Early history—Reorganization—Wall Street struggles—Financial difficulties—Second reorganization—Development of coal business—Extension to Chicago—Grant & Ward—Financial readjustment—New York, Pennsylvania & Ohio—Third reorganization—Later history.
The New York & Erie Railroad was organized in 1833 in the hope of bringing to the southern tier of counties in New York State a prosperity equal to that which the Erie Canal had secured for the northern tier. It was to run from New York or some suitable point in its vicinity to Lake Erie. A six foot gauge was adopted, partly because the grades encountered were thought to require locomotives with more power than a narrower gauge could accommodate, and partly because it was wished to make the road independent of any connection which might lead trade away from the city of New York.[88]
The events of the early years may be briefly dealt with. Difficulty was experienced in getting subscriptions, and in 1836 the legislature granted a loan of $3,000,000. An assignment was made in 1842, due to the difficulty of getting the enterprise under way, which resulted in the release of the company from liability to the state on condition that it complete its line from the Hudson to Lake Erie by 1851. Stockholders were to exchange two shares of old for one share of new stock, and a first mortgage of $3,000,000 was authorized.[89] In 1851 the line was completed to Dunkirk on Lake Erie, and the following year it reported a bonded indebtedness of $14,000,000, capital stock of $6,000,000, and floating debt to the amount of $3,080,000, or a total of $43,961 per mile of line; a high figure, but probably necessarily so in view of the difficult work to be performed. Although nominally completed, the troubles of the road were not over; and a precarious existence was maintained only by the placing of additional loans in 1852 and 1855, and by the aid of Daniel Drew on two distinct occasions. A war of rates with the New York Central aggravated the situation; heavy storms and ice floods in January, 1857, caused serious loss, and the panic of that year, with the ensuing depression, proved more than the road could stand. Proceedings were begun in 1859 by the trustees of the fourth mortgage, and in August a receiver was appointed.[90] The wonder was that such action had been delayed so long. The income of the road had been so far short of meeting current expenses that claims for labor, supplies, rents, and unpaid taxes, and judgments rendered against the company before the receivers were appointed, had mounted up to $741,510; while not only had interest on three mortgages fallen due in April, May, and June, but the principal of the second mortgage, amounting to $4,000,000, had matured. The settlement of claims and the reorganization of the company were put in the hands of J. C. Bancroft Davis and Dudley S. Gregory. Since the earnings of the road were at so low an ebb, wisdom would have seemed to dictate some scaling of the charges to correspond. This did not enter into the views of the trustees; instead, they proposed to give preferred stock for all unsecured indebtedness, to extend the principal of the second mortgage coming due, to exchange old common stock for new, to levy an assessment of 2½ per cent on both classes of new stock, and with the proceeds of the assessment to pay all coupons in arrears. Provision was made for the retirement of certain fourth mortgage bonds, and for a sale under foreclosure of that mortgage. By the arrangement no saving in fixed charges worth mentioning was secured; no sacrifice was demanded of bondholders; and, save for the payment of assessments and the (new) stock given for floating debt, the stockholder’s position was not made worse. The scheme was an easy and temporary means of escape from an embarrassing position. Before the reorganization the bonds outstanding had amounted to $18,006,000, the stock to $11,000,000, and the unsecured indebtedness to $8,504,000. After reorganization the totals were: indebtedness, $17,953,000, and stock, $19,911,000 (of which $8,911,000 preferred); or a capitalization of $67,728 per mile. The road was sold in 1862, and the Erie Railway took the place of the original New York & Erie Railroad Company.
With 1864 began the career of the Erie as a speculative Wall Street stock. Its large capitalization and the painful slowness with which its earnings grew kept the quotations of its shares normally at a low figure and invited speculation; while the location of its lines tempted more serious efforts to obtain control. Up to 1867 Daniel Drew was in power, while Commodore Vanderbilt spent his best efforts to drive him out; after that date Jay Gould and Jim Fisk became more and more prominent, and manipulated the Erie securities with enthusiastic regard to profits which they might derive both from the Erie Company itself and from operators who wished to speculate in its stock. In the course of the abundant litigation to which Gould’s methods gave rise, various receivers were appointed; but the orders of appointment were subsequently vacated, and the receiverships were nominal only. The details of the Wall Street struggles have little interest for us here.[91] But the result is of importance. In the eight years from 1864 to 1872, when Gould was turned out of Erie by General Sickles and his English backers, the bonded indebtedness of the company increased from $17,822,900 to $26,395,000, and the common stock from $24,228,800 to $78,000,000; in the one case a growth of 48 per cent and in the other of 221 per cent, at a time when the mileage increased 53 per cent and the net earnings but 22 per cent.[92] No more disgraceful record exists for any American railroad. The stock was not issued for the sake of improving the road, and it was subsequently shown that the road was not improved; but it was thrown upon the market at critical times in support of bear operations by the Erie managers, while portions of it, on at least one occasion, were bought back with the funds of the company to aid speculation for a rise. The result was to ruin the credit of the Erie, and to make it the favorite tool of cliques of gamblers. The increase in bonds occasioned an unmistakable increase in fixed charges, which rose from 20 per cent of gross earnings in 1864 to 25 per cent in 1871, 21 per cent in 1872, and 30 per cent in 1873, while the purchase of worthless bonds of subsidiary roads, such as the Boston, Hartford & Erie, lessened the assets without disclosing the real position to the casual observer.
In 1872 the control of Erie was taken from Gould through a vigorous campaign managed by General Daniel E. Sickles, and an “eminently respectable” board of directors was elected. Temporary relief was obtained from the use of $6,000,000, available from an issue of bonds previously approved,[93] and dividends, first on the preferred and then on both preferred and common stock were declared. Unfortunately the dividends were not earned; and this fact, which was suspected from the previous record of the company and the marvel of its so early restoration to a dividend basis, was shown in the statements of ex-Auditor S. H. Dunan, who resigned in March, 1874, alleging that the accounts had been falsified to suit the company’s purposes, and that he was unwilling any longer to be a party thereto.[94] Investigations conducted by representatives of English bondholders showed that in the three years ending in September, 1875, the profits of the road had been $1,008,775 instead of $5,352,673 as stated in the company’s accounts; and the severity of this finding was scarcely mitigated by the conclusion that in the opinion of the committee the dividends on the preferred stock at least were justified by the books.[95] At the same time the report of Captain Tyler, another English representative, laid emphasis on the necessity for a change of gauge, a double track, improvements in gradient, fresh extensions and connections, and other similar matters.
The real position of the company at the time was shown but too well by the frequency of strikes upon its road. Thus in February, 1874, a strike of freight brakemen on the Susquehanna division broke out, caused principally by an order to discharge one of the brakemen from each freight crew, leaving only three on a train; and at the same time there was a strike of the switchmen on some of the divisions owing to a decrease in pay. In March occurred a serious strike among the employees of the road in Buffalo, mainly on account of irregularity and delay in payment of wages, and, finally, in April, there was trouble both in the Susquehanna shops and in the Jersey City freight yard over this same cause. The indications afforded by these troubles were borne out by the figures of the annual reports. The gross earnings of 1874 were $1,413,708 less than those of 1873, while the decrease in operating expenses was so slight as to reduce net earnings by nearly the same amount. If, now, there is deducted from the net earnings of the years 1871–3, inclusive, the sum which the London accountants declared to have been improperly reported as profits, there results an average of $4,175,699 net; or less than the net earnings for either 1864, 1865, or 1866, although the average charges for the years mentioned exceeded the average of the earlier period by $1,769,060 each year. These figures exclude the influence of the panic of 1873, which, as has been seen, caused a still further falling off in the earnings of the company. It was a time, moreover, when the Erie could not be content to sit still and wait, for competition was daily becoming more severe. By 1874 the Baltimore & Ohio, the New York Central, and the Pennsylvania had connections with Chicago, and the Erie was competing with them for business by means of traffic agreements with connecting lines. The next decade was to see the bitterest rate wars that the country has ever known; and the Erie, with its exceptional gauge and single track, was to compete with rivals of normal gauge, who were adding third and fourth tracks to the two which they already possessed. The one bright spot was the development of the coal traffic, which in 1874 formed the greatest item of the Erie’s tonnage, and was in a measure apart from the competition of other lines.
Suit was brought in July, 1874, for the appointment of a receiver. The complaint reviewed alleged improper acts of the management in declaring dividends, in buying Buffalo, New York & Erie stock and sundry coal lands, and in issuing the new $30,000,000 mortgage before mentioned.[96] In October the Attorney-General of New York instituted suit on nominally the same grounds; not, as he explained, in the expectation that the appointment of a receiver would be required, but in order that this action might be taken if the conduct of the directors should make it necessary. Still other suits were begun before the year was out.
Meanwhile the management was changed. Whether or not Mr. Watson, who had been president since 1872, had done all humanly possible to set the Erie on its feet, his administration was not unnaturally in bad odor after the charges of Dunan and the report of the London accountants, to say nothing of the admittedly low earnings for the year 1874. An attempt was made to secure the very best man possible for the presidency, and to support him in necessary reforms, in the hope of some different results from those with which securityholders had become familiar. The man for the place was thought to be Mr. H. J. Jewett, a railroad man then in Congress from Ohio; and this gentleman was accordingly secured at an extremely liberal salary. Soon after his election a ten per cent cut in salaries was decreed, and an examination of the accounts of the stations along the line in behalf of the company was begun. It was too late, however, for the company. The business of the last of 1874 and first of 1875 was poor; floods in the spring damaged the property of the road, and rumors of a receivership were rife. On May 22 a private meeting of stockholders in New York passed resolutions to the effect that the borrowing of money by the sale of 7 per cent bonds at 40 cents on the dollar, and other means adopted by the Watson administration, would inevitably result in bankruptcy; that sound interest required that the money needed to pay interest should be raised by an assessment on the stockholders, and that the directors should be thereby requested to open books to examination, and to invite stockholders to contribute voluntarily a sum sufficient to keep the company from immediate failure.[97] The proposal showed a proper spirit, but was impracticable. Four days later Mr. Jewett was appointed receiver on application of representatives of the Attorney-General and of the Railroad.[98]
This was the second receivership which the Erie had had to face, and the situation was materially worse than at the previous failure. According to the statement of President Jewett the funded indebtedness in May, 1875, amounted to $54,394,100, and the fixed charges to $5,059,828; while the net earnings for the previous nine months had decreased 13.4 per cent from the corresponding period for the previous year, and a serious deficit was in view. Temporary measures of relief had served but to drag the company further into the mire;[99] and, most important of all, the causes for the existing difficulties were of a permanent nature, so that the future gave promise of still harder conditions than had existed in the past. What was needed was a reorganization which should undo the evil work of Gould, Fisk, Drew, and their associates, and which should secure the margin of surplus earnings which the reorganization of 1859–62 had failed to provide. Perhaps the chief difficulty lay in the fact that the men who were responsible for the increased capitalization were not at all those on whom the brunt of reconstruction would fall; for while the managers of the road had been Americans, the gullible investors had been Englishmen; and it was reported that much of the watered stock of the Gould régime had been unloaded on the English market.
Committees sprang up promptly. The most important of them were the English committees of bond- and stockholders, soon consolidated under the chairmanship of Sir Edward Watkin. On August 7, Sir Edward left England on a visit of inspection, accompanied by Mr. Morris, counsel for the bondholders. Conference with the board of directors and with President Jewett followed, and a provisional scheme of adjustment was decided upon. In his report to his English constituents Sir Edward outlined the results. Current indebtedness, said he, was $42,180,075; estimated net revenues for the year ending in June last were $3,715,609; operating expenses had been for that year 79 per cent, due largely to the cost imposed by exceptional gauge, while the chief lines with which the Erie competed showed proportions of only from 60 to 66 per cent. Out of fourteen branches only three showed a profit above rentals, and pay-rolls had ordinarily been months in arrears. These facts were familiar; the remedy proposed was unfortunately familiar as well. “Let it be hoped,” said this English financier, “that the bond- and stockholders will have the courage now to submit to a period of self-denial, and will consent to pay their debts and complete essential obligations out of available net profits, the bondholders receiving in place of cash such equitable obligations, realized out of surplus revenue in the future, as each, according to right of priority, may justly expect.”[100] What could this have meant save an issue of stock or income bonds for coupons falling due, with the result of adding to the unwieldy capitalization of the road instead of reducing it as should have been done! For the rest, Sir Edward Watkin concluded with Mr. Jewett the following arrangement: