the Central Branch Union Pacific. In the case of each road he turned
over his purchase to the Union Pacific for the same or a greater
price.[480] Thus for the St. Joseph & Western bonds, for which he had
paid 40, he received par in Union Pacific stock selling as high as 94
in January, 1880; for $634,000 bonds and 4000 shares of stock of the
St. Joseph Bridge Company, costing $480,440, he received 6340 shares
of Union Pacific stock; for $479,000 in bonds and 2521 shares of stock
of the Kansas Central, he received 4790 shares of Union Pacific; and
for 7616 shares of Central Branch Union Pacific, costing $1,826,500,
he received $913,500 in Union Pacific six per cent bonds and $913,500
in Kansas Pacific six per cent bonds.[481] The result was the issue
of considerable amounts of stock of the consolidated and bonds of the
consolidating companies, without equivalent value received.

The Union Pacific Railway Company, therefore, began its career in
1880 in worse shape than the Union Pacific Railroad Company, which
had preceded it, for it suffered not only from an initial watering of
stocks and bonds, but from a watering of assets which had followed.
Including the government subsidy and accrued interest thereon, the
total bonds and stocks of the company in 1880 were $179,058,902, or
$98,329 per mile, of which $27,876 were stock, $45,372 mortgage bonds,
and $25,081 government subsidy and interest. The figures per mile were
slightly lower than in 1870, and yet the water in the capitalization
was more abundant, for the average value of the assets had declined
still more. A dividend-paying road had been combined with non-dividend
payers, with the result of large profits to the promoters of the
consolidations, but of serious harm to the solvent party.

Between 1880 and 1883 a number of branches were constructed, to provide
funds for which the capital stock of the Railway Company was increased
$10,000,000. Of these the Denver & South Park was constructed in the
years 1881 to 1883, and was the last of Mr. Gould’s gifts to the
parent line. This road was handled by several construction companies,
in the last of which Gould took a quarter interest, receiving stock
of the Denver & South Park Railroad Company as a dividend on his
investment.[482] In November, 1880, acting in behalf of the Union
Pacific Railway Company, he bought the stock of the Denver road at par
for cash, benefiting in his capacity as quarter owner by his action as
representative and stockholder of the Union Pacific.[483] In relation
to the road Mr. Charles F. Adams, Jr., subsequently said: “The chief
source of revenue … was in carrying men and material into Colorado
to dig holes in the ground called mines, and until it was discovered
that there was nothing in those mines the business was immense.”[484]
A more important and genuinely beneficial project was the organization
in 1881 of the Oregon Short Line Railway Company to construct and
operate a railway from Granger on the Union Pacific to and into the
state of Oregon, a distance of 610 miles, with the intention of
securing the Washington and Oregon business. The Northern Pacific was
in financial difficulties at the time, and it was not expected that it
could anticipate the new road; but even though this expectation was
disappointed, and the Oregon Short Line was second in reaching the
disputed territory, its value was great and steadily grew.[485] The
road was built by the construction department of the Union Pacific,
and was financed by the organization of a subsidiary corporation which
issued stock and bonds to an amount of $25,000 per mile, one-half of
the stock being reserved in the Union Pacific treasury for the purpose
of control, and the Union Pacific guaranteeing the payment of interest
on the bonds. This branch at least was not unloaded on the main line by
interested parties, and forms an essential part of the system to-day.
Other branches were bought or constructed at the time, but do not
require detailed mention.

Gould for the time had obtained from the Union Pacific all that he
thought possible, and quietly unloaded his stock, while keeping up the
payment of dividends. By 1883 he was substantially clear, but he had
left his mark; the consolidation of 1880, with the forced purchase of
worthless branches, aided as it was by the high capitalization caused
by extravagant original construction, and accompanied by a steadily
increasing intensity of competition between transcontinental lines,
had diminished the surplus to a dangerous extent. At the same time the
prosperity of the country as a whole was declining; the wheat crop of
1881 was only three-quarters as large as the crop of 1880, and the corn
crop was the smallest since 1874; though the decline was not so marked
in Kansas and the far West as in the states east and south of Omaha and
Kansas. By 1882, says Noyes, all the markets were moving downward, and
after the reaction of that year, the volume of internal trade decreased
continuously until after the panic of 1884.[486]

The evidence of distress on the part of the Union Pacific was the
mounting up of the floating debt. In November, 1882, President Dillon
stated that it then amounted to $3,400,000, and that a loan of
$5,000,000 was to be negotiated to take care of it.[487] The annual
report at the end of the year stated the net debt to be only $842,743,
but included in the assets used to offset the gross debt $2,768,437 in
fuel and material on hand, and $927,648 in balances due from auxiliary
roads; so that early the following year it was again a subject of
discussion, and the stockholders recommended to the directors the
issue of collateral bonds in order to wipe it out. Pursuant to the
recommendation the directors executed to the New England Trust Company
of Boston an indenture under which it proposed to issue trust bonds to
an amount equal to 90 per cent of the securities deposited. By 1884 the
gross floating debt amounted, nevertheless, to $11,306,595, as against
$9,852,325 gross in 1882, and the quick assets, exclusive of fuel and
material, counted up to $8,068,898, instead of to $6,241,145. The chief
increase in liabilities, as always, had taken place in bills payable,
meaning that the road had been giving its notes for the payment of
current indebtedness, with the consequent necessity of paying a high
rate of interest, and of making frequent renewals. Meanwhile dividends
had been stopped and salaries cut down.

At this juncture Mr. Sidney Dillon resigned the presidency, and Mr.
Charles Francis Adams, Jr., was elected his successor. Mr. Dillon was
well along in years, was said to be in poor health, and doubtless
missed the support which Mr. Gould had been accustomed to render him.
Mr. Adams was a younger man, only forty-nine years of age as against
the sixty-nine of Mr. Dillon. He had been a member of the Massachusetts
Railway Commission from 1869 to 1879, had served as government director
of the Union Pacific in 1878, and now brought to his position as
president an inexhaustible fund of energy, large resourcefulness,
and more important still, a nice sense of his obligations towards
the bondholders and shareholders of his road. Under his régime the
economies earlier initiated were continued and extended; employees were
discharged until, by June 28, 1884, the company had only about 10,000
men in its employ instead of the 20,000 who had been on the rolls at
one time; and rolling mills, etc., were closed wherever the company
found it cheaper to purchase rails and equipment at current prices.
This, with the cessation of dividends, left a considerable surplus
revenue applicable to the payment of the floating debt. In addition,
bonds and stock from the company’s treasury were sold between January
1, 1884, and January 1, 1887, for which $6,550,000 were obtained; and
the aggregate of resources made available was $16,200,000, of which
$8,251,368 were applied to the floating debt, $6,708,632 to betterment
of the road and branch-line construction, and $1,240,000 to increase of
equipment.[488] In addition the proceeds from land sales were used to
the same general end. In August, to reassure investors, President Adams
stated that no part of the floating debt was pressing, and in November
he repeated the statement; the truth of which was made evident by the
payment of the last bit of net unfunded indebtedness on August 22, two
years later. The result was highly creditable, although the continued
cessation of dividends provoked some protest.

Much could be done at this time by able and energetic management; there
was, however, much that could not be done; and it is to this that we
must attribute Mr. Adams’s failure to put the road in a permanently
stable position. For first, the competition which the Union Pacific
was obliged to meet was constantly increasing in severity. In 1881
the Atchison, Topeka & Santa Fe was extended to a junction with the
Southern Pacific at Deming; in 1883, in the language of the annual
report, “Not only was the Rio Grande completed to Ogden, making, in
connection with the Atchison, Topeka & Santa Fe and the Burlington
& Missouri extension of the Chicago, Burlington & Quincy, a direct
competing route with the Union Pacific from Chicago and all eastern
points to a common western terminus, but the Northern Pacific also was
connected through, making a third transcontinental route.”[489] In 1887
the Atchison built 450 miles of line and the Chicago, Rock Island &
Pacific was scarcely behind, so that Kansas and Nebraska were covered
with a network of lines, which transformed the natural local traffic of
the Union Pacific into competitive business of the most uncertain kind.
At the same time the profitable high grade business was giving way to
a larger volume of mineral traffic, and the average length of haul was
increasing, all of which resulted in a decrease of about 45 per cent
in the average receipts per ton mile between 1881 and 1890, a slow
increase in gross earnings which bore little relation to the greatly
increased volume of business done, and a fluctuating progress of net
earnings, which were actually over $3,000,000 less in 1889 than they
had been eight years before.

And second, during this time the fixed charges of the Union Pacific
did not materially decrease. They were $7,626,626 when Mr. Adams
assumed the presidency, and $7,309,142 five years later; and the
necessity for further decrease was shown by the fact that the total
net income of the road was $11,402,199 in 1884, $10,339,402 in 1889,
and $9,561,673 in 1890. What Mr. Adams could do he did, and the funded
debt under his régime decreased from $90,760,582 in 1884 to $82,090,585
in 1889, and to $73,968,885 in 1890; the company steadily buying up
its own indebtedness: but the conditions which he had to face were too
exacting, and the saving made here was offset in other ways.

To save itself the Union Pacific was driven to a rapid extension of
its branch mileage, which Mr. Adams held to be the only means by which
fixed charges could be paid.[490] Between 1884 and 1890 3132.45 miles
were built or acquired, all under separate organizations, but with
their accounts and management under the supervision and control of the
officers of the parent line; and the amount invested in branch-line
securities was raised from about $28,000,000 in 1881 to $41,879,724 in
1892. These roads reported annual deficits, which were either paid out
of earnings or carried as floating debt. The report of the Government
Directors in 1891 declared that $15,000,000 out of $21,400,000 of
floating debt were the result of expenditures and advances in the
construction of branch and tributary lines and the purchase of stock in
such lines for the purpose of control.[491] But speaking in 1887, Mr.
Adams declared the branches to be worth $5,000,000 a year to the main
line, entirely apart from anything which appeared in the accounts of
the branches themselves, and in a letter to the Government Directors in
1884 he said: “The branches and auxiliary lines of the Union Pacific
should be considered the only real security the Government has for the
repayment of its indebtedness…. Were it not for these branches the
Union Pacific would be confined to such small local traffic as it could
pick up at points directly upon its main line; and to its share of the
through transcontinental business which has recently been subdivided
by four through the construction of competing routes.”[492] The most
important of the branches remained the Oregon Short Line, with the
connecting line of the Oregon Railway & Navigation Company, of which
the Union Pacific became finally possessed in 1889. This last road had
been long considered the natural outlet of the Northern Pacific to the
Pacific coast, but had been leased by the Union Pacific in 1887 through
the Oregon Short Line with a guarantee of 6 per cent dividends upon
its stock as well as interest upon its bonds for 999 years. In 1889
negotiations with the Northern Pacific resulted finally in the sale
of the Oregon Railway & Navigation stock held by Mr. Villard and his
friends. Pending the issue of a collateral trust mortgage the stock
was deposited with a trust company, a note was given for the amount,
and the sum was carried as floating debt. Whatever the value of the
property to the Northern Pacific, it proved of great worth to the Union
Pacific, providing it with an independent outlet to the coast, and
giving it a haul on its main line of over 800 miles on all interchanged
traffic. The method of payment proved a dangerous one, however, in
that it so largely swelled the volume of the Union Pacific’s quick
liabilities.

In 1891 Mr. Gould again began buying Union Pacific stock. Mr. Adams
therefore resigned late in the year, and Mr. Dillon was elected to
his position. The time was not ripe for expansion of any kind, and
Mr. Gould’s death the following year put an effectual check on any
schemes which he might have entertained. The immediate problem was the
floating debt, swollen to unwieldy proportions by the acquisition of
branch lines, and in particular by the purchase of the Oregon Railway
& Navigation Company. During 1890 a block of collateral bonds was
issued and sold, but the remainder of the proposed issue was kept
back in the hope of a better price. While waiting, Mr. Gould devised
a scheme for the postponement of the payment of these and of other
quick liabilities by the issue of three-year collateral notes, to be
underwritten by a syndicate composed of himself and of other gentlemen
interested in the property. These notes were to bear 6 per cent, and
were to be issued at 92½ to such holders of the floating debt as would
accept them, the syndicate taking care of the balance. The authorized
amount was to be $24,000,000, of which $5,500,000 were to be issued at
once. The plan was declared operative on September 28, 1891. If, now,
the Union Pacific had been a moderately capitalized corporation, with
fixed charges normally well below its earning capacity, and if, in
1894, when the notes were to mature, the market conditions had been
more favorable than in 1891, it is probable that this scheme, temporary
as it was, would have met the needs of the situation. Since neither
of these contingencies occurred the insufficiency of the plan may be
said to be in part the misfortune of the Union Pacific and in part its
fault. It was a particular misfortune that the severest panic since
1873 should occur when the road was staggering under a load which it
could scarcely bear; but it was altogether a fault that the railroad
should have been so burdened as to be able to lay by no reserve in good
times for the hard times which were bound to come.

In 1892, therefore, the Union Pacific was in a difficult position. Its
capitalization was high; its earnings had shown scarcely any increase
for five years; its surplus had not been sufficient to prevent the
accumulation of a large floating debt; it had to prepare to raise a
large sum of money in two years for the payment of its short time
notes; and, in addition, there was ahead a fact of which little has
been said so far,—the maturing of the government indebtedness.

Briefly sketched, the history of this indebtedness was as follows:
The Acts of 1862 and 1864 had provided for the issue of government
bonds for stated amounts per mile on the subsidized portions of the
system in aid of construction, which bonds were to mature thirty years
from date of issue, and to have a lien on the property covered second
only to the first mortgage of the company. The rate of interest was 6
per cent, payable to the bondholders by the Government; and in 1875
the Supreme Court decided that the company was not obliged to repay
to the Government the accruing interest before the maturity of the
bonds.[493] This ruling was regarded as a victory for the company, but
meant the steady piling up of arrears of interest, lessened only by the
retention by the Government of one-half the amounts due for government
transportation, and, under the Thurman Act, of such additional sum
not in excess of $850,000 as, added to the whole compensation for
government services and to the 5 per cent of net earnings set aside
under the Act of 1862, should make the annual contribution equal to
25 per cent of the net earnings of the company, unless the remaining
75 per cent should be insufficient to pay the interest on the first
mortgage bonds; in which case the Secretary of the Treasury was
authorized to remit a portion of the 25 per cent of net earnings
required.[494] The Thurman Act did not fulfil expectations. The Supreme
Court in 1891 held that expenditures for new construction and new
equipment could not be deducted from gross earnings in ascertaining
net earnings,[495] but the road met hard times and the maximum limit
of the contributions to the sinking fund was not attained, and in
investing the fund in government bonds the Secretary of the Treasury
was compelled to pay high premiums, thus reducing the net interest;
so that from the beginning to 1892 the question of indebtedness to
the Government occasioned constant dispute and litigation, introduced
uncertainty into the affairs of the railroad, and caused hard feelings
between it and the Government. In 1892 the necessity for some
settlement was near at hand. The principal of the government debt
matured as follows:

November 1, 1895 $640,000
January 1, 1896 1,440,000
February 1, 1896 4,320,000
January 1, 1897 6,640,000
January 1, 1898 17,342,512
January 1, 1899 3,157,000
———–
$33,539,512

Deducting from this amount the sums paid to the Government and
the company’s credits for mail and carriage, and adding arrears
of interest, the sum due the Government at the last of 1893 was
approximately $52,000,000.[496] It was obviously highly difficult for
the company to pay this sum in 1892 or 1898 or any other time, and
for some years both the company and the Government had been earnestly
discussing schemes for refunding, and the advantages and disadvantages
of the ownership and operation of the road by the United States.
Thus in 1892 an overwhelming obligation was hanging over the Union
Pacific; and did not crush it only because the inability of the road
to pay was so evident, and the inadvisability of government ownership
was so strongly believed in, that every one felt that the necessary
concessions would be made.

In 1893 the sinking-fund 8 per cent bonds matured to the amount of
$5,176,000, and were partially extended and partially paid off through
the medium of an underwriting syndicate; but this was the last attempt
to meet indebtedness coming due. During the year both gross and net
earnings fell off enormously, owing to the general depression of
business, and particularly to the stagnation upon the Pacific coast.
Freight rates were said to be in a state of chaos; and the Union
Pacific served notice that it would withdraw from the Western Passenger
Association on October 10. As the year wore on the continued decrease
in earnings made the situation desperate. “The company for the year
ending December 31, 1892,” said Mr. John F. Dillon, counsel for the
Union Pacific, in November, “had a surplus of $2,000,000. In the month
of September (1893) there was a loss of net revenue of $1,500,000 as
compared with the preceding year, and from January 1 to August 31
there has been a falling off in net revenue of over $2,500,000. The
company is indebted for labor and materials on October 1 to the amount
of $1,500,000; and its sinking-fund and interest charges for September
would be more than $1,000,000; for October $750,000, for November
$850,000, for December $1,000,000, and for January $1,000,000. There
will be a deficit for the year 1893 of at least $3,000,000 and the
company is without money or means to meet these obligations….”[497]

Under these conditions a receivership was the only device which could
prevent the dismemberment of the system and protect the interests of
all the creditors; and accordingly, on application of parties friendly
to the company, Messrs. S. H. Clark (president of the Union Pacific),
O. W. Mink (comptroller), and E. E. Anderson (government director),
were appointed in October;[498] Mr. Clark taking charge of the
operation of the road, and Messrs. Mink and Anderson of the financial
and legal business.[499] One month later, on application of the
Attorney-General, Messrs. John W. Doane and Frederick R. Coudert were
appointed additional receivers to safeguard the government interests
and to assist the other receivers in the general administration of
the property.[500] These gentlemen remained in office until the
reorganization was complete, though various portions of the system
passed from their jurisdiction from time to time.

The appointment of receivers closed a long struggle to maintain the
solvency of the road. A reorganization was now in order, and in this
it was to be possible to do what Mr. Adams had not been able to
do,—namely, to rearrange the capitalization of the road, thereby
permanently lessening the fixed charges and securing a reserve of
earning capacity sufficient to avoid bankruptcy when receipts for any
cause should show a considerable decrease. This was the fundamental
condition of future prosperity. Besides, the debt to the Government
had to be settled, cash raised to pay the floating debt, including the
three-year notes of 1891, and the system held together so that its
earning capacity should not be destroyed.

As might be expected, it was the debt to the Government which was most
publicly and persistently discussed. There seemed to be four ways in
which this might be handled:

First, the Government might have cancelled the obligation and have
remained satisfied with the enormous economies which it had secured
in the transportation of mails and other government business. In the
seven years between 1867 and 1873 alone the Quartermaster-General
estimated that the Union Pacific had saved the Government $6,507,283
in the cost of moving troops and supplies,[501] and there was no doubt
that by 1896 the investment of the Government, with interest, had
been many times regained. But it was pointed out not only that the
Union Pacific deserved little consideration, in that its earnings had
been wrongfully diverted from the payments demanded by the Thurman
Act by the manipulations of Gould and others, but that the precedent
of renouncing a just claim would be an extremely bad one for the
Government to set.

Second, the Government might have exacted larger payments to the
sinking fund, and have extended the debt at an unchanged rate of
interest until it should be automatically discharged. This was the
proposal of Mr. Hampton, Commissioner of Railroads, who suggested
the amendment of the Thurman Act as follows: it should embrace all
the United States bond-aided Pacific railroads; it should compel the
contribution of 50 per cent of net earnings to a sinking fund instead
of 25 per cent, and should extend the indebtedness to the Government
until discharged as provided. If any company should abandon a portion
of a subsidized line or divert its business from a subsidized to an
unsubsidized line, that company should transfer the conditions which
were attached to the former to the latter, in order to protect the
interests of the United States Government.[502] The weak points in
this scheme were many. Among them may be pointed out the fact that
contributions to the sinking fund under the Thurman Act had been
necessarily invested in government bonds, which, in view of the premium
at which they were necessarily purchased, yielded a very small return.
To double the contributions would have been to double the amount of the
railroad’s funds sunk in but slightly remunerative investments; and the
Government did not seem inclined to permit the company to adopt the
only practicable alternative, that of investing its sinking fund in its
own securities. Also, Mr. Hampton’s amendment would have continued to
an enhanced degree the constant suspicious supervision of the company
by the Government which had been, perhaps, the chief evil result of the
Thurman Act.

Third, the Government might have consented to a refunding of the
indebtedness to it at a lower rate of interest. This was most urgently
pressed by representatives of the road. Mr. A. A. H. Boissevain,
representing the Dutch bondholders, proposed to redeem the first
mortgage by the securities in the sinking fund so far as possible,
and to renew the rest at a lower rate of interest;—after which
the Government was to be given a 100-year 2 per cent bond for the
principal and interest of its claim.[503] Attorney-General Olney
similarly suggested a renewal of the first mortgage bonds at a rate of
not over 5 per cent, and an exchange of 100-year 2 per cent bonds for
the government claim; though he differed somewhat from Mr. Boissevain
as to the lien which these bonds should have.[504] Congress and the
Government Directors in 1894 were inclined to insist on harder terms.
The latter, in their annual report, proposed that the first mortgage
bonds be paid off in cash, and that a 100-year 3 per cent instead of a
2 per cent bond be given to the Government, with elaborate provision
for a sinking fund; and the former had before it in the Reilly Bill
a very similar suggestion.[505] As a counter-proposition the railway
company offered to pay off the first mortgage bonds in cash if the
Government would take a 50-year 2 per cent instead of a 3 per cent
bond for its claim. “The petitioners further represent,” it said,
“that it will be utterly impossible to obtain the very large sums
referred to from the stockholders unless it be possible to offer to
them in satisfaction of their assessments reasonable security for the
moneys so advanced. At a meeting recently held, at which were present
representatives of a large amount of the stock of the said company,
the conclusion was reached that if the debt to the Government could be
funded substantially on the terms of the Reilly Bill, but at a rate
of interest of 2 per cent per annum instead of 3 per cent, the said
stockholders would endeavor to raise the funds needed for the purpose
of meeting the requirements of the Reilly Bill.”[506] Finally, Mr.
Pierce, on behalf of the Fitzgerald Reorganization Committee, proposed
that the Government either take 4 per cent bonds for the principal
of its debt, and preferred stock for the interest, carrying into
the settlement with the Government the scheme which was found best
adapted to the satisfaction of other creditors; or that it take a 3
per cent first mortgage bond for its principal, and a second mortgage
non-interest-bearing bond for its interest; or that it accept a lump
sum of money equal to the value of its lien, which he informally
estimated as 50 per cent of the total amount due.[507] The plan of
refunding was the most obvious as well as the most practicable of
all suggestions. It had, however, the disadvantage from the point of
view of the Government of surrendering some part of the government
claim, and from that of the company of continuing the relations of the
Government with the road.

Fourth and last, the Government might have demanded payment in cash.
The sum which the company would have had to obtain was extremely large,
but the accumulated sinking fund reduced it considerably, and many
thought that the balance could be raised. In March, 1896, before a
Senate committee, Mr. John Rooney, for the first mortgage bondholders,
proposed that the Government, through a commission, should buy in
the Union Pacific at foreclosure sale, should issue a new general
mortgage at a lower rate of interest than the existing prior liens,
and should pay off both the first and the government mortgage with the
proceeds;—the road to be turned over to the subscribers.[508] This
suggestion took place among many others which were in the nature of
a compromise. Thus the reorganization committee, in 1895, offered to
pay the principal of the government debt provided that the interest
were cancelled;[509] and Receiver Anderson proposed in 1896 that the
company pay the principal of the debt by adding funds raised by it to
the amount of the sinking fund, and settle the arrears of interest with
a 50-year 2 per cent bond. Full payment in cash was, of course, what
the Government desired, and everything short of that it hesitated to
accept; but equally, of course, full payment was what the bondholders
of the road were most unwilling to concede; and hearing after hearing
took place before committees of the Senate and of the House without
definite result.

Meanwhile the general reorganization of the company was going on.
In November, 1893, the various interests and factions of the road
held a conference in New York, which resulted in the choice of a
reorganization committee as follows: Senator Brice, chairman; Mr.
A. H. Boissevain, for the foreign holders; General Louis Fitzgerald,
president of the Mercantile Trust Company, for the Gould interests;
Mr. Carr, for the estate of F. L. Ames; General Dodge, for the Denver
and Gulf roads’ interests; and Colonel H. L. Higginson, for the Oregon
Railway & Navigation interests.[510] Subsequently Mr. J. P. Morgan
accepted a place.[511] This committee was the only comprehensive
one appointed until 1895; but numerous other committees sprang up
to represent special interests of one kind or another, appearing
frequently as interest on new classes of bonds was defaulted, and
having, with the main reorganization committee, to deal specifically
with the payment of the floating debt and the reduction of fixed
charges. Upon the ability of the committees to agree depended the
retention of the Union Pacific in something like its existing shape.

Aside from the question of the government debt there seemed to be a
general agreement as to what was needed to be done. Every suggestion
contemplated the payment of the first mortgage in full and the
reduction of the interest upon the junior securities; most included
with this an assessment on the stock, and one at least proposed the
cancellation of the guarantee on the stock of the Oregon Railway &
Navigation Company.[512] The principles were obvious. A large sum of
money had to be raised with which to pay the floating debt and to meet
possible demands by the Government. This had to come from the junior
securities or from the stock, and preferably from the stock, which
represented ownership in the enterprise. On the other hand, reductions
in fixed charges had to come from the junior securities as the youngest
interests which had a mortgage lien. Differences of opinion occurred
upon the details. Should there or should there not be a foreclosure?
How large an assessment was required? How great must the reduction in
interest charges be, and should bonds or stock or both be given to the
junior securities in exchange for their holdings? Should the system as
it stood be preserved, or should certain parts of it be let go?

In June, 1894, Mr. Boissevain stated that the reorganization committee
thought that they should be in a position to formulate a complete
plan of reorganization speedily after the terms of the adjustment of
the debt to the United States had been approved by Congress. “It is
our opinion that the fixed charges of the reorganized company …
should not exceed $8,500,000 per annum. Certain classes of existing
bonds secured by mortgage on portions of the system cannot be and
should not be disturbed, as they are amply secured by property earning
the interest which is payable thereon. Other bonds, however, must be
converted in whole or in part into securities not imposing a fixed
charge upon the reorganized company. While the reorganization committee
has not approved of any definite plan, we believe that holders of bonds
which must be disturbed and creditors and stockholders interested in
the system can be provided for upon an equitable basis by the creation
of the following securities:

(_a_) An issue of general mortgage bonds (at 4 per cent), secured by a
general mortgage covering the entire system, subject to such mortgages
as cannot be disturbed, and to the lien of the United States upon the
main line and Kansas Pacific division for the adjusted debt.

(_b_) An issue of 5 per cent preferred stock.

(_c_) An issue of common stock.

The plan of reorganization would require provision to be made to
take up the trust notes secured by valuable collaterals. The funds
required for this purpose and for the other cash requirements of the
reorganization would be met in part by a reasonable assessment upon the
stockholders, and in part by the sale of new securities.”[513]

A not dissimilar suggestion was made by the Government Directors in
1894. They proposed to ascertain the minimum net earning power of
the railroad or railroads to be reorganized, and to issue a blanket
mortgage of 3 per cent 100-year bonds to an amount such that the
accruing interest would not exceed the net earning power. By sale of a
portion of these bonds, together with a $10 assessment on the stock,
and the use of the moneys and securities in the sinking fund, they
would have paid off the prior liens, and then, after exchanging the
new 3 per cent bonds for the government claim, they would have used the
balance to retire the junior securities, adding preferred stock, so
much as necessary, to compensate for the difference in yield between
the old securities and the new ones received. The amount of securities
required they estimated at $150,000,000 3 per cent bonds, $20,000,000
preferred stock, and $61,000,000 common stock; the latter exchanging
for old common stock at par.

Both of these plans contained excellent features, chief among which
were their provisions for the raising of cash and their use of
preferred stock. The cash which Mr. Boissevain proposed to raise was
to meet the floating debt, for he hoped to refund the government
indebtedness; and while he may scarcely seem to deserve commendation
for not attempting to fund the quick liabilities as well, this is not
the case, as the history of the Union Pacific itself can demonstrate.
The Government Directors intended to use the cash procured not only for
settling the floating debt, but also for partially retiring the prior
liens, so under their scheme an assessment was quite inevitable; and
having made that as large as they dared they are not to be criticised
for resorting to the sale of securities for the additional funds
required, especially since these securities were to have a first lien
on the road. As regards the preferred stock it is not clear from his
statement at the time whether Mr. Boissevain had in mind the exchange
of junior securities for bonds and stock or some for bonds and some
for stock alone, but subsequent developments show that his intention
was the former. Thus his idea was the same as that of the Government
Directors, viz., to give the junior bondholders a right to a low rate
of interest well within the earning capacity of the road, and to join
with this the right to a higher return whenever the road should earn
it. Mr. Boissevain’s estimate of the maximum fixed charges which
the road could safely stand was, however, high, and the plan of the
Government Directors, if conservatively carried out, would have been
better. Finally, the Government Directors contemplated foreclosure,
while Mr. Boissevain did not; the relative merits of the plans on this
point depending largely on the terms which the bondholders could be
induced voluntarily to accept.

During 1894 and 1895 discussion was active, both in Congress and out,
while the reorganization committee worked over the scheme which Mr.
Boissevain had put forward, without making any formal announcement of
a plan. Everything depended on the terms upon which the United States
should insist. The reorganization committee hoped for a refunding of
the government debt at 2 per cent. It had suggested that it would raise
the funds to pay off the prior liens if Congress would take a 2 per
cent 50-year bond in satisfaction of the government claim, would extend
the provisions contained in the Reilly Bill to a committee charged
with the duty of purchasing the property of the Union Pacific, and
would grant the committee the power to form a successor corporation
for the general purpose stated in the Acts of 1862 and of 1864, and
with the general powers given in those Acts, together with the same
rights, privileges, and freedom of action that were exercised and
enjoyed by other railroads.[514] Subsequently it had offered to pay the
principal of the government indebtedness in cash, providing that the
Government would relinquish all claims to interest.[515] If either of
these propositions was accepted it was willing to go ahead; while if
both were refused, and no official counter-proposition was made by the
United States, it seemed idle for the general reorganization committee
or any other committee to promulgate a plan.

But meanwhile the Union Pacific system was disintegrating; partly
from the efforts of the receivers to rid themselves of branches and
contracts which had become burdensome, and partly through the action
of bondholders of subsidiary roads who refused to wait for the slow
action of Congress, and insisted on foreclosure of their liens. As
early as August, 1893, ex-Governor Evans, a prominent stockholder of
the Union Pacific, Denver & Gulf, had petitioned for an accounting
from the Union Pacific, alleging that the branch was being bled for
the advantage of the main line. When receivers for the Union Pacific
system were appointed Mr. Evans petitioned for a separate receiver, and
was granted his request. Litigation followed, and an attempt was made
to get Mr. E. E. Anderson appointed as co-receiver; but the machinery
of foreclosure and sale were duly put in motion and the line became
separated from the parent company. In October, 1893, in view of an
impending default, the Fort Worth & Denver City Railway Company was
placed in the hands of receivers, as was the same month the Denver,
Leadville & Gunnison and the St. Joseph & Grand Island. In April, 1894,
a receiver was appointed for the Leavenworth, Topeka & Southwestern;
in June one for the Oregon Railway & Navigation Company. Foreclosure
proceedings against these and other branches were instituted, and
were attended by a very considerable measure of success.[516] On the
other hand, the receivers were anxious to get rid of onerous contracts
and unprofitable branches. On the 16th of March, 1894, they formally
abandoned the Leavenworth, Topeka & Southwestern. In July, 1894, they
petitioned to be relieved from certain guarantees and contracts, and
asked instructions concerning the operation of certain lines. Judge
Sanborn, in the United States Court at St. Paul, set November 15 for a
hearing, and appointed a special master to take testimony. The master
reported in October. He recommended the continuance of operation of
most of the lines in question, but found that the receivers were
not bound by the disputed contracts; and in November Judge Sanborn
confirmed the bulk of his report. The net result was a reduction in the
mileage of the Union Pacific from 8167 in the latter part of 1893 to
4469 in May, 1895; at which time proceedings against the Oregon Short
Line Railroad Company threatened to withdraw 1424 miles besides.

With matters in this state the reorganization committee was genuinely
discouraged by the refusal of Congress to pass the Reilly Bill,
providing for a refunding of the government debt; although this had
been reported to the House with the alternative amendment proposed
by the committee accepting the payment in cash of the principal
of the government debt in full satisfaction of claims against the
company.[517] Since Congress had earlier refused a proposition to pay
off the prior liens in full on condition that the government debt be
refunded at 2 per cent,[518] it was felt that nothing but cash payment
of principal and interest would be acceptable, and this the committee
refused to undertake. On March 8 the announcement was made that the
reorganization committee of the Union Pacific road had abandoned its
task and would return the securities deposited with it, and a few days
later the actual disbandment took place.[519]

Between March, 1895, and the following October little progress was
made. With the dissolution of the general reorganization committee
disappeared the one body capable of formulating a comprehensive scheme
and of securing its widespread acceptance. The committees which
remained represented each some one or two mortgages, and were thus
confined too narrowly in their sympathies to command much confidence
from bondholders as a whole. Late in 1895, however, new interests
undertook the reorganization of the property, and another general
committee was formed, comprising General Louis Fitzgerald; Marvin
Hughitt, president of the Chicago & Northwestern; Chauncey M. Depew,
president of the New York Central; Jacob H. Schiff of Kuhn, Loeb & Co.;
Oliver Ames, director of the Union Pacific; and T. Jefferson Coolidge,
Jr., president of the Old Colony Trust Company.[520] This committee’s
plan of action was noteworthy in three particulars. First, it
contemplated a foreclosure sale. This, it is true, was but resignation
to the inevitable, for foreclosure suits were already under way, and
an attempt to check them would have had scarcely a possibility of
success. Second, it made no definite provision for the government debt.
A certain amount of bonds and stock were reserved from the securities
proposed to be issued for the purpose of settling the government claim,
but the exact method in which that indebtedness should be treated was
left for future arrangement. Third, it did not attempt to meet the
collateral trust notes of 1891, which constituted so large a portion
of the floating debt. “The securities embraced in these trusts,” it
declared, “are largely those of companies which have already, by orders
of court made in the original general receivership, or in independent
foreclosure proceedings, lost in part or in whole their character as
parts of what has been known as the Union Pacific system. Independent
reorganization of many of these properties are pending. The purposes
which brought into existence guarantees of the obligations of many of
these auxiliary companies have been accomplished by construction or
otherwise, and considerations will not exist, upon reorganization, for
continued relations with (them) upon the basis of any assumption of
their fixed charges.”[521] Thus, at the very outset, this new committee
removed the three matters which had given its predecessors the most
trouble. The proposed foreclosure made it both easier to get assents
to a plan and more difficult to block its operation; the postponement
of the question of the government debt allowed the committee to go
ahead without waiting for Congress; and the refusal to provide for
the collateral notes relieved it of many difficulties, and threw the
holders of these notes back upon the collateral which they had exacted
as security.

The plan of the Fitzgerald Committee followed, for the rest, the
general lines earlier laid down by the Brice Committee. To retire all
existing mortgage indebtedness it proposed to issue:

First mortgage railway land grant 50-year 4 per cent
gold bonds $100,000,000
4 per cent preferred stock 75,000,000
Common stock 61,000,000

The reasoning by which these sums were arrived at was as follows:

The lowest net earnings the Union Pacific Railway had
ever recorded had been those of 1894 $4,315,077
The committee planned to issue $100,000,000 4 per cent
50-year bonds, on which the interest would be 4,000,000

This would be all the company would have to pay in any one year.

The average net earnings for the 10 years before 1894
had been $7,563,669
To the $100,000,000 bonds the committee proposed to add
$75,000,000 preferred stock. The annual dividend on
this would be 3,000,000

Payment on bonds and preferred stock together thus equalled the average
earnings.

Net earnings between 1885 and 1894 had gone in some years
as high as $9,000,000

To the above bonds and stock the committee wished to add $61,000,000
common stock, on which dividends might be paid if it seemed advisable.

New common stock exchanged at par for old; new bonds and preferred
stock exchanged for old bonds, with a residue which was to be set off
against the government debt and to be used for cash requirements.
The cardinal principle of the reorganization was that no new 4 per
cent bonds should be issued in exchange where the old mortgage did
not contribute the full value; or, to put it more accurately, that
no securityholders were to be given the right to claim a sum greater
than their property could earn as judged from past experience. At the
same time enough preferred stock was distributed to give bondholders
the same returns as before when the road should earn it. A $15
assessment was levied upon stockholders. This was several times the
quoted price of the stock early in 1896, but was not more than the
stock would probably soon sell for after reorganization. A syndicate
agreed to advance $10,000,000 to $15,000,000, for payment of coupons
as they fell due and for expenses, in return for which they received
$5,000,000 in preferred stock quoted at 59, or 19 per cent on a
capital of $15,000,000 at current prices. In addition the bankers who
managed the syndicate received $1,000,000 in preferred stock; making a
total expenditure of $6,000,000, a not exorbitant commission. Besides
the bonds and stock for strictly reorganization purposes, there was
reserved to dispose of equipment obligations, and for reorganization
and corporate uses, $13,000,000 in 4 per cent bonds and $7,000,000
in preferred stock. Reorganization uses, as defined by Mr. Pierce,
were those which might arise unprovided for and of an extraordinary
character, all of which could not be foreseen. Corporate uses were
those which would be proper to the corporation thereafter, such, for
instance, as the issue of securities in extension of the property.[522]

After all the securities of the old corporation had been accounted for
there remained $35,755,280 of the first mortgage bonds and $20,864,000
of preferred stock as a fund or resource for the settlement of the
government debt; or, in round numbers, an amount of 4 per cent bonds
equal to the principal of that debt and an amount of preferred stock
equal to the accrued interest. Just how this was to be used the
committee did not pretend absolutely to say. “We desire to meet
any proposition of the Government,” said Mr. Pierce, “or to suggest
any proposition which, after investigation, we believe will meet
the approval of the Government within the limits of the financial
possibilities of the property based upon this plan. In other words,
we have made no sort of a hard and fast rule.” In case the Government
should prove obstinate and should refuse settlement on reasonable
terms, it was the idea of the committee that it would be entitled on
foreclosure to its share as a second mortgage bondholder only, and that
the property would pass under the sale free from all liens, including
that of the United States. “Our view upon that point,” said Mr. Pierce,
“is that when the Government subordinated its lien to that of the first
mortgage bondholders, it did so deliberately and in terms effective for
that purpose. The Government then consented to all remedies that were
necessary for the protection of this prior lien; and an indispensable
element of such priority would be the right of foreclosure. And unless
there was a concealed purpose on the part of the Government, that right
of effective foreclosure was undoubtedly impliedly granted.”[523]

Subsequent negotiations with the bondholders brought a reduction in
the proposed issue of mortgage bonds from $100,000,000 to $75,000,000,
affecting the Kansas Pacific consols and the Union Pacific Sinking Fund
8s. Thus the former were allotted 50 per cent in first mortgage 4s and
110 per cent in preferred stock, instead of 80 per cent in 4s and 50
per cent in preferred as before; and the latter 75 per cent in 4s and
100 per cent in preferred stock, instead of 100 per cent and 50 per
cent respectively. This reduced the proposed charges $1,000,000, and
proportionately strengthened the scheme.

On the whole, the plan was a strong one. It reduced fixed charges from
over $7,000,000 to under $4,000,000, with an eventual lower limit of
$3,000,000, and this amount such good authorities as Messrs. Mink and
Clark pronounced the road safely able to earn in spite of the reduction
in its mileage.[524] During the receivership, moreover, the system had
become purged by the cancellation of onerous contracts and the lopping
off of unprofitable branches, and though some lines were lost which
it was desirable to retain, the Union Pacific was not precluded from
the repurchase of these, and did in fact regain the most important.
The bondholders were put in no worse position than before, for they
could never permanently get more than the earnings of the road, and
this the new distribution of securities generally assured them. The
position of the common stockholders was improved, for whereas between
1883 and 1893 fixed charges had only once fallen below $7,300,000, now
less than $7,000,000 were to be taken before their claims were heard,
while both the gross and the net earnings of the road promptly regained
their old level. Finally, the general principle was sound, as has been
emphasized several times before. It gave to each class of securities
a claim to interest strictly proportional to the earning capacity of
the road, and added to this a preferred stock on which no payment was
to be made unless earned; while it provided for a liberal assessment
upon stockholders, and attempted no funding of the current liabilities
incurred during the past troubled years.

The time limit for deposits under the plan was originally set at
December 31, 1895. It was then extended to January 15, 1896, and later
to January 29 of that year. By January 8 the reorganization committee
was able to announce that it had secured majorities of all of the
first mortgage bonds outstanding except an inconsiderable shortage
in one class. This was followed, in spite of some opposition among
London brokers, by the deposit of a majority of the shares of the
company, and by the assent of other securities. In January, 1896, in a
letter to the chairman of the House Committee on Pacific Railways, Mr.
Fitzgerald stated that his committee embraced a substantially single
representation of all Union Pacific mortgage bonds in circulation
except those held by the United States.[525]

Foreclosure proceedings had been long under way. In January, 1897, the
Government agreed to join in them in consideration of a guarantee of
a bid at least equal to the original amount of government bonds, less
payments made by the company to the Government, with interest at 3⅓
per cent per annum.[526] The guarantee was to be of cash, so that the
Government’s relations with the property would terminate completely
upon confirmation of the sale. This was the first affirmative action
which the Government had taken, and the reorganization committee
accepted it, despairing of better terms. The guaranteed payment was
in part offset by sinking-fund assets of $17,062,664, leaving a net
amount to be provided of $28,691,336.[527] By August, 1897, foreclosure
of the main line had been ordered by the courts in all the states
through which the Union Pacific passed, both under the first and the
government mortgages. Previous to this the plan of reorganization had
been declared operative, and articles of incorporation for the new
company had been filed; while the first instalment of the assessment
on the stock was called by the middle of the month. An unexpected
development now occurred. Although willing to join in foreclosure
proceedings, the Government found the decrees of foreclosure to some
extent unsatisfactory, and prepared the papers for an appeal. Objection
was particularly made to the fact that the Omaha Bridge mortgage,
amounting to about $1,200,000, was adjudged superior to the lien of the
Government on that part of the road between Omaha and Council Bluffs,
and that the money and assets in the hands of the receivers accruing
from the operation of the roads were ordered to be sold instead of
being reserved to meet a deficiency judgment expected to be obtained.
Learning this, the reorganization committee increased its guarantee by
over $4,000,000, making the total guaranteed bid $50,000,000 instead
of $45,754,060. “This increase,” said the Attorney-General, “removed
the objections to the decrees so far as the money contents were
concerned. In all else the decrees were just and satisfactory.”[528]
Even so, perhaps partly for political reasons, the Government was
not ready to allow a sale, and later in the year gave notice that
it would apply for a postponement to December 15, in order to give
Congress an opportunity to consider the matter. The prospect of renewed
congressional agitation stimulated the reorganization committee
to prompt action. “The Committee,” it declared, “has reached the
conclusion that the interests of the securityholders represented by it
and of the syndicate furnishing the funds to finance the reorganization
demand reorganization without any further delay. In this situation
the committee contemplates … to oppose any adjournment of the sale
of the main line and to bid it in, if need be, for the full amount
of the Government’s claim, the additional sum involved in this being
$8,000,000.”[529] Postponement of the sale of the Kansas Pacific was to
be allowed, the committee meanwhile making up its mind on what terms to
bid it in. This proposition was telegraphed to Washington and quickly
accepted. It constituted a complete surrender on the part of the
committee, so far as the Union Pacific proper was concerned. Instead
of being refunded, the government debt was paid off in cash; instead
of compromising for the principal alone, both principal and interest
were paid in full. The result reflects credit on the sharpness of the
Attorney-General, but the method was scarcely worthy of the Government
which he represented.

November 1st and 2d, 1897, the property was sold under foreclosure of
the government and first mortgage liens, and the prices were:

For the Union Pacific main line, $40,253,605
For bonds in the government sinking fund, 13,645,250
———–
$53,898,855
In addition the Government received in cash in the
sinking fund as of November 1st, 4,549,368
———–
$58,448,224
In addition to this sum the committee was obliged,
under its agreement with the Government, to buy
up the first mortgage, amounting to $27,637,436
The total of the first and second mortgages was 67,891,041
Adding 13,645,250
Of securities purchased for cash, the total payment
aggregated over 81,500,000[530]

On February 12, 1898, the reorganization committee bought in the Kansas
Pacific, guaranteeing for the Government a bid at the sale which should
equal the principal of the government debt, _i. e._ $6,303,000.[531]
Other minor roads were also bought back on foreclosure sales, and from
time to time as the mortgage committee sold the collateral back of the
trust notes of 1891 the Union Pacific Railroad Company bought portions
of the same. In 1899 the Union Pacific stock was increased $27,460,000,
and the new issue was exchanged share for share with Oregon Short
Line stock, thus regaining control of that important property. Later
the same year a further increase was effected to retire $14,000,000
Oregon Short Line bonds and $11,000,000 Oregon Railway & Navigation
Company preferred stock. The net result was to avoid any considerable
dismemberment of the system. Whereas 7673.59 miles had been reported
for 1892, 5399.01 were reported for 1899. The main line from Portland,
Oregon, to Omaha and Kansas City, via Ogden, Cheyenne, and Denver, was
kept intact, the principal losses being of branch lines in Nebraska and
Kansas.[532]

A detailed account of the later financial operations of the Union
Pacific divides the company’s recent development into three parts:[533]
First, the regaining of control of the principal auxiliary systems and
branch lines which the receivership had temporarily separated from
the parent stem; second, the purchase of large amounts of stock in
the Southern Pacific and the attempt to share in the control of the
Burlington, which latter involved the purchase of Northern Pacific
stock and the formation of the Northern Securities Company; and third,
the sale of the stock acquired in the fight over the Burlington, and
the subsequent purchase of Alton, Atchison, Baltimore & Ohio, Illinois
Central, and other stocks. The repurchase of auxiliary lines has just
been alluded to; and into the history of the Burlington struggle there
is no need to go at length.

On June 30, 1900, the Union Pacific, Oregon Short Line, and Oregon
Railroad & Navigation Companies operated 5427.89 miles of line. The
system stretched from Kansas City and Council Bluffs to Ogden, and
reached the Pacific coast in the Northwest at Portland. It had no
rails of its own in California, but was dependent on the Southern
Pacific tracks for connections both at Ogden and at Portland. The
Southern Pacific extended from New Orleans through Texas, New Mexico,
and Arizona to California, and thence up the coast to Sacramento. At
Sacramento it divided; one line continued north to Portland, and one
turned northeast through Nevada to Ogden, Utah. Now, in 1901 it so
happened that the Southern Pacific was for sale. Crocker, Stanford, and
Huntington, who had controlled it, were dead, and their successors were
not eager to retain the railroad as an independent line. Mr. Harriman
seized the opportunity. In 1901 he bought for the Union Pacific 750,000
shares out of a little less than 2,000,000, and the following year
he increased his holdings to 900,000. The Union Pacific financed the
purchase by the issue of collateral bonds. The acquisition was of vast
importance. Not only did it afford a direct connection between Ogden
and the coast, but it eliminated one of the Union Pacific’s four great
competitors in transcontinental business, and made Mr. Harriman the
dominant figure in the Southwest.

North of the Ogden-San Francisco line the conditions were less
satisfactory. The Great Northern and the Northern Pacific were
here supreme, and in 1901 were negotiating for the purchase of the
Burlington to give them an entrance into Chicago. Mr. Harriman asked
for a share in this purchase but was refused. He thereupon began to buy
Northern Pacific stock in the endeavor to secure by this a half control
in the more eastern road. It was the struggle which then ensued between
Mr. Harriman and Mr. Hill which caused the stock exchange panic of May,
1901, and which resulted in the formation of the Northern Securities
Company, in which Mr. Harriman was allotted a large though not a
controlling interest. On the breakup of the Northern Securities Company
the Union Pacific received back some $25,000,000 in Great Northern and
$32,000,000 in Northern Pacific shares,[534] worth at market prices
about $100,000,000.[535]

This Northern Securities episode had little effect on traffic
conditions in the Northwest, but it did profoundly influence the
financial policy of the Union Pacific during the following years.[536]
The dissolution of the Northern Securities Company gave to the Union
Pacific Great Northern and Northern Pacific shares, which were valuable
as investments only. And as investments these stocks soon became
undesirable. We have said that the combined value of the securities
transferred approximated $100,000,000 at the time of transfer. From
that time on the stocks appreciated in value till they were worth
from $145,000,000 to $150,000,000, and yielded an income of less
than 3 per cent on their market price. It was good policy to sell
them, and $118,000,000 worth were accordingly disposed of, leaving
some $30,000,000 worth still in the hands of the company.[537] What
should be done with the enormous resources thus secured? Some of the
cash was used to buy Chicago & Alton stock,—some of it was put out
in demand loans. But beginning with June 30, 1906, the Union Pacific
and Oregon Short Line began investment in stocks of other companies
on a great scale. $41,442,028 were put into Illinois Central stock;
$10,395,000 into Atchison preferred; $45,466,960 into Baltimore & Ohio,
common and preferred; $19,634,280 into New York Central; and lesser
amounts into Chicago, Milwaukee & St. Paul, Chicago & Northwestern,
St. Joseph & Grand Island, and other companies. In all, $131,693,271
were invested during a little over seven months.[538] This has been
the characteristic feature of recent Union Pacific finance. The large
purchases of stock in other roads have assured it favorable connections
in the Illinois Central and in the Baltimore & Ohio, and have modified
the severity of competition with the Atchison.[539] Including the
Southern Pacific, its system reaches from Chicago to Portland, San
Francisco, Los Angeles, and the Gulf, and has an influential voice
in two of the principal roads connecting Chicago with the Atlantic
seaboard. At the same time, the extensive investment of Union Pacific
funds to secure gains unconnected with increase of traffic over its
lines has provoked merited criticism. A railroad is, after all, a
machine for transporting passengers and goods, not an engine of
speculation; and both from the point of view of the community which it
serves and of the investors who hold its securities it is advisable
that its income should depend on the business which its managers
conduct and are responsible for, and not on circumstances over which
they have no control. So far as Union Pacific purchases have been
designed to open connections or to modify competition they have had a
sound foundation. So far as they have been financial operations only
they are not to be commended.[540]

From the point of view of operation the success of the Union Pacific
has been remarkable. Like most roads it came out of its receivership in
better shape than it went in, but with much lacking for the efficient
and economical handling of its traffic. Since 1900 over $52,000,000
have been invested in betterments and in new equipment, of which some
$15,000,000 have been withdrawn directly from income. Maintenance
charges have also been liberal, particularly in the last few years.
Grades and curves have been eliminated, steel bridges have been put
in place of wooden, new and heavier rails have been laid, ballast
supplied, and equipment greatly enlarged and improved. Whereas in 1896
13 per cent of all the Union Pacific system was laid with iron rails,
and only 24 per cent had rails weighing more than sixty pounds to the
yard, in 1907 there was no iron reported, and only 33 per cent of the
track did _not_ have rails weighing more than sixty pounds to the yard.
The average capacity of freight cars was a shade over twenty tons in
February, 1898; it was over thirty-four tons on June 30, 1907, and the
new freight cars added during the last-named year averaged a capacity
of sixty-seven tons apiece.

In consequence of these improvements the Union Pacific has been
able to handle a very greatly increased business. Between 1899 and
1907 the tons of revenue freight carried one mile increased from
1,393,207,990 to 5,704,061,535, and the passengers carried one mile
from 167,117,388 to 680,278,509. This fourfold increase has been
packed away in the larger cars, which in turn have been combined into
longer trains. Twenty-one tons are now put into the average freight
car, and thirty-two freight cars form an average train. In 1899
the average car held twelve tons and twenty-nine of them carried a
train-load. Sixty-six is the average number of passengers per train
to-day; thirty-three was the average number in 1899. And so the
increased business has not occasioned a proportionate growth in cost.
It takes but little more than three times the outlay in conducting
transportation to do over four times the work, and other railroad
expenses have varied even less.

This increased business and less rapidly increasing cost has meant,
finally, an increase in profits, and explains how it has been possible
in seven years to take $15,000,000 from income for improvements besides
liberally maintaining the property. The Union Pacific is prosperous as
it never has been before. In 1907 its total fixed charges, in round
numbers, were $8,600,000, and its net income was $45,000,000. Of this
income $23,500,000 were paid out in dividends, $1,960,000 appropriated
for betterments, additions, and new equipment, and $10,700,000 carried
to surplus. There were $69,000,000 in bills payable, incurred since
1906, in part for improvements and the like, but largely in the
course of the company’s financial experiments; but $75,000,000 in
convertible bonds have been authorized to cover them. Stock and bond
issues are much larger than in 1899 and will be larger still when the
new convertibles are all sold. Fixed charges, however, are less than
$5,000,000 greater than they were eight years ago. In order to imperil
bond interest net earnings will have to decline by 81 per cent; and
even were this to happen it is probable that some margin could be
retained by a decrease in the generous sums now being spent for the
maintenance of equipment and of road.[541]