Chapter VII: Union Pacific (2)

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]